June 1996 Vol 2, No. 1


June 1996 Vol 2, No. 1




UNEMPLOYMENT AND THE GOVERNMENT: PART I

The End of Unemployment Insurance As We Know It
* * *
Raiding the UI Cookie Jar


This spring the Chretien government is pushing through Parliament a new "Employment Insurance" (EI) act making drastic changes to Canada's UI system. The name of the program was changed to EI from UI, to make it seem as if creating employment (rather than compensating unemployment) was its main goal.

But this choice of name is incredibly cynical. In reality the government is signalling its willingness to take high, chronic unemployment for granted--as a permanent feature of our economic landscape. By gutting UI, and privatizing job-creation initiative to the low-wage private sector, the government is conceding that it will no longer try to reduce unemployment (and hence the cost of UI) through the creation of desirable jobs.

To put a happy face on this sad state of affairs, the EI system dresses up a set of low-cost hand-outs to the private sector as a tool-kit of "active labour market services" This will allow the Liberals to claim that they are keeping their campaign promise to create jobs, on the strength of measures to promote labour market "flexibility" deregulation, and devolution to the provinces. Far from solving the unemployment crisis, however, EI--by weakening income security and subsidizing low-wage employers--will undermine workers and unions throughout the economy.


  • The Issue: More Cuts to Unemployment Insurance
  • The federal government's so-called "Employment Insurance" system reduces eligibility and benefit levels for UI even further--on top of the effects of previous cutbacks. Canadians now have little to fall back on if they lose their jobs.
  • UI premiums were increased in the early 1990s, but benefit payouts have plummeted. The resulting UI surplus is being siphoned off to reduce the federal deficit, and to pay for various experimental employment programs aimed primarily at subsidizing low-wage employers in the private sector.
  • The government has abandoned any responsibility for promoting full-employment. By destroying UI and handing more power to the private sector, downward pressure on wages and working conditions will increase. Employers love this free-wheeling labour market, in which workers need a job--any job--just to survive; their power over labour is greatly enhanced.




Cutting to the Bone

Even before the latest changes, Canada's UI system was already a mere shadow of its former self. Following a progressive UI reform in 1971, the first of many cutbacks was imposed in 1976, and with the exception of expanded parental and sickness benefits in the 1980s, it has been downhill for the program ever since (see Primer).

During the last two decades basic benefit levels have been repeatedly cut from 75% in 1971 to 55% today, and the number of weeks of work required to qualify for UI increased from 8 weeks in 1971 to as high as 20 weeks today. UI was denied altogether to retirees, and to workers who quit or were fired. Now only one-half of officially unemployed Canadians qualify to receive any UI whatsoever (see Figure 1).

The 1996 changes will go even further in denying UI protection to unemployed Canadians. The overall level of benefits will be cut by $1.9 billion (about 11 percent). This will be achieved by:

  • reducing the maximum stay on UI;
  • reducing the benefit rate for seasonal and irregular workers, as well as for so-called "repeat users" (a term which sounds like a combination of a drug addict and a habitual criminal);
  • taxing back UI benefits from middle- and high-income recipients (with the clawback threshold now as low as $39,000);
  • and increasing the eligibility requirements for new workers and re-entrants.

Hours of work, rather than weeks of work, will now be used to calculate eligibility and benefits. This change will have complex and often contradictory effects. Many seasonal workers will be disqualified from UI as a result (although a few others--those who work many hours within a very short period--will newly qualify).

Part-time workers who were covered by the old system (those who worked at least 15 hours per week) must now work for many more weeks to qualify for benefits: up to 47 weeks of work, or more than double the previous requirement, and even longer for new workers and re-entrants. Part-time workers who were not covered by the old system (those who worked less than 15 hours per week) will now participate in UI, but the majority will not qualify for benefits because they work too few hours.

A Slow Train to Nowhere

Bowing to business pressure, the government also reduced UI premiums. The basic premium rate is reduced slightly from $3 per $100 of earnings, to $2.95. More importantly, the maximum insurable earnings threshold is frozen at $750 per week (down from about $845 under the old formula for calculating this ceiling). Workers earning over $40,000 per year (and their employers) thus receive a 10 percent cut in UI premiums, while those earning below $40,000 receive a saving of less than 2 percent.

The significance of this change in the UI system, however, goes far beyond the premium rebate given to high-income earners. By freezing maximum insurable earnings at $750 per week, the government also freezes maximum UI benefits at $412.50 per week. The government has imposed these limits until at least the year 2000, and perhaps longer.

