The Effects of the Shift to an Hours-Based Entrance Requirement - November 2000

The Effects of the Shift to an Hours-Based Entrance Requirement

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

The new employment insurance (EI) system is designed to provide greater access to insurance for individuals working in nonstandard jobs and to provide a clearer relationship between premiums paid into the system and the benefits collected from the system. The goals of this study are to:

• examine the impact of the hours-based system on eligibility and entitlement;
• determine the extent to which nonstandard workers gained coverage under the new system; and
• determine whether the change affected job durations, measured in weeks, total hours, and hours worked per week.

The rationale for the switch from a weeks-based to an hours-based formula for calculating eligibility and entitlement is to improve access to unemployment insurance for individuals with a stable attachment to the workforce who have nonstandard work arrangements. No other country uses an hours-based system, so whether the system will be able to achieve this objective is unknown. This study sheds light on this question.

Under the UI system, individuals working fewer than 15 hours per week were not eligible for benefits. Under EI every hour counts toward eligibility, and those who work fewer than 15 hours a week are also potentially eligible for benefits. The coverage of low-hour jobs means that workers can now combine multiple jobs to qualify for benefits; however, concerns have been raised by labour organizations that a substantial number of workers need to work many more weeks to qualify under EI than they did under UI.

Work patterns have historically varied depending upon the length of the individual's entitlement. At a particular point in the year the sum of weeks worked plus the weeks of EI entitlement will total 52. At this point the individual can collect the maximum possible EI benefits over a one-year period. For each week worked past this point, total EI collected would decline, since this is one fewer week in which the individual can collect EI. Previous studies have found that a large number of individuals tended to work to this point, i.e., bunching occurred. It remains to be seen if this effect is observed after the new EI legislative changes.

The Canadian Out of Employment Panel (COEP) surveys are linked to administrative data from HRDC. This combined data set yields information on individual characteristics, such as education, family resources and expenditures, in addition to the exact job spells used to establish claims. By linking the administrative data set through the Record of Employment (ROE), eligibility and entitlement is calculated for each individual in the sample. Data is only available for the first three quarters of 1997, so to maintain comparability, only data from the first three quarters in 1996 was used. To be able to focus on those claims that were eligible for UI/EI, the study only included samples with jobs terminated through layoffs and not voluntary quits.

The data is grouped into nine regions. The sample is then further split into seasonal and nonseasonal jobs, based on a survey question asking workers about the nature of their work arrangement. The analysis focuses on total employment duration rather than individual job spells, since several jobs may be strung together to improve UI/EI eligibility. The models used to estimate the work behaviour are duration models, which also capture worker characteristics and the state of the labour market.

Overall, the switch to the EI system led to a small increase in eligibility. Still, there were some workers who were eligible under the old system and became ineligible under the new one. They tended to be female, part-time workers in the service sector.

The switch to EI resulted in slight increases in entitlement for workers with more than 35 hours per week. In particular, seasonal workers benefited the most under the EI system, since their hours of work were high (although their weeks of work were low).

The shift from a weeks-based system to an hours-based system redistributed weeks of entitlement in favour of workers with long hours who were predominantly male, seasonal workers and away from female workers who worked part-year and part-time.

The new hours-based system led to a small reduction in employment duration among seasonal workers. The average duration of seasonal employment in 1997 was 1.5 weeks shorter than in 1996, because under EI, seasonal workers might trade-off "fewer weeks worked" for "more hours per week" without any loss in annual income and EI benefits.

In the post-1997 period, workers seemed to have adjusted somewhat to the new system. They had adjusted their employment spells to maximize their benefit/income trade-off in the new EI system. This was not full adjustment, since many workers still ended their employment spell at exactly the pre-EI entrance requirement level.

Under EI, a seasonal worker might work longer hours to reduce the number of workweeks needed to qualify for EI benefits. Using post-EI data, in 1997 a 2-week reduction in the entrance requirement generated a ¾-week reduction in the average employment spell durations for seasonal workers. Under UI, a 2-week reduction only generated a 0.3-week reduction in the average employment spell of seasonal workers. There is little evidence to suggest that UI/EI affected the work patterns of nonseasonal workers.

There was virtually no change in the distribution of usual hours (the number of hours scheduled in a typical week) between 1996 and 1997, even for seasonal workers.

Few workers lost entitlement with EI rules; however, a substantial proportion, about 11 percent of 1997 workers, did need at least 10 extra weeks of work to qualify under the new rule, while 6 percent needed at least 20 additional weeks relative to the 1996 rules.

This analysis estimates the impact of the new EI system on entitlement and eligibility, the behavioural responses of workers, and the impact on usual hours per week. The overall finding is that the new hours-based system tended to benefit workers in long-hour, part-year jobs, and did not benefit those in short-hour, part-year jobs. There was virtually no change in the distribution of "usual hours" per week under EI.

The switch to the EI system led to a net increase in eligibility and entitlement, especially for seasonal workers who worked 10 to 20-week jobs. This occurred mainly because seasonal workers tended to work long hours per week, and under the hours-based system each hour counted toward entitlement and eligibility. Individuals working long hours, even for just part of the year, tended to benefit the most from EI changes, while part-time employees working less than 35 hours but more than 15 hours tended to be slightly worse off. Although it appears that individuals have adjusted to the 1996 entrance requirement, there is no convincing evidence of adjustment to the EI changes in 1997; however, the 1997 EI changes did seem to shorten seasonal employment spells slightly.

David Green is Associate Professor of Economics at the University of British Columbia. His main research interests are the effects of UI/EI on the labour market, the impact of immigration policy, and the adaptation of immigrants to the Canadian economy. More recently he has worked in the area of earnings and income distribution.

W. Craig Riddell is Professor and Chair of the Economics Department at the University of British Columbia. He has published extensively in scholarly and professional journals, mainly in the areas of industrial relations, labour economics, and public policy. He was the research co-ordinator for Labour Markets and Labour Relations for the Royal Commission on the Economic Union and Development Prospects for Canada, 1983-1985 (Macdonald Commission). He is currently the academic co-chair of the Canadian Employment Research Forum.