MEMBERS OF THE TASK FORCE ON UNEMPLOYMENT INSURANCE (UI)Daniel Barron

Denis LatulippeStella Ann Ménard

Jim MurtaMichel Rochette

Jean Sasseville, ChairpersonKERRY WORGAN

TABLE OF CONTENTS

1.INTRODUCTION12.EXECUTIVE SUMMARY13.HISTORICAL BACKGROUND44.CURRENT SITUATION65.SOCIAL INSURANCE VERSUS WELFARE86.INTERNATIONAL COMPARISON127.RECOMMENDATIONS – COVERAGE138.RECOMMENDATIONS – DESIGN149.RECOMMENDATIONS – FINANCING2010.COMPLETE OVERHAUL2111.CONCLUSIONS2212.BACKGROUND ON THE CANADIAN INSTITUTE OF ACTUARIES (CIA)22BIBLIOGRAPHY23APPENDIX A – PRIVATE UNEMPLOYMENT INSURANCE PROGRAMS24APPENDIX B – EXPERIENCE RATING26APPENDIX C – INTERNATIONAL COMPARISON 30APPENDIX D – HISTORICAL REVIEW OF TRAINING32APPENDIX E – REGISTERED UNEMPLOYMENT SAVINGS TRUST (RUST)35APPENDIX F – MEMBERS OF THE TASK FORCE ON UNEMPLOYMENT INSURANCE (UI)37

1.INTRODUCTION

The Canadian Institute of Actuaries (CIA) established a task force to review the Unemployment Insurance (UI) program and recommend changes to improve its efficiency. This report targets areas where actuaries judged they could add the most value. The scope of this paper is limited to the UI program and does not review the other components of social security, such as the Canada Assistance Program. Many valid alternative solutions exist to the very specific recommendations discussed in the report; accordingly, these recommendations should be seen as suggestions and examples of the direction the UI program should be going.

2.EXECUTIVE SUMMARY

The first UI Act became law in 1940, following the Great Depression of the 1930’s. Its original purpose was to provide financial assistance to industrial and commercial workers during periods of temporary unemployment. Between 1940 and 1970, the basic concepts remained unchanged, except that new categories were added, in particular seasonal workers in the fishing and agricultural industries. By 1971, 80% of the paid workers were covered by the plan. The benefits were then based on how long the claimant had worked in insurable employment: one week of benefit for every two weeks of insurable employment during the 104 weeks immediately preceding application.The UI Act of 1971 introduced a major reform. One objective was to implement quasi-universality. A second objective was to improve the coordination with agencies which aim to improve employment potential or provide further social or economic support. Also, the tripartite financing scheme (employees, employers and the federal government) was revised to make the federal government responsible for the costs of benefits when unemployment exceeded 4%.Amendments since 1971 have tended to reduce the government share of UI costs, to reduce the benefits available for regular unemployment situations and to increase the benefits available in case of maternity and training.The current UI program has some valuable features:●quasi-universal coverage;● national uniformity; and●administrative costs represent a small proportion of total costs.However, various criticisms to this program need to be addressed, in particular:●no full universality;●little incentive for employers and employees to reduce claim cost;●program leaves room for abuse; and●a significant number of repeat claimants.The program not only covers the inability to find work, but the inability to perform work due to sickness, maternity or parental care. There are other situations where the claimants are not expected to look for work: work-sharing, job creation, training, self-employment and relocation assistance. For self-employed fishermen, benefits are only paid during the off-season (i.e., when work cannot be performed). The insurance concept of replacing a loss applies poorly to many of these situations.The most important difference between insurance and welfare principles is that the right to welfare and the amount of welfare benefits are based on the beneficiary’s

condition, such as income and family status, rather than on the occurrence of a well-defined contingency and the individual must be earning income prior to the occurrence of the contingency.Welfare coverage is usually not limited to subgroups of the population, and benefits are paid to all the people really in need. The amount of benefits are low and negatively correlated with other sources of income; welfare benefits are paid only to people with limited financial resources. Welfare benefits are usually paid from general taxation, and it is unusual to maintain a separate fund. The administration is more difficult and expensive as the right to benefits is not easily established and stricter control is needed.Regular benefits still represent the largest share of the total benefits paid. However, a larger proportion of the regular benefits are paid to fulfil welfare objectives due to the structure of the UI program, in particular, the coverage of seasonal workers and the regionally extended benefits. Over the years, different studies have clearly highlighted the significance of repeat claims by seasonal and contractual workers which benefit from a continuous source of income supplementation – welfare – through the regular benefits of the UI program.Despite an increase in the unemployment rate, the regular unemployment and sickness benefits now represent a lower proportion of total costs than they did 20 years ago. In 1993, the unemployment and sickness benefits represented about 75% of the total costs versus close to 90% in 1973. The cost of sickness benefits has always been marginal in comparison to the costs of regular unemployment benefits. Most of the growth in the costs of nonregular benefits has occurred in the last five years, following the introduction of the parental benefits and training and its related costs.Each recommendation is analysed in the body of the report. The recommendations are as follows:

RECOMMENDATION 1: In our view, the UI program should continue with its policy of generally not covering self-employed workers. However, certain categories of the self-employed, such as contractual workers, should be covered.RECOMMENDATION 2: UI premiums should only be required on earnings above the minimum insurability limit but benefits still be based on total earnings up to the weekly maximum.RECOMMENDATION 3: The formula for setting maximum contributory earnings should be revised and based on the average earnings over a shorter period than the current eight years.RECOMMENDATION 4: UI coverage should not be extended to more categories of part-time workers. Instead, the current minimum insurability level should be reviewed and perhaps coverage should be increased slightly, where it is needed, and to reduce duplication between the UI and welfare systems.RECOMMENDATION 5: Because unemployed claimants who take part-time jobs pay, in effect, full tax on any earnings over 25 percent of their UI benefit, there is little incentive for them to seek additional

employment. A more progressive formula for calculating part-time earnings should be put in place to increase the incentive for claimants to obtain additional work.RECOMMENDATION 6: The Unemployment Insurance program should be returned to its original purpose as an income protection program for the strict insurable risk of unemployment and as a protection against nonoccupational sickness. The following benefits, which are not insurable risks, and which presently account for just one-third of all UI costs, should be transferred to the welfare, or other appropriate sectors:●extension of duration of benefits because of high regional unemployment●training benefits●fishermen’s benefits●maternity, parental and adoption benefitsRECOMMENDATION 7: Because repeat claimants are largely seasonal and contractual workers for whom UI has become a form of income supplementation rather than pure insurance, the benefit rates of repeat claimants should be reduced or the number of weeks they must work to qualify for benefits should be increased.RECOMMENDATION 8: The benefit repayment provision should be abolished, at least for first-time claimants, and be replaced by different design features for all others.RECOMMENDATION 9: A deficit from unemployment insurance could be recorded as an account receivable in the government’s budgetary balance. Thus, unemployment insurance results would not influence government’s deficits. Any UI deficit is automatically and fully repaid by employers and workers.RECOMMENDATION 10: A new UI Act should require that an actuarial review be performed quinquennially. An actuary would continue to calculate annually the statutory contribution rate, as required by Sections 48 and 49 of the current UI Act, and suggest alternative contribution rates. RECOMMENDATION 11: The premium-setting mechanism could be refined to include the calculation of actuarial reserves.RECOMMENDATION 12: At present, experience rating should not be implemented considering the greater importance of other changes to the current UI program.

The implications of reducing UI benefits should be carefully evaluated. The effect on claimants and provincial social assistance programs should be factored in. We should also remember that an increased level of poverty and the loss of self-respect and social isolation of the unemployed creates high social and economic costs for both the individuals concerned and society: health expenditures, criminal activity and mortality.The Institute believes that changes proposed in this report should be given serious consideration. We offer further assistance as requested.

3.HISTORICAL BACKGROUND

“With hindsight, the 1971 revision may have been naive in holding to a goal of 4% unemployment, and in introducing rules which bred a culture of dependency in many areas and distorted the functioning of labour markets – namely, generous benefits after minimal durations of work and extended benefits in areas of higher unemployment. It was, however, prescient in extending coverage to all paid workers, given the later spread of unemployment, in providing for annual adjustment of financial parameters, given the high inflation rates that followed. Finally, it innovated providing sickness benefits and anticipated women’s demands in the granting of maternity benefits.”

