The federal government is finalizing its long-promised reform of the Employment Insurance system. In this special three-part series, Miles Corak argues that the financing of the program should be part of the reform process, and offers practical changes to EI contributions based on insurance principles.
From: Miles Corak
To: Employment Minister Carla Qualtrough
Date: October 13, 2022
Re: Insurance Principles Offer Three Practical Reforms for Financing EI
The federal government has promised to modernize Employment Insurance (EI) for the 21st century and has been holding consultations to engage stakeholders and others. These have been full of suggestions for the expansion of coverage and benefits.
But when it comes to financing the program, the debate has been framed in terms of how to finance these suggestions, with little acknowledgement that the nature and structure of contributions are also a part of “modernization.”
There is a clear need to think about financing benefits by adjustments to the existing contribution structure, and also to think about that structure and how it can be reformed to enhance program objectives.
The need for better insurance offers a guiding principle for reform and practical reforms that were presented in two previous Intelligence Memos. This Memo summarizes this logic, and highlights the policies the federal government should consider.
The challenges faced by EI extending back to the early 1990s call for better insurance. This implies changes not just to the structure of benefits but also to contributions.
EI’s most fundamental role is to provide workers with income insurance during periods of job disruption, and it is that insurance element of the system that most needs upgrading and modernization. This means a guiding insurance principle for “modernization” should be to align the structure of contributions to the underlying nature and causes of the risks being covered.
Contributions should be structured to most efficiently and equitably cover:
- Job risks associated with employer decisions to manage human resources, whether through changes in hours, layoffs, or even business closures;
- Family risks associated with household decisions about respite, care-giving, and skills development; and
- Collective risks associated with the interconnectedness and uncertainty of a global economy, but also with social choices, the costs of which are often disproportionately shouldered by the unemployed.
Aligning contributions with these risks, with the nature and causes of unemployment, implies three straightforward and feasible reforms:
- Employer contributions should be used to finance regular benefits, and employee contributions should finance “Special Benefits” and some fraction of Part II benefits associated with skills development. The shares of total program expenditures of each of these benefits implies that the ratio of employer to employee contributions should rise from $1.40 for every dollar of employee contribution to about $1.90. But these contribution rates should also evolve gradually over time by being based on the ratio of program expenditures between regular benefits and special benefits. If special benefits become a larger share of total EI outlays, the employee contribution share should rise accordingly.
- Contribution rates should be relatively stable and set at a level to finance benefits associated with underlying trend unemployment rate, evolving gradually in a way that roughly corresponds to the evolution of frictional and structural unemployment. An average of monthly unemployment rates over the past seven years, a horizon consistent with the current funding rules, would currently imply a trend unemployment rate of 7 percent. An average over the past five years, consistent with the usual mandate of a newly elected government, would imply the same. This is only slightly higher than the 6.5 percent that both rules implied in January 2020, before the onset of the pandemic, and suggests relatively constant rates even in the aftermath of a shock as big as the pandemic.
- The program should be based on tripartite funding with federal government contributions from the Consolidated Revenue Fund covering the expansion of benefits needed in the face of big unexpected shocks like business cycle downturns and broad-based regional shocks that take the unemployment rate above its trend, or to compensate for the trade-offs made in social choices like fighting inflation. At the same time, the federal balance sheet should be strengthened by the surpluses associated with lower than trend unemployment rates.
Miles Corak is Professor of Economics with the Graduate Center of the City University of New York, and was an Economist in Residence in 2017 at Employment and Social Development Canada. @MilesCorak.
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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.