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·	From Theory To Practice

• Context
• Key Findings
• Evaluation Approach and Data Sources
• Biographical Notes

Context

The changes to the UI system implemented in February 1994 through the Budget Omnibus Bill facilitated the reduction of the growing costs of the program (which had caused UI premiums rates to increase substantially) and began the process of structural reform of the program. A key objective of the 1994 reform was to retain existing jobs and promote job growth by containing premium rate increases and commencing the process of bringing premium rate levels down. During the recessionary period of the early 1990s, premium rates had increased by about 33%, resulting in additional job losses. The 1994 reform reduced UI premiums for 1995 to $3.00 per $100 of insurable earnings from $3.07 in 1994 and from a planned statutory rate of $3.30. In addition, changes were made to the eligibility requirements for claimants in high unemployment regions and to benefit durations and benefit levels for all claimants.

Overall, the changes to the financing and program rules were designed to promote job creation, ensure adequacy and fairness and commence the process of reducing disincentives in the system.

The key changes to the program design were:

1. Strengthening the link between work history and UI eligibility by changing the method used to determine how long a person could receive benefits and by increasing the minimum amount of time a person in high unemployment areas needed to work to qualify for UI from 10 weeks to 12 weeks;
2. Reducing the effect of regional unemployment rates on how long a person can collect UI benefits, while continuing to recognize the need for additional assistance for claimants who live in areas of high unemployment;
3. Establishing a dual benefit rate: a higher rate of 60% of average insurable earnings for claimants with low weekly wages and dependents; a slightly lower benefit rate of 55% (previously 57%) for all other claimants; and,
4. Improving the fairness of the UI program by amending and clarifying how the Voluntary Quit and Misconduct provisions are applied.

HRDC commissioned four formal evaluation studies to examine how Canadians adjusted to these reforms and one that assessed the degree to which an unemployed individual in 1995 faced financial hardship. These studies were performed by external academic subject-matter experts. Each evaluation represents a stand-alone analysis of a specific topic.

This brief summarizes an evaluation study that examined the impact of the 1994 reforms on eligibility for UI, UI take-up rates and the resulting impact on the UI financial accounts.

Key Findings

The authors of this study concluded that the 1994 reforms did not reduce the attractiveness of UI benefits enough to generate a substantial decline in the take-up rate. They found that the 1994 UI rule changes had a relatively minor effect on the number of unemployed workers who were eligible to receive UI benefits. However, they also found that the changes did have a major effect on the number of weeks of UI benefits that unemployed workers were entitled to collect and a smaller impact on the benefits actually collected. The reduced UI benefit durations generated significant savings for the UI Account.

Specifically, based on a detailed statistical analysis of the Canadian Out-of-Employment Panel (COEP) Survey data from 1993 (pre-Bill C-17) and 1995 (post-Bill C-17), combined with HRDC administrative data, the authors found that:

• The share of unemployed workers who reported that they had applied for UI rose slightly to 68% in the 1995 COEP survey from 66% in the 1993 survey. However, they estimate from the COEP Survey data that reported UI take-up rates declined from 80% to 75% in the weighted data and that this was similar to observed declines in the take-up rates for HRDC administrative data.
• The authors concluded that, after controlling for the regional unemployment rate, a worker losing a seasonal job would be less likely to be eligible for UI benefits than an otherwise identical worker losing a non-seasonal job.
• The study found that, prior to the 1994 reforms, take-up rates for seasonal workers were lower than for non-seasonal workers. After the 1994 reforms took effect, this relationship reversed and seasonal worker take-up rates exceeded those of non-seasonal workers. The authors do not offer an explanation for this change.
• The study also estimated the effects of the 1994 reforms on the overall level of benefit payouts to individuals. By applying the 1993 rules to the 1995 COEP survey group, the authors estimated that benefit payouts to these individuals would have been 21% higher if the 1993 rules still applied. The lower estimated level of benefit payments was primarily due to shorter benefit entitlement periods.

Evaluation Approach and Data Sources

The objective of the authors in this evaluation study was to analyse the impact of the 1994 rule changes on UI take-up rates and the overall UI financial accounts. They used advanced statistical techniques to estimate the behavioural links between an unemployed worker's ligibility for UI benefits and their propensity to collect benefits with socio-economic factors (age, sex, marital status, province of residence, disabilities, education level, etc) and labour market factors (regional unemployment rates, seasonal nature of job, etc). The behavioural relationships were estimated using the 1993 and 1995 Canadian Out-of-Employment Panel (COEP) survey of individuals experiencing a job separation, together with HRDC administrative data. The COEP surveyed workers who lost a job in 1993, before the 1994 reforms, and in 1995 after the reforms came into effect. Individuals were surveyed approximately nine months after their job loss and again six months later.

These estimated behavioural relationships were then used to conduct "what if" analyses of the rule changes introduced in 1994. The authors first looked at how the eligibility status and take-up decisions of workers in the 1993 COEP sample would have changed if the 1994 rules had been applicable in 1993. They then applied the 1993 UI rules to the 1995 COEP sample to analyse the effects that the 1994 reforms might have had on the characteristics of individuals in the COEP survey samples. In particular, they examined how UI take-up rates would have changed for both the 1993 and 1995 COEP samples.

Finally, the authors looked at how payments to the 1995 COEP sample would have changed if the 1993 UI rules had still been in place. This analysis separated out the impacts of the 1994 reductions in eligibility probabilities, benefit replacement rates, and weeks of UI benefit eligibility duration. These results show how much each reform element contributed to savings for the UI Account.

Biographical Notes

Dr. Paul Storer is an Assistant Professor in the Department of Economics at Western Washington University in Bellingham, Washington. He is also a member of the Research Center on Employment and Economic Fluctuations at UQAM in Montreal. Dr. Storer's fields of interest are Macroeconomics, Labour Economics and Canadian Economic Policy. His current research projects focus on measuring the impact of zero-inflation policies on the labour market, examining the link between wages and labour productivity using micro-data for convenience stores, and investigating the effects of UI reform in Canada.

Dr. Storer received a PhD in Economics from the University of Western Ontario in 1992. Prior to his current position, he spent five years in the Economics Department at the Université du Québec à Montréal and worked for three years as an Economist at the Bank of Canada in Ottawa. Dr. Storer has published articles in the Canadian Journal of Economics, The Journal of Economic Dynamics and Control and the Journal of Applied Econometrics.

Dr. Marc Van Audenrode is an associate professor at the economics department, Laval University in Quebec City (Canada). He holds an MA in economics from UCLA and a Ph.D. from the University of California at Berkeley. He is a board member of the Canadian Employment Research Forum and of the Canadian Economic Association.

His research concentrates on the impact of institutions and regulations on labor markets. He has published extensively in academic journals (Journal of Political Economic, Journal of Economic Theory, Labour Economics, Economic Policy, Canadian Journal of Economics).