The Economics of EI "Reform."

May 24, 2012

2-minute read

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.

Any competent economist should recognize that the new rules will depress wages. They will create no 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 The EI Act provisions regarding suitable employment which are being repealed were clearly designed to reduce the downward impact of unemployment on prevailing wages.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."

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