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.

How Capitalism Helped End Slavery

The development of capitalism and the rise of humanitarianism occurred around the same time – from the mid-18th century continuing into the present day. Clearly there is some sort of causal connection that historians and economists have attempted to describe and identify. Recently, some academics have argued that, while slavery obviously contributed to the growth of industrializing economies and capitalism as a mode of production, capitalism was ultimately the system that was able to finally end slavery and the slave trade.

What many fail to realize when examining capitalism in an historic context is that it is more than a system of economic production. Sure, much of what capitalism is boils down to a how it organizes markets – but the mode of production it creates is necessarily informed by the philosophical side of capitalism as an ideology.

From Friedman to Krugman, many economists have agreed that capitalism is more than just economic – it is informed by classical liberalism ideas, such as property rights. This small distinction can easily change the narrative of capitalism throughout history but is lost on many academics. There can be various forms of capitalism but all proper definitions are derived from the central ideas of property rights and individual liberty.

Capitalism was a force that was able to push the moral boundaries of society better than any government or revolution prior. The existence of relatively free markets in the 17th, 18th, and 19th century allowed for the expansion of moral responsibility and for individuals to address society’s values while providing an avenue for others to listen. The expansion of markets and moral boundaries encouraged promise keeping (strengthening contract law) and engaged individuals with the consequences of their actions.

Thomas Haskell has argued that if there was a technology, such as a button, which individuals around the world could use at no cost to the end the suffering or negative utilities of others, most individuals would use that button. He was illustrating the idea that, while we are passively aware of suffering around the globe, we don’t act because we are not confronted with how our actions affect the situation of others. Likewise, free markets forced individuals to contemplate their role in the slave trade.

Take for example, Mr. John Wollman – a Quaker on the Eastern Seaboard of the United States. Born in the 18th century, Mr. Wollman owned many businesses spanning across different industries. What ultimately drove him to oppose the slave trade was his direct dealings with the bills of sale for slaves. He abhorred the dehumanization of others, even if they were not Quakers, and ultimately decided to join the clergy and travel the United States to oppose the slave trade. Increased globalization and free markets ultimately enabled Mr. Wollman to be exposed to the horrors of the slave trade and help inform him of his fellow man.

Put simply, capitalism compounded enlightenment thinking and provided more avenues to end slavery. Capitalism, at is core, is a system that promotes free exchange and voluntary association with other parties. Countries have twisted this system to suit their own political needs, like modern day China, but ultimately lack the core tenants that are necessary in a capitalist system. As a system of production and political thought, capitalism enabled the end of slavery and can be used to end similar systems of oppression around the world today.