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Canada’s declining social safety net
– EI reform & Budget 2009
Lars Osberg
Economics Department
Dalhousie University
Conference: The 2009 Federal Budget:
Challenge, Response and Retrospect
John Deutsch Institute
May 7-8, 2009 - Queen's University
Now that we need a safety net…
OECD Economic Outlook March 2009 http://www.oecd.org/dataoecd/18/1/42443150.pdf
Canada - Unemployment
2006
2007
2008
2009
2010
6.3%
6.0%
6.1%
8.8%
10.5%
UI/EI Replacement Rate
– 38 years of decline
The average of the gross unemployment benefit replacement rates for two earnings levels, three family situations Source: OECD, Tax-Benefit Models.
http://www.oecd.org/document/3/0,3343,en_2649_34637_39617987_1_1_1_1,00.html ; The Canadian Labour Force Participation Rate Revisited: Cohort
and Wealth Effects Take Hold Steven James, Tim Sargent, Russell Barnett and Claude Lavoie Working Paper 2007‐01, Finance Canada, Page 11
Average Gross Unemployment
Benefit Replacement: Canada
1961-2005
OECD Summary Measure
24
22
20
18
16
14
12
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
10
Replacement Rate:
Relatively low by OECD standards
OE C D S ummary Meas ure 2005
Averag e G ros s Unemployment B enefit
R eplac ement
S eries 1
24
33
Au
12 13
A
26 34
US
24
33 35
UK
12
35 39
st
ra
l
A u ia
s
B e tria
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Ca m
n
D e ad
nm a
a
F i rk
nl
an
Fr d
a
G nc e
er
m
an
y
Ne
th I ta ly
N e erla
w nd
Ze s
al
a
N o nd
rw
S w ay
S w ed
itz en
er
la
nd
22
32
49
41
Net Replacement Rate over 60 months of
unemployment, 2006
Average over 4 Fam ily types 67% and 100% of AW w ithout Social Assistance
OECD, Tax-Benefit Models w w w .oecd.org/els/social/w orkincentives
70
60
50
40
30
20
10
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xe tal y
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ur
et
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r
N
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Ze s
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an
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Sp
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Sw in
e
Sw d e
i tz n
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an
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Ki d
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U
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St
at
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Au
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Au
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ria
Be
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Fr
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2
0
“it is important to remember that only
insurable earnings up to the MIE are covered
by the Employment Insurance Program”
REPORT OF THE CHIEF ACTUARY TO THE EMPLOYMENT INSURANCE COMMISSION ON THE EMPLOYMENT INSURANCE PREMIUM RATE AND
MAXIMUM INSURABLE EARNINGS, 2009:
◦
2007
40,000
42.9%
2008
41,100
43.5%
2009
42,300
44.2%
Maximum weekly benefits $
Average weekly benefits $
423
318
435
331
447
% of insurable earnings above MIE
58.5%
59.1%
59.6%
Maximum EI insurable earnings $
Proportion of claims at maximum
CANSIM, table 276-0016
2007 actual: 2008, 2009 estimated
1977-01
1977-09
1978-05
1979-01
1979-09
1980-05
1981-01
1981-09
1982-05
1983-01
1983-09
1984-05
1985-01
1985-09
1986-05
1987-01
1987-09
1988-05
1989-01
1989-09
1990-05
1991-01
1991-09
1992-05
1993-01
1993-09
1994-05
1995-01
1995-09
1996-05
1997-01
1997-09
1998-05
1999-01
1999-09
2000-05
2001-01
2001-09
2002-05
2003-01
2003-09
2004-05
2005-01
2005-09
2006-05
2007-01
2007-09
2008-05
2009-01
The Big Issue – EI is much harder to get,
especially since 1996
UI/EI Beneficiaries to Unemployed Ratio
Canada & Ontario - 1976-2009
CANSIM V384773, V384807, V2091135, V2094924
12 MONTH MOVING AVERAGE
0.900
0.800
0.700
0.600
0.500
0.400
0.300
0.200
0.100
0.000
CANADA
ONTARIO
Responding to Need (a bit)
EI Eligibility and Duration April 12 - May 9, 2009
Regular Benefits
Toronto
Unemployment Rate
Montreal Windsor Halifax
8.8
8.7
13.2
6.0
595
595
420
700
Minimum Weeks Payable
23
23
31
19
Maximum Weeks Payable
47
47
50
41
Unemployed - March 2009
295,300
110,600
Number of Insured Hours
Required to Qualify
42,600 14,100
Formula-driven response to labour
demand variation?

IMF: “the role of fiscal policy as a macroeconomic
stabilizer … could be boosted by making regular tax and
transfer programs more cyclically responsive. For
example, the generosity of unemployment insurance
systems could be automatically increased when the
economy is in a downturn and jobs are harder to find”


IMF World Economic Outlook, October, 2008 Foreword page xiv
Political Economy Costs Large
◦ Regional stereotyping & erosion of common polity
Understanding Unemployment and
(Un)Employment Insurance

1970s/1980s literature
◦ UI incentive effects to labour supply/search
◦ Unemployment ≈ “Leisure”

Explosion of “Happiness” literature in 1990s
◦ Large Negative Impact of unemployment
 Both unemployed & employed miserable when U rate rises

Risk-averse workers facing possible job loss,
unable to smooth consumption privately
◦ Rationally willing to pay for insurance coverage
Canadian fiscal peculiarities

EI Account pays for:
◦ Maternity benefits
◦ Federal deficit reduction in 1990s
◦ Training & employment services

Social decision to fund from EI premiums
◦ payroll tax base NOT normal OECD practice

Defensible expenditures on merits
◦ But NOT = “social safety net” for risk of earnings loss during
recessions

Regular Benefits + Admin ≈ 60% of EI expenditure
Downloading Cyclical Risk

Recessions of early 1980s & 1990s
◦ Greater UI coverage + Social Assistance
 Ottawa cost-shared SA with provinces

Since 1996
◦ SA costs now 100% paid by provinces
◦ Individuals / Families
 Less coverage & shorter, lower benefits under EI
 Lower real value of SA benefits
◦ Less ‘Automatic Stabilization’ implies greater cyclical
risk
 Larger share of greater cyclical risk is now borne by families &
provinces
Budget 2009 response to “worst
global recession since 1930s” ?


No change in EI eligibility or replacement
Increase in duration of benefits
◦ + 5 weeks (Canada)
◦ + 13 weeks (USA)

Cost = 0.037% GDP

= $ 575M / 1560 B (2009) Budget 2009 Page 204
= 3.42 % of projected EI Premiums
Nil change in “social safety net”
Substantially inferior to previous recessions & OECD norm
Marginally inferior to USA 2009
Budget 2009 emphasizes training expenditure + premium freeze
Implications of Inadequacy

Training emphasis of Budget2009 makes sense
IFF ‘short, sharp blip in trend growth’
◦ Social returns nil if general excess supply of skills
◦

But not credible
◦ OECD & IMF & others – 10.5% unemployment at least
through 2010, & then…..????
◦ Benefits exhaustion @ 10%+ Unemployment

Social Insurance for market income risk
◦ Quid pro quo underlying Globalization & Marketorientated policy reforms
◦ Political Economy Implications of generalized job
insecurity & uninsured mass unemployment?
Needed EI Reforms

Easing of entrance requirement

Tier II for longer term unemployed
◦ > 50 weeks – not likely to be rare in 2010+