The Employment Insurance Whack-a-Mole game

There’s no way to get it completely right, writes Stephen Gordon

<p>Human Resources Minister Diane Finley announces changes to Employment Insurance in Ottawa, Thursday May 24, 2012. THE CANADIAN PRESS/Adrian Wyld</p>

Human Resources Minister Diane Finley announces changes to Employment Insurance in Ottawa, Thursday May 24, 2012. THE CANADIAN PRESS/Adrian Wyld

Human Resources Minister Diane Finley. (Adrian Wyld/CP)

The Conservative government, as you might know, has adopted new measures that make it more difficult for people to claim Employment Insurance (EI) benefits, including new guidelines about what constitutes a “valid” job search. The most controversial measure is one that denies benefits to EI recipients if they refuse what is deemed to be a “suitable” job offer.

I’m not going to delve into the merits and/or demerits of the current attempt to improve the system. What I will say here is that, one way or another, EI reform will always be on the agenda, because there really is no way to get it completely right. There’s a fundamental moral hazard problem that will never go away.

For the uninitiated, here’s the Wikipedia definition of moral hazard:

[A] situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. In other words, it is a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others.

(If you want learn more about how moral hazard works, I highly recommend listening to the moral hazard episode of the CBC Radio series The Invisible Hand. Come to that, I highly recommend listening to all episodes of the show, if you haven’t already.)

Employment Insurance offers insurance against the risk of losing your job. But the fact that this safety net is out there makes it less costly to accept the sorts of jobs that have a higher risk of leaving you unemployed. This isn’t a bad thing in itself: for example, it’s important to maintain an environment where startup firms, where jobs are notoriously a gamble, can hire and grow.

EI, however it is designed, will always offer a particular set of incentives: “satisfy these criteria, and we will give you money.” And the overarching lesson of economics is that people respond to incentives. Documenting these responses is an ongoing research project in labour economics. Here are a couple of examples:

  • “Qualifying for Unemployment Insurance: An Empirical Analysis,” by UBC’s David Green and Craig Riddell. According to the (then) UI rules that were in place, you needed to have worked for 14 weeks to be eligible for benefits. But there was a provision that allowed this requirement to be reduced to 10 weeks subject to parliamentary approval. Parliament routinely gave this approval — except in 1990, for reasons unrelated to UI. The result: that year, there was a sharp decline in 10-week employment spells, and a sharp increase in 14-week employment spells.  “Between 1989 and 1990, there is a substantial decline in the hazard in the 10-13 week range, with a particularly noticeable decline at 10 weeks. These changes are offset by an increase in the spike in the hazard at 14 weeks and by increases in the hazard between 14 and 20 weeks.”
  • “Find a Job Now, Start Working Later: Does Unemployment Insurance Subsidize Leisure?” by Princeton PhD candidate Marjolaine Gauthier-Loiselle. People who have found a job but haven’t started working yet are still classified as unemployed. Gauthier-Loiselle found that the average interval between finding a job and the first day of work is about two weeks for those who had exhausted their EI benefits or who weren’t eligible to receive them, and about four weeks for people on EI.

The current round of EI changes is minor, and will no doubt be followed by another round of reforms as people figure out how the new system works. There’s always going to be some gaming of any system that offers cash payments, and — short of shutting the program down entirely — there’s no way of completely solving the moral hazard problem.