Deconstructing the welfare wall

By Mariana Carrera
AIMS on Campus Fellow

There’s been a lot of talk about building walls lately, and I find that very disappointing. It is hugely important to pay attention to the walls policymakers are seeking to construct; however, we also need to remember existing walls that ought to be deconstructed. 

Justin Hatherly’s piece on expanding EI argued that recent federal reforms will have harm our economy, particularly in our beloved Atlantic Canada. He argues that unemployment will increase because it is simply rational to stay on EI, instead of finding work, as the opportunity cost is better than finding a job.

But why is the opportunity cost of finding a job so high? Economists have created a handy term for the answer: the ‘welfare wall.’ As soon as one finds employment, benefits get taken away and one moves into a higher tax bracket, which involves several problems.

First, having nearly 50 percent less income for a prolonged period means that household finances are likely in a precarious state. It is probable that one will not have vast reserves of savings to buffer the costly transition between EI and employment.

Second, the removal of EI in the initial period of a new job is risky for individuals while they go through a required probationary period. If they are terminated during this time, they may be ineligible for financial support due to insufficient hours worked.

Third, the EI process forces individuals to take the first available job. This is bad for the economy because it creates an inefficient use of labour. People working below their skill level means that they do not contribute as much as they could to the economy, and the longer they spend working below their skill level, the more they risk not returning to that level of productivity.

Finally, Atlantic Canada relies heavily on seasonal industries. Reducing benefits has the potential to force labour to move away from essential industries like tourism and natural resource production. If Atlantic Canada wants to move away from those industries and replace it with something better, it had better engage in more strategic planning than simply reducing EI.

So yes, the unemployed are rational. EI expansion is not the problem; it is that we have done too little to dismantle the welfare wall. People are right to fear the risks of re-entering the job market. If we follow the American example as Justin suggested, we may also see employment go up. But this will be thanks to the inefficient use of labour and people falling off the unemployment statistics, which do not include those not actively searching for work. Atlantic Canada can do better. It is time to dismantle our own walls.

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