As a consequence, the UI system will not keep pace with the normal growth in earnings resulting from both inflation and from economic growth. A shrinking proportion of workers' earnings will be covered by UI, and UI benefits will make up a shrinking proportion of a laid-off workers' lost wages.

Already, average weekly UI benefits equal only 44 percent of average weekly earnings in Canada--much lower than the statutory UI benefit rate of 55 percent. The difference arises because UI does not apply to earnings above the maximum threshold (and also because low-wage workers are more likely to be laid-off than high-wage workers). Reducing the earnings and benefits thresholds will reduce this effective UI benefit rate even further.

By freezing the maximum insurable earnings ceiling, and thus reducing it in real terms (since the threshold is not indexed to inflation and to wage growth), the government ensures that the UI system will gradually lose its economic significance. Perversely, it also ensures that more of the remaining cost of UI is transferred from high-wage to low-wage workers. Over time the UI system automatically becomes both smaller and more unfair.





PRIMER: Whittling Away at UI

Workers campaigned for UI during the Great Depression as a form of social insurance: if society wouldn't provide jobs, it at least had the responsibility to provide income security. In response to this pressure, basic UI protection was implemented and gradually expanded through the post-war era, culminating in the 1971 reforms.

For business, however, UI is the most hated of all social programs--it saps workers' "incentive" (ie. eases their desperation), and forces employers to "compete with UI"in their wage offers. Over the last 25 years, business has succeeded in changing the public's view of unemployment and hence the rationale for UI: unemployment is the fault of the individual, not of society, so we emphasize individual responsibility rather than social insurance. The jobs still aren't there, but now it is seen as "efficient"and even "caring" to reduce income security for the unemployed.

  • 1971 Reform:
  • Near-universal coverage.
  • Benefit rate up to 75%.
  • 8 weeks work to qualify.
  • Sickness, maternity & retirement benefits.
  • 1976 Cutback:
  • Maximum benefit rate reduced to 67%.
  • Benefit duration reduced.
  • 1977 Cutback:
  • Variable eligibility introduced.
  • 10 to 14 weeks work needed.
  • 1979 Cutback:
  • Benefit rate reduced to 60%.
  • Clawback of UI benefits introduced.
  • 1980 Cutback:
  • Government pulls out of main UI funding, only paying for "extended benefits"
  • 1990 Cutback (Bill C-21):
  • Retirement benefits eliminated.
  • As much as 20 weeks work needed.
  • Duration of benefits reduced.
  • Government UI contributions end.
  • 1993 Cutback:
  • Benefits denied to those who quit "without just cause" or are fired.
  • Benefit rate cut to 57%.
  • 1994 Cutback (Martin Budget):
  • Benefit rate cut to 55%.
  • 2-tier benefits and means-testing introduced.
  • Minimum 12 weeks work now needed.
  • Shorter benefit duration.
  • Total cuts $2.4 billion per year.
  • 1996 Cutback ("Employment Insurance"):
  • Benefit rate reduced to as low as 50% for "repeat users"
  • Maximum duration reduced to 45 weeks.
  • Family income testing introduced.
  • Tighter clawback of benefits (starting at income as low as $39,000).
  • Hours instead of weeks used to qualify.
  • Higher entrance requirement for new workers and re-entrants.
  • Penalize irregular & seasonal workers.
  • Payment of premiums earlier in year.
  • Total cuts $1.9 billion per year.



A "Pure" Insurance System?

The government claims that "abuse" of the UI system could be reduced by basing the system on stricter insurance principles. They imply that UI "repeat users" are at fault for their own unemployment: by choosing the wrong careers or the wrong parts of Canada to live in, they put themselves at greater risk of losing their jobs.

UI "users" are pictured like homeowners who keep burning down their house by playing with matches. Insurance companies would punish these individuals; their premiums would rise, and eventually they would lose coverage altogether, thus encouraging more responsible fire prevention. UI repeat users should be similarly punished.

Unlike house fires, however, unemployment is not a rare, catastrophic occurrence that strikes randomly--and few workers are able to "prevent" unemployment through common-sense prevention.

Bank executives on Bay Street are almost never laid off; workers in many industries are laid off virtually every year. But it is a lot harder to become a bank executive than it is to install a smoke detector.