Michel Bédard1

The first UI Act became law in 1940, following the Great Depression of the 1930’s. Its original purpose was to provide financial assistance to industrial and commercial workers during periods of temporary unemployment. Between 1940 and 1970, the basic concepts remained unchanged, except that new categories were added, in particular seasonal workers in the fishing and agricultural industries. By 1971, 80% of the paid workers were covered by the plan. The benefits were then based on how long the claimant had worked in insurable employment: one week of benefit for every two weeks of insurable employment during the 104 weeks immediately preceding application.The UI Act of 1971 introduced a major reform. One objective was to implement quasi-universality. A second objective was to improve the coordination with agencies which aim to improve employment potential or provide further social or economic support. Also, the tripartite financing scheme (employees, employers and the federal government) was revised to make the federal government responsible for the costs of benefits when unemployment exceeded 4%.Amendments since 1971 have tended to reduce the government share of UI costs, to reduce the benefits available for regular unemployment situations and to increase the benefits available in case of maternity and training. The 1990 revision completely eliminated the government share of UI costs, which had represented 20% to 25% of the total in the 1980’s. This brought the UI program to full premium financing for the first time since its inception in 1940. Other important amendments provided for increased benefits for training and for parents of new born children, while reducing the availability of regular benefits.There has been a trend towards an increase of total UI costs as a percentage of insurable earnings over the last 20 years. This increase is explained by the increase in the unemployment rate and the introduction or upgrading of ancillary benefits.Although unemployment is cyclical and important variations may be registered from year to year, there has been a fundamental trend towards an increase in the Canadian unemployment rate over the last 40 years, as shown in Table 1 – average unemployment rates in each decade since the second World War. Table 2 shows the impact of the increase in unemployment rates between 1974 and 1993 on the costs of unemployment benefits. Costs adjusted to take away the variation of unemployment rate – standardized costs – are stable over this period.

TABLE 2

COSTS OF UNEMPLOYMENT BENEFITS

% Insured EarningsYear

Standardized CostsReal CostsNotes:Adjusted for unemployment rate only. Not adjusted for program amendments.As shown in Table 3, the increases in total costs are explained by the growth, particularly, of parental benefits and development uses. In 1993, ancillary benefits (including development uses) represented 20% of total benefits paid by UI – 3.5 billion dollars.

TABLE 3COSTS OF ANCILLARY BENEFITS

FishingSicknessMPADevelopment Uses

Notes:1)MPA means maternity, parental and adoption benefits.2)Development uses means work-sharing, job creation, training, course costs and allowances, mobility and self-employment.3)The above graph shows the data on a stacked basis.

4.CURRENT SITUATION

The current UI program has some valuable features:●quasi-universal coverage;● national uniformity; and●administrative costs representing a small proportion of total costs.However, various criticisms to this program need to be addressed, in particular:●no full universality;●little incentive for employers and employees to reduce claim cost;●program leaves room for abuse; and●there are a significant number of repeat claimants.The program not only covers the inability to find work, but the inability to perform work due to sickness, maternity or parental care. There are other situations where the claimants are not expected to look for work: work-sharing, job creation, training, self-employment and relocation assistance. For self-employed fishermen, benefits are only paid during the off-season (i.e., when work cannot be performed). The insurance concept of replacing a loss applies poorly to many of these situations.The characteristics of the unemployed have changed over a period of time. In 1986, the Forget Commission identified three patterns of usage significantly different from the average:●Younger workers have a higher probability of being unemployed but remain unemployed for a shorter time period.●Workers with a longer labour force attachment face a lower probability of being unemployed but will usually exhaust all their regular unemployment benefits, thus becoming long-term unemployed for different reasons.●The seasonal workers in certain industries, like agriculture, fisheries and construction, tend to become long-term partly employed. In 1991, 50% of

claimants had already been on UI at least once in the preceding two years. This percentage was also about 50% in 1971-1974.As shown in Table 4, a decreasing proportion of jobs are covered by the UI program. The proportion of self-employed has increased over the years and they are not covered by the UI program.

TABLE 4PROPORTION OF COVERED EMPLOYMENT (%)

There are increasing numbers of part-time jobs and cumulative part-time jobs which are not covered by the regular program at this time. In fact, 60% of the new jobs created in 1993 were part-time. There is also an increased proportion of jobs in small firms where the risk of being unemployed is higher.In 1976, workers aged 45 and over were claiming benefits for 17 weeks on average while in 1992, the same age group was claiming for 32 weeks on average. The experience over the most recent business cycle suggests that the incidence of long-term unemployment increases sharply during a recession, but then declines more slowly than the unemployment rate during the subsequent expansion.Many studies also indicate that UI benefits and contributions are not uniformly distributed among industries and regions. Regionally extended benefits reinforce this situation.

5.SOCIAL INSURANCE VERSUS WELFARE

A)Basic NotionsSocial programs that provide cash benefits may be defined as social insurance or welfare plans (social assistance). There are also demogrants (such as the old OAS), annual income supplements of the GIS type (an income test, no needs test and no means/asset test) and finally, income tax credits (such as child tax benefits, GST rebates). Although social insurance plans are quite different from private insurance in character and content, some of the insurance principles that define private insurance may also be applied to social insurance. A reader who wishes to investigate further these concepts should read Appendix A of this report and a previous paper presented by the Canadian Institute of Actuaries.2 These principles clearly highlight dissimilarities between social insurance and welfare programs:●payment of an indemnity or of a benefit to compensate for a loss on the occurrence of a well-defined contingency outside the control of the beneficiary;●nonpayment of benefits unless the defined contingency has occurred even though financial need can be demonstrated;●establishment of a specified benefit schedule, generally as a percentage of salary, which does not depend on the particular needs of the individual claimant;●removal or reduction of antiselection, which in terms of unemployment insurance might refer to repeat claims, by the existence of an adequate qualifying period or other eligibility requirements;●establishment of a “kindred” group, which in terms of unemployment insurance means those people who are definitely permanent members of the labour force;●benefits financed out of earmarked contributions normally paid for by covered employees and employers, and established on actuarial principles that such income and outgo of the plan will be kept generally in balance;●maintenance of a separate fund or account; and

●periodic impartial reviews of the financial status of the plan.The most important difference between insurance and welfare principles is that the right to welfare, and the amount of welfare benefits, is based on the beneficiary’s condition of income and family status, rather than on the occurrence of a well-defined contingency; and the individual must be earning income prior to the occurrence of the contingency.Welfare coverage is usually not limited to subgroups of the population, and benefits are paid to all the people really in need. The amount of benefits are low and negatively correlated with other sources of income; welfare benefits are paid only to people with limited financial resources. Welfare benefits are usually paid from general taxation, and it is unusual to maintain a separate fund. The administration is more difficult and expensive as the right to benefits is not easily established and stricter control is needed.As will be shown in the next section, the UI program contains a mixture of insurance and welfare characteristics. Thereafter, an assessment of the current system will be discussed and specific recommendations will be presented.

B)Actual Split Between Insurance and WelfareThe UI program was designed in 1940 as a pure social insurance program to help the unemployed between jobs, solely for the risk of being involuntary unemployed. Over the years, as shown in Table 5, the program has been extended to offer additional benefits:

TABLE 5WEAKENING OF INSURANCE PRINCIPLES

1950Limited coverage of the seasonal workers in the fishing and agriculture industries (later expanded in 1957)1955Qualifying conditions, benefit rates and durations were made more generous1971Minimum qualifying condition of only eight weeks1971Maternity benefits paid to women insured at time of conception (needed 10 weeks between 30th and 50th before expected childbirth; this condition was removed in 1984)1971Coverage extended to nonoccupational sickness1971Extended benefits provided to individuals in economically depressed areas1971Coverage extended to individuals in the event of maternity and retirement (the latter was abolished in 1990)1977Authorization of developmental uses of UI for training, job creation, and work-sharing1984Institution of adoption benefits1987Introduction of limited paternity benefits (later expanded in 1990 to include parental benefits)1991Authorization of development uses for costs of training courses and supplementary allowances if in approved training1992Additional benefits for self-employment, mobility, and re-employment incentives

All these benefits – except sickness – were introduced over the years to respond to

particular needs of specific segments of the population. These benefits have considerably increased the welfare component of the UI program by:●allowing for antiselection (control) over the benefits (e.g., in the case of payments to people employed in seasonal industries);●extending benefits to events that are not insurable contingencies such as benefits paid in the case of adoption, maternity, and parental benefits; and●providing easier and greater benefits to claimants in high unemployment regions, and exempting certain claimants from job search requirements if they fall under job training, work sharing, or training.As shown in Tables 6 and 7, other changes to the UI Act and to administrative policies have modified the insurance/welfare component of the UI program:

