Perspective on the Employment Insurance System

www.cfib.ca
Research September 2009
Insuring Prosperity
SME Perspectives on the Employment Insurance System
Ian Dawkins, Policy Analyst (National Affairs)
Canada’s small- and medium-sized businesses interact with the Employment
Insurance (EI) system in a way that larger businesses do not, making their
unique views of this system a critical component to any reform of the
broader EI system. While SMEs support the core mandate of EI, there are
serious concerns about the cost associated with the program, and the
services it provides in helping Canadians develop skills that will quickly get
them back to work.
Introduction
Canada’s small- and medium-size enterprises
(SMEs) are collectively the largest employer in
Canada, employing about 55 per cent of
Canadians (based on Statistics Canada’s Survey
of Employment, Payrolls and Hours 2008).
When you take into account the fact that they
contribute 1.4 times the premiums their
employees do, this makes them the single
largest employer-stakeholder group in the EI
system today. SMEs employ Canadians in every
province and in every sector of the economy,
from the retail and service sectors to
manufacturing and primary industries. This
broad range of industries and employee
requirements make SME owners an excellent
judge of the efficacy of the EI system.
EI is becoming a more and more important
issue for SMEs. In fact, EI is one of the top
priorities for CFIB members across the nation.
This was highlighted in a survey conducted in
the first half of 2009, which found that 48 per
cent of CFIB members listed EI reform as a
priority for their business, behind only the
total tax burden and regulations and paper
burden, both of which are also directly related
to the EI system.
But why do SMEs care about EI? First, most
small- and medium-sized companies are on
the smaller end of the size scale. For example,
CFIB members employ approximately 12
employees on average. This means that a
majority of Canadians are employed in a small
business, and likely experience direct, face to

Insuring Prosperity 2
face interaction between the business owners
and their employees, and this factor cannot be
overlooked when talking about employment
issues such as the EI system.
Second, when asked to rate which forms of
taxation affect the growth of their business the
most, SMEs cited payroll taxes as having the
biggest impact (Figure 1). This shows the
importance of an effective and well-managed
EI system to SMEs, and to the wider economy
as a whole. Every dollar that comes out of a
business for payroll taxes like EI adds a direct
cost to employment and growth, which in turn
can hurt job creation. As such, every dollar
collected in EI premiums must be used as
prudently as possible.
Figure 1:
Which forms of taxation affect the
growth of your business the most?
62.8
53.6
47.2
42.9
41.8
3.4
Payroll taxes (e.g., EI, C/QPP, WCB, etc.)
Corporate income taxes
Property/capital taxes
Personal income taxes
Sales taxes (e.g., GST/HST, PST)
Don't know
Source: CFIB, Point of View, Tax Competitiveness survey,
2007, based on 7,845 responses.
A Brief History of EI
The Unemployment Insurance (UI) program
was first founded in 1940 as a system
designed to protect workers in sectors with
unpredictable unemployment. A major reform
in 1971 introduced sickness, maternity, and
retirement benefits as well as added extended
benefits for regions of high unemployment,
greatly expanding the scope of the program.
This was followed by another comprehensive
review in 1977 that introduced variable
entrance requirements ranging from 10 to 14
weeks, designed to address regional
unemployment rate differences. Further minor
amendments were made in 1979, tightening
requirements and lowering benefit rates, and
in 1983 and 1984, adoption benefits were
added and maternity benefits were adjusted to
comply with the Canadian Human Rights Act.
The 1996 Employment Insurance Act marked
the change of the program from UI to EI, and
the system was redesigned to place a larger
emphasis on re-employment. Under the new EI
system, eligibility was changed from weeks
worked to hours worked, to allow part-time
workers access to benefits. A new benefits
structure with new rules was put in place, with
stricter requirements overall. In addition, the
Employment Benefits and Support Measures
(also known as Part II of EI) was created to
provide funding for federal/ provincial labour
market initiatives across the country, bringing
the provinces into the program as partners.
It was at this time that the EI surplus truly
started to grow, as a result of lower
unemployment in a stronger economy and the
1996 Employment Insurance Act’s tighter
conditions on benefits. The reduction in
payouts that resulted from these changes,
combined with continued high premiums and
a lack of oversight of the fund meant that
large surplus revenues were collected and
redirected to other programs in the federal
budget.
This trend continued until pressure mounted
from groups like CFIB that pushed government
to act. In 2005, the EI Commission (made up of
an employer, employee and government
representative) was mandated to set premium
rates for the upcoming year. These rates were

