Essay/Term paper: Canada's unemployment rate

Essay, term paper, research paper:  Economics

Canada's Unemployment Rate


For decades prior to the 1981-82 recession, the national unemployment
rates of Canada and the United States had been nearly identical. Since then, a
persistent "unemployment rate gap" has emerged. Throughout most of the 1980s,
Canada's unemployment rate has consistently been about 2 percentage points
higher than in the United States. The gap developed in spite of very similar
economic performances across the two countries: the growth rate of real per
capita incomes has been virtually identical since 1976. However, now, well into
the 90s, the gap has widened much more significantly. In the last five years,
the United States average has actually fallen from 6.7% to 6.5%, with a current
rate of 5.2%, while the Canadian rate has and still remains at 9.4%, with a
current rate of 9.7%. This substantial difference in Canada's unemployment rate
can be attributed mostly to the safety net which the government provides,
including generous payments of unemployment insurance and other social services;
but also to the high payroll taxes; and the under performing Canadian economy.
There is no single reason for the persistent gap in the unemployment rates of
Canada and the U.S., but rather a combination of the above factors.

"No society can be flourishing and happy, of which the far greater part
of the members are poor and miserable." (Adam Smith) This is the theory behind
the creation of social services such as unemployment insurance and welfare
payments in many countries. The Canadian government provides a substantial
"social safety net" for its population. At first, this seems like a fair and
proper thing to do, as it is in the best interests of society as a whole.
However, when this generosity is taken advantage of by undeserving recipients,
problems and controversy arise. The problem of abuse of Canadian social services
has become prominent in 1996. The general consensus of organizations such as the
Fraser Institute and the OECD, is that Canada's generous social safety net is a
disincentive to work, which leads to dependence on the government, thus
resulting in increased unemployment. By comparing the social benefits provided
for Canadians and Americans, the cause of this gap in the unemployment rate
becomes apparent.

In general, the social benefits provided for Canadians are incredibly
generous, and unregulated in comparison to those of the U.S., resulting in a
dependency on them and creating a disincentive to work. Unemployment insurance
is a means of protecting workers who are out of work and looking for employment.
The unemployed workers receive cash payments, usually each week for a limited
period of time. Unemployment insurance is financed by the combination of
employer and employee contributions, of which the employer contribution (a form
of payroll tax) is slightly higher. Canada currently spends 70% as much on U.I.
as the United States, in spite of the fact that the total U.S. labour force is
about 11 times the size of Canada's. There are two principal differences
between the two U.I. systems. The first is that unemployment insurance is
operated at a state level in the United States. This means that the states
administer the insurance system and determine the benefits, while maintaining
certain standards according to federal law. The second is that in most cases the
insurance premium employers must pay is related to the extent to which their
employees use the system. In other words, there is an explicit insurance, or
experience rating feature built into the U.S. system. In Canada the opposite
occurs, with no penalty for employers who overuse the system. Unemployment
insurance is regulated by the federal government, it applies in all provinces
and territories, and covers about 97% of all Canadian workers. Due to the
differences between the two systems, one can understand how Canadians have a
more generous system and an easier time in claiming benefits.

The differences in the requirements for obtaining unemployment insurance,
also result in a more generous distribution of benefits in Canada. Over the
years, there have been many changes in these requirements in the U.S., making it
less accessible and desirable for the people. It is only recently that similar
changes have been undertaken in the Canadian system. In comparing the laws and
regulations of the two systems, it becomes apparent why Canadians have a greater
dependence on unemployment insurance. The system of U.I. distribution in the
U.S. requires workers of all states to be available, and able, to work to be
eligible for the benefits. Most states also require the recipients to actively
seek work. Although the rules are the same in Canada, the government is not as
efficient in its execution of them. The usual maximum period that unemployed
workers may collect benefits in the U.S. is 26 weeks, compared with 50 weeks in
Canada. Another important difference is the qualifying period in which the
individual must work before becoming eligible for a second claim. In the States
this period is 32 weeks after their last claim, while in Canada the time period
is strikingly low at 8 weeks. In the U.S., the benefit amount varies according
to conditions of eligibility, such as total household income. However, the
payment is usually equal to about half of the individual's average wage for a
set period prior to his/her unemployment. In Canada the rate is virtually the
same for all recipients with no regard to their circumstances. Recent work by
the Fraser Institute revealed that all recipients of U.I. are not equally in
need, and in fact over $10 billion in U.I. payments are made to families whose
incomes are above the national average family income of $53, 854.

Another factor resulting in greater dependence on the Canadian system,
is the probability one has of collecting unemployment compensation. The
likelihood of collecting U.I. is much lower in the U.S. than in Canada. Almost
every person that becomes unemployed in Canada collects U.I., whereas the
possibility is only about 30% that one can do so in the U.S. To the average
person, it would seem obvious that a person who quits their job should not be
eligible for U.I. This has been the case in the United States for many years,
but it was only recently that this was made a law in Canada. Therefore in past
years Canadian workers could simply quit their jobs and collect U.I. benefits
without question. However, the new regulation may not have as much of an impact
on the unemployment rate of Canada as one would think. It is speculated that
employers will band with their employees to produce "lay offs" as opposed to
"quits", therefore enabling employees to claim compensation. These differences
between the two systems, provide evidence of a much more generous, and less
regulated Canadian system of U.I. distribution. In fact, the Canadian system
acts as a disincentive to work, as people realize they can get paid for doing
nothing. To many people this is a more favourable option, thus resulting in an
increasing unemployment rate.