TABLE 6STRENGTHENING OF THE INSURANCE PRINCIPLES

1977Introduction of a 10- to 14-week entrance requirement in replacement of a flat 10-week requirement1979Increased entrance requirement for repeaters, new entrants and re-entrants1985All earnings on separation (including severance and vacation pay) counted for UI benefit purposes1986Retirement pensions deducted from UI benefits1990Increased entrance requirement to 10-20 weeks instead of 10-14 weeks1990Disqualification period for voluntarily quitting, misconduct, or job refusal raised to 7-12 weeks with a benefit rate of 50%1993Complete disqualification from benefits for voluntary quitting, misconduct, or job refusal1994Increased entrance requirements to 12-20 weeks and more emphasis on longer term work attachment to determine total benefit entitlement1994Reduction in maximum benefit periods, especially in high unemployment regions

TABLE 7STRENGTHENING OF THE WELFARE COMPONENT

1976Spouses of fishermen become eligible for benefits1977Severance pay disregarded for UI benefit1977Claimants referred to training courses granted UI benefits1979Introduction of the 30% benefit-repayment provision1982Vacation pay disregarded for UI benefit purposes1987Maternity/paternity/adoption benefit period extended to one year if child is hospitalized1990Expansion of maternity/parental/adoption benefit period from 15 weeks to 25 weeks1994Two-tier structure: 60% for claimants with low insured earnings and with dependents, and 55% for all other claimants

C)Breakdown of BenefitsThe breakdown of annual costs of the different programs is shown in Table 8:

TABLE 8SCHEDULE OF BENEFITS

19931992(In thousands of dollars)

BenefitsRegular14,273,58415,275,993Maternity795,861829,892Parental486,561491,673Sickness416,920410,658Fishing257,061290,861Adoption4,9685,06816,234,95517,304,145

Development Uses ProgramsWork-Sharing51,691112,737Job Creation104,679112,043Training – Income Support926,595978,330Training – Course and Program Costs489,407520,113Training – Supplementary Allowances81,74893,642Self-Employment Assistance – Income Support83,02816,045Self-Employment Assistance – Project Costs15,7414,597

1,752,8891,837,507Gross Benefits17,987,84419,141,652Less: Benefit repayments by higher income claimants15,71631,339

17,972,12819,110,313Regular benefits still represent the largest share of the total benefits paid. However, as mentioned above, a larger proportion of the regular benefits are paid to fulfil welfare objectives due to the structure of the UI program, in particular, the coverage of seasonal workers and the regionally extended benefits. Over the years, different studies have clearly highlighted the significance of repeat claims by seasonal and contractual workers which benefit from a continuous source of income supplementation – welfare – through the regular benefits of the UI program.Miles Corak3 & 4 summarizes the impact of repeat users on the unemployment insurance program.●The share of all UI claimants who are repeaters is substantial. During 1989, there were almost 950,000 UI claims initiated by males. Over 80% of these were made by individuals who had another claim at some point since 1971.●On average, it can be expected that a male who has had at least one UI claim will make another once every three to four years.●Seasonal factors are very important in determining the chances that a male will start another claim within 14 weeks from the end of the first.●The probability of repetition within five years is lowest in service industries, and highest in primary industries.●Those with relatively long periods of continuous employment – greater than one year in length – are less likely to be UI repeaters than those who had short, intermittent jobs.Changes to the characteristics of the labour force are contributing to this phenomenon.

Despite an increase in the unemployment rate, the regular unemployment and sickness benefits now represent a lower proportion of total costs than they did 20 years ago. In 1993, the unemployment and sickness benefits represented about 75% of the total costs versus close to 90% in 1973. The cost of sickness benefits has always been marginal in comparison to the costs of regular unemployment benefits. Most of the growth in the costs of nonregular benefits has occurred in the last five years, following the introduction of the parental benefits and the course costs, allowances and training.For the next five years, regular benefits are forecast to remain around 15 billion dollars. With gradual reductions in the unemployment rate at the current trend, the coverage ratio remains constant around 60%-70% (ratio of the unemployed covered by the UI to all the unemployed).Most of the increase in total costs forecast over this period, will originate from the budgets allocated to the “development uses” – 2 billion dollars – and the maternity and the parental benefits which, based on the above analysis, are clearly within the domain of welfare and human resources policies.

6.INTERNATIONAL COMPARISON

Comparison with programs in other countries is complex and should be conducted with care. The culture and institutions are generally very different. However, it is interesting to compare some of the provisions to see where Canada has similar features and where our program diverges. Appendix C outlines programs in some influential countries.These programs have at least four common features:1)quasi-universal coverage2)no experience rating, except in the U.S. (contributions vary in Sweden according to industry classification, but not according to the experience of each individual employer)3)many encourage early retirement with an extended maximum duration of benefits for older workers4)changes in the last decade have tended to strengthen the insurance componentThe following are examples of such changes:●increase the insurable earnings limit (Austria and Germany)●extension of the qualifying period (Germany)●increase in contribution level (Germany, Austria and the U.S.)In short, the welfare component of European UI programs is generally very limited.

7.RECOMMENDATIONS – COVERAGE

A)Coverage of Self-EmployedA self-employed worker is a person who has control over his or her working conditions. The person may determine when to work, how long to work, and where to work; consequently, there is no formal employer/employee relationship where an employer has control over the working conditions of his/her employees. This is the same reasoning as was done by the Forget Commission which concluded that “the degree of moral hazard presented by the self-employed is incompatible with UI.”Self-employed workers now represent an increasing proportion of the total number of workers in Canada. In 1993, they represented 16% of the working population compared to 12% in 1975.

RECOMMENDATION 1: In our view, the UI program should continue with its policy of generally not covering self-employed workers. However, certain categories of self-employed, such as contractual workers, should be covered.

B)Insurable EarningsThere is a disincentive for employers to provide a 15th hour of work to employees, to avoid UI premiums on total earnings, apart from the consequential administrative requirements (remittances, reporting and eventual employment records at separation).In 1994, the incremental tax imposed by UI premiums for this additional hour of work can be calculated at 64% for the employer alone, and at 111% if the employee contribution is also counted! In contrast, Canada Pension Plan contributions are only required on earnings above the basic exemption.

RECOMMENDATION 2: UI premiums should only be required on earnings above the minimum insurability limit but benefits still be based on total earnings up to the weekly maximum.

This recommendation would favour low-income employees and their employers, mainly small and medium-sized businesses. It would make UI premiums a progressive tax up to maximum weekly insured earnings. More than the current system, it would encourage employers to provide part-time work to those who want it, then to extend the working hours of their part-time employees if needed for business reasons. This exemption would reduce the contributory base by about 20% requiring an offsetting increase in the rates of premium to raise the same overall revenues.

C)Maximum Contributory EarningsMaximum contributory earnings are increased each year according to average wage increases over the last eight years. The eight-year formula provides for gradual and predictable increases but does introduce a significant time lag. A shorter period such as the one used for the premium-setting mechanism is more desirable. Maximum contributory earnings have increased more rapidly than average earnings (27% more from 1972 to 1994). This is caused by the formula and by the eight-year average. A better self-correcting formula would start from a percentage of the current average weekly earnings each year, rather than from the previous year’s maximum.

RECOMMENDATION 3: The formula for setting maximum contributory earnings should be revised and based on the average earnings over a shorter period than the current eight years.

D)Coverage of Part-Time WorkersAccording to Statistics Canada’s monthly Labour Force Survey, a part-time worker is a person who works less than 30 hours in a week, all jobs combined. Part-time work has grown steadily over the years, but remains a secondary phenomenon overall. In 1993, for example, 92.5% of the total hours worked in Canada still belonged to full-time workers. And while 60% of the net increase in employment in 1993 was of a part-time nature, only 14% of the added hours of work belonged to part-time workers.As pointed out recently by Statistics Canada, most part-time workers prefer a part-

time job (an average of about 75% during the 1980’s). In this category of people who work part-time in order to supplement personal or family income, we can identify, for example, students who have access to student loans and scholarships, retired workers who have access to retirement income from their employer or personal pension plan, married people for whom the other spouse already works full time, workers with secondary jobs who also hold another full-time job.The recent growth in involuntary part-time work, to about 35% of all part-time work in 1993, is largely linked to the recent recession. A similar phenomenon occurred in the early 1980’s.It is worth pointing out that when a worker now loses a job, any and all simultaneous jobs are used to calculate his or her UI benefits (provided each job was insurable on its own – lasting at least 15 hours in a week or providing earnings of at least $156). In this context, again, Statistics Canada showed that the average of 628,000 or 6% of workers with more than one employment during 1993, only half combined paid work with other paid work that could be insured, the others being otherwise self-employed. Even more striking is the fact that about 90% of multiple job-holders worked long enough to be insured in at least their main jobs.It can be concluded that current UI coverage of part-time workers, including multiple job-holders, is probably as complete as needed. The part-time workers not already covered can be estimated at about 30% of all part-time workers, but to work less than 1% of the total hours in Canada, at an average of about seven or eight hours a week. At these lower earnings levels, even with the current exclusion rules, any significant need for income support probably has to be supplemented by welfare benefits, leading to duplication of administration.