to be based on the Department of Finance’s
unemployment rate projections and were to be
set at a rate to just cover the costs of expected
benefits in the subsequent year. At the same
time, the maximum yearly change in premium
rates was set at +/- 15 cents (0.15 per cent) for
employees and +/-21 cents (0.21 per cent) for
employers.
By 2008 it was clear that this new rate setting
process was not working as the EI surplus
continued to grow. In 2007/08, total program
revenues through premiums stood at $16.9
billion, with total expenditures at roughly $16
billion resulting in a surplus of almost $900
million that was spent by government on other
priorities unrelated to EI (Figure 2).
Figure 2:
Percentage of EI Expenditures
Regular
benefits,
47%
Special
benefits,
22%
Training and
support
measures,
12%
Administration,
10%
Other benefits,
4%
Surplus,
5%
Source: Canada Employment Insurance Commission,
Employment Insurance Monitoring and Assessment Report,
2008.
This surplus came about despite continued
efforts to reduce premiums to levels that
would cover program expenditures without
creating further surpluses. In fact, the amount
of surplus money collected via EI premiums
between 1996 and 2008, plus interest, had
grown to be approximately $57 billion dollars
(Figure 3). The worst part is that this surplus
has all been spent as it was used by
government in other areas unrelated to EI,
rather than allowing the EI Account to
maintain the surplus which could then be used
to balance rates and deal with EI deficits
during periods of higher unemployment.
Figure 3:
EI Account Surplus, 1993-2008
-10
0
10
20
30
40
50
60
70
S
u
rp
lu
s
In
$
B
illio
ns
Current Projected
Source: HRSDC, 2006–2007 Performance Report.
As a result, the Canada Employment Insurance
Financing Board (CEIFB) was established in
2009 as a separate body to implement an
improved EI premium rate-setting mechanism
that would ensure that EI revenues and
expenditures break even over time; manage a
separate bank account, where any excess EI
revenues from a given year will be held and
invested until they are used to reduce
premium rates in subsequent years; and,
maintain a $2 billion cash reserve as a
contingency fund to support relative premium
rate stability. To establish the reserve, the
Government of Canada transferred $2 billion
from general revenues to the fund.
Finally, to offset some of the uncertainty being
experienced by SMEs as a result of economic
instability, the federal government agreed to
freeze EI premium rates in 2009 and 2010 to
2008 levels. As payroll taxes, such as EI, are
among the greatest deterrents to growth and
job creation (see Figure 1), freezing rates was a
positive step to not saddle SMEs with
increasing costs at a time when they could
least afford it.
Surplusin$Billions

However, while this EI rate freeze was a very
important response to a global recession, a
consequence of this action could be an
enormous unfunded liability in the EI account.
When EI rates are set in 2011, there will almost
certainly be an immediate increase to fund this
gap. Figure 4 below shows the likely increase
in per-employee annual EI payments over the
next six years, calculated based on pessimistic
and optimistic unemployment levels at the end
of 2010. In both scenarios, employers will
likely face large premium increases, with the
pessimistic scenario resulting in a near
doubling of EI costs to the employer- all
without any new programs or benefits added
in.
Figure 4:
Projected Cost To Employer Per
Employee, 2009-2015 ($)
800.00
900.00
1,000.00
1,100.00
1,200.00
1,300.00
1,400.00
1,500.00
1,600.00
1,700.00
1,800.00
2009 2010 2011 2012 2013 2014 2015
PessimisticForecast OptimisticForecast
See footnote.
1
In addition to this, there is some concern that
the shortfall in EI revenues created by this
artificially low EI premium rate for 2009 and
2010 will not be funded out of general
revenues as part of the stimulus measures
being enacted by the government, but will
instead be the responsibility of the CEIFB, and
will be added on to the amount needed to be
1
Based on CFIB calculations of differing unemployment
rate projections, e.g. Finance Canada September 2009 Fiscal
Update vs. private sector forecasts.
covered by higher premiums from 2011
onwards. If this is indeed the case, the likely
premium increases in 2011 and beyond will be
astronomical, almost certainly amounting to
the maximum legal increase for the better part
of a decade.
Results of CFIB’s 2007
Survey
In order to better understand the unique
relationship between the Canadian SME sector
and the EI system, CFIB undertook a survey of
its membership in 2007, during the height of
the booming economy when EI was less of a
hot-button issue. Business owners were asked
to answer some general questions about their
hiring practices related to EI, as well as specific
questions about their familiarity with the EI
system, their opinions on funding for various
EI programs, and their take on the fairness of
EI premiums overall.
Responses were received from 9,242
businesses across Canada, with provincial and
sector breakdowns representative of the SME
community as a whole. The results of this
survey are accurate to +/-1.0 per cent, 19
times out of 20.
Using this data, this report will seek to explore
SME’s perspective of the EI system in more
detail, and will provide recommendations for
policy makers to consider when they debate
changes to the EI system.

