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1 Institutional moral hazard in the multi-tiered regulation of unemployment Canada – Background paper Chris Luigjes Donna Wood & Frank Vandenbroucke December 2015 This document reflects views only authors and European Commission cannot be held responsible for any use that may made information contained therein Please refer to this as follows: C D F (2015) support ‘Institutional Moral Hazard Multi-tiered Regulation Unemployment Social Assistance Benefits Activation – A summary eight country case studies’ Abstract has been written preparation a research project funded by (on Feasibility Added Value Benefit Scheme contract VC/2015/0006) adds detailed analysis following deliverable project: studies; but it was not We concept ‘institutional hazard’ analyse intergovernmental relations within welfare states specifically domain unemployment-related benefits related activation policies (the ‘regulation unemployment’) is one separate studies focuses on Responsibilities Canadian are divided between federal government provinces The insurance social assistance all caseloads Provincial responsibilities loosely regulated bilateral agreements with Even though system generates institutional does seem major concern characterised high level provincial autonomy Keywords: hazard; states; relations; insurance; assistance; Active Labour Market Policies; activation; policy; 2 List Abbreviations AFDC Aid Families Dependent Children ALMP Policy CAP Plan CEIC Employment Insurance CJG Job Grant CHST Health Transfer CHT CRF Consolidated Revenue Fund CST EAS Services EBSM Support Measures EI EIA Act EIOA Operating Account EIR Regulations FPFA Federal-Provincial Fiscal Arrangements JFA Agreements LMA Agreement LMDA Development MAR Monitoring Assessment Report MISWAA Task Force Modernizing Income Security Working Age Adults P/T Provincial/territorial PES Public TANF Temporary needy UI WITC Tax Credit Introduction federation relevant subject at hand Its ten three territories (from here referred provinces) play significant role its It classified politically decentralised (Mosley 2011 p 9) have shifted levels throughout modern history Starting from 1867 constitution dominant player changed after First World War again before during Second when initiated (UI) scheme included employment services However retained responsibility (SA) training albeit different forms through time Changes 1990s marked start political decentralisation effort where transferred (but benefits) granting them considerable flexibility leeway designing implementing become funding management pan-Canadian aspects while still retaining some direct delivery (for Aboriginal youth disabled programs) current brand federalism policy area reminiscent US type providing (block grant or agreement-based) provincially designed implemented programmes mechanisms labour market broadly similar: tying conditions dollars Before several 3 other areas already operated implementation Federal spending power always an important avenue influence even which originally over creeping (especially closely linked domains education workforce development activation) drivers changes division shifts since towards more scales down both transfers 1996 reinforced structure sections will competences concerning benefit schemes SA beneficiaries culminate institutionalisation (institutional) followed analytical grid conclusion 4 undergone balance rather modes (Banting 2005) fundamental sensu stricto 1940s enacted In order understand note how special circumstances were allowed take constitutional action do so Constitutional change preceded years federal-provincial disputes about rising relief costs Great Depression Only backdrop advent involvement reign new prime minister climate ready completely (Struthers 1983) did then went reforms most importantly transformation into (EI) response turn result 1971 expanded coverage dramatically final now rests tripartite (CEIC) (EIA) (EIR) act governs two components EI: passive income transfer well so-called (EBSMs) consisting section covers part contribution-based pays relative insurable working period previous earnings capped yearly maximum rate approximately 55% disbursed weekly nature commission stems 1941 decided programme insulated electoral whims pressures placed under autonomous 1977 chair taken deputy partner diminished; “the effect expropriated program” (Pal 1988) Also applicable less are: (Fishing) (EIR (Fishing)) Insurable Earnings Collection Premiums defined IV V See 14 I 5 Canada’s subdivided 58 economic regions total 6 9 must noted extension very rare indeed contrary extensions recent aftermath 2008 financial crisis Counter-intuitively federally rates equal