Unemployment Insurance and Labour Market Deregulation


Introduction

The last decade has seen profound and far-reaching changes in Canada's labour market, perhaps more dramatic than any others during the post-war period. Disturbing trends in employment patterns, workers' rights, and labour and social policies have been solidified as pervasive and seemingly permanent features of the labour market. Governments and the financial establishment have argued that to lower our unemployment, we must cut social programs, reduce the influence of unions and make the labour market more "flexible".

"Flexibility", in this context, means a working environment with fewer and fewer protections for workers. In contrast, inflexible or rigid labour markets are considered to be those that include minimum wages, severance pay, strong unions, unemployment insurance, pay equity laws and anything else that stands in the way of employers wishing to hire at the cheapest rate possible. Any law, any government policy, any social standard that interferes with the free labour market is seen as uncompetitive and damaging.

Government budget cutters and business lobbyists see the changes in the labour market as beneficial: workplaces are becoming more flexible and workers more insecure. We are more at the mercy of so-called market forces and the economic power of employers than we have been for generations. The effects of this shift in the power relations that underlie the labour market are visible all around us - Canadians are working harder, for longer hours, for lower wages in more precarious and insecure jobs and with less to fall back on if they lose their jobs.

This is what is meant by labour market deregulation. It is what happens when governments embrace a cheap labour strategy. And it is the reason for the attack on Unemployment Insurance.

The Attack on U.I.

The dangerous freefall in UI coverage continues. Back in 1990, fully 87% of the unemployed received UI. Since then the coverage ratio has dropped by virtually 1 percentage point each month. By May of this year, an average of just 42% of the unemployed were receiving UI benefits country-wide. In other words, the majority of unemployed Canadians had been cut off unemployment insurance altogether. In B.C. UI coverage stood at only 37% this May, and in Ontario coverage had fallen to an abysmal 29%. Canada's UI system now mirrors the disgraceful coverage rates of the U.S. system. Since poor UI coverage is a key reason for higher American poverty rates, we can expect to see similar consequences in Canada.

And the fallout isn't over. Some of the 1996 changes to the Employment Insurance Act, like Contact-C pills, are slow to take effect. The penalties for "repeat claimants", for example, are only now starting to kick in (since everyone started with a "clean slate" as of July 1996). The result? Between 1998 and 2001, increasing numbers of the unemployed will fail to qualify for UI, or they will receive benefits for a shorter period, or a smaller benefit payment.

This is particularly troubling given the possibility of another economic recession. Many of the phased-in penalties may hit just as Canada's economy slows down and we most need the UI safety net to cope with rising unemployment. UI benefits have been made increasingly "noncyclical," meaning that they will not adapt properly in times of recession.

Whose Surplus Is It Anyway?

Unemployment Insurance was a social insurance program paying close to $20 billion per year in benefits just a few years ago. Soon this system will have been cut in half - even though the number of unemployed has not fallen significantly during the so-called "recovery" of the 1990s, and still stands at over 1.3 million.

Since UI premiums are not being spent as they should on unemployment benefits, it is no surprise that the UI Account is generating a mounting surplus. These surplus monies show up each year in Paul Martin's federal budget, helping him to eliminate the deficit - even though the federal government has not contributed a cent to the UI Account since 1989. In turn these unused UI funds are used to pay off the banks and investors who control our national debt.

All on its own, the UI (EI) Account will generate an annual surplus in the current fiscal year of about $8 billion - precisely the amount of the total anticipated federal government surplus. This $8 billion is in addition to the accumulated stockpile of UI surplus funds of more than $12 billion, built up over previous years (see pie chart).

The wrong questions are being asked about the UI surplus. Corporations and business editorials demand reduced premiums, but this overlooks the obvious: how did we get such a large surplus in the first place? The surplus is growing at the direct expense of Canadians' benefit entitlements. The employers now calling for premium reductions will be the first during the next recession to argue that EI premium revenues are insufficient to sustain benefits, thus justifying even more cutbacks. A vicious circle has been created, one that requires workers to make all the sacrifices.

