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Employment Insurance reform doesn’t need consitutional change

August 28, 2012

In a recent column in the Globe and Mail, Tom Flanagan bemoans the fact that the premium structure of Employment Insurance is not lined up with expected benefits. As a result, provinces to the west of the Ottawa River have long paid a good deal more into the program than they receive in benefits.

The solution: a constitutional amendment allowing Quebec to run its own EI program.

Quebec and Alberta interests certainly line up on this issue: one wrestles more control over federal powers, the other sees smaller government and lower taxes.

But let’s be clear, devolution of EI responsibilities—which constitutionally rests with the Federal Government—is about this sort of politics, not at all about the underlying economics of social insurance.

There are a host of legislative changes that the Federal government can introduce to make EI more efficient without even whispering the C-word.

First, reduce the number of Employment Insurance regions used to determine benefits and benefit eligibility. When major reforms were made to this program in 1971 only 16 regions were introduced. Now there are close to 60.

There is no doubt that this evolution was driven much more by small-town politics than any changes in the nature or risk of unemployment.

Incrementally, bit by bit, election by election, governments responded to the need of MPs to dole out local prizes by adjusting EI regions so that they became smaller and smaller.

The minister of finance has only to propose that each province become an EI region, along with perhaps a few of the major metropolitan areas to recognize the rural-urban divide.

This would not eliminate all cross-subsidies between provinces, but it would narrow them and it invite more mobility of the unemployed.

Job done. No constitutional amendment required.

But the EI benefit structure insures a whole host of other things, what Flanagan lists as subsidies to parents who have babies, and adults who take time off to care for sick relatives. “Worthy objectives to the sure,” but apparently not something that should be the purview of insurance for unemployment.

Giving the program to the provinces would apparently return the scheme to the narrow insurance program it should be, the provinces not being able to afford all these frills.

But covering these risks is not only laudable, it is totally legitimate.

A lesser EI system is a throw back to the good old days of the single earner household with economic security depending upon the breadwinner’s wage.

Those days are gone. The capacity for families to self-insure in the face of a marriage falling apart, of sickness, of the need for extra care-giving to a child or an elderly parent, are much more limited now. In the best of cases, both parents work and the entire family is more time-stressed than is often healthy.

Demographic risks, not just labour market risks, need somehow to be insured.

If cash-strapped provinces can’t manage these risks we should not call that an efficiency gain.

A die-hard believer of EI as insurance does not have to deny the legitimacy of covering demographic risks, only to argue that premium rates should adjust according to benefit type. Indeed, some component of the premium rate could be person-specific, with Canadians given the freedom to choose whether they wish to have supplemental insurance associated with the risk of having a baby, caring for a child, taking time off for other family responsibilities.

In fact, EI already does this sort of thing by offering unemployment insurance for the self-employed, a group with certainly the highest degree of moral hazard. The Minister of Finance need only follow this template.

Job done. No constitutional amendment required.

Any government that had the courage to open up a Constitutional debate on Employment Insurance could certainly expend much less political capital making these changes, and fight separatism another day.

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From → unemployment

4 Comments
  1. Allen Scantland permalink

    I would concur entirely, that accepted risks should be metered out as varying premiums, rather than allow the continuance of the patronizing black box that the present EI program is. It covers all risk nationally regardless of needs or desires, or whether the individual is ever eligible for such benefits. It has been long argued that the present program rewards poor policy/laws and encourages economic underdevelopment or a lack of regional capital investment by encouraging the underemployment of individuals. Like CPP which I liken to an insurance policy for retirement, disability and death, it cannot do everything well and costs more than it should for the benefits provided. I don’t disagree with the number of regions but do take issue with assessing the level of risk and the premiums for that region. How is it that an employee in a region with chronic under-employment pays the same premiums but receives better benefits than a region that has higher employment? Only in the quasi-reality world of government programs does this make any sense.

    Earlier, the Minister of Finance played again with the rules for mortgages, applying a national edict under the guise of cooling regional condo markets. I would say that it was false, and rather a recapitalizing of the mortgage insurance plan by diversifying the risk of its portfolio. If they were solely concerned with regional housing hot spots of speculation, then each region would have differing risk profiles and insurance conditions/premiums. As it is now, Fredericton and Flin Flon have the same risk profile as Toronto or Vancouver and residents must pay the same premium to insure their mortgage. CMHC’s mandate is what exactly? Do they not have existing staff to measure and manage regional risk profiles?

    National policies are only good from the veneer of a political perspective. Deeper politics and economic policy would take issue with one size fits all legislation and programs, because they are inefficient for the regional economies and instead of buffeting transient unemployment they support cyclical unemployment and encourages lower capital investment. Industry with regional cyclical unemployment is a separate issue, which may not need income supplements but certainly could use income deferral legislation. Right now certain commodities have lower wholesale prices because of EI subsidies suppress wage demands. These subsidies in effect would also allow for more employment, but both commodity prices and the supply of employment as a production factor have their restrictions and limitation. I guess you could chalk EI as another subsidy for those areas, but it doesn’t encourage innovation or investment in human or physical capital, or extending the production schedule of cyclical industries.

    Here is the actuarial report: http://www.ceifb-ofaec.ca/en/PDF_Reports/2012%20English%20CA%20Final.pdf

    • Allen, thanks for your detailed comments, particularly about the challenges of the optimal jurisdiction for government policy. I had not thought about the CMHC in this regard, but it is pretty clear now that you mention it.

      I am of the view that there is a good deal of scope for more flexibility in the design of EI that would permit a federal program to respond to the needs of diversified labour markets.

      Most importantly there is, after all, a certain advantage to having an insurance scheme based upon as wide a pool of individuals as possible: risks can be more fully diversified. The problem is that unemployment is of different types, requires different types of support, and there is potential for changing individual and business behaviour. Unemployment as cyclical, structural, and frictional all require something different from this program. The original 1971 changes recognized this in a reasonable way building in a certain amount of flexibility across regional labour markets. But they did not properly, or at all address, the financing of the program so that over time substantial cross-subsidies got hard wired into the program, not only across regions, or across industrial sectors, but between firms within sectors. In fact there were plans for experience rating the program on the books, but this legislative change was allowed to lapse while the benefit reforms went ahead.

      Here is a paper that a co-author and I wrote on the nature of the cross-subsidies built into the program; it is a bit dated, but I think it is still relevant to the discussion: http://www.iza.org/en/webcontent/publications/papers/viewAbstract?dp_id=811
      These findings suggest that the most important, and probably under-recognized disincentive, is the impact on firm hiring policies.

      The financing of the program is still in real need of reform, but I don’t think this is a program that should devolve to the provinces in spite of your comments … mostly because of the need to diversify risks as broadly as possible.

      best, m.

  2. Jamie Carson permalink

    Brookings published a paper on employment skills gaps in urban centres today:

    http://www.brookings.edu/research/papers/2012/08/29-education-gap-rothwell#M10420

    Jamie Carson

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