Over the past few decades, Canadians have taken steps—from the Canada Pension Plan to universal health care—to make Canada a more caring and equitable society. However, despite politicians’ best intentions, these societal efforts can sometimes produce unintended negative consequences. Nowhere is this more evident than with the current design of the employment insurance (EI) system.
In 1971, the Liberal government dramatically expanded and increased the generosity of the EI program. Under the new system, seasonal workers were insured, benefits were enhanced, and for the first time, the qualifying period for EI was determined on a regional basis. Though seemingly compassionate on the surface, these reforms had a negative impact on large parts of the country.
In order to understand why insuring seasonal workers is a problem, one should start off by examining how insurance operates. People insure themselves against unpredictable events, such as fires or floods. The same principles can be applied to unemployment. Given the risk of unexpected layoffs, it makes sense for workers to band together to insure each other and provide temporary income support. By having all workers in a government-run insurance program, costs can be kept low and coverage broad.
However, seasonal work does not operate in the same way due to its predictable nature. For example, it is a certainty that a ski instructor will be out of work in the off-season.
In the absence of an employment insurance program, seasonal employers would have to pay their workers enough to make them stick around from one season to the next. Moreover, as the government subsidizes seasonal work and unemployment, both of these phenomenon become more prevalent.
In short, EI is an incredibly inefficient and poorly designed program, rewarding a token bout of seasonal work with months of tax-financed idleness.
Regional EI entry requirements also impede the functioning of a fluid national labor market. These requirements mean that in regions with unemployment rates above the national average, workers only have to pay into the EI fund for six weeks as opposed to 16. In many parts of Western Canada, robust economic growth has contributed to labor shortages. In Atlantic Canada, there is close to a double-digit percentage of unemployment. One would think that the simultaneous existence of these two situations would be complementary: Canadians in regions of high unemployment could take jobs in areas of the country with demand for workers.
However, some entry requirements in parts of the nation are an active deterrent to unemployed workers in those regions from taking jobs in other regions. For example, if unemployed seasonal workers were to move to Alberta in search of work, and were unable to find it, their sparing work history would mean their contributions to the EI fund would be insufficient to qualify for benefits under these tougher rules. Thus, regionally enhanced EI can deter Canadians from migrating to other parts of the nation to meet labour market needs. This has a detrimental effect on the labour market, and worsens the performance of the economy as a whole.
Easy access to EI for seasonal workers has contributed to a persistent unemployment problem in many areas of the country like Nova Scotia, and a consensus forecast among economists estimates that the system has led to a permanent two per cent structural unemployment gap compared to that in the U.S.
To rectify the situation, EI should return to its original purpose as a government-administered insurance program for workers with one national set of eligibility requirements and benefit levels. To protect themselves, seasonal workers should be forced to save a certain proportion of their income in a specific account to provide a degree of income security when unemployed.
Most people want a fair society, but sometimes, policy making doesn’t work as planned. It is time to reform EI and do away with the unintended negative consequences that result from Canada’s flawed EI system.