The Economics of EI “Reform”

Changes to the EI rules announced by the government today are not rooted in any lengthy policy rationale. But Minister Finley and and the media release spoke to the need to “strengthen work incentives.” This conjures up images of  unemployed workers sitting around and spurning job offers amidst growing labour and skills shortages.

As I have previously commented, this framing of the issue is at odds with the reality of still high unemployment and under employment, and that fact that there are about six unemployed workers on a national basis for every job vacancy reported by employers.

It may well be that there are some labour and skills shortages in a few parts of the country. But this  is not the overall reality in central and eastern Canada and much of BC and the North where the great majority of EI recipients are to be found.

In the world we actually live in, the proposed changes to EI will be implemented in the context of slack local job markets, and will put further downward pressure on already stagnant wages.

Long story short, the new rules will, after a short period of time on claim,  require most unemployed EI claimants to accept job offers at significantly lower hourly wages than in their previous job.

The shocker in the new rules is that turning down job offers with wages 30% below the previous wage will justify being cut off benefits for  so-called “frequent” claimants after just 7 weeks, and after 18 weeks for “occasional” claimants.  “Frequent” claimants – those who have made 3 claims over the past 5 years and collected 60 or more weeks of benefits -  make up about one in three claimants. “Long tenured workers” – those who have worked in seven of the last ten years and collected less than 35 weeks of benefits in total – are relatively spared, but will not be allowed to turn down a job paying more than 80% of their previous wage after 18 weeks on a claim.

(Addition) The new rules will have a ratcheting down effect. A worker who takes a lower wage job may have to accept an even lower wage job during a subsequent claim.

Any competent economist should recognize that the new rules will depress wages. They will create few if any new jobs, while increasing the downward wage pressures of unemployment. The biggest impact will be on wages in relatively low wage jobs, given that the average EI beneficiary earned about $16 per hour in her or his previous job.

The current EI Act was drafted in more progressive times. The EI Act provisions regarding suitable employment which are being repealed were clearly designed to reduce the downward impact of unemployment on prevailing wages. They allowed workers time to look for a job at their normal wage and set a floor for “suitable employment.”

After a reasonable interval to seek work in their own occupation, workers are currently expected to take a job “at a rate of earnings not lower and on conditions not less favourable than those observed by agreement between employers and employees or, in the absence of any such agreement, than those recognized by good employers.” (Section 27.3)

Consistent with Finance Minister Flaherty’s view that there is no such thing as a “bad job”, unemployed workers will no longer be allowed to hold out for a “good employer.”

10 comments

  • 2 major points to add on to your analysis Andrew

    1) this is blatantly stuff that Dickens so grandly captured from another time. Beat on the victims. remember when poverty was viewed as a disease?! Well, now the radical right who have a hold of the reins of power in Canada, are embarking on their utopian dreams where there is no such thing as unemployment. And the accuse Mulcair as inciting regionalism! Well my friends this policy change is quite pounded into place on the anvil of regionlism.

    As Jimbo pointed out today, over 730K unemployed do not even qualify for EI and somehow are supposed to find work where there are over 6 unemployed for every job. Does anybody in the Harper government know how to use a calculator???

    2) These policy “tightening the screw” on the unemployed, in the end will create even more unemployed and more labour shortages. Connect the dots here-

    Okay so for centuries immigrants have tried settling this land under a capitalist economic culture of profit maximization. We live in a geography that is frozen a quarter or more of the year- and hence a good portion of business entities in Canada have and always have been seasonal in nature due to two facts, the climate prevents work and the profit maximization means workers in specific industries will be without pay for parts of the year. It is a penalty many seasonal workers must endure, intermittent paypackets. Companies rely on these workers to accept these economic penalties and hence we maintain some core skill sets within these occupations- some which are in short supply- given the locality of the business interest.

    So in the social Darwinian law of the jungle that guides much rabid right wing policy fantasies of the Tories, they will actually penalize the workers of these industries and hence the hence result will be an out migration of many of these workers out of these occupation. This as a result of the EI polices that were calming the economic ravages of seasonal nature of work- are now fully put on the backs of workers. Of course workers are rational, and they will decisions, and the result will be to abandon these occupations. Especially the more experienced and skilled within these occupations as the price of having no pay for months of the year will not be tolerated and you will get occupational shortages in such seasonal industries: construction, fishing, tourism etc.

    So this will in the end result in more job loss and displacement and only exacerbates the problem.

    Truly this was drawn up on the back of an envelop at some bar room in Calgary.

