Canadian Unemployment Benefits Encourage Unemployment

"direct experience with receiving benefits--as opposed to simply being aware of their existence--prompted many workers to make UI an integral part of their income portfolio."

Contemporary analyses of why people are unemployed or underemployed usually focus on a number of now familiar factors: the loss of manufacturing jobs to low-wage countries; the corporate vogue to "downsize"; lack of training in high-tech skills; loss of export markets; costs of child care; recession; and even a lack of transportation to enable city dwellers to reach jobs in the suburbs. Though these are all valid reasons for explaining why some people are out of work, this litany fails to consider another possible (and politically charged) cause of unemployment: unemployment benefits. That's what NBER Research Associate Thomas Lemieux and W. Bentley MacLeod consider as they examine how an initial bout of unemployment in Canada exposes people to the country's unemployment insurance (UI) system, the benefits of which then entice them to stay unemployed or underemployed for some time to come.

In Supply Side Hysteresis: The Case of the Canadian Unemployment Insurance System (NBER Working Paper No. 6732), Lemieux and MacLeod focus on Canadian workforce behavior between 1972 and 1992. This was a period in which Canada first greatly increased its UI benefits, but then curtailed them somewhat; use of the UI system increased steadily during the period, irrespective of the benefit reductions.

The authors discover that the benefit boost in the early 1970s is not what initially seduced people into conducting a long-term affair with the system (though it certainly caused them to remain faithful). "Rather, when workers experienced unemployment for the first time, due to natural turn-over or recession," they sought out help, and for many of them, according to Lemieux and MacLeod, it was a transforming experience.

The authors find that direct experience with receiving benefits--as opposed to simply being aware of their existence--prompted many workers to make UI an integral part of their income portfolio. For example, the fact that one could qualify for benefits after working a relatively short period, and then receive benefits for a relatively long stretch, appeared to spark growth in "part-year" or "seasonal" employment. This is what many Canadians affectionately call the "lotto 10/42." Work 10 weeks and win 42 weeks paid holidays.

The authors believe the "lotto 10/42" could explain the seemingly contradictory evidence that both workforce participation and unemployment increased during the period they study. They find that the system has created an incentive for some full-time employees to work part of the year, "while some individuals who are not in the labor market enter and work part of the year." Thus, more people are working, but many of them do so in a fashion that requires unemployment benefits and periodically leaves them jobless.

Lemieux and MacLeod do not rule out the possibility that it's not just workers but employers as well who make decisions based on the benefits system. They note that "it is possible that firms have an incentive to learn along with the worker" about how to use the system to subsidize part-year work.

-- Matthew Davis

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