Category: unemployment

Insurance principles offer three practical reforms for financing Employment Insurance

~ MilesCorak ~ Leave a comment

The Canadian federal government has promised to modernize Employment Insurance for the 21st century and has been holding consultations to engage stakeholders and others. These have been full of suggestions for the expansion of coverage and benefits. But when it comes to financing the program the debate has been framed in terms of how to finance these suggestions, without a realization that the nature and structure of contributions are themselves also a part of the “modernization” of Employment Insurance.

There is a clear need to think not just about how to finance benefits by adjustments and tweaks to the existing contribution structure, but rather to also think about that structure and how it can itself be reformed to enhance program objectives.

The need for better insurance offers a guiding principle for reform and practical reforms

The challenges the Employment Insurance has faced during what is almost the first quarter of the 21st century, if not for even a decade longer back to the early 1990s, are calling for better insurance, and these imply changes not just to the structure of benefits but also to contributions.

The most fundamental role of Employment Insurance is to provide workers with income insurance during periods of job disruption, and it is the insurance part of Employment Insurance that needs upgrading and modernization. As a result, a guiding insurance principle for “Modernization” should be to align the structure of contributions to the underlying nature and causes of the risks being covered.

This implies that contributions should be structured to most efficiently and equitably to cover:

  • Job risks associated with employer decisions to manage human resources, whether through changes in hours, layoffs, or even business closures;
  • Family risks associated with household decisions about respite, care-giving, and skills development; and
  • Collective risks associated with the interconnectedness and uncertainty of a global economy, but also with social choices, the costs of which are often disproportionately shouldered by the unemployed.

Aligning contributions with these risks, with the nature and causes of unemployment, implies three straightforward and feasible reforms.

  1. Employer contributions should be used to finance Regular Benefits, and employee contributions should finance “Special” Benefits and some fraction of Part II benefits associated with skills development. The shares of total program expenditures of each of these benefits implies that the ratio of employer to employee contributions should rise from $1.40 for every dollar of employee contribution to about $1.90. But these contribution rates should also evolve gradually over time by being based on the ratio of program expenditures on Regular Benefits to those on Special Benefits. If Special Benefits become a larger share of total Employment Insurance outlays, the employee contribution share should rise accordingly.
  2. Contribution rates should be relatively stable and set at a level to finance benefits associated with the underlying trend unemployment rate, evolving gradually in a way that roughly corresponds to the evolution of frictional and structural unemployment. An average of monthly unemployment rates over the past seven years, a horizon consistent with the current funding rules, would currently imply a trend unemployment rate of 7%. An average over the past five years, consistent with the usual mandate of a newly elected government, would imply the same. This is only slightly higher than the 6.5% that both rules implied in January 2020, before the onset of the pandemic, and suggests relatively constant rates even in the aftermath of a shock as big as the pandemic.
  3. The program should be based on tripartite funding with Federal government contributions from the Consolidated Revenue Fund covering the expansion of benefits needed in the face of big unexpected shocks like business cycle downturns and broad-based regional shocks that take the unemployment rate above its trend, or to compensate for the trade-offs made in social choices like fighting inflation. At the same time, the Federal balance sheet should be strengthened by the surpluses associated with lower than trend unemployment rates.

[ This post is based upon a presentation I made to a workshop organized by the Institute for Research on Public Policy on June 29th, 2022. My presentation was called “Principles and Practicalities in aligning Employment Insurance Benefits and Contributions”.

You can download and read the full paper that summarizes the presentation, and upon which this post is based. You can also read short summaries published by the CD Howe Institute on October 11th, 2002 as “Insurance Principles Make the Case for Stable Contribution Rates as a Part of Employment Insurance Modernization,” and on October 12th, 2022 as “Reality-based Employer EI Contributions.”

A version of this post was also published by the CD Howe Institute on October 13th, 2022 as “Insurance principles offer three practical reforms for financing EI.” ]

The Canada Emergency Wage Subsidy: First steps, missteps, and next steps

~ MilesCorak ~ 1 Comment

The Canada Emergency Wage Subsidy can reasonably thought of as an experiment not to be repeated. This post is an excerpt from the conclusion to my forthcoming paper called “The Canada Emergency Wage Subsidy: First steps, missteps, and next steps.” Download a copy and read the full paper.