The Cheap Labour Agenda: Unemployment Insurance

Finance Minister Paul Martin's Budget

When the government decided on a major overhaul of the Unemployment Insurance system in 1995 it was not because the UI system was unaffordable. On the contrary, by 1994 the government knew the UI Account was starting to generate large annual surpluses. Instead, UI reform was central to the government's agenda of eroding worker protections, while at the same time re-jigging economic policy to undermine social policy and the role of the government in the economy.

When the Organization for Economic Co-operation & Development (OECD) met with some of the largest, richest countries in the world at a 1994 "Jobs Summit" to discuss the crisis levels of unemployment, they concluded that cutting back on social programs, wages and labour laws would address that problem. The OECD prescriptions were followed closely by the Canadian government when it went about the restructuring of our unemployment insurance system, including the decision to offload the financing of training to the provinces and the dumping of the National Training Act.

The Fraser Institute has called for:
  • Reduced regulation; introduce "flexible" employment standards, especially flexible hours
  • "Flexible" labour relations; unions undermine employers' bargaining power and inflate wages
  • Devolution of power to local jurisdictions
  • A larger role for private training institutes; an end to public funding for post-secondary education
  • Private sector delivery of workfare "training"
  • Individual vouchers for retraining as well as Registered Educational Savings Accounts (like RRSPs)
  • Reduced minimum wages and payroll taxes, especially EI(UI) and CPP.
  • Require the Public Employment Service to compete in the market for placements.
The OECD advocates similar measures:
  • Promote policies that encourage greater wage and labour cost "flexibility"
  • Restrict UI benefit entitlement period
  • Extend the use of UI entitlements for enterprise creation and self-employment
  • Make long term benefits conditional on participation in active labour market programs
  • Shorten and target training programs for the unemployed
  • A significant cut in payroll taxes would favour the hiring of low-wage, unskilled labour
With the 1996 Employment Insurance Act the Canadian government would:
  • Introduce new "disciplines" to the work force. With a less secure, fraying UI safety net, desperate workers would presumably be more willing to take poor jobs.
  • Withdraw from the financing of training and labour market development, shifting the responsibility to provinces and individuals.
  • Facilitate the commercialization and privatization of training, education and employment services, opening up this arena to private investors and injecting competition into the sector.
  • Support employers with "lower business costs": reduced premiums, lower maximum insurable earnings, "premium holidays" and wage subsidies
  • Move away from universal entitlements and establish new precedents for "targeting" benefits only to the most "deserving" of the poor. The new EI Act contains a "super" clawback of benefits for some "repeat users", a Family Supplement that goes only to claimants with children and less than $26,000 in total family income and new Part 2 Employment Benefits and Measures which will be assessed on the basis of "need".
  • Use UI to fund non-UI programs which the government had abandoned or seriously curtailed, such as disaster relief for floods and storms.
  • Use UI to pay the deficit. A 1986 amendment allows the government to include the UI Account in its annual budget, even though it hasn't contributed a cent since 1989. The Liberals needed a major source of funds to make good on their promise to pay down the deficit. With more cuts to benefits, they could build up an even larger UI surplus to tap into.
  • Use UI to silence the provinces. The Liberals wanted to appear responsive to their Quebec base and at the same time, to placate provincial premiers who would rail against the cuts to provincial transfers under the new CHST. The federal/ provincial labour market agreements under EI Part 2 would be key because the devolved UI monies allow premiers to offset some of the cuts to social assistance transfers.
  • Divert attention from the government's abysmal record on job creation by placing the blame on the unemployed themselves.

The Liberals have cut some $9 billion from UI since taking office in 1993. There has been a dramatic overhaul of benefits with new rules that penalize repeat claimants, workers with irregular schedules, and part-timers and others working 15 to 34 hours a week. The government has cut benefit rates and the maximum benefit period. They have imposed harsh rules for "new entrants and re-entrants" and those claiming pregnancy, parental and sick benefits. They have introduced bigger tax clawbacks, new "family income tested" allowances, a new hours system and new policing powers using electronic linkups.

