The Moral Hazard of Current Employment Insurance

By Ainslie Pierrynowski (AIMS on Campus Student Fellow)

Employment Insurance (EI) was created with the best of intentions in mind. Launched in 1941, the program provided temporary benefits to the poorest workers. Over the years, EI has evolved and expanded, becoming Canada’s main source of relief for displaced workers as of 2013. Yet, in Atlantic Canada, EI has coupled with seasonality to produce dire consequences for the region’s economy.

These effects can be traced back to the EI reforms which took place in the 1970’s. As AIMS author Justin Hatherly recounts in this policy paper, the 1971 Unemployment Insurance Act rendered EI eligibility criteria less stringent. Further, in 1977, Canada’s provinces and territories were divided into EI economic regions. The higher the unemployment rate in one’s EI region, the fewer insurable hours are needed to qualify for EI benefits and the longer these benefits can be received. Due to these changes, workers in Atlantic Canada today receive a substantial percentage of EI benefits relative to the percentage of covered workers in the region. Not coincidentally, according to Andrew Sharpe and Jeremy Smith of the Centre for the Study of Living Standard, Atlantic Canada had the highest employment seasonality rate in the country throughout the period 1976-2003. In fact, while Atlantic Canada only accounted for 11.1% Canada’s total unemployment during this time period, it encompassed 20.9% of Canada’s total seasonal unemployment. While Atlantic Canada may have a high concentration of seasonal industries relative to the rest of the country, EI in its current incarnation has played a major role in seasonal unemployment’s current prevalence—and persistence—in Atlantic Canada.

In particular, EI benefits may serve to incentivize workers to pursue part-time, seasonal work rather than full-time, but seemingly less lucrative, jobs. For instance, Sharpe and Smith note that the lack of full-time work in Atlantic Canada could partially stem from the practice of firms with full-year operations hiring seasonal employees that only work long enough to attain EI benefits. The resulting seasonal unemployment problem, in turn, has an adverse economic impact on the region. With a population that is both aging and in decline, but which relies increasingly on public services—thus fewer and fewer individuals are burdened with paying for these services—the dual issue of seasonal unemployment and EI hints at an approaching financial tipping point. Moreover, numerous small and medium-sized enterprises (SMEs) in Atlantic Canada have voiced concern over the labour shortage in Atlantic Canada—and its possible connection to EI. Indeed, 31% of SME owners in Atlantic Canada asserted that they felt as if they were “competing” with the EI system for employees (compared to 33% who stated the contrary and 36% who reported being unsure), while 27% contended that employees had requested to be laid off in order to collect EI benefits. Further, as Hatherly notes, whereas labour mobility in a healthy labour market can eventually cause regional differences in unemployment rates to dissipate, the regional nature of EI benefits may deter seasonal workers from migrating to more productive areas and thus entrench the unemployment disparity between Atlantic Canada and the remainder of the country.

Thus while it provides much-needed relief to unemployed workers, the EI program as it exists today underpins Atlantic Canada’s seasonal unemployment problem. When it comes to combatting the underlying causes of seasonal unemployment in Atlantic Canada, the path forward is fraught with difficulties. Attempts to dial back EI benefits may be met with resistance from Atlantic Canadians who rely on the program, as shown by the unpopularity of the Chrétien government’s Employment Insurance Act, which mandated stricter entry requirements for EI and reduced certain benefits, in many Atlantic Canadian ridings. Meanwhile, a Canadian Federation of Independent Business report found that of the Atlantic Canadian seasonal SMEs which attempted to extend their seasons, the vast majority were unsuccessful. Hence, Atlantic Canada has found itself in a Catch-22, in that the region needs labour mobility, a diverse economy, and profitable full-time jobs to combat seasonal unemployment and dependence on EI, yet the EI program serves to disincentivize attaining these very needs. As one Atlantic Canadian well-drilling entrepreneur attested, “We cannot get trained workers; I have been looking for trained, licensed, workers for our industry for four years without success.” In light of the evidence presented here, an EI program with benefits tied to pursuing human capital—the training, experience, education, and skills needed to create a diverse, productive economy—rather than the region where one lives would push Atlantic Canada further to meeting these needs, grant unemployed workers support and security, and avoid falling victim to the moral hazard of the current EI system.

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