Many of the implemented social programs in Canada have proven to be
ineffective in the goals they were meant to achieve. Well meaning programs keep
jobs from being created and stop people from taking jobs that do exist. Another
disincentive to work, for Canadians, is the welfare trap. "It traps the
recipient into dependency, and it traps the government into perpetuating
dependency." Welfare is simply a redistribution of the country's wealth
obtained from taxes. The government of Canada views their redistributionist
spending as part of a social contract. The government encourages and supports
economic growth through a mixed public and private market economy, and
compensates those that don't share "equally" in the generated wealth through
social spending, including welfare. Governments resist any action that could
make anyone less well off, even if only for a short period of time, as this
would violate the contract. The net result of implementing these types of
social programs is an increasing unemployment rate.

In 1994, more of Ontario's population received social assistance per
capita than received assistance in the United States. In Ontario, one in eight
people are enrolled in social assistance, and one in five children live in
families which are receiving social assistance. According to some reports, one
in three children in metropolitan Toronto are being raised on welfare. A report
by the Economic Council of Canada pointed out that a growing number of people
are becoming dependent on social programs, and that the system is not helping
recipients help themselves. In 1985, Ontario had the lowest percentage of its
population (5.4%) collecting social assistance of all the provinces. By 1994,
Ontario had the highest percentage of its population on social assistance of any
province. "It is not clear how much dependency the system creates or encourages,
however there is ample evidence that the number of people using the system has
increased and that they are staying on the system longer" , reported Paul Storer
of RBC Dominion Securities. Therefore, it is evident that a decrease in the
dependency of the population on welfare would result in a decrease in the
unemployment rate. However, as is the case with many other government programs,
once they are implemented they are hard to remove.

Welfare has become a very costly government program, which serves only
to attract new recipients every year. The welfare system originally dealt with
those who were unable to work; then sole-support parents were made eligible,
followed by people who couldn't find employment. "Welfare has now become
responsible for failed educational systems, failed marriages, failed
contraceptives, failed personal finance planning, and a failed economy."
Governments even manage to make trying to get off welfare difficult. To leave
welfare, a "client" must give up the certain benefit of a government check for
the uncertain return of work. A client faces a dollar for dollar deduction in
B.C. and a $0.75 to the dollar deduction in Ontario from welfare income for
every dollar earned privately. This reduces the incentive to learn new skills
which could prove helpful in finding long-term employment, therefore causing
dependency on government assistance. This dependency means more of the labour
force is settling for government payments, thereby causing an increase in the
unemployment rate. The United States does not have this problem of dependency,
as it's system of welfare is once again stricter, and less generous, causing the
people to be more self-sufficient as a whole.

Too many Canadians are dependent on social programs such as unemployment
insurance and welfare, which cause a growing unemployment rate. These programs
are a disincentive to work. When comparing the benefits provided for Canadians,
with those provided for Americans, it is evident why there is such a large gap
in the unemployment rates of the two countries. The gap is the result of the
less generous payments of social benefits, and stricter enforcement of
eligibility conditions in the U.S. Therefore, one can assume that a trend in
the Canadian system towards that of the American could prove to be instrumental
in the decline of the unemployment rate. However, as with many other government
implemented programs it is hard to take away from society what they have already
become accustomed and dependent upon.

A lesser contributing factor to the unemployment rate is the effect of
payroll taxes. When government imposes or increases a payroll tax, the cost to
employers of creating or maintaining a job goes up; thus resulting in a decrease
in the demand for labour. Payroll taxes are a major component of the tax system
in all industrial countries. Most taxes are instituted to help finance social
security programs, such as pensions and unemployment insurance, these are
referred to as "social security taxes." With payroll taxes of this type, a link
exists between the taxes paid and the benefits or benefit entitlements available
to the worker. Many governments also levy general revenue type payroll taxes.
These are not linked to specific benefit entitlements for workers; the tax
revenues collected simply go into consolidated government revenues. The tax base
for general revenue payroll taxes is usually defined as aggregate employer
payrolls.
"We must recognize that these payroll taxes are job killers, they are
taxation by stealth" , stated Fazil Mihlar of the Fraser Institute on the
adverse effects of payroll taxes on the employment rate. There is concern in the
business community over the effects of Canada's rapidly rising payroll taxes on
job creation. A spring poll produced by the Fraser Institute concluded that high
payroll and personal income tax levels are the biggest obstacle to job growth in
Canada. Payroll taxes have risen dramatically over recent years. This increase
has caused employers to reconsider their need for new employees, and has
discouraged the employment of young, inexperienced workers. In comparing the
payroll taxes of Canada and the U.S., all of Canada's component taxes are higher,
with the exception of social security levies which are higher in the U.S. by
only 0.9%. A recent study by the OECD concluded that a 1% increase in average
payroll tax permanently lowers employment by 0.32%, which translates into about
50,000 jobs. From the 1980s to the early 1990s payroll taxes increased
substantially in Canada; this is evident from looking at the figures of payroll
taxes as a percentage of GDP. In 1980 they accounted for 3.3% of GDP, while in
1990, they accounted for 5.2% of GDP. There is compelling evidence that these
steep increases in payroll taxes raised labour costs, therefore decreasing the
demand for employment, thus causing an increase in the Canada/U.S. unemployment
rate gap.