These radical cutbacks to regular UI benefits, and the consequent growth of the UI surplus, are becoming familiar problems to Canada's unemployed. But lurking in the background is a possibly more outrageous manipulation and abuse of our UI system: the new so-called "Part 2" benefits and programs. They constitute a fundamental restructuring of the system.

Fiscally, the UI program has become a convenient means of subsidizing federal deficit reduction. And politically, it has become a convenient playing field for a federal government that wants to demonstrate its commitment to "new" forms of federalism. But this is no game; the results could be devastating for workers. Given the political and economic orientation of most provincial governments in Canada these days, giving them control over Part 2 training "tools" will undoubtedly lead to some truly bizarre and frightening outcomes.

What Is "Part 2" ?

Lock-step with the dramatically reduced entitlements to Part 1 "unemployment" benefits (the income maintenance benefits we historically associate with unemployment insurance), the government introduced new Part 2 "employment benefits and measures" in its 1996 legislation. As more of the unemployed are assigned to Part 2 , we will discover just how different they really are.

There are five Part 2 "employment benefits": wage subsidies, earnings supplements, self-employment assistance, skills loans and grants, and "job partnerships". "Support measures" on the other hand refer to employment services such as labour market information, counselling and job clubs.

These Part 2 "employment benefits and measures" are the UI funds that are being transferred (devolved) to the provinces and territories as provided for in the new legislation.

Unlike Part 1 benefits, Part 2 is not based on an entitlement model. Provinces and regional offices will use a variety of "needs" and "means" testing to decide if an individual qualifies for assistance and how much they can afford to contribute. There is no appeal procedure if someone feels they've been unfairly assigned to or denied Part 2 benefits.

A provision in the new E.I. Act rescinds the National Training Act and Apprenticeship program. By the year 2000, there will be no government purchase of training seats. Instead, claimants will usually be invited to take out a Part 2 loan (in a few cases there will be means-tested vouchers or grants). In effect we'll be borrowing the premiums we already paid into EI, then re-paying that money - with interest. This will apply to apprenticeships as well as plant closure adjustment programs and other training and upgrading situations. Lifelong Learning will too easily become Lifelong Debt.

Part 2 focuses on the individual, their individual financial resources and their "action plan". Human Resource Centres will give more attention to individuals who don't face employment barriers and who require little or no financial support, the result of new policies that judge each office on how much money they "save" the UI account. This approach will also make it more difficult for unions to organize good quality group programs, including adjustment programs.

Since there are no national or pan-Canadian standards in these labour market agreements, there will be different rules and interpretations in virtually every regional and sub-regional office. There are reports of an emerging chaos as each office becomes its own fiefdom, beholden to no one except perhaps the local MP, MPP/MLA or private sector "partner". In some cases the offices are "partnering" or contracting-out with private trainers, temporary help agencies, and the like. Contract terms with private companies and other third parties reportedly set out a bare minimum of conditions, typically the number of people to be seen monthly and a specified placement target - and nothing about the standard of service or the quality of the job placement. This, despite the fact that third party deliverers may be deciding who gets training and program money.

U.I. and the Provinces

With the exception of Ontario which is still negotiating, all provinces have now signed onto labour market agreements with the federal government. Some $1.9 billion of UI funds will go to the provinces, including a maximum of $500 million in income supports from Part 1. The provinces can use the devolved monies for a variety of programs, including workfare if a province moves in that direction.

New Spending Authorities

When the federal government offered to give the provinces spending authority over Part 2 Employment Benefits & Measures, it was a seductive proposition. The provinces have been struggling with a $6.2 billion cutback in federal support for health, post secondary education and welfare. The UI money was seen as an easy way to make up for some of the losses, particularly for social welfare programs. The federal government actually redefined "UI-eligibility" for Part 2 benefits and programs to include social assistance recipients who have had a UI benefit claim in the last 4 years (5 years in the case of parental benefits). This is a divergence from past practice, according to which only currently insured workers were eligible for UI programs. The federal government has made a special point of reminding provinces that 55% of social assistance recipients are eligible for Part 2 under this new expanded definition. In short, Part 2 monies can now be used to reduce provincial welfare spending, as long as the provinces can develop programs (even punitive workfare programs) that encourage or force welfare recipients to join a training or re-skilling program.

