The Bean Counter

Under scrutiny

MARY JANIGAN December 13 1993
The Bean Counter

Under scrutiny

MARY JANIGAN December 13 1993

Under scrutiny

In 53 years, the labor market has changed more than the architects of Unemployment Insurance could have ever foreseen. To those survivors of the Great Depression, UI was a temporary lifesaver to support the unemployed between jobs, ensuring their dignity, their homes and their very survival. They never imagined that entire communities would

regularly rely on those federal payments, year after year, for most of their income. They never predicted that thousands of low-skilled jobs would disappear permanently so that UI recipients would search in vain for any work and then slip helplessly onto the welfare rolls.

And they would be flabbergasted to discover that UI has cost more than $20 billion this year—and that it is largely financed through a tax on jobs. Says Simon Fraser University economist John Richards: “It is no longer a device to aid people over temporary unemployment. Increasingly, it has become a very inefficient welfare system.”

The sensible program bom in 1940 has, in fact, become one of Canada’s distressing so-

cial and financial problems in 1993. And the incentive to reform the system dramatically increased last week when Finance Minister Paul Martin announced that the 1993-1994 federal deficit could hit a staggering $46 billion. Overnight, all social programs were on the table. UI faces intense scrutiny, partly because it is the costliest federal program—accounting for fully one-eighth of Ottawa’s

Unemployment Insurance faces a major overhaul to prepare workers for 21st-century jobs spending—and partly because it could play a vital role in a changing economy. Senior bureaucrats and academics are flooding the new government with plans to overhaul the UI and provincial welfare systems—together—to ensure access to training and to break the expensive cycle of dependency. The costs of UI are indeed high: in five years, its price tag has almost doubled. Although it

is financed through contributions from employers and employees, the program has $6 billion in accumulated debts. It will slip another $1 billion into debt next year unless Ottawa increases premiums from employers and employees—or cuts the level of benefits. “There is no painless way to do this,” warns Judith Maxwell, associate director of the Queen’s University School of Policy Studies. “Increasing the premiums is the wrong way to go because premiums constitute a tax on jobs. But we cannot allow the system to contribute to an even greater federal deficit. It is time for society to get used to the fact that we have to change our expectations.”

But the UI fund’s financial woes are among the least of its problems: the system itself no longer works. Experts warn that if Martin merely tinkers with premiums and benefits, he will lose a golden opportunity to break the crippling cycle of UI dependency, to provide more training for new jobs and to overhaul the outdated, hopelessly convoluted skein of social programs. The Liberals are uneasily aware of that challenge—and of the complications that they will face during discussions with the provinces. UI was designed for workers who were temporarily between jobs,

while provincial welfare payments were crafted for the so-called “unemployables” who could never work.

The recession and the changing job market have almost eliminated those tidy distinctions. The average worker no longer slips easily between jobs because the very backbone of the labor force is disappearing: there are fewer traditional jobs on assembly

_ lines, in mining or in forestry.

The newer jobs require more skills—but few UI recipients receive training or counselling. As a result, in many communities the less fortunate often exhaust their benefits—and resort to welfare. Many welfare recipients, in turn, are looking

_ for work. In communities with

higher rates of unemployment, where the benefits last longer, many unskilled workers survive through several months of seasonal work combined with annual stints on UI. Such repeated dependency has become a dispiriting intergenerational pattern that defies easy answers. Warns Arthur Kroeger, chairman of the Ottawabased think tank Public Policy Forum: “I don’t think you can avoid reform, because UI now costs so much. But it is not possible to do it in six months. You have to get into a really ambitious redesign because long-term unemployment is becoming much more prevalent.”

Opposition to such reform is enormous— largely because so many Canadians depend on the income. Last month, more than 1.53 million people—or 11 per cent of the labor force—were on UI. Defenders of the current system argue that UI is an insurance scheme which finances itself; as a result, they say, any contributor has a right to collect it as often as that contributor is eligible. But UI is not a genuine insurance scheme. Workers in high-unemployment regions or industries such as forestry do not pay higher premiums to reflect their higher risk of losing their jobs. Workers in different parts of the country do not even receive the same benefits— even though they pay the same weekly premiums. In high-unemployment regions such as Newfoundland, employees need only 10 weeks of work to qualify for 39 weeks of benefits. But in low-unemployment regions such as southern Manitoba, in contrast, employees need 19 weeks of work before they can even qualify for benefits—and those benefits last only 19 weeks. Vancouver’s Fraser Institute estimates that 90 per cent of the recipients who work the minimum number of weeks to qualify are “repeaters” whose working patterns have likely been adjusted to take advantage of the benefits.