RECOMMENDATION 4: UI coverage should not be extended to more categories of part-time workers. Instead, the current minimum insurability level should be reviewed and perhaps coverage should be increased slightly, where it is needed, and to reduce duplication between the UI and welfare systems.

8.RECOMMENDATIONS – DESIGN

A)Incentives to Return to WorkUI claimants are allowed to keep a small part of any earnings they receive while drawing UI benefits. The amount is 25% of their weekly benefits. Any additional earnings are deducted dollar for dollar from their UI benefits.With a general benefit rate of 55%, the allowed earnings correspond to only 133/4% of previous average earnings. In 1972, the allowable portion was 21% higher, then being one quarter of 662/3%.The 100% tax on earnings above the allowable portion is severely discouraging with regard to increasing one’s work effort. A more progressive formula would seem desirable, for example:●no deduction on the first 15% of benefits●the deduction of 1/3 of earnings on the next 30% – allowing the equivalent of another 20% of benefits●the deduction of 2/3 of earnings on the following 30% – allowing another 10%●100% deduction of all excess earningsSo if a claimant managed to obtain part-time work worth 75% of his or her weekly

benefits, that person could “keep” the earnings up to 45% of weekly benefits – the other 30% being used to reduce the benefits paid by the UI system. Consider for example the librarian who had previously earned $600 a week, which entitled him or her to weekly benefits of $330. That claimant is now allowed only $83 (25% of benefits) from part-time earnings, and anything more is deducted in full. Under the proposed system, this unemployed librarian would be encouraged to add to his or her total income by earning up to three times more, namely up to $248 (75% of benefits): his or her total weekly income would then reach $479, only $231 from UI (the $330 weekly benefit reduced by 30%) and the larger amount from his or her own work.Other similar formulas could be considered.

RECOMMENDATION 5: Because unemployed claimants who take part-time jobs pay, in effect, 100 percent tax on any earnings over 25 percent of their UI benefit, there is little incentive for them to seek additional employment. A more progressive formula for calculating part-time earnings should be put in place to increase the incentive for claimants to obtain additional work.

B)Transfer of Welfare Benefits“Schemes of social insurance are not schemes of social assistance. This is not to say that insurance or assistance is the superior instrumentality in attaining social security. Each has its appropriate place and function; they are, in fact, complementary. It would be a bad mistake to attempt to extend either beyond its proper sphere.”

A.D. Watson9

In Sections 3 and 4, we reviewed the evolution of the UI program over the years. We also discussed its fundamental objective. Each type of benefit was categorized as either an “insurance benefit” or a “welfare benefit.” In order to improve efficiency, we now recommend maintaining some benefits in the UI program while transferring some other benefits.UI can be seen as a positive way to achieve welfare objectives of income supplementation and support, since the eligibility conditions and the amount of benefits are easily established. On the other hand, there are major drawbacks in using UI as a welfare vehicle since for UI:●coverage is not universal, but based on labour force attachment;●eligibility conditions are not tied to income or needs;●no protection is provided to the long-term unemployed;●there is a positive link between earnings and benefits, thus, those who receive more are those who need it less;●requirement of a job loss to draw regular unemployment benefits; and●there is increased dependency by establishing the right to benefits on the basis of a short period of work and extending these conditions to repeat claimants. (In this respect, UI is not really coordinated with other manpower programs and can be sometimes in conflict with other employment policy objectives.)

RECOMMENDATION 6: The Unemployment Insurance program should be returned to its original purpose as an income protection program for the strict insurable risk of unemployment and as a

protection against nonoccupational sickness. The following benefits, which are not insurable risks, and which presently account for just one-third of all UI costs, should be transferred to the welfare, or other appropriate sectors:●extension of duration of benefits because of high regional unemployment●training benefits●fishermen’s benefits●maternity, parental and adoption benefits

This type of recommendation is not new. Many studies over the years have recommended this approach including the Forget Commission which stated in 1986 that the “role of Unemployment Insurance would become one of strict income replacement. Income supplementation and other aspects of the current program would be transferred to programs specifically designed for these purposes.” However, it remains a central issue to any substantial reform.1)Extension of Duration of Benefits Because of High Regional Unemployment

In order to redefine the UI program as a social insurance scheme, the benefit duration period should be revised to depend mainly on length of insurable employment. You will find below examples of alternatives that could be envisaged:

ALTERNATIVE 1: The benefit period could be set equal to one week of benefit for every two weeks of insurable employment. The period of insurable employment would be limited to 104 weeks with a minimum of 12 weeks. A similar formula was in place before 1971.ALTERNATIVE 2: Similar to alternative 1, but insurable employment could be extended to 208 weeks for claimants over age 54.ALTERNATIVE 3: One-fifth the number of days of contribution in the five years preceding claim, less one-third the number of days of benefit in the three years preceding claim.ALTERNATIVE 4: One week of benefit for every two weeks of insurable employment.

Overall costs are very sensitive to the level of maximum duration of benefits. Table 9 reveals that two thirds of the reduction in costs for the amendments announced in the 1994 federal budget is expected to originate from the reduction to the maximum benefit period:

TABLE 91994 FEDERAL BUDGET

Benefit rate changed from 57% to 55% (or 60%)400 M$Minimum entrance requirements raised from 10 to 12 weeks400 M$Maximum benefit period reduced1,600 M$Total savings2,400 M$

The effect of this reduction to the maximum benefit period is shown in Tables 11 and 12.

2) TrainingAn effective training program is highly desirable. However, its effectiveness would be enhanced if separated from the UI program to avoid duplication with other programs. Furthermore, only individuals with jobs can qualify for UI training benefits.Appendix C reviews the long list of UI training programs in the last eight decades. Many, after reading this appendix, may wonder why this time a new approach to training would last longer. The chart below shows the exponential growth of UI benefits paid for reasons other than regular unemployment. Training expenditures are the principal reason for this large increase, as illustrated by Table 10.

TABLE 10UI benefits paid for other reasons thanregular unemployment – 1972 to 1993

Proportion of nonregular benefits (left scale)Standardized 1993 values (right scale)

We have not found any study evaluating the effectiveness of this spending. Before deciding on a further increase in training expenditures, we believe it is essential that a reliable cost/benefit analysis be performed. We are delighted that a current objective of the government is to evaluate the long-term impact of policies and programs. A serious study of the impact of training appears to be a priority. Current per capita costs can be high; 55/60% of insurable earnings can be paid for up to three years, in addition to a reimbursement of education expenses. Our recommendation to remove training benefits from the UI program does not signify that important cuts in training expenditures in general are desirable. Even if training programs do not lead immediately to available jobs, they may reduce unemployment in the long-term and increase the adaptability of the worker. Training may prevent the loss of self-respect and social isolation that many unemployed experience. By removing training from the UI program, more flexibility is given to create a new program that is better adapted to those needs. The effectiveness can be improved by increasing the synergy among parties (employee, employers, labour organizations, educational institutions and governments). The experience of some other countries is discussed in Appendix C.

