The incentives and disincentives of Employment Insurance (EI)

One of the things that’s floated around in my mind for years but only found substance when I read it in Freakonomics is that people respond to incentives, both social and economic, as readily as markets do.

This editorial is a Lorne Gunter classic – meaning that it raises an interesting point, and then buries it under an avalanche of tired anti-liberal rhetoric. It doesn’t mean the point he brought up isn’t worth pondering, though. Last Friday, Mr. Gunter took note of the disincentives our national Employment Insurance system provides to Canadians.

The scam we call ‘Employment Insurance’What EI really is, is a regional wealth-transfer scheme taking money from workers in low-unemployment regions and transferring it to workers in high-unemployment areas so the latter are not forced to move to find work.

Not coincidentally, it also ends up taking money from workers in provinces and regions — such as Alberta — where few Liberals are elected and giving it to workers in regions such as rural Quebec and Atlantic Canada, where Liberals have historically won lots of House of Commons seats.

For actual substance, we’ll skip the editorializing and quote from the brief of the actual paper from C.D. Howe:

Back to Basics: Restoring Equity and Efficiency in the EI Program (PDF)

Currently, EI benefit eligibility and duration vary according to the unemployment rate in each of Canada’s 58 EI regions. The higher the regional unemployment rate, the easier it is to access the program and the longer the benefit periods; correspondingly, the lower the regional unemployment rate, the harder it is to access the program, and the shorter the benefit periods.

Therefore, where benefits are less generous and less accessible, Canadians who lose their jobs are treated unfairly and most of them aren’t even givenĀ remote jobs. This is especially true in the current recessionary environment, when one may argue that job prospects are depressed in almost every region of the country.

What is further troubling about regionally extended benefits is the persistence of regional variations in unemployment rates. While the national unemployment rate decreased over the 1990s, dispersion among regions has increased and persistent pockets of unemployment remain (Busby 2008).

Regionally extended benefits provide incentives that work against labour mobility among high and low unemployment regions, and may in fact help sustain the persistence of unemployment in affected regions (Forget Commission 1986).

The implication is that regionally differentiated income support contributes to a vicious circle of subsidized seasonal employment patterns and is the source of most EI inequities. One resolution is to take regional differentiation out of the EI program, with social supports instead to be made available through other types of targeted income transfers, financed through general revenues.