The Canada Emergency Wage Subsidy as an employer-based response to the pandemic intended to prevent business closures and prevent layoffs was certainly a program constructed in haste, but perceived to be necessary in the face of limits in the capacity of better designed existing programs, particularly the national unemployment insurance program.

Even so, the program was not informed by fundamental lessons from economic theory. It was not addressed to the fixed costs that actually determine business closures; it did not recognize that a subsidy nominally directed to worker payroll can be shifted to other purposes; and it was not, or in principle could not be, targeted on the margin, on businesses that would indeed have closed in the absence of support. This implies that the job losses actually prevented are much lower than the actual payroll covered, each person-month of employment saved costing $25,000 according to one estimate.

Income support of this magnitude paid directly to affected workers would likely not be considered politically acceptable among informed citizens, and it is therefore hard to imagine that the program would pass any reasonable cost-benefit analysis.

Going forward it will also be important to recognize the practical considerations that shaped, and perhaps even motivated, this program. Their downsides should be recognized. They call for policy makers to be as concerned with program delivery as they are with program design, offering ongoing investments in the modernization of physical and human capacity to deliver benefits.

One positive consequence of the Canadian experience is that these investments have been promised to overcome limitations in the capacity of the country’s unemployment insurance program. The expectation should be that in the future this program will play an even bigger role should it be necessary, particularly provisions within it designed to promote work-sharing which reduces the reliance on layoffs by offering benefits for adjustments to work-hours.

The practical experiences during the pandemic also call for policy makers to recognize that programs may interact and should be designed to complement each other. Other programs, notably the Canada Emergency Response Benefit, making real-time direct payments to individuals suffering income losses, were in some measure a substitute for the Canada Emergency Wage Subsidy, which was slower out of the starting gate and undersubscribed when it mattered most to the most vulnerable businesses during the first weeks and month of the pandemic. Success in making direct transfers to individuals to some degree made the wage subsidy less relevant, delays in getting it off the ground made it less necessary.

Finally, the practical considerations of public policy also call for policy makers to avoid policy drift, the development of vested interests that can prolong the duration of a program after its need has passed, or pervert its intent by informing it design. This calls for increased reliance on programs designed as automatic stabilizers, rather than on discretionary interventions.

[This post was updated on December 9th, 2021 with a link to the final version of the paper, also available here: https://milescorak.files.wordpress.com/2021/12/corak-2021-american-enterprise-institute-canada-emergency-wage-subsidy.pdf ]

In pandemic times, the unemployment rate is not what it seems

~ MilesCorak ~ Leave a comment

Interpreting job market statistics demands a lot of care right now. The pandemic has muddied the statistical waters and created the illusion that unemployment rates are significantly higher in Canada than in other countries.

The leader of Canada’s official opposition claims the Canadian unemployment rate is higher than in other rich countries. Source: https://twitter.com/erinotoole/status/1367181227338264578?s=20

Erin O’Toole, with a sense of indignation and urgency, has boldly proclaimed that “We lead the G7 in unemployment.”

Statistics in the service of partisan politics are often, to put it gently, rather elastic in their meaning, so it is natural to wonder: do we really lead the pack in the dubious distinction of having the highest rate of unemployment?

Statistics Canada reported Friday that the unemployment rate stands at 8.2 per cent, a full two percentage points above that of the United States. As opposition leader Mr. O’Toole points out by citing the Organization for Economic Cooperation and Development, that’s higher than in many other rich countries.

But more care is needed to uncover the true meaning of these numbers, because the pandemic has twisted the workings of the statistical machinery that in normal times serves us well.

Continue reading “In pandemic times, the unemployment rate is not what it seems” →

Employment Insurance for the future of work, right now

~ MilesCorak ~ 1 Comment

This posts offers my written statement for a presentation made on February 23rd to the Canadian House of Commons, Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities as a part of its Review of the Employment Insurance Program.

 

Employment Insurance has been found wanting.

It has been found wanting for decades.

It was slow to respond to the Great Recession of 2018, and left many Canadians, particularly in central Canada, with poor and inadequate income insurance.

