Canada’s declining social Canada’s declining social safety net – EI reform & safety net – EI reform & Budget 2009Budget 2009

Lars OsbergEconomics Department Dalhousie University

Conference: The 2009 Federal Budget: Challenge, Response and Retrospect

John Deutsch InstituteMay 7-8, 2009 - Queen's

University

Now that we need a safety net…OECD Economic Outlook March 2009 http://www.oecd.org/dataoecd/18/1/42443150.pdf

2006 2007 2008 2009 2010Canada - Unemployment 6.3% 6.0% 6.1% 8.8% 10.5%

UI/EI Replacement RateUI/EI Replacement Rate – 38 years of decline – 38 years of decline The average of the gross unemployment benefit replacement rates for two earnings levels, three family situations Source: The average of the gross unemployment benefit replacement rates for two earnings levels, three family situations Source: OECD, Tax-Benefit Models. http://www.oecd.org/document/3/0,3343,en_2649_34637_39617987_1_1_1_1,00.html ; OECD, Tax-Benefit Models. http://www.oecd.org/document/3/0,3343,en_2649_34637_39617987_1_1_1_1,00.html ; The The Canadian Labour Force Participation Rate Revisited: Cohort and Wealth Effects Take Hold Canadian Labour Force Participation Rate Revisited: Cohort and Wealth Effects Take Hold Steven James, Tim Sargent, Russell Steven James, Tim Sargent, Russell Barnett and Claude Lavoie Working Paper 2007‐01, Finance Canada, Page 11Barnett and Claude Lavoie Working Paper 2007‐01, Finance Canada, Page 11

Replacement Rate: Replacement Rate: Relatively low by OECD standardsRelatively low by OECD standards

OE C D S ummary Meas ure 2005Averag e G ros s Unemployment B enefit

R eplac ement

2232 41 49

35 3924 33 35 26 34

24 3312 1312

S eries 1

Net Replacement Rate over 60 months of unemployment, 2006

Average over 4 Family types 67% and 100% of AW without Social AssistanceOECD, Tax-Benefit Models www.oecd.org/els/social/w orkincentives

0

10

20

30

40

50

60

70

““it is important to remember that it is important to remember that only insurable earnings up to the MIE only insurable earnings up to the MIE are covered by the Employment are covered by the Employment Insurance Program” Insurance Program” REPORT OF THE CHIEF ACTUARY TO THE EMPLOYMENT INSURANCE COMMISSION ON THE EMPLOYMENT INSURANCE PREMIUM RATE REPORT OF THE CHIEF ACTUARY TO THE EMPLOYMENT INSURANCE COMMISSION ON THE EMPLOYMENT INSURANCE PREMIUM RATE AND MAXIMUM INSURABLE EARNINGS, 2009:AND MAXIMUM INSURABLE EARNINGS, 2009:

◦ 2007 2008 2009

Maximum EI insurable earnings $ 40,000 41,100 42,300Proportion of claims at maximum 42.9% 43.5% 44.2%

Maximum weekly benefits $ 423 435 447

Average weekly benefits $CANSIM, table 276-0016 318 331

% of insurable earnings above MIE 58.5% 59.1% 59.6%2007 actual: 2008, 2009 estimated

The Big Issue The Big Issue – EI is – EI is muchmuch harder harder to get, especially since 1996to get, especially since 1996

Responding to Need (a bit)

EI Eligibility and Duration April 12 - May 9, 2009

Regular Benefits Toronto Montreal

Windsor

Halifax

Unemployment Rate 8.8 8.7 13.2 6.0

Number of Insured Hours

Required to Qualify 595 595 420 700

Minimum Weeks Payable 23 23 31 19

Maximum Weeks Payable 47 47 50 41

Unemployed - March 2009 295,300 110,600 42,600 14,100

Formula-driven response to labour demand variation?

IMF: “the role of fiscal policy as a macroeconomic stabilizer … could be boosted by making regular tax and transfer programs more cyclically responsive. For example, the generosity of unemployment insurance systems could be automatically increased when the economy is in a downturn and jobs are harder to find”

IMF World Economic Outlook, October, 2008 Foreword page xiv

Political Economy Costs Large◦ Regional stereotyping & erosion of common polity

Understanding Unemployment and (Un)Employment Insurance

1970s/1980s literature◦ UI incentive effects to labour supply/search ◦ Unemployment ≈ “Leisure”

Explosion of “Happiness” literature in 1990s◦ Large Negative Impact of unemployment

Both unemployed & employed miserable when U rate rises

Risk-averse workers facing possible job loss, unable to smooth consumption privately ◦ Rationally willing to pay for insurance coverage

Canadian fiscal peculiaritiesEI Account pays for:

◦ Maternity benefits◦ Federal deficit reduction in 1990s◦ Training & employment services

Social decision to fund from EI premiums◦ payroll tax base NOT normal OECD practice

Defensible expenditures on merits◦ But NOT = “social safety net” for risk of earnings loss

during recessions

Regular Benefits + Admin ≈ 60% of EI expenditure

Downloading Cyclical RiskRecessions of early 1980s & 1990s

◦ Greater UI coverage + Social Assistance Ottawa cost-shared SA with provinces

Since 1996◦ SA costs now 100% paid by provinces◦ Individuals / Families

Less coverage & shorter, lower benefits under EI Lower real value of SA benefits

◦ Less ‘Automatic Stabilization’ implies greater cyclical risk Larger share of greater cyclical risk is now borne

by families & provinces

Budget 2009 response to “worst global recession since 1930s” ?

No change in EI eligibility or replacement Increase in duration of benefits

◦ + 5 weeks (Canada)◦ + 13 weeks (USA)

Cost = 0.037% GDP = $ 575M / 1560 B (2009) Budget 2009 Page 204

= 3.42 % of projected EI Premiums

Nil change in “social safety net”Substantially inferior to previous recessions & OECD normMarginally inferior to USA 2009

Budget 2009 emphasizes training expenditure + premium freeze

Implications of Inadequacy

Training emphasis of Budget2009 makes sense IFF ‘short, sharp blip in trend growth’◦ Social returns nil if general excess supply of skills◦

But not credible◦ OECD & IMF & others – 10.5% unemployment at

least through 2010, & then…..????◦ Benefits exhaustion @ 10%+ Unemployment

Social Insurance for market income risk◦ Quid pro quo underlying Globalization & Market-

orientated policy reforms◦ Political Economy Implications of generalized job

insecurity & uninsured mass unemployment?

Needed EI ReformsEasing of entrance requirement

Tier II for longer term unemployed◦> 50 weeks – not likely to be rare in

2010+