What to do about Employment Insurance?

After running up a $45-billion surplus, Ottawa considers changes to system
By David Brown
|Canadian HR Reporter|Last Updated: 09/22/2003


here’s no shortage of opinions on what to do with Employment Insurance funds, as Ottawa considers an overhaul of the system.

Labour wants to spend $2 billion a year in Employment Insurance money to fund a new training program, while business groups say EI premiums should simply be reduced to encourage more hiring.

Since 1996, the EI system has taken in $45 billion more than it has paid out in benefits. The government has faced criticism over the surplus from many quarters, including the federal government watchdog, the auditor general. In February’s budget, the government said it would review the premium-setting process with a goal to introduce changes by 2005.

Public consultations wrapped up at the end of June, and bureaucrats at the Finance Department and Human Resources Development Canada are reviewing the proposals and drafting a report for review by both ministers.

The Canadian Labour Congress (CLC) wants the premium rate to remain virtually unchanged and the excess money used to fund new programs to increase training across the country.

“You could have a very good EI training program without breaking the bank,” said Kevin Hayes, senior economist for the CLC. “Our proposal, at maturity, would be in the range of $2 billion a year. That would be about less than 0.5 per cent of EI revenues.”

Under the CLC model, employers would be eligible for an EI premium rebate if they put in place a workplace training committee, not unlike the health and safety committees currently in most workplaces. This would give workers greater say in what training is provided and ensure the employer has a written training plan, Hayes said.

In a paper written for the CLC national executive earlier this year, Hayes explained that rebates could be given to employers that provide 40 hours of training per employee per year. Otherwise, three per cent of payroll could be the level at which employers get the rebate.

While an amount for the rebate would still have to be determined, reducing premiums by one per cent would not be unreasonable, he said. This year employers are paying a premium rate of 2.94 per cent ($2.94 per $100 of employees’ earnings, up to a maximum of $1146.60 per year).

The federal government has said it wants to increase training but is left with few options for action since training is a constitutional responsibility of the provinces. Using the EI system in this way allows the federal government to promote training without stepping on any provincial toes.

There is already a precedent for this, said Hayes. Ottawa already provides EI benefits for apprenticeship training and the provinces have never complained about it, he said.

But Ian Howcroft, vice-president of the Canadian Manufacturers and Exporters, said premium rates should be reduced significantly, and the government should stop using the money for anything other than income support for people who lose their jobs.

More has to be done to increase training levels, he agrees, but spending more money from EI is not the answer. Billions of dollars have been spent by the government in recent years and the problem of skills shortages is getting worse, he added.

Employers would be better off with paying smaller EI premiums. A reduction would likely encourage employers to hire more, he said. “When you start taxing employment it creates a disincentive to hire.”

The Business Council of British Columbia called for the elimination of the employer multiplier premium. Currently, the employer rate is set at 1.4 times the employee rate. “The government has never offered a compelling justification for maintaining such a marked difference in employer versus employee premiums,” states the council in its submission.

“The Business Council’s position is that the employer multiple should be phased out over the next five years.”

The Canadian Chamber of Commerce weighed in expressing its concern about the introduction of new benefits funded through the EI account. In particular, the chamber said it is uncomfortable with proposed compassionate family care leave benefit, estimated to cost $86 million in 2003–2004 and $221 million in fiscal year 2004–2005 and each year thereafter.

The chamber said the EI system should not be used to pay those benefits. “It diverts the program further from its original goal, which was to provide insurance against unintended periods of unemployment.”

The chamber also said EI premiums act as a drag on hiring, quoting an oft-sited 1995 study by Livio De Matteo and Michael Shannon. The two economists from Lakehead University in Thunder Bay, Ont., concluded that a one-per-cent increase in average payroll taxes paid by employers results in a 0.56 per cent increase in real wage costs to employers, a 0.55 per cent drop in real wages received by employees, and a 0.32 per cent drop in the level of employment.

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