Economic analysis

If you want to reform EI to boost hiring, go back to the 1990s

The Liberals propose dusting off an old EI-reform program that would avoid the flaws in the government’s Small Business Jobs Credit

Resource CanadaIn response to a government employment-insurance (EI) reform proposal that only applies to very small companies and has a major structural flaw, Liberal Party Leader Justin Trudeau has proposed an alternative. Instead of reinventing the wheel, the Liberals are suggesting a policy be brought back from the 1990s, one that avoided the unintended consequences of the current government proposal, where firms receive benefits by firing workers.

The policy the Liberals wish to resurrect was called the New Hires Program (NHP). It was announced in November 1996 and lasted for two years. The program guide listed the relatively straightforward criteria for eligibility:

Your share of 1996 EI premiums, including the premiums for all employers with whom you were associated on Dec. 31, 1996, was less than $60,000.

Your share of 1997 EI premiums, including the premiums for all employers with whom you were associated in 1997, was at least $250 more than the amount of 1996 EI premiums for you and all associated employers.

Eligible firms that saw their EI payments rise in 1997 (either through hiring or increasing the wages of their workers) had any increase in EI payments returned back to them (minus $250) as a rebate, up to $10,000. This program was better designed than the current government program in three distinct ways:

1. Far more firms were eligible, as the $60,000 eligibility cap greatly exceeded the $15,000 cap of the government’s recent proposal, even after accounting for inflation.

2. Firms only received benefits if they increased their payrolls. Under the current proposal, companies can hold steady or reduce their payrolls and still receive a rebate.

3. Under the New Hires Program, companies cannot make themselves ineligible for the rebate by hiring too much, since the eligibility criteria were backward-looking. Under the current government proposal, eligible firms can make themselves ineligible by hiring too much, causing them to lose their tax credit. As well, ineligible firms can make themselves eligible for the program by firing workers and cutting salaries, giving them a $2,200 tax credit they would not have otherwise received.

The Liberals have not released details of their plan, so we do not know how closely it would resemble the New Hires Program. As such, we cannot fully evaluate claims to the cost of the program or the effect it will have on employment. According to the 1997 budget, the cost in Year 1 of the New Hires Program was $250 million, so Liberal claims that they could build a second-generation NHP for $225 million seem reasonable. As far as the effects on employment, I do not believe any economist has published a study on the effect the NHP had on job growth. If they had, the number would likely have been far more modest than what politicians would claim, as a significant portion of the increase in payrolls would have happened even without the tax rebate. Economists and politicians will always be at loggerheads when it comes to job growth claims, with economists continually stating that the benefits are overstated and politicians will respond like William Shatner at a Star Trek convention.

The New Hires Program provides a great framework for a new Small Business Job Credit. I hope the government will take Trudeau’s suggestion seriously and correct the flaws in their current proposal.