EI watch: Is unemployment a choice?

There’s been some debate lately on both sides of the border about unemployment insurance and its impact on unemployment. The argument centers on whether the generosity of unemployment insurance benefits creates unemployment.

Here’s how the argument works. You are an average working person. You have two choices. You can continue to work for income, despite the fact that work is boring and cuts into your free time. Or, you can opt to be unemployed, collecting insurance income and enjoying all of your leisure time. The more money unemployment insurance offers you, the more likely you are to choose unemployment. Similarly, the longer benefits are available to you, the longer you will choose to be unemployed. Hence, collectively, more people choose unemployment when the benefits are higher.

Now if you are, in fact, an average working person, I’m sure you can identify a few places where this argument departs from reality. First of all, if you do choose unemployment over work, you don’t qualify for benefits. So-called “voluntary quits” do not get Employment Insurance (EI) in Canada. You need to be laid off by your employer in order to get insurance. That limits your choice right there.

Second, you can’t just cash your cheque and enjoy the good life while on EI. You must be “willing and able to work at all times” and “actively look for work and keep a record of employers you contacted and when you contacted them.” Within certain parameters, you do not have the right to refuse a job if it is offered to you.

Third, while there is some truth to the idea that work can be boring and prevents you from enjoying leisure, that doesn’t strictly mean that people will not work, given the choice. Most people want to work – both because they will generally make a lot more money from work than from EI, and because they get a lot of other benefits from work. On the flip side, unemployment is generally a time of stress and anxiety, not a time of unadulterated enjoyment of leisure. People are worried about feeding their families, paying their mortgages, and what happens if the benefits run out before they find a new job. Evidence suggests people are happier and healthier when they are employed.

Fourth, this argument assumes that people have no plan for their lives beyond the next 50 weeks of employment benefits. Either that, or it assumes that unemployment has no impact on pensions, benefits, promotions or pay increases at work. Neither assumption is very realistic.

And finally, and most importantly in a recession, where are all the jobs that unemployed people are choosing not to take? Canada has lost at least 400,000 full-time jobs since the recession began last October. Some of that loss has been off-set by part-time employment or involuntary self-employment. However, this loss of jobs can’t be blamed on employees thinking that a recession is a great time to be on unemployment insurance.

In fact, the recession has only made an ongoing problem worse. The official unemployment rate in Canada has not been below an annual average of 6% over the past thirty years, regardless of the changes made to unemployment insurance at different times, even when generosity was severely cut. Even during the recent years of the economic boom, unemployment stayed in the 6-7% range. And this official unemployment rate does not include those who are underemployed or working part-time involuntarily because they cannot find full-time work. There are simply not enough jobs for every person who needs one.

Punishing the unemployed because employers do not create enough jobs is unreasonable and unfair. This approach of blaming the victim isn’t going to solve any problem.

Besides these reality checks, there is also evidence from the research that refutes this argument. This week, Andrew Jackson posted a paper from 1995 on the Progressive Economics Forum which provides an impressive literature review debunking a lot of myths about unemployment insurance. While it is 14 years old, it is still totally worth checking out. Among the highlights, a study that demonstrated that demand for work is highly inelastic: adult men would rather work at a lower wage than not work at all. (Since it was conducted in the 1980s, there were some differences for men and women. It would be interesting to find out how much that differential has changed since then.)

The paper also provides an explanation for a plank used in the American debate: twenty-year-old research demonstrating that the intensity of job searches increases as people near the end of their benefits. To me, it’s not that strange to think that at the moment where the only options are a new job or social assistance, people redouble their efforts to find a new job. Yet there’s another element to consider as well. There is also twenty-year-old research showing that for a period in the late 1980s, 80% of the unemployed had a reasonable expectation that they would be recalled by their former employer. The majority of them were, in fact, recalled. So many recipients would not search very hard initially, believing that the recall was imminent. Only when they were nearing the end of the benefits without being recalled would it seem urgent to find new work.

Unemployment insurance seems to bring out all kinds of stereotypes and assumptions. Policy makers need to be sure they are creating policy based on reality, not unfounded and unreasonable allegations.