SMEs As Employers
While the majority of SMEs are year-round
employers, about one-third (35 per cent)
across the nation hire some seasonal
employees. Of note is that almost half (47 per
cent) of employers in Atlantic Canada hire
some seasonal workers (Figure 5). This
regional variance may be partly explained by
the fact that more than half (54 percent) of
employers in the agricultural sector hire
seasonal workers (this is second only to the 58
per cent of employers in the construction
sector that hire seasonal workers). In the case
of Atlantic Canada, this would include fishers
and farmers, as well as those involved in
hospitality and tourism.
Figure 5:
Seasonal Employment By Province
31 33 31
35 33
40
43
40
57
49
35
69 67 69
65 67
60
57
60
43
65 65
0
10
20
30
40
50
60
70
80
Yes
No
The distinct seasonality of certain sectors also
means that employment fluctuations will be
inevitable. This also indicates that many of
these SMEs likely have experience dealing with
the EI system.
When looking at employment patterns by size
of firm, there is a distinct inverse correlation
between size of business and likelihood of
having fired or laid off someone in the last
year (Figure 6).
Figure 6:
Layoffs By Size Of Firm
This clearly shows that the smallest firms are
the least likely to lay employees off, in part
due to the personal nature of the employer-
employee relationship and their desire to hold
onto their employees whenever possible.
This assumption is further validated by other
CFIB survey data, which found that 73 per cent
of SMEs have had difficulties hiring skilled
workers.
2
In fact, the same study found that 59
per cent of SMEs reported being hurt by labour
shortages because they ended up ignoring
business opportunities, scaling back expansion
plans and/or losing business in other ways.
In fact, the importance of personal
relationships is a very large factor in SME
employment, as the majority of SMEs (60 per
cent) employ relatives in their business (Figure
7). This fact remains constant across firm size
right up to the largest SMEs. This adds to the
personal dimension of SME employment, and
further illustrates that when small businesses
are forced to interact with the EI system in
some way, it is usually as a last resort, or that
it is unavoidable due to the nature of their
work.
2
See: CFIB’s 2009 report - Canada’s Training Ground: SMEs’
$18 billion Investment in the Nation’s Workforce.

