If EI needs fixing blame politics, not economics

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In a recent Globe column, Tom Flanagan bemoans the fact that the premium structure of Employment Insurance is not lined up with expected benefits. As a result, provinces to the west of the Ottawa River have long paid a good deal more into the program than they receive in benefits.

The solution: a constitutional amendment allowing Quebec to run its own EI program.

Quebec and Alberta interests certainly line up on this issue: one wrestles more control over federal powers, the other sees smaller government and lower taxes.

But lets be clear, devolution of EI responsibilities – which constitutionally rests with the Federal Government – is about this sort of politics, not at all about the underlying economics of social insurance.

There are a host of legislative changes that the federal government can introduce to make EI more efficient without even whispering the C-word.

First, reduce the number of Employment Insurance regions used to determine benefits and benefit eligibility. When major reforms were made to this program in 1971, only 16 regions were introduced. Now there are close to 60.

There is no doubt that this evolution was driven much more by small-town politics than any changes in the nature or risk of unemployment.

Incrementally, bit by bit, election by election, governments responded to the need of MPs to dole out local prizes by adjusting EI regions so that they became smaller and smaller.

The minister of finance has only to propose that each province become an EI region, along with perhaps a few of the major metropolitan areas to recognize the rural-urban divide.

This would not eliminate all cross-subsidies between provinces, but it would narrow them and it invite more mobility of the unemployed.

Job done. No constitutional amendment required.

But the EI benefit structure insures a whole host of other things, what Mr. Flanagan lists as subsidies to parents who have babies, and adults who take time off to care for sick relatives. "Worthy objectives to the sure," but apparently not something that should be the purview of insurance for unemployment.

Giving the program to the provinces would apparently return the scheme to the narrow insurance program it should be, the provinces not being able to afford all these frills.

But covering these risks is not only laudable, it is totally legitimate.

A lesser EI system is a throw back to the good old days of the single earner household with economic security depending upon the breadwinner's wage.

Those days are gone. The capacity for families to self-insure in the face of a marriage falling apart, of sickness, of the need for extra care-giving to a child or an elderly parent, are much more limited now. In the best of cases, both parents work and the entire family is more time-stressed than is often healthy.

Demographic risks, not just labour market risks, need somehow to be insured.

If cash-strapped provinces can't manage these risks we should not call that an efficiency gain.

A die-hard believer of EI as insurance does not have to deny the legitimacy of covering demographic risks, only to argue that premium rates should adjust according to benefit type. Indeed, some component of the premium rate could be person-specific, with Canadians given the freedom to choose whether they wish to have supplemental insurance associated with the risk of having a baby, caring for a child, taking time off for other family responsibilities.

In fact, EI already does this sort of thing by offering unemployment insurance for the self-employed, a group with certainly the highest degree of moral hazard. The Minister of Finance need only follow this template.

Job done. No constitutional amendment required.

Any government that had the courage to open up a Constitutional debate on Employment Insurance could certainly expend much less political capital making these changes, and fight separatism another day.

Miles Corak is a professor of economics with the Graduate School of Public and International Affairs at the University of Ottawa. You can follow him @MilesCorak, or read his blog  at milescorak.com.