Unemployment is a common, chronic, devastating occurrence whose costs are borne very unequally. As much as one-third of Canada's labour force is laid off at some point during a typical year. Workers in some industries experience multiple lay-offs; lucky workers in other industries (especially those in management occupations) may never be laid off in their entire lives.

No "pure" insurance scheme could be devised to address the unequal but potentially huge risks of unemployment. Workers in seasonal and cyclical industries would face astronomical premiums and high "deductibles" Meanwhile, well-off individuals who are already insulated from the risks of unemployment would pay little. And a pure UI system would be bankrupted every few years by recession and soaring benefit costs: selling UI in our jobless economy would be like selling life insurance during the Black Plague.



UI Cuts: The Impact on Bargaining

UI cutbacks undermine the bargaining position of workers throughout the economy, by increasing their vulnerability to downsizing and lay-offs. But the UI cuts also have direct bargaining implications for those units (including the Big Three automakers) which have negotiated employer-based income security provisions, such as supplementary unemployment benefits (SUB).

Since it is a "top-up" over and above basic UI, the cost of SUB protection increases dramatically as underlying UI benefits are eroded. For example, the 1994 cutbacks in UI benefit rate (from 57% to 55%) and benefit duration (from 45 weeks to 35 weeks, on average) resulted in a doubling of the SUB cost of a typical lay-off. The 1996 cutbacks will have a similar effect, for the same reasons: benefit duration and rate will be reduced further for many workers.

Higher SUB costs affect bargaining in one of two ways: either the employer's SUB contributions must increase (in which case the employer will want offsetting savings in wages or other benefit costs), or else the SUB funds will be quickly exhausted during the next economic downturn (in which case workers could lose their SUB protection too).

Canada has not yet experienced a major recession since the Liberal government began gutting UI in 1994. Thus the impact of the cuts on SUB plans has been largely hidden from view--but it is still a financial timebomb ticking in the background, ready to explode with full force with the next wave of layoffs.




The Economic Functions of UI

The labour movement fought for UI in the 1930s as more than just "pure", quasi-commercial insurance against occasional random bouts of unemployment. They envisioned UI as social insurance: recognizing society's responsibility to those who are discarded by our economy, and giving workers dignity and bargaining power despite a depressed economy. Similar functions need to be fulfilled today:

  • Income Security: The obvious function of UI is to provide laid-off workers with replacement income, so that their lives are not completely disrupted by unemployment. UI helps laid-off workers to keep their homes and cars, to stay off welfare, and indeed to look for new employment.
  • Cost-Sharing: Employers pay 58 percent of the cost of the UI system, in recognition of their role in creating unemployment. High-income and managerial workers pay far more into the UI system than they take out (since they are rarely laid off). Until 1990, government also contributed to UI funding, thus creating an incentive for government to create jobs. Without UI, the full cost of unemployment is borne solely by unemployed workers themselves.
  • Macroeconomic Smoothing: By supporting the purchasing power of unemployed workers during a recession, UI prevents that recession from becoming even deeper. For example, in 1991 the UI system contributed up to $5 billion towards consumer spending in Canada even as consumer confidence was collapsing. This helped to preserve as many as 100,000 jobs (without which the downturn in employment would have been 25 percent worse than it was).
  • Backstop Labour in the Workplace: When workers can protect their standard of living independently from their job, they can adopt a stronger position in their dealings with their employer: both in contract bargaining over wages, and in day-to-day "bargaining" over working conditions and production. UI protection gives workers something to fall back on, if push comes to shove with the employer and they find themselves without work. Without UI, on the other hand, workers lose everything when they lose their job --and that makes them thankful, not militant, when they arrive at work each morning.



UI and the Labour Movement

If one function of UI is to reinforce labour's bargaining position with their employers, then the erosion of UI over the past two decades has contributed to the general weakening of the labour movement.

The 1971 UI reforms coincided with a great upsurge in the economic and political power of workersin Canada (see Table 1). Workers joined unions in record numbers, they were militant in their dealings with employers, and they won unprecedented wage increases and reductions in poverty. This was not solely thanks to UI--a strong economy, smart unions, and other social programs (such as medicare) all played a role--but the UI reforms were important.

The erosion of UI has contributed to the reversal of those gains. Unions and wages are barely holding their own, and poverty is growing. The fact that workers have little to fall back on explains much of the "take-it-or-leave-it" attitude on the part of business today.

