Liberal EI plan is built for Barney the dinosaur

Posted on June 3, 2009 in Debates, Social Security Debates – Full Comment – Liberal EI plan is built for Barney the dinosaur
Posted: June 03, 2009.  Jack Mintz*

We know political silly season arrives when some of the worst ideas start getting serious attention. The latest is the Liberal proposal to reduce the qualification working period for Employment Insurance recipients to 360 hours before claiming 50 weeks of EI benefits (a recent extension by the Conservatives in the January 2009 budget).

Under this proposal, someone could virtually work each summer (about 45 days) to claim benefits for the rest of the year. Maybe in Barney the Dinosaur’s world, in which people are only good, we would like to be generous to workers who barely work before claiming EI. But, shortening drastically the qualification period would encourage greater turnover of workers, result in a permanent rise in the unemployment rate and impose a high economic cost.

Several provincial premiers have mistakenly taken up the proposal to reduce the qualification period. More on the mark, several provincial leaders rightly object to discrimination against some workers since the EI qualification period varies from as low as 420 hours in high-unemployment regions to 700 hours in low-unemployment regions. But the answer is not moving to the lowest common denominator (and then some) whereby workers hardly have to sweat before claiming EI benefits.

The current system whereby qualification periods depend on the level of unemployment goes back to a reform introduced by the Chrétien Liberals in the mid-1990s. This reform was intended to reduce the incentive to take up jobs for short period and then quit to claim EI benefits until being hired again. This led to a perverse behaviour such as extended families sharing jobs at taxpayers’ expense. Overall, the EI system adopted in the 1970s and 1980s contributed to sharply higher unemployment as estimated by several economic studies.

Although originally well intended, the system introduced by the Chrétien government is highly distortive. The qualification periods vary even within a province. For example, a person living in Saskatoon would need to work 700 hours to qualify for EI benefits while someone living in the Northern Saskatchewan only works 420 hours before claiming EI. In Newfoundland, workers in St. John’s must work 630 hours while those outside the city only work 420 hours to qualify. This fine division of regions influences where people wish to live and where businesses hire workers.

The argument made to loosen the qualification period is that too many workers are currently ineligible for EI. One study by Human Resources Canada showed that 1.03 million workers were unemployed in 2007. Of that number, 720,000 workers contributed to EI (since self-employed individuals and those unemployed for more than 12 months do not qualify). Those potentially qualifying for benefits numbered 560,000, since some returned to school or left their job without just cause. Of these, 100,000 were ineligible for EI since they did not have sufficient hours of work, resulting in 460,000, or about 45%, qualifying for EI of the total unemployed.

The fact that fewer than half of the unemployed qualify for EI has led to calls for a shorter qualification period. But, one should be careful not to come to quick conclusions about access to EI. The same study shows that eligibility is not a problem for many hardworking Canadians who have recently lost a long-term job. Ninety per cent of those who work full time with a recent job separation qualify for EI benefits. Only a third who work part-time have the necessary qualification period.

In other words, the real issue is access to EI for the part-time workers. And, the question is how easy we should make it for people to work part of the year before claiming EI. If some form of experience rating were used, employers or employees would be penalized for a history of frequent layoffs, either in the form higher contribution rates or lower benefits. However, without some penalty, the EI system supports employee turnover.

Thus, any change to shorten qualification periods should only be part of a larger reform of the EI system that would reduce incentives to game the system by employers and employees. If the intent is to remove discrimination, one could move up the qualification period on all regions to, say, 700 hours instead of reducing it by a half as proposed by the Liberals. With the current state of the economy, it would be suicide for any government to follow this course of action.

The qualification period is not the only form of discrimination since differentials unfairly apply on the benefit side. Under the current system, laid off workers are entitled to benefits equal to 55% of their annual earnings up to a maximum of $42,300 in earnings. For part-time workers, however, the benefits are adjusted according to the unemployment rate in a region.

For people working less than 26 weeks, the EI weekly benefit is based on average earnings as calculated by the greater of actual weeks worked and a divisor that varies from 22 weeks (for low-unemployment regions) to 14 weeks (for high-unemployment regions). Thus, for example, if one works only 12 weeks, the EI benefit is reduced more severely in a low-unemployment region (total earnings are divided by 22 rather than 12) compared to a high-unemployment region (total earnings are divided by 14).

Removing regional differences in benefit rates would make sense since it would help get more money into people’s hands. For that matter, bumping up the income replacement rate from 55% to 60% for full time workers might help many of those recently unemployed who lost jobs after many years of work.

EI does need an overhaul but it should be carefully thought through. We should especially avoid mistakes made in earlier years that led to excessive access to the system.
Cross-posted from FP Comment. Jack M. Mintz is the Palmer Professor of Public Policy, School of Public Policy, University of Calgary

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