Figure 7:
Family Employment By Size Of Firm
53.4
62.2 63.1 61.1
68.4
46.6
37.8 36.9 38.9
31.6
0
10
20
30
40
50
60
70
80
0-4 5-19 20-49 50-99 100+
Number Of Employees
Yes
No
SMEs’ Views of Current EI
System
In the previous section, a picture begins to
emerge of SME employers: small firms in every
province and sector that work hard to retain
their valuable workers, in many cases because
of a personal or familial relationship, and only
lays them off as a last resort. This concern for
the welfare of their employees is also seen in
responses to survey questions about SME
support for core EI programs, where despite
serious concerns about the EI program as a
whole, we find broad support for the key
concepts of protecting employees from
unforeseen events.
A substantial proportion of our members - 42
per cent - support the current level of core EI
benefits, with the remainder expressing a
mixture of views on what to do (Figure 8).
Figure 8:
Changes To EI Benefit Levels
Make More
Generous,
17.8%
No Change,
42.3%
Make Less
Generous,
22.3%
Don't Know,
17.6%
A similar proportion (39 per cent) support the
current qualifying period for EI benefits, with
another 25 per cent suggesting it should be
less generous (Figure 9). This shows that in
spite of the strong concerns many SMEs have
with the program (which we will detail later in
this report), most are content with the basic
core of EI and support the role it plays in
Canadian society. It should be noted, however,
that with both benefit levels and eligibility
requirements, a greater proportion wish to see
EI benefits reduced than those who want them
increased, indicating an overall resistance to
the idea of increasing benefits or reducing the
qualifying period. This is particularely relevant
in light of the recent study by a joint Liberal-
Conservative blue-ribbon panel on the EI
qualifying period, as any move to reduce the
qualifying period would be opposed by a
majority of SMEs.
Figure 9:
Changes To EI Qualifying Period
Make More
Generous,
18.7%
No Change,
38.9%
Make Less
Generous,
25%
Don't Know,
17.4%
In a similar vein to their support of the current
level of EI benefits, there is support for the
continued funding of maternity/parental
benefits out of the EI fund, with 53 per cent of
SMEs nationwide saying EI is the most
appropriate source of funding for those
benefits (Figure 10).

Figure 10:
Funding For Maternity/Parental
Benefits
EI Premiums,
53%Other Sources
Of GoV't
Funding,
35.5%
Don't Know,
11.5%
The same amount, 53 per cent, also say that EI
funds are the most appropriate source of
funding for sickness benefits (Figure 11).
Again, this indicates that the basic EI program
as an insurance system for employment is
supported by a majority of SMEs.
Figure 11:
Funding For Sickness Benefits
EI Premiums,
53%Other Sources
of Gov't
Funding, 35%
Don't Know,
12%
However, the lack of support for the expansion
of the core EI program to areas outside this
mandate is evident when SMEs are asked about
the newer compassionate care benefits, as only
39 per cent say EI is the best source of
funding, and 45 per cent say it should be
supported by government funding outside of
EI (Figure 12).
This lack of support for the compassionate-
care program, which has had much lower than
expected uptake, is likely due to the fact that a
majority of SME employers are already flexible
on issues relating to scheduling for their
employees in times of personal difficulty. In
2004, CFIB found that 74 per cent of SME
employers provided employees time off for
personal reasons
3
. It should be noted that in
smaller companies this is often provided in an
informal manner and negotiated between the
employer and the individual employee.
Figure 12:
Funding For Compassionate Care
Benefits
EI Premiums,
39%
Other Sources
of Gov't
Funding, 45%
Don't
Know,16%
In a separate survey conducted in March of
2009 CFIB asked 10,257 members across the
country about their views on the idea of
extending EI maternity and parental benefits
to the self-employed on a voluntary basis.
4
A
small majority (53 per cent) are in favour of
the concept. However, 35 per cent were
opposed and 9 per cent were undecided. Given
the slim support for this approach, CFIB
strongly recommends that should this concept
be debated in public policy circles, that a full
consultation takes place with a fully defined
plan on how it will work and the impact it will
have on the EI system as a whole.
Overall, these results indicate that SMEs
support many of the basic tenets of the EI
system based on their individual merits.
3
See CFIB’s 2004 Report - Fostering Flexibility:
Work and Family – Results of the CFIB Survey on
Workplace Practices