TABLE 11TABLE OF WEEKS OF BENEFITS

CLAIMS FILED BEFORE APRIL 4, 1994Regional Unemployment Rate

Weeks6%6%7%8%9%10%11%12%13%14%15%ofandtotototototototototooverWorkunder7%8%9%10%11%12%13%14%15%16%16%10373911363840123537394113343638404214333537394143

1530343638404244162731353739414345172428323638404244461821252933373941434547191922263034384042444648201720232731353941434547492118212428323640424446485022192225293337414345474950232023263034384244464850502421242731353943454749505025222528323640444648505050262225283236404446485050502723262933374145474950505028232629333741454750505050292427303438424648505050503024273034384246485050505031252831353943474950505050322528313539434749505050503326293236404448505050505034262932364044485050505050352730333741454950505050503627303337414549505050505037283134384246505050505050382831343842465050505050503929323539434750505050505040293235394347505050505050413033364044485050505050504230333640444850505050505043313437414549505050505050443134374145495050505050504532353842465050505050505046323538424650505050505050473336394347505050505050504833363943475050505050505049343740444850505050505050503437404448505050505050505135384145495050505050505052353841454950505050505050TABLE 12

TABLE OF WEEKS OF BENEFIT

CLAIMS FILED AFTER APRIL 3, 1994Regional Unemployment Rate

Weeks6%6%7%8%9%10%11%12%13%14%15%ofandtotototototototototooverWorkunder7%8%9%10%11%12%13%14%15%16%16%

1226283032132426283032142325272931331521242527293133162022242628303234171820222426283032341817192123252729313335191517192123252729313335201416182022242628303234362114161820222426283032343622151719212325272931333537231517192123252729313335372416182022242628303234363825161820222426283032343638261719212325272931333537392717192123252729313335373928182022242628303234363840291820222426283032343638403019212325272931333537394131192123252729313335373941322022242628303234363840423320222426283032343638404234212325272931333537394143352123252729313335373941433622242628303234363840424437222426283032343638404244382325272931333537394143453924252729313335373941434540242628303234363840424446412527293133353739414345474226283032343638404244464843272931333537394143454749442830323436384042444648504529313335373941434547495046303234363840424446485050473133353739414345474950504832343638404244464850505049333537394143454749505050503436384042444648505050505135373941434547495050505052363840424446485050505050C)Repeat Claimants

As was discussed in Section 5.C), repeat claimants represent a significant portion of total cost.

RECOMMENDATION 7: Because repeat claimants are largely seasonal

and contractual workers for whom UI has become a form of income supplementation rather than pure insurance, the benefit rates should be reduced or the number of weeks they must work to qualify for benefits should be increased.

D)Benefit Repayment ProvisionOn grounds of equity, and to strengthen insurance principles, it would seem that the current benefit repayment provision should be abolished. It is unfair to require higher premiums from higher paid workers, to nominally increase their protection against job loss, yet to deny them full benefits when they do become unemployed. Some argument could be made for reduced benefits of repeating or seasonal claimants, but not for individuals who become unemployed for the first time after a long period of steady work.In addition, the current 30% benefit repayment provision is poorly structured. Individuals may still be unemployed when benefits must be repaid. The annual accounting period is artificial and can affect unemployed persons differently depending on when their unemployment period started. The provision is quite inefficient even with regard to seasonal workers since it only recovers less than 0.2% of regular benefits paid.

RECOMMENDATION 8: The benefit repayment provision should be abolished, at least for first-time claimants, and be replaced by different design features for all others.

9.RECOMMENDATIONS – FINANCING

A)UI AccountThere is no UI fund as such. The UI account is a bookkeeping account. Temporary surpluses or deficits may arise when employer/employee contributions are greater or less than total program costs. These attract interest at current rates until liquidated. The UI annual deficit or surplus is part of the government budgetary balance. Since the UI program is entirely self-financing, the current mechanism distorts the government budgetary results.

RECOMMENDATION 9: A deficit from unemployment insurance could be recorded as an account receivable in the government’s budgetary balance. Thus, unemployment insurance results would not influence government’s deficits. Any UI deficit is automatically and fully repaid by employers and workers.

B)Actuarial ReviewThere does not appear to be explicit consideration of long-term trends. While such an exercise is secondary for the decision on rates, it may be quite helpful for other purposes (e.g., for deciding the type and level of benefits). It is very difficult to predict the long-term trends in unemployment and even more difficult to predict the economic cycles. However, some other variables, like demographic trends, are more easily predictable. The aging of the work force and possible increases of the normal retirement age of the Canada/Québec Pension Plans are major influences that should be analysed in advance, before their repercussions are felt. Such a long-term actuarial review would be helpful to policymakers. For example, with the aging of the labour force, it will become even more critical for older unemployed individuals be re-integrated

into the work force.RECOMMENDATION 10: A new UI Act should require that an actuarial review be performed quinquennially. An actuary would continue to calculate annually the statutory contribution rate, as required by Sections 48 and 49 of the current UI Act, and suggest alternative contribution rates.

C)Premium-Setting MechanismThe UI Act provides for determination of a minimum contribution rate if a cumulative deficit is expected and a maximum rate if a cumulative surplus is expected. The rate is set higher (lower) than the minimum (maximum) rate so that the deficit (surplus) is eliminated over a number of years. In the last 22 years, program results for the year showed a surplus 40% of the time. The accumulated deficit of $6 billion at the end of 1993 (30% of annual cost) is not that onerous considering the deep recession we have been through. A relatively higher deficit was incurred during the 1982-1983 recession which was eliminated by 1988.Benefits are accounted for on the basis of benefits paid rather than incurred. The latter approach would result in the calculation of reserves even for those who have already terminated employment but have not yet reported. This approach measures the actual costs and better follows the objective of matching costs and revenues. Private insurance programs are run this way. Because the UI program does not attempt to balance revenues and costs on an annual basis but rather on a somewhat retroactive period of a few years, the calculation of actuarial reserves is not a necessity. It would, however, allow for more accurate cost measurement.

RECOMMENDATION 11: The premium-setting mechanism could be refined to include the calculation of actuarial reserves.

D)Experience RatingAll employers currently pay the same contribution rate. Experience rating is a methodology where contribution rates vary by the amount of claims for which the employer is responsible. The most often cited method is that only employers have different rates. Some others suggest that the employee contribution rate also vary. Others suggest that each employer within the same industry should have the same rate. The 1971 UI Act had provisions for the introduction of experience rating. These provisions were never put into effect and were later repealed. There has been debate about the usefulness of experience rating. For example, the MacDonald Commission recommended it while the Forget commission did not. Varying the contribution rate for each employer is the most valid approach and has been analyzed in Appendix B. As much as we found advantages, we found more and more disadvantages as we continued a thorough analysis of the impacts. We concluded that the cost/benefit relationships for the other recommendations in this report are more attractive than experience rating.

RECOMMENDATION 12: At present, experience rating should not be implemented considering the greater importance of other changes to the current UI program.

10.COMPLETE OVERHAUL

At least two suggestions imply the replacement of part, or all, of the UI program by radically different schemes. First, some have suggested to replace the current

insurance program by a savings program. You will find in Appendix E a description of how it could be designed. This analysis is only preliminary and more thorough research is required before appraising its desirability.

11.CONCLUSIONS

The implications of reducing UI benefits should be carefully evaluated. The effect on claimants and provincial social assistance programs should be factored in. We should also remember that an increased level of poverty and the loss of self-respect and social isolation of the unemployed creates high social and economic costs for both the individuals concerned and society: health expenditures, criminal activity and mortality.The Institute believes that changes proposed in this report should be given serious consideration. We offer further assistance as requested.

12.BACKGROUND ON THE CANADIAN INSTITUTE OF ACTUARIES (CIA)●Actuaries are business professionals who apply their training in probability and risk theory and in statistics, to problems of future financial uncertainty.●These uncertainties are frequently associated with property, casualty and life insurance, annuities and pensions, employee benefit plans or social security programs.●The Canadian Institute of Actuaries was incorporated by Act of Parliament on March 18, 1965.●The Canadian Institute of Actuaries is the professional body of actuaries in Canada. It serves the public by commenting on issues of actuarial significance; it also operates a review and disciplinary system, maintains contact with government, other professionals and organizations, and promotes actuarial research.●As of September 1994, there were 1,881 qualified actuaries or “Fellows,” and 1,222 students who had successfully completed at least 50% of the actuarial exams.The address of the CIA and the names of the members of the task force which drafted this report, can be found in Appendix F.

