Canada’s Unemployment RateFor decades prior to the 1981-82 recession, the national unemploymentrates of Canada and the United States had been nearly identical.
Since then, apersistent “unemployment rate gap” has emerged. Throughout most of the 1980s,Canada’s unemployment rate has consistently been about 2 percentage pointshigher than in the United States. The gap developed in spite of very similareconomic performances across the two countries: the growth rate of real percapita incomes has been virtually identical since 1976. However, now, well intothe 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.Order now
5%, with a currentrate of 5. 2%, while the Canadian rate has and still remains at 9. 4%, with acurrent rate of 9. 7%.
This substantial difference in Canada’s unemployment ratecan 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 ofCanada and the U. S. , but rather a combination of the above factors. “No society can be flourishing and happy, of which the far greater partof the members are poor and miserable. ” (Adam Smith) This is the theory behindthe creation of social services such as unemployment insurance and welfarepayments in many countries.
The Canadian government provides a substantial”social safety net” for its population. At first, this seems like a fair andproper 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 serviceshas become prominent in 1996.
The general consensus of organizations such as theFraser Institute and the OECD, is that Canada’s generous social safety net is adisincentive to work, which leads to dependence on the government, thusresulting in increased unemployment. By comparing the social benefits providedfor Canadians and Americans, the cause of this gap in the unemployment ratebecomes apparent. In general, the social benefits provided for Canadians are incrediblygenerous, and unregulated in comparison to those of the U. S. , resulting in adependency on them and creating a disincentive to work. Unemployment insuranceis 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 limitedperiod of time. Unemployment insurance is financed by the combination ofemployer and employee contributions, of which the employer contribution (a formof 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 isabout 11 times the size of Canada’s. There are two principal differencesbetween the two U. I. systems.
The first is that unemployment insurance isoperated at a state level in the United States. This means that the statesadminister the insurance system and determine the benefits, while maintainingcertain standards according to federal law. The second is that in most cases theinsurance premium employers must pay is related to the extent to which theiremployees use the system. In other words, there is an explicit insurance, orexperience rating feature built into the U. S. system.
In Canada the oppositeoccurs, with no penalty for employers who overuse the system. Unemploymentinsurance is regulated by the federal government, it applies in all provincesand territories, and covers about 97% of all Canadian workers. Due to thedifferences between the two systems, one can understand how Canadians have amore 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 theyears, there have been many changes in these requirements in the U.
S. , making itless accessible and desirable for the people. It is only recently that similarchanges have been undertaken in the Canadian system. In comparing the laws andregulations of the two systems, it becomes apparent why Canadians have a greaterdependence on unemployment insurance.
The system of U. I. distribution in theU. S.
requires workers of all states to be available, and able, to work to beeligible for the benefits. Most states also require the recipients to activelyseek work. Although the rules are the same in Canada, the government is not asefficient in its execution of them. The usual maximum period that unemployedworkers may collect benefits in the U. S. is 26 weeks, compared with 50 weeks inCanada.
Another important difference is the qualifying period in which theindividual must work before becoming eligible for a second claim. In the Statesthis period is 32 weeks after their last claim, while in Canada the time periodis strikingly low at 8 weeks. In the U. S. , the benefit amount varies accordingto conditions of eligibility, such as total household income.
However, thepayment is usually equal to about half of the individual’s average wage for aset period prior to his/her unemployment. In Canada the rate is virtually thesame for all recipients with no regard to their circumstances. Recent work bythe Fraser Institute revealed that all recipients of U. I. are not equally inneed, and in fact over $10 billion in U. I.
payments are made to families whoseincomes 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. Thelikelihood of collecting U. I. is much lower in the U. S.
than in Canada. Almostevery person that becomes unemployed in Canada collects U. I. , whereas thepossibility is only about 30% that one can do so in the U. S. To the averageperson, it would seem obvious that a person who quits their job should not beeligible 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 pastyears Canadian workers could simply quit their jobs and collect U. I. benefitswithout question.
However, the new regulation may not have as much of an impacton the unemployment rate of Canada as one would think. It is speculated thatemployers will band with their employees to produce “lay offs” as opposed to”quits”, therefore enabling employees to claim compensation. These differencesbetween the two systems, provide evidence of a much more generous, and lessregulated Canadian system of U. I. distribution.
In fact, the Canadian systemacts as a disincentive to work, as people realize they can get paid for doingnothing. To many people this is a more favourable option, thus resulting in anincreasing unemployment rate. Many of the implemented social programs in Canada have proven to beineffective in the goals they were meant to achieve. Well meaning programs keepjobs from being created and stop people from taking jobs that do exist.