These results also show that SMEs do not
support programs that are outside of the EI
mandate nor ones that are counter-productive
to the purpose of the program.
SMEs Level of Satisfaction
with the EI System
When SMEs are asked to rate various
administrative aspects of the EI program, a
majority indicate they find the amount of
paperwork required of employers, availability
of information, and the readability of that
information for the most part acceptable
(Figure 13). The paperwork question is
especially notable, as CFIB’s members
consistently rank regulatory/paper burden as
one of their top concerns. The fact that SMEs
are less critical of this aspect of the EI
program shows that they are balanced in their
assessment of the program overall, and willing
to give a passing grade to those aspects of the
program that they see as working adequately.
Figure 13:
Ratings Of EI Services
10.1
12
10
66.5
61
57.8
23.4
27
32.2
Amount of paperwork for employers
Availability of information
Readability/Simplicity of information
Good Acceptable Poor
However, there is still a substantial number of
SMEs who see these three aspects of the EI
program as poorly run, and there remains a
great deal of room for improvement in
expanding the number of SMEs who rate them
4
CFIB’s Mandate Survey #234, April 2009
as ‘good’. The mere fact that a majority of
SMEs view this aspect of the program as
‘acceptable’ is hardly a ringing endorsement,
and should be seen as a sign of progress
rather than a final destination.
Despite their support for core EI programs and
their ‘acceptable’ ratings for the administrative
aspects of the EI program, SME owners give
low scores to the management of the EI system
as a whole. A majority (55 per cent) of
respondents are either ‘somewhat dissatisfied’
or ‘very dissatisfied’ with the federal
government’s approach to managing the EI
program, with only 33 per cent saying they are
somewhat satisfied and just 1.4 per cent
reporting they are ‘very satisfied’ (Figure 14).
These numbers remain stable when analyzed
by the length of time a firm has been in
business, showing that the government’s
administration of the EI program does not
grow more appealing as businesses get used to
it. Nor are there significant variations based on
the province of the respondent, the number of
employees, or the sector they represent.
Across all of these subgroups, SMEs remain
dissatisfied with the management of the EI
program.

Figure 14:
Overall Satisfaction With
Government Management of EI
Very Satisfied,
1%
Somewhat
Satisfied,33%
Somewhat
Dissatisfied,
32%
Very Dissatisfied,
23%
Don't
Know,11%
If SMEs support the core principles of EI and
are not angry about the paper burden they
face, what is causing this broad-based
dissatisfaction? A partial answer can be found
in the responses to questions on various
programs within the EI system. While some of
these programs are a step removed from the
employer, many, such as job creation
partnerships, employment assistance services,
wage subsidies, and skills development
programs, should be of use to employers who
faced severe skilled labour shortages, which
were rampant at the time of this survey.
Indeed, almost as telling as the plurality of
members who indicate these programs are ‘not
helpful’ are the ones who indicate they have
not even heard of these programs, which
makes up the second largest portion of
respondents (Figure 15).
With SMEs facing a shortage of qualified
labour and therefore eager to hire workers, the
fact that these critical components of the EI
program that deal with skills training and
labour-market development are either
unhelpful or unknown speaks to a critical
failure of the EI system as a whole.
Figure 15:
Ratings Of EI Programs
24
17.9
12.9
14.9
20.3
9.5
41.3
43
44.6
42.5
41.2
39.9
25.8
28.7
29.1
30.1
26
34.2
8.9
10.3
13.4
12.5
12.5
16.4
Skills Development
Targeted Wage Subsidies
Self-Employment
Job creation partnerships
Employment Assistance Services
Labour market partnerships
Helpful Not Helpful Not aware of program Don't know
SMEs’ Challenges With EI
One of the most troubling findings of the EI
survey relates to the number of businesses
that feel they are competing with the EI system
for employees. A shocking 22 per cent of
respondents said they had had difficulty hiring
someone in the past year because they felt
potential employees would rather stay on EI
benefits (Figure 16), and an equally troubling
16 per cent said that in the past year they had
experienced an employee asking to be laid off
so they could collect EI benefits (Figure 17).
Figure 16:
Difficulty Hiring People On EI
20 21 19
25
18
25
29 29
37 39
22
80 79 81
75
82
75
71 71
63 62
78
0
10
20
30
40
50
60
70
80
90
BC AB SK MB ON QC NB NS PE NL Nat
Yes No
While these national averages are bad enough,
the rates from PEI and Newfoundland and
Labrador are particularly so, with 39 per cent
of Newfoundland and Labrador SMEs saying
they had difficulty hiring someone because
they would rather be on EI (Figure 16) and 30
per cent of P.E.I. respondents saying they had

