The Employment Insurance Whack-a-Mole game

There’s no way to get it completely right, writes Stephen Gordon

by Stephen Gordon

Human Resources Minister Diane Finley. (Adrian Wyld/CP)

The Conservative government, as you might know, has adopted new measures that make it more difficult for people to claim Employment Insurance (EI) benefits, including new guidelines about what constitutes a “valid” job search. The most controversial measure is one that denies benefits to EI recipients if they refuse what is deemed to be a “suitable” job offer.

I’m not going to delve into the merits and/or demerits of the current attempt to improve the system. What I will say here is that, one way or another, EI reform will always be on the agenda, because there really is no way to get it completely right. There’s a fundamental moral hazard problem that will never go away.

For the uninitiated, here’s the Wikipedia definition of moral hazard:

[A] situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. In other words, it is a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others.

(If you want learn more about how moral hazard works, I highly recommend listening to the moral hazard episode of the CBC Radio series The Invisible Hand. Come to that, I highly recommend listening to all episodes of the show, if you haven’t already.)

Employment Insurance offers insurance against the risk of losing your job. But the fact that this safety net is out there makes it less costly to accept the sorts of jobs that have a higher risk of leaving you unemployed. This isn’t a bad thing in itself: for example, it’s important to maintain an environment where startup firms, where jobs are notoriously a gamble, can hire and grow.

EI, however it is designed, will always offer a particular set of incentives: “satisfy these criteria, and we will give you money.” And the overarching lesson of economics is that people respond to incentives. Documenting these responses is an ongoing research project in labour economics. Here are a couple of examples:

  • “Qualifying for Unemployment Insurance: An Empirical Analysis,” by UBC’s David Green and Craig Riddell. According to the (then) UI rules that were in place, you needed to have worked for 14 weeks to be eligible for benefits. But there was a provision that allowed this requirement to be reduced to 10 weeks subject to parliamentary approval. Parliament routinely gave this approval — except in 1990, for reasons unrelated to UI. The result: that year, there was a sharp decline in 10-week employment spells, and a sharp increase in 14-week employment spells.  “Between 1989 and 1990, there is a substantial decline in the hazard in the 10-13 week range, with a particularly noticeable decline at 10 weeks. These changes are offset by an increase in the spike in the hazard at 14 weeks and by increases in the hazard between 14 and 20 weeks.”
  • “Find a Job Now, Start Working Later: Does Unemployment Insurance Subsidize Leisure?” by Princeton PhD candidate Marjolaine Gauthier-Loiselle. People who have found a job but haven’t started working yet are still classified as unemployed. Gauthier-Loiselle found that the average interval between finding a job and the first day of work is about two weeks for those who had exhausted their EI benefits or who weren’t eligible to receive them, and about four weeks for people on EI.

The current round of EI changes is minor, and will no doubt be followed by another round of reforms as people figure out how the new system works. There’s always going to be some gaming of any system that offers cash payments, and — short of shutting the program down entirely — there’s no way of completely solving the moral hazard problem.




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The Employment Insurance Whack-a-Mole game

  1. For what it’s worth I recall years back ( actually decades – too many ) I worked the
    overnight shift at a local motel while diddling around at university. The motel lobby
    at 3:00 am offered a number of educational opportunities. One that stuck with me was
    a conversation with a guy in town for a conference. He was a benefits system designer
    and he said that the systems that worked best allowed for a 1% to 3% fraud/error rate.
    Try to reduce that and too many deserving people ran into obstacles that they bounced
    off of and dropped through a crack in the system. Allow more than that and public
    support could not be sustained. Made sense to me.

    ps … The best conversation I had there was an extended session with John Lee
    Hooker and a couple of guys from Canned Heat … now *that* was an education ..

    • Don’t know if the govt has a target like that, but the reasoning sounds right. EI changes aren’t always about tightening access.

      • Sssshhh Stephen. The man is talking about John Lee Hooker!

    • Sssh Stephen, the man is talking about John Lee Hooker!

    • You just had an extended conversation with JLH…you didn’t have time or the inclination to raise a glass or two? Or is that word “extended”… cover for a multitude of sins?

      • It was the best kind of conversation .. I listened, he rumbled
        in a vocal range that dogs would never hear.
        I was impressed that he did not indulge in anything during
        that short time … now, the Canned Heat guys ..
        And of course, being a serious young person, I did not engage
        i frivolity while at work :) ..

        • I certainly hope you made up for this lost opportunity…:-)

  2. I’ve told this story a number of times on EI/UI related blogs, so it’s routine for me by now. Admittedly anecdotal doesn’t stack up to those two studies.
    I’ve observed that guys who work in the oil patch in AB [ mostly in the union skilled category] get themselves onto rolling UI claims. Presumably this is because it enables companies to keep needed skilled personal around on a relatively short and UI subsidized leash. [ ironic that this is ok for these guys but the wrong argument when you are a skivvy on the fish floor in the maritimes. Guess we need the oil more than the fish?] Which makes sense from a company and employee perspective. The guys go out and work for sometimes brief but intense periods[ shutdowns etc] and go home and wait to be called out again, immediately picking up their maimum UI cheques of course. Most justify it because they pay top premiums [around $800 per year i believe] and have higher life style costs; they think they’ve earned it. Admittedly clawbacks have likely put a bit of a crimp in the practise these days. But this used to be common practise when i hung around the AB oil patch. Guys like me who didn’t have the training couldn’t get into those union jobs, unless you were fortunate enough to get a boost up the labourers union list …by, [it was rumoured] donating the odd bottle in the right quarter…essentially who you knew.
    I’m not trying to diss union guys, i’ve been one. That’s life. People will game systems. But it has always annoyed me that the greatest amount of abuse and scolding is always reserved for those at the bottom who basically take the little they can if its there. But others in the system feel they’re entittled to game the system with the connivance of the employer even in a place like AB.
    I’m not sure i ever believed the system was truly equitable – insurance or not. I think i’d prefer to see premiums more narrowly or commonly grouped and benefits no longer linked soley to income earned – which makes people feel entittled. IOWs, more of a universal unemployment programme that didn’t encourage entittlement at the top margins or encourage employers to regard it as a privately financed regional subsidy. I guess that would run into some difficulties in parts of the country that depend on seasonal work. It would need to be flexible,or a separate programme. But perhaps it might encourage less reliance on short term seasonal employment? Another idea might be to link premiums to time spent on Ui? Again it might be necessary to excempt Sws?