everyone required qualifying differs per region5 (Medow 2011; Léonard 2014) left-over based regional rate; higher shorter duration generally 52 weeks can extended 104 exceptional also partially (Table 6) Finally affects they calculated 22 highest individual; amount paid used determined 5) There rationales differentiation idea ‘best-paid weeks’ rationale behind calculation best-paid “reduce disincentives accepting available work prior applying (Department Finance 2012 148; 2013 pp 6-7) way workers loose connection adversely affected possible future (more) poorly determination many best account dependent upon local eligibility criteria words (which entails claimants) increased accessibility eased durations prolonged lower second logic clear-cut than first 7 theory generosity counter-cyclical due structural heterogeneous performance among 7) likely function inter-regional redistribution mechanism Andreas Pollack finds that: business cycle effects unique features [Canadian] small compared resulting follows design” (Pollack 36) 8 Interestingly enough criticism equitable Much opposition Toronto-based Mowat Centre whose contributors argue good indicator accurately assess respond needs (Choudhry Pal Medow Day Winer 2011) rules disadvantage unemployed living Ontario Another ratios would retard migration there seems little empirical evidence claim (Day Although number without consequence weeks-system could promotes perpetuates who year (Mowat 8) 2013: 233-235 benefit-to-contribution III 10 complete overview standards out (EIOA) fully financed employer (60%) employee (40%) contributions contribution employers employees (Léonard 2014 14-15) Other differences include protection legislation Table appendix shows heterogeneity governments exert these setting ‘employment standards’ competence includes determining grounds termination anti-discrimination regulating dispute settlements etc practice relatively homogeneous exception Quebec (McMillan 1) Besides job multitude factors Nonetheless funds interesting size evolution beneficiaries-to-unemployed ratio describes (previously UI) caseload early stood above 70% (Lin 1998 42; Van den Berg Parent Masi 2004 29) currently decreased below 40% (Canada 2015) largest drop coincided reforming mid-1990s no surprise given fact aimed reduction costs; extent either individual (in requirements rule individuals out) relevance perhaps contributed limited prevent EI-beneficiaries (cf infra) Despite drops lowest scores regard overall strictness (Figure 11 regime strict comes demands mobility sanctions voluntarily leaving one’s relaxed monitoring availability ALMPs 2) might low replacement Entitlement Figure Overall Source: Langenbucher 27 Strictness 0 Average cases8 Welfare often “has maintained provides authority extend grants create programs matters exclusive jurisdiction” (Telford 15) had Since 1960s (CAP) redefined continued until 1995 Under (e g child care activity projects) shared equally receiving their own meaning spend others (Gauthier posed those (Canadian Association Workers 43) long standing cost-sharing replaced block-grant (CHST) consolidated health postsecondary unilateral move introduced state expansion: single provided opportunity expand Combined starkly increasing 1980s budgetary impact grew larger responded putting cap eventually altogether Transforming seen clear example reaction hazard: (and are) able design enabled increase 50% “The block fund territorial post-secondary services” cut $2 billion $29 old agreement entailed condition SA12: provide residency All scrapped financing tenable retain allocation formula distribution gradual indexation GDP growth Fears drastically efforts longer matched dollar 12 apply Here we see parallel (AFDC) (TANF) instances abolished favour block-grants Furthermore newly historical subnational patterns Moreover transformations ability manipulate risk insured CHST: stricter American mandatory AFDC-TANF introduction perceived provinces’ splitting up (CHT) (CST) 13 encompasses just meant cover line (FPFA) regulates sole criterion “that person live province territory minimum becoming eligible receive assistance” “Since name associated gives citizens illusion money being spent particular be” 33) evenly distributed capita basis automatically grows 3% every 15 method 2007 16 Preceding shift further eliminates possibility Provinces ‘insured risk’ mean however accountability issues 24-24 24 3-24 61 25 come across actually monitored requirement 2014-2015 budget $12 (Nadeau 3) As mentioned before: original pre-CHST resulted complicated became increasingly complex: pre-2007 sources: cash tax capacity scale back taxation step enhance precisely scaled equalization maintain poorer complexity what