Anotherdisincentive to work, for Canadians, is the welfare trap. It traps therecipient into dependency, and it traps the government into perpetuatingdependency. Welfare is simply a redistribution of the country’s wealthobtained from taxes. The government of Canada views their redistributionistspending as part of a social contract. The government encourages and supportseconomic growth through a mixed public and private market economy, andcompensates those that don’t share “equally” in the generated wealth throughsocial spending, including welfare.
Governments resist any action that couldmake anyone less well off, even if only for a short period of time, as thiswould violate the contract. The net result of implementing these types ofsocial programs is an increasing unemployment rate. In 1994, more of Ontario’s population received social assistance percapita than received assistance in the United States. In Ontario, one in eightpeople are enrolled in social assistance, and one in five children live infamilies which are receiving social assistance.
According to some reports, onein three children in metropolitan Toronto are being raised on welfare. A reportby the Economic Council of Canada pointed out that a growing number of peopleare becoming dependent on social programs, and that the system is not helpingrecipients help themselves. In 1985, Ontario had the lowest percentage of itspopulation (5. 4%) collecting social assistance of all the provinces.
By 1994,Ontario had the highest percentage of its population on social assistance of anyprovince. “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 hasincreased and that they are staying on the system longer” , reported Paul Storerof RBC Dominion Securities. Therefore, it is evident that a decrease in thedependency of the population on welfare would result in a decrease in theunemployment 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 onlyto attract new recipients every year. The welfare system originally dealt withthose who were unable to work; then sole-support parents were made eligible,followed by people who couldn’t find employment.
“Welfare has now becomeresponsible for failed educational systems, failed marriages, failedcontraceptives, failed personal finance planning, and a failed economy. “Governments even manage to make trying to get off welfare difficult. To leavewelfare, a “client” must give up the certain benefit of a government check forthe uncertain return of work. A client faces a dollar for dollar deduction inB. C.
and a $0. 75 to the dollar deduction in Ontario from welfare income forevery dollar earned privately. This reduces the incentive to learn new skillswhich could prove helpful in finding long-term employment, therefore causingdependency on government assistance. This dependency means more of the labourforce is settling for government payments, thereby causing an increase in theunemployment 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 thepeople to be more self-sufficient as a whole.
Too many Canadians are dependent on social programs such as unemploymentinsurance and welfare, which cause a growing unemployment rate. These programsare 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 gapin the unemployment rates of the two countries. The gap is the result of theless generous payments of social benefits, and stricter enforcement ofeligibility conditions in the U. S. Therefore, one can assume that a trend inthe Canadian system towards that of the American could prove to be instrumentalin the decline of the unemployment rate.
However, as with many other governmentimplemented programs it is hard to take away from society what they have alreadybecome accustomed and dependent upon. A lesser contributing factor to the unemployment rate is the effect ofpayroll taxes. When government imposes or increases a payroll tax, the cost toemployers of creating or maintaining a job goes up; thus resulting in a decreasein the demand for labour. Payroll taxes are a major component of the tax systemin all industrial countries.
Most taxes are instituted to help finance socialsecurity programs, such as pensions and unemployment insurance, these arereferred to as “social security taxes. ” With payroll taxes of this type, a linkexists between the taxes paid and the benefits or benefit entitlements availableto the worker. Many governments also levy general revenue type payroll taxes. These are not linked to specific benefit entitlements for workers; the taxrevenues collected simply go into consolidated government revenues. The tax basefor general revenue payroll taxes is usually defined as aggregate employerpayrolls. “We must recognize that these payroll taxes are job killers, they aretaxation by stealth” , stated Fazil Mihlar of the Fraser Institute on theadverse effects of payroll taxes on the employment rate.
There is concern in thebusiness community over the effects of Canada’s rapidly rising payroll taxes onjob creation. A spring poll produced by the Fraser Institute concluded that highpayroll and personal income tax levels are the biggest obstacle to job growth inCanada. Payroll taxes have risen dramatically over recent years. This increasehas caused employers to reconsider their need for new employees, and hasdiscouraged the employment of young, inexperienced workers. In comparing thepayroll 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. byonly 0. 9%. A recent study by the OECD concluded that a 1% increase in averagepayroll tax permanently lowers employment by 0. 32%, which translates into about50,000 jobs.
