Canada-U S Unemployment Rates-why Is Canada

’s So High Essay, Research Paper

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.