  • Piccolo Economista

    @Paul Tulloch
    What are you talking about?
    According to CERI we’re all going to become Asphalt Juice squeezers–or sandwich artists–by 2035…
    All roads lead to Fort McMoney. King Harper will surely save us all !!!
    /sarcasm off

  • I graduated highschool unemployed in 07, lost a job, 2010, after 6 months, and have worked for cash, doing any job any time, meaning I dont say no. I have friends went to school, that didn’t work took debt for multiple degrees, that have not been applied at all in jobs they work today. My friends who borrowed to school & worked, for cost the living they needed or wanted to stay healthful. I have been told by them, & I am better off. I have bought silver since it was 9$ an ounce, & every local pawn, for 10 ounces of silver I can buy a month of food, gas. I saving for college, but interest is not compounding. If rates were closer to 5% – 20%, I would be able to pay out of pocket from pent up demand. Inflation makes it near impossible to succeed responsibly today presently, no statistic can change the fact we have no general decrease in prices.

  • @ Paul T

    The 6 job seekers per available job may not reflect local market dynamics.

    I am unemployed and in researching a project located a job on a corporate web site. Since the job had not been listed elsewhere and was posted in very negative (yet realistic) terms, I thought it unlikely there would be much competition. The firm later emailed their regrets and advised that they had had over 150 applicants.

    This was in the Ottawa area where we have yet to feel the full effect of Harper’s trickle down job losses.

    The big irony is that the job market has grown much more specialized than it was when EI was first introduced. This results in longer job search times and a greater mismatch between unemployed worker skills and available openings. Such a situtation would call for enhancements to EI, not policies that minimize access.

  • @ Andrew J

    With regards to the economics of EI reform the focus has been on the negative behaviours of job seekers and the disincentives to an active search.

    What is being left unremarked is the negative incentives of Harper’s new policies.

    If I am an employer and my margins are being squeezed I now have significant incentive to layoff a percentage of my workforce and then relist the positions at a lower wage rate knowing that job seekers will be compelled to accept the reduced wages.

    If we accept the utililty maximizing function of the job seeker, I see no reason not to accept the same utility maximization on the part of the employer.

  • Michael Boudreau

    I wonder how these changes will affect out already stellar OECD Indicators of Employment Protection (2nd from the bottom in 2008)
    http://www.oecd.org/document/11/0,3746,en_2649_37457_42695243_1_1_1_37457,00.html
    H/T Bill Mitchell, Billy Blog

  • http://www.theglobeandmail.com/report-on-business/economy/economy-lab/the-economists/corporations-also-benefit-from-seasonal-ei/article2443802/

    Okay my guess is Mike Moffit is smart enough to connect the dots from my comment above. However, he infected my arguement with his biased pro-corporate conclusion. And gee his article started out so well.

    Why will nobody look at the numbers and also conclude that construction is the number one industry that repeat claimants measure up within the EI data.

    Again Mike gets it wrong- it is Construction, fishing, tourism and forestry, and some service industries.

    It is the bulk of these industries that do benefit.

    So Mike’s conclusion, every business that has a component of seasonality is be essence inefficient and should be shuttered and all these communities of workers should relocate.

    Well I am glad Mike does not eat fish, or like to have his house renovated, or schools built, or his lawn care completed. I would swear Mike was a textbook economist, but is he not a business guy?

    Hey Mike we are trying to have a civilization here!

  • Of course if governments were willing to be interventionist in a positive way, they could create regular off-season jobs around fishing towns and so forth. But of course we know government isn’t allowed to be part of the solution.

  • Piccolo Economista

    @ Francis

    BINGO! I was thinking about something very similar to what you stated. Except I was wondering about lower productivity through resentment of the workers “forced” into these “offered” positions.
    And from the employer’s side, what manner of undue suspicion would arise knowing “this employee is only here because EI said they had to take the job”. But I admittedly did not consider the perverse incentives you suggest… that may be more of a problem than “resentment”.
    It seems this “reform” has many overlooked negatives attached to it.

  • @ Piccolo

    I think one of the other unforseen negatives will be that “marginal communties” sustained through EI will cease to exist and the inhabitants will need to relocate.

    I suspect that many will migrate to Alberta which will result in increased demand for housing, schools, hospitals and other social services. What this implies is that Albertans (they appear to be the ones leading this change) who object to the cost of supporting eastern “freeloaders” will find themselves forced to accept increased taxes to address the costs of substantial in-migration.

    The only positive outcome I forsee is that in 2015 Harper may end up winning two seats less than the short lived Campbell PC government.

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