The Canadian government makes it difficult for companies to increase
their demand for labour. Not only must they pay a certain amount of their
profits to the government in the form of payroll taxes, but there is a defined
minimum wage which they must pay each employee. The average minimum wage for
Canada as of October 1, 1996 was set at $6.35 Cdn. This minimum wage is quite
generous in comparison to other countries, in particular the U.S., whose average
minimum wage for the same date was set at $5.25 Cdn. Therefore, the cost of
hiring a new employee can sometimes prove to have a negative effect on
profitability, rather than positive, as the cost of employing him/her may be
greater than the amount of incremental earnings that he/she could bring to the
company. The result of a set minimum wage may be a disincentive in the hiring of
employees unless they are absolutely necessary, therefore contributing to a
decreased supply in jobs and an increase in the unemployment rate.

One can conclude that Canada's higher unemployment rate is a direct
result of the higher payroll taxes, and the higher fixed amount of minimum wage
that companies are obligated to pay their employees. One can also conclude, that
much could be done for job creation, and a reduction in the unemployment rate,
if the federal, and provincial, governments cut payroll taxes, and reduced the
minimum wage.

Another factor leading to a decrease in job supply, and a high
unemployment rate in Canada, is its underperforming economy. This under
performance can be attributed to the recession which hit the country in the
early 90s. The most appropriate way of measuring the success of an economy is by
its GDP (Gross Domestic Product). After the recession Canada's real GDP figures
showed a positive trend of increase, however the years of 1995 and 1996
displayed a decline in the average increases. This decline can be attributed to
a lack of consumer spending, and fiscal drag, which occurs when governments rein
in their deficits. In contrast, the U.S. economy is booming. As in Canada,
there is a trend of increasing GDP, with two noteworthy differences: the first
is that the average rates of increase over the years is much greater than those
in Canada; and the second is that they have been increasing steadily with no
decline in the level of growth in recent years.

The net result of an under performing economy, like that of Canada, is a
decrease in the demand for goods and services, and therefore a reduction in the
demand for labour, causing the unemployment rate to rise. The economic downturn
in the early 90s took a substantial toll on employment. Between the years of
1990 and 1992, the number of jobs fell by about 330,000, and full-time
employment shrank by 460,000. There has been an increase in the number of jobs
created in the private sector since 1992, however the pace has not been fast
enough to make a notable difference in the unemployment rate. Canada's economy
is operating well below full capacity, with real output running about 3% below
the level if all resources were fully employed. This is known as an output gap
of 3%. Employment gains are closely tied to output growth, therefore Canada's
high unemployment rate may be explained by looking at its poor economic
performance.

Canada's somewhat sluggish output growth has caused many large
corporations to downsize, as they do not have need for large numbers of
employees. This recent trend of corporate downsizing, combined with several
years of high unemployment, have aggravated fears about job security, and
lessened consumer confidence and spending. People are now saving their money,
which in essence is actually destroying their own jobs, as it contributes to the
need for corporate downsizing.

The United States has had nothing but success coming out of the most
recent recession. Their economy is booming, their resources are being employed
to their full capacity, and they have an envious unemployment rate. In
comparison, the Canadian economy has been very slow in its recovery. As a result
of corporate downsizing, and peoples' reluctance to invest their money in the
Canadian economy, Canada has been experiencing a lengthy economic downturn,
resulting in a decreased demand for labour. Therefore, by looking at the
economic performances of Canada and the U.S., one can understand the reasons for
the prominent differences in their unemployment rates.

As with many economic phenomenon, there is no single explanation for the
gap in unemployment between the U.S. and Canada. It is evident that Canada has
many contributing factors affecting its high unemployment rate, although most
seem to be rooted in government policies and programs. Some argue that a cut in
such government instituted programs is the only way to initiate a decline in the
unemployment rate, while others disagree maintaining that this would be
undemocratic and would violate the social contract. The United States has a much
less generous offering of social assistance, and lower payroll taxes and minimum
wage rates, however this has not affected the people in a negative way. In fact,
there is substantial evidence that their economy is booming, proving that it is
possible to have a fruitful society with lower government subsidies. It is not
until there is a cut back in these programs, that the Canadian unemployment rate
will drop. Any change, calls for significant measures, with real impacts on
peoples' lives. However, until this happens, the unemployment rate gap between
Canada and the U.S. will remain present and lasting.