Rational actors, irrational policy: Employment Insurance and Atlantic Canada

By Henry Gray (AIMS on Campus Student Fellow)

In 1971, Prime Minister Pierre Trudeau’s government passed the Unemployment Insurance Act, overhauling Canada’s Employment Insurance (EI) system (then known as “Unemployment Insurance” or “UI”) by dramatically expanding the scope of the program that had been created in 1935 in the midst of the Great Depression. Trudeau’s reforms shortened the length of time required to qualify by 73%, boosted benefits by 65%, and lengthened the benefit period by 40%.

 

This had the unfortunate but entirely predictable effect of raising unemployment levels in those regions further still by making joblessness, in many cases, more attractive than work. Why would someone do extra work when they could earn as much or more by collecting a pogey cheque? If someone is offering you money, why not take it? Indeed, the amount of UI claimants instantly swelled. Provincial governments devised short-term employment schemes that shifted their residents from provincially funded welfare to federally funded UI. The Canadian unemployment rate rose by 2% in Canada, but it rose by 4% in Atlantic Canada.

 

It makes no sense to criticize the Atlantic Canadians who elected to accept unemployment benefits in this scenario. This is exactly what rational choice theory would predict. If one assumes that individual choice is fundamentally ‘rational’ in the sense that an individual will try to gain as much as possible while expending as little as possible, then why would one assume that an individual would do more work to earn a given amount of money than is necessary? Rather than the rational choices of individual Atlantic Canadians, what deserves to be criticized are the irrational federal government policies that engineer a state of affairs in which not working is more advantageous than working.

 

Trudeau’s major reform of EI had a particularly deleterious effect on Atlantic Canada. As Justin Hatherly noted in his recent policy paper published by AIMS, Canada is the only industrialized state that adjusts unemployment benefits by region, i.e. EI beneficiaries in regions with chronically high unemployment such as Atlantic Canada receive longer-lasting benefits and do not have to work as long in order to qualify for benefits. EI is divided into 58 ‘Economic Regions,’ each with its own unique set of rules. This induces both confusion and unfairness.

 

In an earlier AIMS-on-Campus op-ed, I pointed out that Atlantic Canada holds the dubious distinction of having the most people per capita at or near the minimum wage in Canada, and one of the factors to which I attributed this is the fact that minimum wage rates across the Atlantic Provinces are high relative to the median wages in those provinces. However, it is also possible that the same disincentives to employment that EI generates play a part in wage stagnation in Atlantic Canada.

 

President Ronald Reagan is alleged to have noted that, “If you want more of something, subsidize it”. Whatever its compassionate intentions, EI, as presently constituted, effectively subsidizes unemployment, thus hurting the very people that the program is meant to help. For 46 years – two generations – bad government policy has afflicted Atlantic Canada, and a corrupting flood of federal money has severely impeded economic prosperity. Atlantic Canadians should put more pressure on the federal government to reform EI in a way that provides assistance to those who need it while avoiding the distortions that have plagued the region for almost half a century.

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