Trudeau government creating harmful work disincentives for many Canadians

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Appeared in the Ottawa Sun, November 4, 2020
Trudeau government creating harmful work disincentives for many Canadians

The Trudeau government recently replaced the Canada Emergency Response Benefit (CERB) with an expanded employment insurance program and the Canada Recovery Benefit (CRB).

The CRB will doubtless help some economically distressed households. It will also, however, produce harmful work disincentives for many Canadians.

For example, the CRB has a maximum value of $500 per week. However, once an individual reaches $38,000 in income for the year, that benefit begins to get “clawed back” at a rate of 50 cents on the dollar. This year, the 50 cent clawback will end once an individual earns $52,000.

In a recent analysis, public finance expert Robin Boadway of Queen’s University shows that the CRB, when combined with taxes and existing benefits (such as the Canada Child Benefit, which declines as income rises), will create significant work disincentives. Specifically, for a CRB recipient in a two-earner family with two children, once income reaches $38,000, he or she will lose approximately 20 cents in taxes and lost benefits for every extra dollar they earn. And again, this prohibitive clawback rate is in effect until an individual reaches $52,000 of income.

Consider the implications of such a large clawback. For Canadians earning $20 per hour as “gig workers” (independent contractors, temporary workers, etc.), once they reach $38,000, they will only keep four dollars for every additional hour worked until they reach $52,000.

Taking a bigger picture, this means that this hypothetical CRB recipient earning $52,000 will only enjoy an after-tax and benefit take-home pay that’s only $2,800 more than if their income was $38,000.

This kind of severe work disincentive is sometimes referred to as a “welfare wall,” which creates disincentives for work for individuals who get to keep only a small share of each extra dollar they earn. Recognizing that many people will respond to these situations by working less isn’t to accuse them of being lazy, but rather it’s to simply acknowledge they are responding rationally to the incentives they face.

The clawbacks described above are particularly worrisome when you consider that the targeted group—gig workers and the self-employed—have a lot of control over how many hours to work in any given week, month or year. Unlike regular employees with a set 40-hour week, gig workers can often choose to scale up or down their hours worked based on the incentives they face. For moderate-income gig workers, the prospect of extra work beyond $38,000 will obviously not be attractive.

Of course, not all gig workers or self-employed people will face these work disincentives. Specifically, many gig workers don’t earn $38,000 per year and so won’t reach the point where the CRB clawback begins. Still, it’s important to recognize that what Dr. Boadway describes as a “significant minority” of self-employed CRB recipients will bump up against these harmful incentives. In other words, thousands of Canadians will be in a position where they’ll receive almost no benefit for taking on additional work.

Of course, the CRB is a temporary program related to the pandemic. It’s not meant to last forever. Hopefully, the work disincentives described above will therefore be temporary and Canada can move to a social welfare system that gets help to those in greatest need while also creating positive incentives for work and productivity.

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