Wednesday 14 April 2010

Unemployment insurance

If the New Zealand government's Welfare Working Group is looking at international models of unemployment insurance, and figures Canada's isn't a bad place to start, I'm a bit worried.

Last I'd heard, the Canadian scheme was mostly a regional support initiative ensuring that full time workers outside of the Atlantic provinces could subsidize seasonal fish plant workers in Newfoundland. I'm a bit out of date on the Canadian nonsense, but stories of provincial government make-work schemes getting their workers up to the required 10 weeks continuous work so they'd qualify for pogey on Ottawa's dime for the remaining 42 weren't uncommon. Nor were stories of folks in the Atlantic being pissed off if some worker didn't leave his job after the required 10 weeks so as to free up the spot for somebody else to get his 10 weeks. The Liberals tidied things up a bit around 1996 and consequently lost a whole lot of support in the Atlantic.

I've not kept up with it much, so I'm much less up to date on recent developments there.

But there are a few general recommendations I could make.
  • Employment under fixed term contract should only qualify for coverage if employment ceases before the contract ends, and should not pay out if the employee either quits or is fired for cause.
  • Premiums have to be actuarily fair: condition them on the employee's work history and the employer's severance rate.
  • Don't split the costs between employer and employee. The incidence of the premium will be invariant to the official split, but officially putting it on the employer induces fiscal illusion and only is done to deceive voters about the programme's true costs. Check out Tyran and Sausgruber's awesome experiment from a few years back.
  • Do NOT use it as a way of subsidizing high turnover employers or high turnover employees. The ACC uses low risk employer contributions to subsidize high risk industries: premium differentials across industries are small relative to risk differentials. Very high odds this also winds up being the case with employment insurance. Don't let it happen. Again, see point 2, above.
  • All funds collected in the program have to be outside of the general government accounts. Lockbox, if such a thing can exist. We'd expect it to accumulate assets during upturns and to spend down its asset base during recessions. If central government can just use those assets for general spending during the upturn, then there's no point in having the system. And if you want the lockbox to invest in government infrastructure development or other government assets, consider yourself deserving of a hard slap. Funds ought to be invested in acyclical (at worst) or countercyclical investments.
  • DO NOT use the system to provide coverage for maternity leave. That's not an insurable loss of income, it's a life choice. If you're going to insist on using it to provide payment for maternity, then let premiums vary appropriately by gender and age. If we think it's desirable for the government to pay maternity cover, it really ought to come out of general revenues rather than distort an insurance scheme.
  • Canada's scheme now seems to condition the number of work hours required for eligibility on prevailing regional unemployment rates (rather than the old 10/42). This of course attenuates efficient migration from high unemployment regions to low unemployment regions. Don't do that! The system ought to encourage folks to move to where the jobs are rather than the opposite. But think hard on it, 'cause setting high premiums in high unemployment regions isn't exactly going to help encourage job creation. Instead, receipt of benefits for folks in high unemployment areas might be truncated after a shorter period of time unless the recipient begins job search in a lower unemployment area. This part could well be tricky.
  • Don't let it turn into a transfer system to folks in seasonal work. Look hard at the first two points above and think of ways that seasonal employers might collude with seasonal employees to game the system.
Update: And, of course, worry about the rather serious concerns that UI can exascerbate unemployment, though I'm not sure they cut more substantially against a UI system than against our current system.

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