From the 1980s to the early 1990s payroll taxes increasedsubstantially in Canada; this is evident from looking at the figures of payrolltaxes as a percentage of GDP. In 1980 they accounted for 3. 3% of GDP, while in1990, they accounted for 5. 2% of GDP. There is compelling evidence that thesesteep increases in payroll taxes raised labour costs, therefore decreasing thedemand for employment, thus causing an increase in the Canada/U. S.
unemploymentrate gap. The Canadian government makes it difficult for companies to increasetheir demand for labour. Not only must they pay a certain amount of theirprofits to the government in the form of payroll taxes, but there is a definedminimum wage which they must pay each employee. The average minimum wage forCanada as of October 1, 1996 was set at $6.
35 Cdn. This minimum wage is quitegenerous in comparison to other countries, in particular the U. S. , whose averageminimum wage for the same date was set at $5.
25 Cdn. Therefore, the cost ofhiring a new employee can sometimes prove to have a negative effect onprofitability, rather than positive, as the cost of employing him/her may begreater than the amount of incremental earnings that he/she could bring to thecompany. The result of a set minimum wage may be a disincentive in the hiring ofemployees unless they are absolutely necessary, therefore contributing to adecreased supply in jobs and an increase in the unemployment rate. One can conclude that Canada’s higher unemployment rate is a directresult of the higher payroll taxes, and the higher fixed amount of minimum wagethat companies are obligated to pay their employees.
One can also conclude, thatmuch could be done for job creation, and a reduction in the unemployment rate,if the federal, and provincial, governments cut payroll taxes, and reduced theminimum wage. Another factor leading to a decrease in job supply, and a highunemployment rate in Canada, is its underperforming economy. This underperformance can be attributed to the recession which hit the country in theearly 90s. The most appropriate way of measuring the success of an economy is byits GDP (Gross Domestic Product).
After the recession Canada’s real GDP figuresshowed a positive trend of increase, however the years of 1995 and 1996displayed a decline in the average increases. This decline can be attributed toa lack of consumer spending, and fiscal drag, which occurs when governments reinin 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 firstis that the average rates of increase over the years is much greater than thosein Canada; and the second is that they have been increasing steadily with nodecline in the level of growth in recent years.
The net result of an under performing economy, like that of Canada, is adecrease in the demand for goods and services, and therefore a reduction in thedemand for labour, causing the unemployment rate to rise. The economic downturnin the early 90s took a substantial toll on employment. Between the years of1990 and 1992, the number of jobs fell by about 330,000, and full-timeemployment shrank by 460,000. There has been an increase in the number of jobscreated in the private sector since 1992, however the pace has not been fastenough to make a notable difference in the unemployment rate. Canada’s economyis operating well below full capacity, with real output running about 3% belowthe level if all resources were fully employed. This is known as an output gapof 3%.
Employment gains are closely tied to output growth, therefore Canada’shigh unemployment rate may be explained by looking at its poor economicperformance. Canada’s somewhat sluggish output growth has caused many largecorporations to downsize, as they do not have need for large numbers ofemployees. This recent trend of corporate downsizing, combined with severalyears of high unemployment, have aggravated fears about job security, andlessened consumer confidence and spending. People are now saving their money,which in essence is actually destroying their own jobs, as it contributes to theneed for corporate downsizing. The United States has had nothing but success coming out of the mostrecent recession.
Their economy is booming, their resources are being employedto their full capacity, and they have an envious unemployment rate. Incomparison, the Canadian economy has been very slow in its recovery. As a resultof corporate downsizing, and peoples’ reluctance to invest their money in theCanadian economy, Canada has been experiencing a lengthy economic downturn,resulting in a decreased demand for labour. Therefore, by looking at theeconomic performances of Canada and the U. S. , one can understand the reasons forthe prominent differences in their unemployment rates.
As with many economic phenomenon, there is no single explanation for thegap in unemployment between the U. S. and Canada. It is evident that Canada hasmany contributing factors affecting its high unemployment rate, although mostseem to be rooted in government policies and programs.
Some argue that a cut insuch government instituted programs is the only way to initiate a decline in theunemployment rate, while others disagree maintaining that this would beundemocratic and would violate the social contract. The United States has a muchless generous offering of social assistance, and lower payroll taxes and minimumwage 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 ispossible to have a fruitful society with lower government subsidies. It is notuntil there is a cut back in these programs, that the Canadian unemployment ratewill drop. Any change, calls for significant measures, with real impacts onpeoples’ lives.
However, until this happens, the unemployment rate gap betweenCanada and the U. S. will remain present and lasting.