Unemployment and Benefit Durations - May 1998

Unemployment and Benefit Durations

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

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 summarises an economic study conducted by Dr. Stephen Jones on behalf of HRDC, which evaluated the impact of the 1994 rule changes on the duration of unemployment spells and the length of time that unemployed workers received UI benefits. The author of this study used the Canada Out-of-Employment Panel (COEP) survey data linked with HRDC administrative data and advanced statistical methods to isolate the impact of the Bill C-17 rule changes from the effects of other economic and demographic variables.

Duration of an Unemployment Spell

The study found that the 1994 rule changes were significant enough to induce workers to change their behaviour. The author's analysis of the COEP data showed that the share of job separations for which an individual was eligible to receive UI benefits fell from 67% in the 1993 COEP survey to 57% in the 1995 COEP survey. Of those who were eligible to receive UI, he found that the average length of entitlement fell from almost 45 weeks in 1993 to 36 weeks in 1995. He estimated that the median duration of unemployment was 34 weeks in 1993 and 15 weeks in 1995. These values are estimated from the survey data and as such are the results of a wide range of economic and demographic factors in addition to the 1994 rule changes. Dr. Jones then applied advanced statistical methods to the survey data to isolate the effects of the 1994 reforms on unemployment duration and benefits duration.

Starting with the 1994 changes as an explanation for the observed changes, Dr. Jones progressively added additional demographic variables to control for other differences between the two surveys that could have also explained the observed changes. These additional variables included such things as age, gender, marital status, visible minority status, education, geographic region and the local unemployment rate. He found that the reduction in benefit entitlement by itself had a major impact on the duration of unemployment spells. When he added the demographic variables together with the local unemployment rate to his model, the effect of the 1994 reforms alone was a reduction of 3 weeks in unemployment duration. There was some variation across provinces in the size of the impact but the different patterns were never strong. The only demographic variable that had a strong influence on the observed changes in the survey data was gender, with men uniformly tending to have shorter unemployment durations.

UI Benefit Duration

Dr. Jones' analysis of the survey data found that the average length of the UI entitlement period fell from 45 weeks in the 1993 COEP survey to 36 weeks in the 1995 COEP. Further, individuals in the 1995 COEP found new jobs faster than their counterparts in the 1993 COEP survey.

When evaluating the impact of the 1994 reforms on the duration of UI benefit claims, Dr. Jones reported statistical results that showed that the changes in the entitlement rules led to a decline in the weeks of UI benefits collected. This result remained valid after he introduced additional demographic and economic variables to control for other changes between the two samples.

Dr. Jones concluded that the 1994 changes had a significant impact on the duration of unemployment and the length of time an unemployed worker collects benefits. He points out that, given the modest nature of the 1994 changes to the UI benefit rates, the significant changes in entitlement and eligibility rules implemented in 1994 were the primary factors leading to the decline in the duration of unemployment spells and the duration of benefits receipt.

This study examined individuals with separations from jobs before and after the 1994 rule changes took effect using the Canada Out-of-Employment Panel (COEP) surveys for 1993 and 1995. Dr. Jones attempted to distinguish the impacts of the 1994 reforms on unemployment durations and UI benefit durations from other possible causes by using advanced statistical methods. His general approach was to begin with simple measures of these durations and gradually build more complicated and more encompassing sets of potential determining variables, looking for results that are apparently robust under a number of different alternative specifications.

Dr. Stephen R.G. Jones holds a BA from Cambridge University (UK) and a PhD from the University of California, Berkeley. Professor and presently Associate Chair in the Department of Economics at McMaster University, he has also worked at the Institute for Advanced Study (Princeton), the University of California (Berkeley), the University of British Columbia, the London School of Economics and the research institute DELTA in Paris.

His academic research has covered many areas of labour economics, with particular focus on issues relating to unemployment, and has been published in two monographs and leading academic journals. He is a Co-Editor of the Canadian Journal of Economics and directs the Labour Market Institutions and Unemployment project of the Canadian International Labour Network, a collaborative research venture involving some fifty academics and policy makers drawn from many countries.

His past consultative work includes: a major study on unemployment for the Economic Council of Canada; the initiation, design and implementation of the Canada Out-of-Employment Panel (COEP) dataset funded by HRDC; various studies of UI legislative changes (Bills C-113 and C-17) for HRDC, using the COEP dataset linked to administrative files; participation in the Elliot Lake Academic Advisory Panel; and, most recently, membership in the 6-person Core Analysis Technical Advisory Group to HRDC (Strategic Monitoring and Evaluation Branch) for the monitoring of the effects of the move from UI to EI, as mandated in Bill C-12.