    Instead successive govts have been undermining both access and percentage of take home benefits anyway [ now at 55%. It used to be considerably higher] and premiums have gone nowhere but up. Sure they have broadened the programme in some useful ways – maternity leave, access to education while on UI. But since the principle of access, portability and remuneration has been steadily eroding, perhaps it is time to make it a straight up out of work, tide you over until you find a job, w/o worrying if you will be cut off, or make the 10 or 14 week hurdle, scheme. With added incentive to reward retraining/upgrading and ability to move to the work.

    Right now it is a life style suppliment scheme for the top earners as well as the more frequently castigated gamers at the bottom margins. Honestly, who has the more excuse for this behaviour, even if it is all wrong in the end?

    • I know people in the Maritimes who have worked in the tar sands. They were basically turned into migrant workers leaving behind their families for long stretches at a time, sending back their paychecks. Harper’s plan to turn Canada into a resource “super-power” will turn many Canadians into migrant workers: all the resources are in remote parts of the country.

      Norway also pays out huge sums to remote oil workers: like around $180k/yr.

      Of course, resource corporations in Canada won’t have to worry about that. After Harper blows tens of billions of taxpayer dollars building infrastructure for these companies (and doling out big subsidies,) he’ll open up the floodgate of migrant workers driving down the cost of labor.

      Like the financial columns warn: don’t expect your retirement savings in home equity to be there when you retire… Downsized wages mean downsized houses…

      • Nah, Harper doesn’t have enough of a cushion with his majority.

        The housing market is heading for a downturn and the commodities super cycle is winding down. That will leave more Canadians unemployed and expose Harpers “economic action plan” for the sham it is.

        Once Harper loses the support of the Canadians who were conned into thinking he is some sort of political economic wizard, he won’t have enough of the vote to hold majority and there goes his government.

  3. This leaves out the real motivation for the current changes. The story starts out in 1993, when the Liberals came to power. Then they inherited a $10B EI deficit (then UI.) Since this was part of the budget, that made the debt $10B deeper.

    So Paul Martin brought in cuts to benefits. The economy recovered and the deficit went into a surplus that built up to $56B by 2008 (largely because there was no major recession for 15 years; the Liberals had cut EI taxes to slow the fund’s growth.)

    That’s when Harper decided to make the EI fund separate from the budget. But instead of putting the $56B into the new reserve, he only put in $2B, robbing workers of $54B.

    Soon after the “Great Recession” hit and the fund went into a $14B deficit. Harper has since been raising EI taxes and slashing benefits to pay it down. If Harper hadn’t cooked the books, the fund would still be in a $40B surplus.

    So Paul Martin basically turned the unemployment insurance program into a tax. Now Harper is squeezing workers even more.

    • Not ‘workers’, only those not working and taking EI are being affected.

  4. There’s also another element to Harper’s wage busting through stiffer EI regulations and the 15% discount he offers corporations on temporary migrant workers: the overvalued dollar.

    According to the OECD, the dollar is overvalued by 25%. This not only makes exports 25% more expensive putting the squeeze on manufacturing and other value-added industries. It also means that wage costs have jumped by 25%.

    The only way to restore the competitiveness of wages is if they are cut by 20%.

    So by adopting the US greenback as our currency, we find ourselves in the same position as nations like Greece and Spain when they adopted the euro. They were expected to undergo an “internal devaluation” (wage deflation) to make their workers as competitive as Germany’s.

    Of course, it didn’t work out that way. The high purchasing power of the euro caused big current account deficits. And according to the “twin deficits” theory, that eventually led to big budget deficits.

    A similar thing is happening in Canada: $20B current account surpluses we had 6 years ago have turned to $50B deficits. This is the main reason why ON’s budget deficit has jumped so high. We see the same thing happening in AB. Odds are the federal deficit will turn out worse than Harper claims. As Uncle Milty was fond of saying, there is no free lunch…

    • The dollar is hardly ‘overvalued’.

      It hovers around par, equal to the US dollar.

  5. No, there is no way of completely solving the moral hazard problem, people with insurance will always be less careful than people without. However, the insurance industry, where real insurance is sold, does have some effective tactics. One such tactic is to increase premiums following a claim. That seems to work quite well.

    The government has instituted reforms that decrease benefits for a future claim following a claim. Which is not the same thing but does have some similarities. I think the tactic of increasing premiums following a claim would be better.

  6. Mr. Gordon – I would like to hear your thoughts on adding a risk premium to the employer side of the equation – where seasonal employers who rely on seasonal workers pay a higher premium for their own moral hazard. The current scheme puts all the onus on the employee. Churn and burn employers get a free pass here.

    • Employers already pay 60% more than employees do. Boosting that even further would probably bring cries that the government was trying to ruin industries in high EI areas.

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