It was slow to respond to the collapse of commodity prices in 2014 that devasted the jobs and livelihoods of many Canadians, particularly in Alberta, leaving them with poor and inadequate income insurance.

And of course, it was slow to respond, indeed stalled almost completely, to the COVID pandemic, leaving all working Canadians, almost without regard to their station in life, with poor and inadequate income insurance.

But many Canadians have long been shut out or at best under-served by this crucial pillar of our social insurance system, a program that is solely under federal responsibility.

Workers in the arts and culture industries; self-employed workers; lower paid workers with intermittent jobs; quitters, new labour market entrants, the young as well as those in mid or late careers.

Employment Insurance has been found wanting, many Canadians have experienced that for decades, and now is well beyond the time to do something about it.

The government can proceed immediately with a series of important changes that are well within its administrative capacity, but it also must proceed with an eye to more fundamental changes in the near term that may require more consultation.

But before I outline these immediate-term and near-term possibilities, let me tell you what Canadians don’t need more of.

They don’t need more platitudes about getting a better education, getting more training. The EI program already transfers almost $3 billion to the provinces for programs of this sort, some are effective, some less so.

But the government doesn’t need to spend more money on training through EI, and putting more responsibility on individuals to adjust to the storms of a turbulent job market.

Canadians, in the first instance, need better and more complete income insurance. My suggestions are directed to this need.

Continue reading “Employment Insurance for the future of work, right now” →

An Employment Insurance system for the 21st century: Lesson 2, The future of work calls for better income insurance

~ MilesCorak ~ 1 Comment

The COVID pandemic has fast-forwarded many changes in the way employers manage, monitor, and motivate their employees. The future of work is here and will involve more insecurity for many workers. The Canadian federal government can offer better and more appropriate income insurance by responding with both quick and easy, and with more fundamental changes to the Employment Insurance program.

 

The 2020 Speech from the Throne boldly claims that “This pandemic has shown that Canada needs an [Employment Insurance] system for the 21st century, including for the self-employed and those in the gig economy.” That is a tall order, a major overhaul of a complicated program in the span of the next couple of months, with little or virtually no consultation of stakeholders or engagement of experts outside of the government.

Will Minister Qualtrough, her cabinet colleagues, and of course the Prime Minister, get it right?

After all the need for EI reform has long been recognized, with lessons learned well before the onset of COVID19, but always politically convenient to put off. What does the 21st century hold for us?

Well, we’ve seen a good deal during its first 20 years, and some big lessons are pretty clear.

I draw three lessons, and these should be used to judge what the government has in store. You can read about the first here: Big shocks matter and need a response in real time.  This post discusses the second and the reforms it calls for: Lesson 2 is “The future of work has arrived and needs better income insurance for all.”

 

Continue reading “An Employment Insurance system for the 21st century: Lesson 2, The future of work calls for better income insurance” →

An Employment Insurance system for the 21st century: Lesson 1, Big shocks matter

~ MilesCorak ~ 3 Comments

Canadian workers and their families have been rocked by three major shocks in just barely more than a decade, and all three times the Employment Insurance program has been found wanting. What reforms do big shocks call for? A big shock is a big change, and so the eligibility for and generosity of Employment Insurance benefits should in some part be determined by real-time changes in employment, not just the level.

 

The 2020 Speech from the Throne boldly claims that “This pandemic has shown that Canada needs an [Employment Insurance] system for the 21st century, including for the self-employed and those in the gig economy.”

That is a tall order, a major overhaul of a complicated program in the span of the next couple of months, with little or virtually no consultation of stakeholders or engagement of experts outside of the government.

Will Minister Qualtrough, her cabinet colleagues, and of course the Prime Minister, get it right? After all the need for EI reform has long been recognized, with lessons learned well before the onset of COVID19, but always politically convenient to put off.

What does the 21st century hold for us? Well, we’ve seen a good deal during its first 20 years, and some big lessons are pretty clear. These should be used to judge what the government has in store. This post discusses the first of three lessons and the reforms they call for: Lesson 1, Big shocks matter and need a response in real time

Continue reading “An Employment Insurance system for the 21st century: Lesson 1, Big shocks matter” →