Title: Does Canada’s EI plan need beefing up?

Sub-title: Improving Canada’s employment insurance program would provide key stimulus during tough economic times. But doing too much, may do more harm than good.

 

Increasing calls have come out in recent weeks for improvements to Canada’s Employment Insurance (EI) regime.  Earlier this year the federal government announced $3 billion in new measures, including a five-week benefit payment extension. But pressure for further action increased late last month, after Statistics Canada reported that 325,000 Canadians made initial and renewal benefits claims, the largest number ever reported.

 

Politicians and special interest groups jumped on the news. Liberal Party leader Michael Ignatieff, as well as representatives of the NDP, Bloc Québécois and several union leaders, have been pushing for increases in the percentage of unemployed workers eligible to receive coverage.

 

Ignatieff even threatened to force an election if the government does not act. Shortly thereafter Prime Minister Stephen Harper conceded that he would be willing to make changes to the system if employees were willing to pay higher taxes. The question right now is what those changes will be.

 

Employment insurance: an excellent economic stabilizer

Temporarily increasing EI funding makes some sense when a country is in recession. In addition to helping those laid off workers who are entitled to collect benefits, proponents argue that the increased spending would stimulate the Canadian economy. On the other hand, like any federal government measure, if taken too far, current pressure to boost EI spending could end up doing more harm than good.

 

First things first. There is indeed a strong school of thought - popularized by the late British economist John Maynard Keynes, - that government spending during tough times should be boosted to compensate for reduced private sector spending. In theory, among the most effective of such stabilizers would be those (like EI), which directly help the people most affected by a downturn.

 

Indeed during peak months of the current financial crisis, fears that global economies could slip into another depression were greatly calmed by the fact that government spending in the developed world is far higher as a percentage of the economy than it was during the last depression of the 1930s. That’s because since government spending tends to remain stable (or to increase) during tough times, it provides a floor to how bad things could get.

 

On the other hand, the safety nets are not as strong in Canada as they once were, argue Grant Bishop and Derek Burleton, economists with TD Bank Financial Group. “Over the past decade, the EI program has gone through a seemingly continuous evolution,” they write in a recent study. “The most recent overhaul occurred in 1996, when qualification criteria were tightened and benefits reduced.”

 

The net effect of those, and other changes, was such that during the current recession, according to various estimates, only about 40 percent of unemployed Canadians are eligible to collect EI benefits. That is a far lower percentage than those eligible during the recessions of 1980s and 1990s.

 

According to Sebastien Lavoie, an economist with Laurentian Bank Securities, the weaker EI regime has been in part responsible for a recent rise in personal bankruptcies. He argues that the reduced EI coverage, covered with shorter benefits collection periods, suggest that personal bankruptcies could increase even further in Canada during coming quarters. 

 

Too much, could do more harm than good

So with government, major opposition parties and unions all supporting increased EI spending, the idea must me a good one, right? Well yes and no. That’s because there are two sides to the EI story. One big problem with the program is the way it is funded. Under the existing regime employees pay 1.73 percent of their insurable earnings into the system and employers pay 2.42 percent. When you add the two, that works out to a 4.15 percent levy on workers’ salaries. 

 

The problem is that economists have long known that anything you tax, you get less of. For example, if you tax employee salaries, this makes other productivity enhancing options, (such as outsourcing, or machinery purchases) more attractive. If businesses buy sophisticated machinery and outsource, rather than hire more workers, this ultimately hurts job creation.

 

In fact payroll taxes on employees’ salaries are what experts call “jobs taxes.” Worse, since workers do not see the portions of EI payments made by their employers, many assume that the program costs far less than it actually does. The same thing applies to other jobs taxes such as medicare levies and employers’ shares of Canada Pension Plan remittances.

 

In short, although improvements to the EI regime would likely be helpful during coming months, those changes would work best if they remain temporary. As the economy picks up, the focus will need to once again shift to boosting job creation and overall Canadian economic productivity. Keeping jobs taxes to a minimum is one of the best ways to do that.

 

The big challenge is that once government spending measures get onto the books, it’s almost impossible to get them off.

 

Peter Diekmeyer is Bankrate.ca’s economics columnist.

 

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