Today's UI program is almost three times as expensive for workers as it was in the 1970s, yet workers are more than three times as insecure as they were in the 1970s (measured by the out-of-pocket cost to them of losing their jobs). A full-employment economic strategy is desperately needed: both to save UI and to rebuild workers' bargaining power.

But the new "tool-kit" of EI employment programs is definitely not the strategy we need. In the name of "flexibility", these programs will be farmed out to provincial jurisdiction (without enforceable federal standards). The highest-profile new initiatives includewage subsidies, income supplements, and self-employment subsidies. The next issue of Economic and Social Action will look at the EI tool-kit in more detail, and will criticize the new ideology and labour-market deregulation.


Table 1 -- UI Then and Now: Income Security & Workers' Power
1976 (5 yrs after 1971 Reform) 1995 (5 yrs after Bill C-21)
The Need: Average Duration of Unemployment 13.9 weeks 24.3 weeks
The Protection: Probability of Qualifying 83% 51%
Benefit Rate (1) 75% 55%
The Cost: Premium Rate (2) 1.27% 2.97%
The Insecurity: "Cost of Job Loss" (3) 5.2 weeks pay 17.5 weeks pay
The Effects on Labour (previous 5 years): Annual Change Real Earnings +2.2% +0.3
Change Union Membership +568,000 +47,000
Labour Militance (% days lost in strikes) 0.38% 0.03%
Change in Families in Poverty -166,000 +256,000

NOTES:

1. BASIC STATUTORY RATE. 2. EMPLOYEE'S SHARE, 5-YEAR AVERAGE. 3. LOST INCOME, AFTER UI COMPENSATION, UNTIL NEW JOB IS FOUND. 4. FIVE YEARS ENDING 1993 (MOST RECENT DATA AVAILABLE).




UI Surplus: The Secret and the Scandal

The repeated cuts to UI, like other government cutbacks, are justified on grounds that "we just can't afford it anymore." For three years in a row, however, the UI system has been turning a huge yearly profit for the government--currently about $5 billion per year. By 1995, the UI fund had paid off all previous debts; the accumulated UI surplus is now swelling rapidly, and is forecast to reach $9.4 billion by the end of fiscal 1997 (see Figure 2).



How has this surplus been created? UI premiums were jacked up to record-high levels in the early 1990s to pay for the huge cost of UI benefits for those who were laid off in the aftermath of free trade (and to offset the loss of the government's own contributions). But the sharp cuts in UI benefits introduced by the Tories and then the Liberals, together with the weak economic turnaround since then, have dramatically reduced the overall cost of UI. Premiums remain high, so the system is making a multi-billion dollar profit.

So far the surplus has been used to reduce the federal deficit. The UI surplus is paid straight into federal coffers: since there is no formally separate UI account, all excess funds are simply absorbed by the government. The turnaround in UI finances has thus contributed an amazing $9 billion to the reduction of the yearly federal deficit since 1991.

The switch to hours instead of weeks for calculating UI eligibility will produce a further one-time $1.8 billion windfall for the government, since workers will now pay all UI premiums up-front at the beginning of each year (instead of spreading payments over 12 months).

Politically and perhaps legally, however, this outright siphoning of UI revenues can only continue for so long. So an alternate means of surplus-robbing has been devised: UI premiums will be used to pay for the so-called "employment tools" which were formerly covered by the government's Human Resources budget. This budget was slashed by Paul Martin--but now the funds have been recouped by raiding the UI fund, and could be used for everything from training to subsidizing provincial workfare experiments.

The end result: almost 30 cents of each dollar collected in UI premiums this year will go towards deficit reduction instead of UI benefits.

The final battle over the UI surplus has yet to be fought. Business groups want the savings from benefit cuts channelled back in the form of reduced UI premiums--and they make all sorts of outlandish promises about massive job creation in return. Labour argues that surplus monies should be devoted to the restoration of UI benefits and a cushion for the next recession.

Canada's UI system is indeed too expensive: premium rates are more than three times as high as they were after the initial 1971 reforms, even though the generosity of benefits has been more than cut in half since then. But the key to a progressive and humane reduction in UI costs is not to further slash benefit levels. Our UI system is expensive because our economy perpetually generates very high levels of unemployment, year after year. The costs of a strong 1971-style UI system could be lower than current premiums--as long as we adopted pro-growth, full-employment macroeconomic policies at the same time.


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