The contention that UI is largely self-financing has also hampered reform. In reality, the fund ran a deficit of $1.3 billion this year. It will lose another $1 billion next year unless Martin decides to increase the premiums by 3.3 per cent to meet the shortfall:

that is, to $3.10 per week for each $100 of insurable earnings for employees; and to $4.34 for employers. Such premium boosts are, in effect, tax increases. Worse, such taxes penalize employers who hire workers, because every new employee means higher costs for UI premiums. Says Kroeger: “It is an elementary principle that if you tax something, you tend to discourage its use, as we are regularly told in justification for increases in

tobacco taxes. Why would anyone want to tax jobs or to increase taxes on them during a period when unemployment is rising?”

That is common sense. But there is no easy way to slash billions of dollars from UI overnight without wrecking lives. Most experts, including Kroeger, warn that the task of overhauling UI may stretch over the entire five-year life of the current Parliament—and that it requires high levels of federal-provin-

‘We have got to be prepared to spend as much but spend it smarter’

cial co-operation. As a first step, Ottawa must bring the fund into line with insurance principles: that is, all employees should work the same number of weeks for the same benefits. That apparently simple adjustment, however, means that many employees who have worked only 10 weeks each year for years because there is no more work in their current fields may have to retrain, and perhaps move. Says Queen’s University economist

Thomas Courchene: ‘This notion that we are going to transfer funds in order to make some place more sustainable is gone.”

Such traditional recipients might, of course, simply resort to welfare, straining the provinces’ already overloaded budgets. The only answer is co-operation: Ottawa and the provinces must work together to retrain and to foster jobs for employable Canadians. At present, Ottawa spends a comparatively paltry $3.5

billion on retraining and job creation: only 10 per cent of the UI fund, about $2.2 billion, is earmarked for such benefits, while another $1.3 billion comes from general revenues.

That is an inadequate response to disturbing patterns. Average unemployment rates have shot from 4.2 per cent in the 1950s to 5 per cent in the 1960s, 6.7 per cent in the 1970s, 9.3 per cent in the 1980s and more than 11 per cent in the 1990s. Many UI recip-

ients now require more time to find work: an unprecedented 30 per cent have drawn benefits for more than six months. When they do find jobs, that work is often parttime, lower-paying and less satisfying.

Any solution must be innovative. Ottawa’s highest hopes are pinned on an experimental project, NB Works, which began in New Brunswick in May, 1992. That six-year, $177-million program uses both UI and provincial welfare funds to give education, training and job experience to 3,000 welfare recipients. So far, 549 of the first 1,000 entrants are still in the program after 20 months (most of the rest have fallen back on welfare); another 751 out of the second 956 entrants have lasted seven months. That program will likely furnish the model for reforms:

Human Resources Development Minister Lloyd Axworthy and New Brunswick Premier Frank McKenna talked late last month about its lessons.

NB Works could also open the door to a range of fascinating options. Maxwell suggests that UI recipients should receive their cheques for only four months. If they cannot find work, they should be required to enter a federal-provincial program that retrains UI and “employable” welfare recipients. By the turn of the century, Maxwell adds, 75 per cent of UI funds should go to active support measures such as retraining—instead of the current 10 per cent. “It is true that there are not enough jobs to go around now,” she admits. “But if we do not train people then they get stuck in a quagmire: they will never be able to qualify for the new jobs.”

It is not clear that such UI overhauls will mean any major, short-term savings for Ottawa. Some experts, such as Kroeger, maintain that Ottawa must pare about $5 billion from the UI fund—at the same time as it puts increased emphasis on fostering employment. Other experts, such as Simon Fraser economist Richards, argue that all savings from UI reform must be put back into retraining. “No one should view UI reform as a way of solving the deficit,” he argues. “We have got to be prepared to spend as much but spend it smarter.” Whatever Martin decides, it is clear that UI will change. As Patrick Johnston, executive director of the Canadian Council on Social Development, observes, “I don’t think that we can keep our heads in the sand any more.”