been asked to lay someone off so that they
could collect EI benefits (Figure 17). What this
indicates is that regional variations in EI
benefits may be forcing businesses to compete
with EI for employees, even during stronger
economic conditions, such as when this survey
was conducted in 2007. Employers across
Canada, and particularly in PEI and
Newfoundland, are frustrated at the difficulty
they face in moving some potential employees
from the EI system and into the labour market.
This will likely remain the case until
substantive changes are made to prevent these
sort of abuses from occurring, which is
another reason why a broad reform of the EI
system is the best path to achieving improved
results within the system.
Figure 17:
Difficulty Keeping People Off EI
15 16
12
18
14 16
19 18
30 27
16
85 85
88
82
86 84
81 82
71 73
84
0
10
20
30
40
50
60
70
80
90
100
BC AB SK MB ON QC NB NS PE NL Nat
Yes
No
Two of the largest irritants, however, have to
do with the fairness of the EI system. A large
majority of respondents said that employers
and employees should pay the same premium
rates, reflecting a long-standing grievance
among SME owners that they continue to pay
1.4 times what employees pay (Figure 18).
Figure 18:
Fair Premium Split
Yes, 82%
No, 11%
Don't Know,
7%
Even more striking was that 95 per cent of
respondents agreed that employers should be
entitled to a refund for EI premium over-
contributions, which can occur when an
employee works for more than one employer
in a year (Figure 19). The employee is
reimbursed for any amount paid above the
annual maximum amount, but not their
employers.
These fairness-related factors, combined with
the sense that EI’s labour-related programs are
not working for SMEs, are among the issues
driving the dissatisfaction with the EI program
as a whole, and are important areas to address
in making the EI system more relevant to
today’s labour market.
Figure 19:
Refund For Over Contributions
Yes, 95%
No,3%
Don't Know, 2%

The Need for Better Metrics
CFIB strongly belives that some of the biggest
problems currently facing the EI system are
the result of poor metrics. This lack of
measurement has resulted not only in
shortfalls in the training and labour-market
aspects of the program, but has likely
contributed to the financial difficulties now
facing the EI program.
An example of the financial waste caused by
poor metrics was the more than $2.1 billion
spent in 2006/07 on ‘Employment Benefit and
Support Measures’, or EBSMs. These programs
are run via the Labour Market Development
Agreements (LMDA) and managed by each
provincial government. While there are
supposed to be regular reviews of the
effectiveness of these programs, the 2007 EI
Monitoring and Assessment Report (MAR)
commissioned by the Department of Human
Resources and Skills Development (HRSDC)
was vague to the point of being useless. The
categories used to assess the progress of
hundreds of millions of dollars in EBSMs had
titles such as “Some positive impacts,” which
was to mean “One or two jurisdictions show a
statistically significant positive net impact, with
all other jurisdictions showing a non-significant
result.” What is left unexplained is what,
exactly, qualifies as a “statistically significant”
impact, how these impacts are calculated, and
whether there is a cost/benefit analysis
component to these assessments. With that
said, the MAR shows that the majority of these
programs are failures or have mixed results at
best, with not a single program earning the
distinction of “Positive impacts”.
These results are not surprising to small
business owners, as our survey results show
across the board dissatisfaction with these
very same programs. Far more surprising is
that according to the MAR and Organization
for Economic Co-Operation and Development
(OECD) literature, these shortcomings have
been known in policy circles for nearly a
decade. The 2007 MAR itself says, “In 2001,
the OECD member nations… concluded that
active labour market programs had limited
effects on ending high unemployment or
ameliorating poor labour market conditions.”
Studies conducted by the OECD reinforce our
member’s views that current job-training and
return-to-work programs are not meeting their
needs. A 2001 OECD report
5
, says the
following about large job-training programs
(such as those conducted by the federal
government via EI). “Training programmes
tend to be among the most expensive active
measures… But evaluations of public training
programmes in OECD countries suggest a
mixed track record. Some programmes in
Canada… have yielded low or even negative
rates of return for participants when the
estimated programme effects on earning or
employment are compared with the cost of
achieving those effects”
The report’s authors go on to say that
“keep[ing] public training programmes small in
scale and well targeted to the specific needs of
both job seekers and local employers…[and]
build[ing] in as much on-the-job content to
training programmes as possible” is the best
route to achieving success in job training
measures. They also point out that “private
5
What works and for whom: a review of OECD’s
countries experiences with active labour market
policies, written by John P. Martin and David Grubb