BIBLIOGRAPHY1BÉDARD, MICHEL Y., HRDC Chief Actuary, Canadian Unemployment Insurance, Society of Actuaries’ Study Note no. 561-22-94, 1994.2CANADIAN INSTITUTE OF ACTUARIES, A Submission to the Commission of Inquiry on Unemployment Insurance (Forget Commission), 1986.3CORAK, MILES, Repeat Users of the Unemployment Insurance Program, Canadian Economic Observer, Statistics Canada, January 1992.4CORAK, MILES, Unemployment Insurance, Temporary Layoffs, and Recall Expectations, Canadian Economic Observer, Statistics Canada, May 1994.5GEORGE, DENIS R.J., “Experience Rating Unemployment Insurance,” Proceedings of the Canadian Institute of Actuaries, 1973-74.6HUNTER, JOHN, The Employment Challenge – Federal Employment Policies and Programs 1900-1990, Government of Canada, 1993.7KARAGIANNIS, ELIAS, Experience Rating UI Premiums, Employment and Immigration Canada, 1986.8KESSELMAN, JONATHAN R., Financing Canadian Unemployment Insurance, Canadian Tax Foundation, Paper no. 73, 1983.9WATSON, A.D., actuarial adviser for the Canadian Department of Insurance on the

first UI Act in 1940, Miscellaneous Notes on Actuarial Procedure in the Field of Unemployment Insurance, 1945.

APPENDIX APRIVATE UNEMPLOYMENT INSURANCE PROGRAMS

It may be of interest when evaluating the application of insurance principles to unemployment insurance to consider some of the characteristics of private unemployment insurance programs in Canada.Job loss insurance, or involuntary unemployment insurance (IUI) as it is more commonly known, is not available on a stand alone basis and is almost always tied to some form of loan. It is generally offered in conjunction with other creditor insurance such as life and disability insurance. The primary reason for this is the potential for significant antiselection on the part of the insured. With creditor insurance, however, the insurance is secondary to the loan. Also, the financial underwriting requirements for loans mitigates the antiselection risk to some extent, though a number of insurers have experienced significant losses with this type of product.It is interesting to note that creditor insurance not only protects the borrower, but also protects the lender from default resulting from loss of income source of the borrower. Because of this, “blanket” IUI coverage where all borrowers are covered and the financial institution pays the premium, is not uncommon in the U.S. In Canada, IUI programs tend to be voluntary with the borrower paying the insurance premium.IUI is most prevalent as part of credit card outstanding balance insurance where the benefit is generally equal to the minimum monthly payment. It can also be found in installment loans, mortgages, auto dealer loans and most recently, in several housing development sales programs where the benefit is all or a portion of the monthly scheduled payment.The following are some of the key features that differentiate the private unemployment insurance programs from public ones:●Eligibility: Often a private program will have eligibility for UI as a prerequisite, but there are a fair number of differences between the private and public programs. Private programs have never covered voluntary unemployment, resignation or retirement because it is not an insurable event. Unemployment Insurance has now caught up with this approach. Private programs also exclude unemployment of which the insured had been advised prior to application to enrol in plan (or even more onerous, no prior knowledge of job loss). Additionally, self-employed people are not covered. There are also age limitations (e.g., 18 to 65).

Most significantly, there is generally a requirement that the insured be continuously employed (30 hours a week), for the 12 months immediately preceding the commencement of the coverage and has not changed employers more than once during that time. As such, the labour attachment requirement is more onerous than Unemployment Insurance. The 12-month requirement excludes a significant portion of those who qualify for Unemployment Insurance, especially for those engaged in seasonal employment and younger workers who change jobs more frequently.

●Benefit Period: The benefit period is fixed regardless of the number of weeks

worked, geographic region or unemployment rates. Generally, the benefit period will be six or 12 months. The marketing perspective is that the majority of claimants will return to work within the benefit period. For those who do not, there is sufficient time to adjust and restructure loans or sell assets including the principal home, if necessary.●Elimination Period: There is generally an elimination period which varies from seven days to 60 days. The benefits may also be retroactive to the first day of job loss. However, 30- and 60-day non-retroactive benefit periods are more common. The effect of the elimination period is similar to disability insurance.●Initial No-Benefit Period: Because of the risk of antiselection due to prior knowledge or suspicion of job loss, some programs have a waiting period of up to four months during which no coverage is provided.●Maximum Benefit Amount: The maximum benefit amount will be the lesser of the monthly payment and some fixed amount. The benefit is generally not directly related to the insured’s need or income. However, it will always be significantly less than the insured’s income as the amount a person can borrow is a function of his/her income. In the case where there are two borrowers insured, the benefit is often prorated, based on the relative income levels. In some cases, a full benefit can be paid out; however, this can lead to antiselection as the lower income earner may have net income lower than the loan amount.●Premiums: Premiums are set like other types of benefits on a prospective basis based on market levels and actuarial adequacy without consideration of past deficits. Premiums may vary by geographic region though not by other factors such as age or sex used for other types of insurance. Premiums per $100 of monthly benefit are generally substantially less than Unemployment Insurance due to some of the more severe limitations discussed above.●Lifetime Maximum: Some programs have instituted a lifetime maximum benefit amount such as 12 or 24 months. This serves to exclude continuous repeaters and limit the cost of the benefit.

APPENDIX BEXPERIENCE RATING

“An important function for any unemployment insurance financial system is to allocate differential cost to the employments which generate these costs. The principal concerns here are industries, occupations and/or regions which are unusually sensitive to seasonal or cyclical variations. If a type of employment is associated with greater-than-average unemployment, given the products produced by it should bear the additional costs of UI protection. Conversely, places of employment which are more stable than average should enjoy lesser financial burden.”

Jonathan R. Kesselman8

Whether one is for or against experience rating appears to depend on the answers given to several questions, and, where the responses are not all affirmative or negative, the weight given to each response. The questions are:●Does the UI program contain sufficient elements of “insurance” to enable it to be viewed and rated as an insurance scheme?●If a UI program is an insurance scheme, can experience rating be used to alter the

behaviour of the parties to the scheme so that they will be less inclined to make unnecessary claims?●If experience rating is being used to more fairly allocate costs amongst the parties, is the changed allocation likely to be to the general good or detriment of the economy as a whole?

Insurance SchemeThe paper prepared by the Canadian Institute of Actuaries2 identifies some of the insurance principles as they could be applied to a social insurance plan. These principles were outlined in Section 5.On balance, it appears that the UI program likely fulfils some of the insurance principles some of the time, but the case is certainly much weaker than for, say, Workers’ Compensation which is often used for comparison. Indeed, many experts identify the UI program as a social transfer system – the first principle of which is that of a targeting, so that payments go to those most in need. The second principle is that, in return for such assistance, claimants should be expected to enroll in appropriate retraining, upgrading and relocation programs and, failing all else, be expected to engage in public and social works.

Behaviour MechanismTurning now to the question whether experience rating is likely to modify the behaviour of the parties involved, it is useful to look at the experience of the United States. The U.S. has had experience rating in place since the early 1980’s. The objectives which led to its introduction included:●incentive to an employer to regularize his employment, thus reducing unemployment;●proper allocation to each employer of his production costs, which include all costs of unemployment in accordance with the free enterprise concept of the market place; and●to have employer participation in the administration of the program to reduce the number of fraudulent or unnecessary claims.The first of these objectives was put forward at a time much different from today – a time when permanent and career employment with one employer was both the expected and the norm. Not surprisingly, studies since then have failed to identify any correlation between an employer’s human resource strategy and the cost or saving due to UI experience rating adjustments.The second objective focuses on attempting to improve the fairness in the allocation of costs to employers. However, while meritorious on the surface, in application, the objective has a number of problems. Employees with the least skills who are most likely to be unemployed, tend to move from employer to employer and not always within the same industry. The experience rating systems which allocate the cost of benefits of an individual to his last employer serve only to discourage his hiring in the first place.Unemployment is often due less to the operations of the employer then to the industry or economy in general. As a consequence, an employer who is least able to withstand financial distress would find with experience rating that his cost of employment increases following a downsizing. The consequence in the U.S. has been for many states to modify the experience rating program to erase certain

benefits or to cap the costs passed back to employers.The last objective, employer participation in administration, also presents difficulties. Employer participation is largely directed to control the benefit levels. While Workers’ Compensation has had some positive experience through its experience rating systems in encouraging employers to create a safer work place and become more involved in the rehabilitation and retraining programs of its employees, it can not be presumed that the same positive experience will carry over to an experience rated UI program.Since it is generally accepted that the duration of benefits is more dependent on general economic activity than a specific employer’s employment practices, the greatest control that an employer has is related to the frequency of claims and not the duration. To keep costs down, an employer should ensure that all layoffs occur amongst those with the least qualification towards extended benefits and avoid hiring anyone who may possibly be laid off in the future. An employer would be further ahead to use overtime as a means of adjusting to heavier workloads rather than hiring part-time or temporary workers. This seems to fly in the face of current economic needs.