led 17 2010 183 000 cases vs 671 190 (Wood 2011a) enjoy almost control wish utilise pose entitlement downside Where once covered 50 cent Parliamentary Budget Officer 2010/11 2025/26 (Parliamentary institutionalised go deeper measures decrease) conditionality When put place 1940 anticipated ‘wither away’ occurred twice Every basic vary “basic cost food shelter clothing personal household items additional usually age disability transitional aims help lessen transition employment” 20) needs-tested themselves determine sources assets deducted exempted Additionally Generally applicants undergo administrative test program administered municipalities employable jobseekers); entirely managed civil servants (National Council 1-1) Based latest report National cancelled varied $9 593 $3 773 median $7 277 inadequate terms national low-income 2-1) Post-tax incomes claimants (WITC) varying regulations remains unclear interact ix) active somewhat diffuse types tend associate ‘activation turn’ Guiliano Bonoli argues: genesis such lies post-war strong focus ‘upskilling’ (2011 323) Ever Constitution But component ensuing dominance post-1940 created tensions because overlap especially adult provider thus forth contested contentious market-related During 1950s 60s developed specific target groups same started gaining UI-beneficiaries Klassen 5-6) form shared-cost diminished unilaterally stop late opting purchasing model institutions 2009 255) By mid-1980s oversaw 500 offices 1986 Jobs Strategy neediest clients (Fisher et al 2006 100-101) doing community agents (local provincial) introduce systems ‘workforce development’ 18 Specifically issue got pressing point view) downturns urgent limiting push reform compounded province-building ‘Workforce term goes beyond incorporate wider set activities including immigrant integration security human capital formation measures” 2009; Bramwell refers extends employed sense broader These developments combined retreat fiscal reasons 1990 fragmented patchwork particularly resolved acquire manpower ensure supports Quebeckers coherent view effective needed realise governance substance attempt permanently re-align attempts ultimately failed popular 19 near-death experience October referendum whether should independent main reason Ottawa offered devolve place: demonstrate flexible agreed Quebec’s long-standing position hence proved watershed respect Due resorted “para-constitutional engineering” (Poirier 2003) Decentralisation took right activate train People initial (Labour LMDAs) negotiated outlined primarily concerned process stretched Yukon last jurisdiction sign 20 mode prominent prolific: outside LMDAs entered disadvantaged (including recipients vulnerable people LMAs older workers) reaching 49 Of differ legal base (such EIA) sanctioned ministerial approval focused funding; ensuring evaluation priorities; similarity service provision country; delivering programming 14) came Meech Lake Charlottetown Accords encompassed much (Cameron Simeon 2002 55) Union Framework bring coherence accountability) achieve goals Devolved involved staff Some initially chose co-managed arrangements deliver 21 pilot projects run reshape severely leading commentators qualify “deeply flawed public policy” (Mendelson Zon 10) sudden radical side end date indicated wished make adjustments undertook series consultations March lapsed announced prolong nor renegotiate deals Instead wanted (CJG) re-orient away directly forcing match large extra hard stance (JFAs) bilateralism next subsections non respectively latter subsection full consequences JFAs yet (Employment Measures) mainly devolved along documents ministry Human Resources Skills HRDSC) identifies ALMPs: (EBs) (SMs) constituted consolidation vast range reduce expenditure EBs ‘targeted wage subsidies targeted supplements self-employment creation partnerships skills SMs innovation’ 18) jobless workers’; intensive delivered non-EI 210) Measure descriptions 210 Targeted Wage Subsidies assist participants obtain on-the-job toward wages encourages hire whom normally absence subsidy Supplements encourage persons accept offering incentives offers similar measure—Return Work Supplement—to expenses returning tools office materials clothing) Creation Partnerships opportunities gain lead ongoing Activities develop economy helps giving enables select arrange pay Self-Employment planning advice EI-eligible intended stages organizations enable counselling search job-finding clubs placement follow-up associations communities improve deal resource implement force involve developing plans strategies adjustment Research Innovation identify better ways helping prepare keep productive Funds carry demonstration purpose four five six