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Canadian employers are grappling with historic labour shortages. The job vacancy rate was 5.6 per cent in the third quarter of 2022, nearly double the average rate in the year before the pandemic (3.2 per cent). To make matters worse, this trend is not expected to go away, as Canada’s aging population threatens to slow down labour-force growth.

It’s no surprise, then, that employer groups listed labour shortages as one of their main concerns ahead of Employment Insurance (EI) reform – both during the government’s consultation and in Institute for Research on Public Policy (IRPP) workshops on the subject. They worry that making benefits easier to access and more generous might dissuade some people from taking a job, exacerbating an already tight labour market. While understandable, these concerns may overlook important context on the benefits of the current situation, how the EI program works and how it can create a more resilient workforce.

A tight labour market is not necessarily a bad thing

The term “labour shortage” is somewhat misleading. Canada is not running low on workers. On the contrary, the labour force is bigger than ever. We’re experiencing near-record low unemployment rates and labour-force participation is virtually back to pre-pandemic levels. While strong employment growth among foreign workers has played a big role, there’s no evidence that residents are choosing to go on EI rather than work. Fewer people receive EI regular benefits (income support for people who have been laid off) today than before the pandemic, both net and as a share of the labour force.

Instead, the rise in job vacancies is a product of excess labour demand. Two years of high inflation that outpaced wages has increased incentives for firms to hire more workers. As a result, for the first time in 50 years, firms are now having to compete for labour.

That isn’t necessarily a bad thing, because a tight labour market pushes employers to raise wages, improve working conditions and worker productivity, strengthening the economy. Refusing to expand the EI program on these grounds won’t significantly increase or rejuvenate Canada’s labour force, but it might send a message that we expect unemployed workers to accept lower wages.

The EI program is designed to push people back to work

More importantly, the program is designed to minimize disincentives to work. Workers are not eligible if they quit or are fired with cause, so they can’t choose to go on EI. Claimants also need to work a minimum number of hours in the 52-week period prior to filing for benefits to qualify, and the maximum period for collecting benefits is 14 to 45 weeks, depending on hours worked before being laid off and the local unemployment rate.

Of those who qualify, most receive 55 per cent of their average earnings in EI benefits. In 2023, that worked out to a maximum of $650 per week, a rate that would hardly cover living costs in most Canadian cities, especially as wages continue to lag inflation.

Easier-to-access or more generous benefits are unlikely to change this. In a recent commentary, we proposed a package of EI reforms including a uniform entrance requirement set at 420 hours worked in the preceding 52 weeks and a replacement rate (the share of average earnings used to calculate benefit amount) of 60 per cent. We estimate it would increase the number of people able to access EI by seven per cent, driven largely by part-time workers in large urban centres who often work fewer than the current 700 hours needed to qualify.

This, combined with the higher benefit rate, might allow a small share of workers to remain unemployed longer than they would otherwise. But at the same time, it would also provide them with additional time and support to create stronger labour force attachments – one of the main goals of the program.

Concerns are regional, not national

In some regions, EI provisions for seasonal workers can provide a disincentive to seek year-round employment. Seasonal workers in regions with high unemployment have access to periods of benefits larger than the time they spent employed (assuming a 35-hour work week). The way in which benefit amounts are calculated allows workers with fluctuating income to receive benefits that are higher than their average weekly earnings.

While these provisions serve broader policy objectives, such as ensuring that rural or remote regions can retain their working-age population, expanding EI benefits without adjustments might widen the gap. Additionally, some have argued that these benefits promote seasonal work over more stable forms of employment, which could be a problem given the growing availability of non-seasonal jobs. Despite those concerns, EI reforms should be used as an opportunity to ensure the program is offering the right incentives.

Building a Package of Compromise Solutions for EI Reform

How to fix Canada’s broken employment insurance program

That is why our commentary also includes strategies intended to reduce overall reliance on EI in the long term. Beyond the sudden increase in job vacancies, Canada’s labour force will face additional challenges in the coming decades, such as automation, the shift to remote work and the transition to a low-carbon economy.

These challenges call for a nimbler and more adaptable workforce. Giving access to EI to low-skilled, low-wage workers who quit their jobs to enrol in full-time training or education programs might worsen labour tightness in the short-term, but it would allow some of the most precarious workers to proactively upskill or reskill in response to the changing labour market. This will better position Canada to successfully face challenges in the coming decades.

In short, concerns about disincentives to work should not stop EI reform that better supports workers and Canada’s economy.

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