Fairer AllocationTurning to the last question noted above, the most persuasive argument for experience rating comes from statistics that demonstrate there is a wide and consistent difference in UI costs between various segments of the economy. Government has produced numerous statistics that show that benefit payments as a percent of contributory wages and salaries are very low in the finance and insurance industry and very high in the forestry, fishing and trapping industries. Denis George notes that similar results are observed in the U.S.:“The basic philosophy underlying the allocation of Unemployment Insurance costs to individual employers is that it is equitable for a typical employer in a high risk industry to pay higher premiums than a typical employer in a low risk industry ... in the U.S., this follows the philosophy of permitting the marketplace in a free enterprise economy to govern the allocation of costs in setting of prices.”

Denis George5

This allocation of costs can be looked at from three levels: by region or province, by industry and by employer.

Allocation by Region or ProvinceThe current UI program reallocates funds from Ontario and the Prairies to British Columbia, Québec and the Atlantic provinces. In part, this is due to the prevalence of industries which typically result in higher claims being located in certain provinces rather than others. However, it is also due to the economic conditions in the regions, the size of employers in the province (large employers typically have much better claims experience than small employers), the degree of industrial diversification and a variety of other factors less amenable to statistical analysis. The current system of reallocation results in a cross-subsidization under which Québec and the Atlantic provinces are the clear winners. If experience rating is introduced at the employer level, consideration would need to be given to whether costs were balanced against the experience of the region, the industry or all employers in Canada.

If the claims experience were balanced against that of the region with the current reallocation of costs maintained, the result would be that a low claims employer in the Atlantic provinces might actually pay a lower UI premium than a similarly situated employer in the Prairies. Or an employer with high claims experience in Québec might actually pay the same rate as a similar employer in Ontario which has much better claims experience, but is high relative to the experience of that province.

Allocation by IndustryFrom an industry perspective, the current UI program also results in cross-subsidization. Industries such as transportation, trade, finance, community and public administration and mining tends to subsidize agriculture, forestry, fishing and trapping, manufacturing and construction. Most of the industries in the subsidizing group are service industries, whereas those in a subsidized group are producing or manufacturing and often seasonal in nature.Industry subdivisions comprising large firms tend to subsidize others with medium or small firms. Experience rating would change the allocation of costs to more represent the experience of the employer and industry. This would mean our service industries would tend to become more competitive while our process and manufacturing industries would become less competitive.

Allocation by Employer“Such a[n experience rating] system is equivalent to a separate fund for each firm with the government establishing and enforcing the rules and providing bookkeeping services to the firm’s account. The allocation of differential costs requires that the government set up an account of each firm to which credits (UI contributions) and debits (UI benefits) will be charged. By analogy, the same system will be required for employees in order to take into account employee-induced job terminations.”

Elias Karagiannis7

At the employer level, the issue becomes how much of the claims experience should properly be allocated as a responsibility of the last employer. The arguments in favour of experience rating are that it would ensure the claim costs are allocated to employers and industries which generate most of the unemployment problem. These costs would find their way through as either a reduced profit margin or as increased prices for the goods or services produced, and there would be some incentive to moderate undesirable behaviour such as layoffs.The arguments against experience rating are that much of the behaviour which is to be prevented is beyond the employer’s control. Layoffs are often effected by the results of the industry not individual employers. And, in practice, experience rating will only serve to curb the hiring of young inexperienced workers who are in need of a temporary position to gain some training.Experience rating would also act as a targeted payroll tax and could affect overall employment levels. Karagiannis7 calculated that experience rating would decrease real GNP by 0.2%. A larger percentage decrease could be expected today, since the proportion of both part-time workers and small businesses in the economy (both contributors to high claims rates) has increased substantially since his study was done.

The complexities of administering experience rating would add costs to both government and employers. There are many other arguments to justify experience rating, in particular:●increases the employers’ interest in the UI program;●encourages the minimization of temporary layoffs (experts often speculate that layoff decision is jointly determined by employers and workers and the design of the UI program is influential4); and●reduces cross-subsidy.The evidence presented above compels us to recommend, at present, against the introduction of experience rating.

APPENDIX CINTERNATIONAL COMPARISON

1)Overall ComparisonIn Section 6, we accentuated some common features of programs in certain countries. More information is provided in the chart found on the next page. However, the number of differences between countries should not be underestimated. It is beyond the scope of this paper to provide an exhaustive inventory of these differences. However, one example may be instructive: the impact of high unemployment on retirement and disability plans is treated quite differently in North America than it is in Europe. Most European countries’ reactions has been to extend eligibility under programs designed for the retired or disabled as a way to alleviate unemployment. The response in the U.S. has followed a more traditional approach; that is, to maintain separate remedies to help the long-term unemployed and reject policy options to expand eligibility under public retirement or disability programs. Instead, the U.S. has responded, in the past, by temporarily extending the duration of UI benefits.

2)TrainingWhile the overall training cost in Canada is similar to that of many countries, there is a major difference of approach in Canada: most of the training costs are for passive support while it is the opposite in Europe. There are more placement officers in Sweden’s unemployment assistance agency than in Canada’s, despite the fact that Canada’s population is three times Sweden’s. On the other hand, Canada has almost 34 times as many people collecting benefits. Elaborate training in Europe is better focused and aimed principally to the aged workers.The apprenticeship system has helped Germany to combine a powerful market economy with a generous welfare state. What works for a manufacturing-dominated economy like Germany does not necessarily work for a services-oriented economy like Canada. The German system also depends on a set of social relationships not found in Canada. Also, the German system is experiencing some difficulties, some of them of short-term nature: with unification, a flood of poorly trained East Germans entered the system, and with the recession, there has been a shortage of jobs. But other problems are deeper: ●apprenticeships are inflexible and antiquated (good for turning out skilled car workers but less effective for producing software programmers)●produces narrow specialists whereas modern manufacturing techniques require more and more flexible generalists

●it allows little room for retraining (the system assumes that workers will remain in the same jobs throughout their career)●depends on a co-operative relationship with the trade unions, including worker representation on company boards and national wage agreementThe Japanese system is based on a guarantee of life-time employment from the company and a willingness on the part of the employee to sacrifice all for the firm. Some observers indicate that this system will have to be modified, with the growing individualism among the young. In short, the German and Japanese training systems could not be implemented in Canada, without major adaptations.

APPENDIX DHISTORICAL REVIEW OF TRAINING

“Industrial efficiency is all important in the development of the Dominion and the promotion of the home and foreign trade of Canada in competition with other nations and can be best promoted by the adoption in Canada of the most advanced systems and methods of industrial training and technical education.”

Royal Commission on Industrial Training and Technical Education, Order-in-Council, June 1, 1910

Eighty-four years later, this message is still relevant. To compete internationally, Canada needs a quality work force. You will find below a brief description of different programs implemented during this period. Most of the information has been extracted from a book written by Mr. John Hunter and published by the Government of Canada.6

In 1910, the Liberal government of Sir Wilfrid Laurier, under the recommendation of Mackenzie King, the Minister of Labour, announced a Royal Commission on Occupational Training. Business and labour organizations had been encouraging action for the last decade. Passed in 1913, the Agricultural Instruction Act provided $10 million to be granted over a 10-year period to provinces for instruction in agriculture. The war convinced most people that the federal government had to become more involved in the labour market. On July 7, 1919, the Technical Education Act was passed, a 10-year, $10 million program. The federal government was bearing 50 percent of the cost of approved provincial expenditures.There was considerable progress during that period. The number of municipalities offering daytime vocational education courses went from 32 to 89 while the number of student places increased from 60,546 to 121,252. These programs depended to a large extent on the availability of federal funds. When federal allotments were exhausted, programs were usually curtailed. Provinces that chose to continue the programs complained that the federal government had lured them into new permanent programming and then left them holding the bag.There was considerable pressure to continue federal aid. But the Prime Minister, Mackenzie King, announced that his government would not extend aid. This decision was consistent with the recommendations of the Royal Commission which had proposed a 10-year program as a temporary measure to help provinces with start-up costs. The King government made one concession. Provinces which had