The fact that these programs have repeatedly demonstrated their ineffectiveness at reducing unemployment in an economy where jobs are scarce does not matter. Backed by rhetoric about the "new economy" and the need for "personal responsibility" from the unemployed, the federal government is buying off the provinces by offering to share the riches that have been raided from the true UI system. In December 1995 all of the provinces allowed their social services ministers to sign on to an accord that called for the integration of UI and provincial social assistance income support systems (Quebec was part of the process but chose "observer" status).

What few of the provinces have yet realized is the extent to which they are now responsible for training programs that were previously funded by the federal government's general revenues and then abandoned with the Employment Insurance Act provisions that rescind the National Training Act and related programs. Between 1993 and 1997, more than $1,000,000,000 was cut from federal training expenditures (Consolidated Revenue Fund contributions and UI).

Right-wing governments, like those in Alberta, New Brunswick, Manitoba and Ontario, are interested in Part 2 benefits for yet another reason. The new law allows them to establish public/private partnerships, and even privatize Part 2 benefits, training programs, and administration.

Labour Market Agreements

While the new labour market agreements are supposed to be about training, none of them have enforceable guarantees of equitable access to training, good quality programs, prohibitions against commercialization, support for non-profit, public sector delivery, a ban on means-testing workers who need training grants, or an appeal procedure for claimants.

There are few, if any, provincial governments which will refrain from throwing the hundreds of millions in these labour market agreements at phoney "employability" projects for those on UI and social welfare, in some cases as part of mandatory workfare. There are few, if any, provincial governments which will support training that meets worker's needs rather than corporate-defined needs (in Ontario the Conservative government is on record opposing any funding for labour-based training and literacy programs). There are few, if any, provincial government which will resist applying to training and apprenticeships the same slash and burn approach they've taken to public education.

All of this at a time when only 42% of the unemployed are receiving UI benefits. The money that was not spent on benefits for the rest of the unemployed, the big majority, is now being handed over to provincial premiers for purposes that may have nothing to do with income maintenance for the insured unemployed. Equally disturbing, the federal government has offered provinces some potential authorities in respect of Part 1 pregnancy, parental and disability benefits.

New Legislation?

There are persistent rumours the government will introduce amendments to its EI legislation as early as this Fall.

We know from the government's 1997 Monitoring and Assessment Report that it is embarrassed by the plummeting UI coverage rates and has commissioned internal studies on the matter. But there is talk of a "one time" confiscation of billions of dollars from the UI Fund to the government's general coffers (under current legislation, they have to repay the UI Account for any UI surplus they borrow for other purposes).

If we want to ensure the surplus is used to restore benefits, and to rebuild our UI system to carry us through the next recession and beyond, we need to be setting the terms of the public debate.

***

A Labour Agenda for U.I.

We need to reject the rhetoric of UI "re-engineering" and dispute the unfounded notion that gutting our UI system will somehow help to get the unemployed back working in good jobs. Business demands for premium cuts serve only to permanently undermine the funding base of the UI program, making it all the more difficult to rebuild in future years. At the same time, we can spell out the pro-active changes that will be required to restore the UI system to its intended role as a pillar of economic security for workers in this country.

The following UI improvements are advocated by the CLC:

  • Ensure that at least 70% of the unemployed are receiving U.I.
  • Eliminate rules penalizing those without steady full-time jobs
  • Restore benefits to 60% of earnings.

The UI Commission Chief Actuary estimates the yearly cost of the improvements at $6.5 billion - much less than the current $8 billion yearly surplus. Assuming current premium rates, the accumulated surplus of about $12 billion would still be there as a cushion for the next "rainy day" recession when unemployment will soar.

