Directorates
·	Director General's Office
·	Data Development
·	Strategic Evaluations
·	Partnership and Continuous Evaluations
Publications
·	Evaluation Reports
·	Evaluation Briefs
·	Labour Market Development Agreement Series
·	Lessons Learned Series
·	Evaluation Tool Kit Series
·	Evaluation Forum Newsletter
·	From Theory To Practice

• Purpose
• Background
• Methodology and Data Sources
• Key Findings
• Conclusions
• Biographical Notes

Purpose

Under the Employment Insurance Act, the workers' experience-rating system (the intensity rule), which reduced the replacement rates of repeat users of the employment insurance system, came into effect July 1, 1996. This brief summarizes the evaluation findings of the impacts of the experience-rating system on the behavioural patterns of benefit recipients. In particular, this study aims to:

• examine the initial impacts of the workers' experience-rating system on claimants' use of EI; and
• report on the preliminary findings in terms of the cost savings involved.

Background

The objective of the workers' experience-rating system is to reduce the generosity of the EI system by lowering benefits for repeat EI users. This provision is designed (a) to discourage any unnecessary use of the EI system by some users, and (b) to reduce the operating cost of the EI system.

The intensity rule states that when a claimant has drawn regular benefits in the past, the replacement rate is reduced by one percent for every 20 weeks of regular benefits collected in the previous five years. The maximum reduction is 5% for a claimant who has collected more than 100 weeks of benefits in the last five years. Because weeks of benefits collected before June 30, 1996 were not counted when determining claimants' replacement rates, the full effect of the experience-rating system will not be felt until 2001.

Methodology and Data Sources

The theoretical underpinning of the workers' experience-rating system is a search model. In this model, factors such as personal characteristics, the general economic environment, and the generosity of the EI system determine an individual's use of EI. This study attempts to isolate the impact of one particular aspect of the EI system, namely the intensity rule on individual EI use. Two approaches were employed. First, a duration analysis explaining the number of weeks of benefits claimed before and after the introduction of the experience-rating system was performed. Second, the EI usage and replacement rates were estimated simultaneously.

The authors also examined whether there was a strong tendency to exit the EI system during the 19th week. This would be positive if the experience-rating system had an impact on claimants' behaviour. Although claimants who claimed up until the 19th week would not have affected their future benefits, the marginal impact of claiming the 20th week was considerable.

The study was based on HRDC's administrative information as well as data from the Canadian Out of Employment Panel Survey (COEP). It extracted from the Status Vector file on all the claims filed by the respondents of the COEP between July 1995 and June 1997. This produced two comparison groups: that of claims filed in the year before (July 1995-June 1996) and that of claims filed during the year following implementation of the experience-rating system (July 1996-June 1997).

Key Findings

There was some evidence that after the introduction of the experience-rating system, there was an increase in people leaving the EI system a week before their future replacement rates would be affected. The probability of exiting the EI system during week 19 was 1 percentage point higher than in week 18, and 0.6 percentage points higher than in week 20. This phenomenon did not exist before the introduction of the intensity rule. For repeat users (those who claimed six or more times during the 1990s), this phenomenon was more marked. The probability of becoming employed was 1.3 percentage points higher during week 19 than it was during week 18. The findings also indicate that the difference in overall average usage (including all claimants) caused by the experience-rating system was less than a quarter of a week.

The impact of the experience-rating system differed according to subcategories

The sample data showed that 33 percent of men claimed six or more times in the 1990s compared with only 27 percent of women. Thus, men were expected to respond more strongly than women did. However, the evidence suggested that the reverse was true. For women, compared with week 18, the probability of re-employment at week 19 was 86% higher. For men this figure was only about 21 percent. The number of weeks of benefits received by women during a claim was less than those received by men.

In general, older people and claimants with dependants tended to receive more weeks of benefits during a claim. There were also large seasonal and provincial differences. Claimants whose benefits were reduced by the new rating system continued to use EI more than the average unemployed worker did. This suggests that either the penalty is not so severe or some repeat users have no alternative but to be reliant on the EI system.

Conclusions

This study shows that the initial impact of the experience-rating system had a small but significant effect in inducing selected EI recipients to leave the EI system earlier. The economic impact is currently small. However, if this provision had been introduced in the mid-1990s and assuming workers had not changed their work behaviour, 70 percent of claimants might have been affected. This would have translated into a reduction of more than 2.5 percent (or about $2-2.5 million per annum) of payments made to beneficiaries. If more conclusive results do not appear in the future, one will have to conclude that unemployed workers do not have as much control over their usage of EI as the proponents of the reform thought they had. In this case, the experience rating system would merely result in a reduction of the welfare of the unemployed, with no improvement of welfare for the society as a whole.

Biographical Notes

Pierre Fortin is Professor of Economics at the University of Quebec in Montreal. He is currently the editor of L'Actualité économique, a member of the editorial board of Canadian Public Policy, the Council of Advisors at the C.D. Howe Institute, the Canadian Productivity Network, and the Committee on Social Trends of the United Way (Montreal). His present research interests include wage and employment dynamics, fiscal and monetary policy, social policy, and population economics.

Marc Van Audenrode is Professor of Economics at the Laval University in Québec City (Canada). He is a member of the board at the Canadian Employment Research Forum and Canadian Economic Association. His research concentrates on the impact of institutions and regulations on labour markets. He has published extensively in academic journals (Journal of Political Economy, Journal of Economic Theory, Labour Economics, Economic Policy, Canadian Journal of Economics).