not earned all their allotments by 1929 (every province except Ontario) could continue to earn federal funds. The last province to exhaust its allotment was Manitoba in 1948.One of the campaign promises of the Conservative Party, which returned to power in August 1930, was to renew assistance to technical education. In May 1931, the Vocational Education Bill was passed. It provided an annual total of $750,000 to be paid to the provinces for a 15-year period.The extraordinary conditions of the Depression and the fact that Canada lacked Unemployment Insurance forced the Mackenzie King government, after their return to power in 1935, to provide subsidies and loans to the provinces to help them cope with welfare and other costs.Several training initiatives undertaken during the Depression were continued in the 1940’s. Some programs were adapted to the needs of wartime. The Vocational Training Coordination Act, passed on August 1942, repealed the Vocational Education Bill of 1931. Unlike earlier legislation, no specific funding amounts were included in the bill. Major federal/provincial agreements under the Act included:●Apprentice Training Agreement (1944), which persisted for 20 years;●Re-establishment Training Agreement (1945), which terminated in 1948 because of low enrollment; and●Vocational Schools Assistance Agreement (1945), which provided $2 million per year for 10 years and also made available $10 million for a three-year period to cover capital costs. Matching contributions were required from provinces. The agreement was later extended to 1957.Enrollments in vocational schools doubled from 125,000 in 1948 to about 250,000 in 1953. At first sight, Canada seemed successful. But many of the resources went to commercial and home economics courses which were inexpensive to provide. Provinces also tended to concentrate expenditures on secondary vocational schools while giving little support to institutes, that is, training centres designed to provide the practical skills and knowledge necessary for direct entry into employment. This was the type of training facility that had impressed the Royal Commission during its visit to Europe. In its 1913 report, the Royal Commission had strongly recommended that Canada should move immediately to create a number of these institutes.In January 1957, The Royal Commission on Canada’s Economic Prospects (the Gordon Commission) published its preliminary report. It recommended correcting an anticipated shortage of skilled labour. It recommended existing secondary level technical schools and vocational schools be expanded and new ones developed. Post-secondary technical schools should also be created. Later in 1957, two actions were taken. First, the Vocational Schools Assistance Agreement was revamped. It emphasized the training of tradespeople and technicians and offered the provinces $40 million over five years compared to $30 million over 10 years. Secondly, it helped set up a National Advisory Committee on Technical Change. Although spending was increased, the country was still not producing enough trained workers to meet the needs of the labour market. The shortfall was met through immigration. Canadians had problems obtaining the training needed to enter the labour market or

re-enter it if their skills or knowledge grew obsolete. The creation of the Red Seal Program was another important development. This initiative made it easier for skilled workers in regulated trades to take jobs in other parts of the country.High unemployment in the early 1960’s led to vastly increased expenditures on occupational training. Federal expenditures had averaged to $4 million annually for much of the 1950’s. It increased to $8 million in 1959-60. Even with the doubling of expenditures, it was apparent that Canada needed to provide far more occupational training than in the past.In November 1960, the Vocational Training Coordination Act was introduced. Michael Starr, the Minister of Labour, noted that the legislation could substantially increase federal funding to the provinces and he hoped, in return, the provinces would be a little more responsive to federal concerns. The legislation included a few practical financial incentives designed to move the provinces in that direction. For example, the federal share would go from 50% to 75% for training unemployed workers if a province exceeded a ratio based on the number of training days delivered relative to the size of the work force. The bill removed provincial allotments so that provinces were, in effect, in competition with each other for whatever pot of money the Department of Labour could win from Treasury Board. These financial incentives had a profound effect.On December 20, 1960, the Technical and Vocational Training Assistance Act replaced the Vocational Training Coordination Act. Financial and other support to training programs continued, but without the former quota allotments to each province. The scope was broadened. Workers receiving training jumped from a few thousand in the later 1950’s, to 27,000 in 1961-62, to nearly 50,000 in 1962-63 and to nearly 100,000 in 1965-66.Most of Canada’s government-financed training was taking place in institutions rather than industry. In fact, over 95% of expenditures, except apprenticeships, went to institutional training, in contrast to the U.S. where 80% of government funding went to training in industry. With the passage of the Adult Occupational Act in April 1967, on-the-job training became important.Allowances could be paid to trainees who had been in the labour force for a period of at least three years, or who had dependants. Annual expenditures averaged about $300 million over the next few years. The period in the early 1970’s was a period where many innovative programs were introduced: Training-on-the-Job for Skill Shortage (TOJSS), Training-on-the-Job for the Disadvantaged (TOJD), Work Adjustment Training (WAT), Basic Job Readiness Training (BJRT) and Training Improvement Program (TIP).The Job Experience Training Program (JET), introduced in September 1977, was aimed at unemployed persons below age 25, who had been out of school for three to 24 months. The program was quickly dismantled as it was felt that a significant proportion of the young people might well have been hired without the wage subsidy.In the mid-1970’s, Deputy Minister Allan Gotlieb launched a major review of training programs. Several academics reviewed training programs. One study, by Morley Gunderson, was typical. It commended the flexibility and adaptability to changing needs and training techniques that the program had shown but wondered

if society and the economy were receiving benefits commensurate with the substantial costs. It was concluded that there was a need for more training in certain areas where there was a shortage, mostly, of blue collar workers. The Critical Trade Skills Training (CTST) was then created in 1979.In the early 1980’s, two task forces were set up. The Dodge Report concluded that much of the enthusiasm for training during the 1960’s and the 1970’s had been misplaced. Training could meet certain labour market needs but others were better met through different employment policies. The Allmand Report did not share the Dodge Report’s view. It would have maintained or even expanded training activities.From 1979-80 to 1984-85, training expenditures increased by 61%. Almost all funding went to general training in 1979-80 but only 35% by 1984-85. the major change in that period was the replacement of the Adult Occupational Act by the National Training Act in 1982. It retained institutional and industrial training but added the Skills Growth Fund (SGF). The SGF was designed to modernize and expand training facilities. This, in a sense, was a return to the philosophy of the early 1960’s. SGF was abandoned in 1984-85.The next few years saw the publication of many reports. The Nielsen Report, in its scepticism about the value of certain forms of occupational training, was echoing the Dodge Report. The other reports (Macdonald Royal Commission, the House Commission and the Forget Commission), though more sanguine about the value of training, still wanted it to be more responsive to the needs of the labour market. Interestingly, none of the reports saw training as a major solution to the high levels of unemployment. “All is flux, nothing stays still.”

Heraclitus, Sixth Century BAPPENDIX E

REGISTERED UNEMPLOYMENT SAVINGS TRUST (RUST)A well-designed Unemployment Insurance program would be one to encourage and reward attachment to the workforce. A capital accumulation program would fulfil this role, as this type of plan could be set up to deposit employer and worker contributions into a registered unemployment savings trust (RUST) account. This account would be tax-sheltered and invested at the sole discretion of the worker, similar to a group RRSP arrangement. This program would be compulsory for all workers and would replace the existing UI program.Workers who become unemployed would be eligible to make withdrawals from their own RUST accounts within legislated limits, and all withdrawals would be fully taxable. The contributions rate to the RUST account could be set initially at the unemployment insurance premiums currently payable (employer – 4.2% of insured earnings, workers – 3.0% of insured earnings). Alternatively, they could be set at the current rates and then adjusted downward over a three- to five-year period to long-term stable rates (e.g., employer – 3.5% of insured earnings, workers – 2.5% of insured earnings).

Advantages●incentive to find new job quickly since reducing personal assets●workers with long-term attachment to workforce will have significant

accounts at retirement●very little administration required●no financial impact to government●RUST account facilitates mid-career changes and re-training●eliminates financial incentive for repeat claimants●allows coverage of self-employed and part-time workers

We have compared the number of weeks of maximum benefits available to an individual age 25 who does not draw from their RUST account, and for a similar individual who collects their maximum entitlements every two years under both the current UI program and the proposed RUST program.

Projected Weeks of Benefit — No ClaimsYearCurrent UI ProgramRUST Program150.07.1250.014.4350.022.1450.030.0550.038.21050.084.41550.0140.12050.0207.53050.0387.04050.0648.8Projected Weeks of Benefit – Repeat Claimants Every Two YearsYearCurrent UI ProgramRUST Program150.012.6250.012.6350.012.6450.012.6550.012.61050.012.61550.012.62050.012.63050.012.64050.012.6

Other Factors for Consideration ●Co-ordination with CPP/QPP – this program could be co-ordinated with the Canada/Québec Pension Plans (CPP/QPP) to enhance retirement income security.●Flexibility – the existence of a savings account would enable the development of many special programs utilizing those assets (e.g., Home Buyer’s Plan)●Capital market – the accumulated savings would provide a large source of funds for both public and private market needs.●Individual empowerment – the program allows workers to utilize their accounts to reflect their own individual and family needs (e.g., sickness, maternity/paternity, training)

APPENDIX F

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