1. Restore UI coverage and benefit rates.
2. Establish a genuinely arms-length UI fund so that UI monies cannot be used to finance the federal deficit.
3. Oppose privatization of UI and maintain a Federal Government role. But curb the Minister's blanket powers.
4. The Government must contribute to the UI fund when unemployment is more than 4%, as they did in the 1980s, an incentive to do more about job creation.
5. Premium cuts should only be considered after we've dealt with the crisis in UI coverage. Canada's payroll taxes are already the lowest of G-7 countries, including the U.S. Once benefit coverages are restored, premiums should be stabilized to allow a reserve fund equal to 1 year of benefits. Consideration should be given to raising the maximum insurable earnings that are subject to premiums, making this a less regressive system. Companies using excessive overtime should pay a higher employer premium on such hours, an incentive for firms to create new jobs.
6. A moratorium on devolution and privatization of UI-funded employment programs and benefits. It is essential that we continue to recognize Quebec's right to self-determination, and hence recognize that Quebec will have more leeway in designing its programs than will other provinces. It is equally important to resist the political fragmentation which is occurring within English Canada. We need a democratic debate and review of current directions.
7. Maintain a strong public, non-commercial employment service that continues to employ our brothers and sisters in the public sector. The use of UI monies to subsidize the operations of private consultants and counsellors is completely wrong.
8. UI funds must be used strictly for income maintenance for insured workers. "EI Part 2" programs (the federal/provincial labour market agreements) violate this principle, and should be funded instead by general government revenues.
9. A renewed commitment to programs, funded from general government revenues, that will provide benefits and programs for the long-term unemployed, social assistance recipients, new labour force entrants, and special programs for older workers, women, workers of colour, youth and others who face employment barriers.
10. A new employer-funded training program and changes to employment standards legislation to ensure that every employed worker has an annual entitlement to paid education and training during regular working hours.

As well as the political fight for a new approach to UI, there are important measures we can take up at the bargaining table. Members want to offset the worst impacts of UI "reforms" and corporations need to hear the message, repeatedly, that workers won't continue making all the sacrifices.

Where possible, we can demand better funding for our SUB plans (which become more expensive when UI is cut back) and the creation of new supplementary benefit plans (including top-ups for UI sickness, pregnancy and parental benefits) where none exists. Members working less than 35 hours weekly may be negatively impacted by the new EI "Hours System" so Weekend Workers need to be described as "full-time equivalents" and part-timers may want to consider "maximizing hours" by seniority for those members wanting more hours. Sickness and accident plans need to be strengthened to pick up the UI shortfall; S & A benefit rates, for example, should not be tied to EI maximums which have been slashed and frozen.

The new EI Act dumped the National Training Act and the government withdrew from the financing of training and the direct purchase of apprenticeship, adjustment and training seats. Other provisions shift those training costs onto individual workers in the form of EI loans. This puts the spotlight on the employer's obligation to provide paid training and upgrading on company time for apprentices, pre-hires, and those affected by technological change (hardware and software), work re-organization, layoffs, postings, and closures. Literacy and basic skills also need to be negotiated. Part 2 benefits, including wage subsidies, can be used for workfare, youth internships, co-op placements; a great injury will be done if such labour isn't protected by our contracts. Finally, we need to include contract language wherever possible that commits our employers to job creation through reduced worktime and other measures.

Most importantly, we need to keep restating what is so obvious to so many of us: "re-engineering" Unemployment Insurance addresses none of the fundamental and critical labour market issues of the day. Our economy is not producing sufficient jobs, particularly "good" jobs. Instead, precarious and short-term contract work is increasing. Indeed, we need to constantly highlight the problem of growing underemployment, visible in growing part-time and self-employment. Undermining the economic security of workers hardly addresses this problem. Some of the EI changes actually penalize the people who take these jobs. We need to simultaneously address the jobs crisis with measures that enhance sustainable economic growth, while repairing our UI system to enhance the security and bargaining power of all workers#employed or unemployed.



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