Overly generous EI system could cause problems long after CERB winds down

Canada’s employment insurance (EI) is on autopilot, heading in a perilous direction. As unemployment increases, EI’s accessibility and generosity automatically grow, with risky consequences for Canada’s fiscal health and labour market.

EI benefits are based on unemployment in each of Canada’s 62 EI regions. For example, where unemployment is 6.1 per cent to 7.0 per cent, a minimum 665 hours are required for 15 weeks of benefits, with additional hours generating additional weeks, compared to 420 hours for 26 weeks of benefits where unemployment is between 13.1 per cent and 14.0 per cent.

Due to soaring unemployment, vastly more people already qualify for additional weeks of EI benefits with reduced hours of work than just a couple months ago. This could create long-term problems. Generous unemployment systems boost unemployment and weaken private sector activity, as businesses vie against government payments to attract employees.

EI is now more generous across Canada than it was in Atlantic Canada two months ago. Canadian workers then (on average) had to work a minimum of 627.5 hours to qualify for 17.3 weeks of benefits. By comparison, in Atlantic Canada, 570.5 hours qualified workers for 19.7 weeks of benefits.

Today, Canadian workers on average need only 491.3 hours of work to qualify for 23.5 weeks of benefits. For example, the EI system in Toronto is now more generous than it was in St. John’s, Newfoundland, two months ago; 595 hours of work for 18 weeks of benefits in St. John’s then compared to 490 hours for 23 weeks of benefits in Toronto today.

This poses a long-term threat to the Canadian labour market. When “regionally-extended” EI was introduced in 1971, Atlantic Canada’s relatively high unemployment immediately created more generous and accessible benefits, ultimately entrenching increased levels of unemployment as more workers became dependent on the system. The continuing high levels of unemployment maintained the system’s generosity.

In 1970, Atlantic unemployment was 7.6 per cent, or 1.7 percentage points above the national average; by 1975, Atlantic unemployment was 11.6 per cent, or 4.5 percentage points above the national average. Many employers found they couldn’t compete with government payments. Despite double digit unemployment, businesses reported worker shortages.

Already, worries are emerging that the temporary COVID-related Canadian Emergency CERB program may discourage people from returning to work and create increased dependency. Canadian Federation of Independent Business president Dan Kelly warns: “Despite the record unemployment numbers, many of these small business owners are now facing significant staffing challenges.” An overly generous EI system could entrench problems long after CERB winds down.

This adds to Canada’s fiscal woes. In most years, the amount workers and employers contribute to EI is considerably greater than the benefits paid out, producing a healthy surplus for Ottawa. Current high levels of unemployment will expand generosity, reduce contributions, and increase benefits, turning a surplus into a significant deficit.

In 2018, the most recent financial data available, the average EI contribution across Canada per participant in the labour force was $1,121 with average benefits of $856. In Atlantic Canada, the average contribution was about the same, $1,193, but the benefits were three-times the national level at $2,512. EI ran a total surplus of $6.9 billion outside of Atlantic Canada-wide but lost $1.6 billion in Atlantic Canada.

The average unemployment rate in Atlantic Canada in 2018 was 9.2 well below the current cross-Canada rate of 13.7 per cent. Higher unemployment means more red ink. Uncertainty around COVID makes precise predictions impossible, but losses will be in the billions. (CERB will absorb much of the short-term loss, since many unemployed will collect CERB rather than EI, reducing EI payouts while CERB is in place.)

EI has many critics on a number of grounds, not just the employment impact but also equity issues. These critics fairly question why a poor waitress in Calgary, who makes contributions every year and may never be eligible for benefits, should subsidize an affluent fisherman in Nova Scotia who collects EI every year.

Employment patterns do not change overnight. If the COVID unemployment spike is brief, EI could return to normal, but normal is not satisfactory. For reasons of fairness and economic efficiency, the system should be reformed.

Over the long term, this will benefit Atlantic Canada too. The problems EI creates are not lost on Atlantic Canadians. As the Royal Commission on Newfoundland and Labrador reported on its consultations in 2002 and 2003, “Many felt that the self-reliance and work ethic of the people in the province have been lost as a result of easy access to government social programs, particularly employment insurance.”

This is not the fault of Atlantic Canadians—I am one—but rather of a badly structured program, which has done much damage in the region. The danger now is the damage will become national.