By Justin Hatherly
AIMS on Campus Fellow
In its 2016 budget, the federal government announced plans to expand Employment Insurance (EI). By reducing eligibility requirements and enhancing benefit levels, the government claimed that it wished to help Canadians through the economic difficulties they have been facing in recent years. However, while superficially laudable, the truth of the matter is that an expansion of EI benefits will likely have significant adverse consequences for both the Canadian economy and our social fabric. The damage will be particularly acute in an area of high unemployment such as Atlantic Canada.
The budget expanded access in two ways. Firstly, in regions of high unemployment, Canadians would have to pay premiums for a shorter period before qualifying for benefits. Secondly benefit levels would be enhanced by increasing the percentage of income insured.
While these reforms are intended to help Canadians, they will be debilitating over the long run by increasing structural levels of unemployment. This is because EI essentially subsidizes joblessness. When you pay people not to work, the increased number of people who fail to hold employment over the long term should not be surprising.
This is not to say that the unemployed are lazy. They are instead simply rational. As EI becomes easier to receive and the payouts become more generous, the opportunity cost of not finding a job declines.
If EI pays high benefits and is easy to qualify for, fewer people will have incentives to find full-time work quickly and instead may become unemployed or underemployed over the long term. When the relative price of leisure falls, at the margin, people tend to demand more leisure time.
Evidence from the United States validates this economic theory. For example, in the aftermath of the 2008 Financial Crisis, the US extended the duration for which most workers could collect unemployment insurance from 24 to 99 weeks. Subsequently, the unemployment rate remained elevated until the beginning of 2014, when extended benefits ended.
Following the end of extended benefits, the unemployment rate fell rapidly from 6.6 percent in January 2014 to 4.6 percent in November 2016. This rapid decline has not been driven by the business cycle alone, as US real GDP growth slightly decelerated during this period.
Instead, as evidence from economists Craig A. Depken II and Paul Gaggal demonstrates, a substantial reduction in the unemployment rate can be attributed to the changed incentives relating to unemployment insurance. With a shorter duration of benefits, those collecting unemployment payouts increased the intensity of their job search and adjusted their wage expectations to more moderate levels.
EI policy represents a delicate balance between providing an adequate safety net while maintaining work incentives. Unfortunately, the new policies of the federal government would upset such a balance.