employment subsidies were more effective than
public training programs or direct job
creation”.
Despite the poor results given to the EBSM
programs, even when judged by loose, ill-
defined standards, and with OECD data
backing up the conclusion that these programs
do not work, they have continued to operate
for the last eight years with little to no data to
back up their continued existence.
The fact that the Federal and Provincial
governments have continued to spend billions
of dollars on these programs in the last
decade, despite mounting evidence of their
shortcomings, is made worse by the fact that
their source of funding for these EBSM
programs is a payroll tax. OECD and other
internationally peer-reviewed studies are as
clear on the negative effects of payroll taxes
on employment as they are on the
shortcomings of labour market programs. High
EI premiums on employers could easily have
cost more jobs than the entire EBSM system
has created to date. As seen in Figure 1, this
growing consensus is reflected in the views of
our members, who also list payroll taxes as the
greatest impediment to growth.
It is useful to put these failed programs in the
context of potential cost savings; according to
the EI Chief Actuary’s 2009 report, each 100
million dollars in EI revenue equates to nearly
a full cent in EI premiums. Unlike EBSM, the
reduction of payroll taxes has a proven effect
on job creation, which means that each cent of
EI premiums must be carefully assessed and
collected to provide the most positive impact
possible, lest it be counter-productive to the
purpose of the system as a whole. EI is one of
the few programs in the Federal sphere where
failed or unjustifiably expensive programs are
not simply wasteful, but are directly causing
the problem which they seek to alleviate by
taxing job creation.
Conclusions
Given the clear shortcomings of the current
approach to EI-based training, what is the
solution? CFIB’s own recent report on training
mirrors OECD’s conclusions and suggests that
the most effective use of EI-based job training
and re-employment measures should come in
the form of incentives for on-the-job informal
training that is focused on the needs of the
employer.
6
In fact, CFIB’s report on training found that
Canada’s SMEs spend $18 billion a year on
formal and informal, on-the-job training; a cost
which is a serious impediment to hiring new
employees. The report goes on to discuss the
success of programs such as the EI-based New
Hires and Youth Hires programs, which gave
an EI holiday for employers based on increases
in payroll. These programs demonstrated that
simple, cost-effective solutions administered
through the EI program are possible. SME
owners are the best judge of just what kind of
training a new employee may require, and with
survey data showing that training is a
necessary and widespread component of SME
employment, putting the training credit at the
disposal of the SME owner themselves is the
best, most cost-effective way of spurring
employment.
This type of credit would also be much more
cost-effective than the current EBSMs. In 2007,
6
See: CFIB’s 2009 report - Canada’s Training
Ground: SMEs’ $18 billion Investment in the Nation’s
Workforce

the Federal government transferred
approximately $2.1 billion dollars to the
provinces for “active employment measures”,
which the 2007 MAR notes benefitted about
612,000 individuals across the country. This
works out to about $3,500 per person, for
programs that the MAR itself shows have
unimpressive outcomes.
However, as an example, an EI tax credit for
employers to offset the cost of training new
employees, at the present premium rates and
maximum insurable salary, would cost
approximately $1000 per individual ($2.42 per
$100 of income at a starting salary of $42,300
comes out to $1023.66), a much cheaper
alternative with a proven track record of
success. If nothing else, such a measure is
worth diverting funds from ineffective EBSM
programs into an exploratory three-year pilot
project, to assess its benefits. CFIB’s proposal
and principles for an EI tax credit for training
is described in more detail in Appendix 2.
EI ‘Pilot Projects’ are another aspect of the EI
system in need of review. The lack of real
measurement is not limited to the EBSMs. Most
of the so-called EI “Pilot Projects” have been
renewed, in some cases repeatedly, with no
measurement done to assess their
effectiveness. According to the Chief Actuary’s
report for 2009, the total cost of pilot projects
and transitional measures for 2009 is
estimated to be over 500 million dollars, which
is equivalent to nearly five cents of the EI
premium rate. With little to no measurement
of the effectiveness of these programs, there is
no way to say how much of a cost savings
could be potentially achieved through a review.
Not only do the individual pilot projects
currently in operation need to be reviewed, but
the entire system of evaluation and decision-
making of pilot projects needs a serious
overhaul.
Aside from issues relating to job training and
labour shortages, the biggest irritant to SMEs
when it comes to the EI system is the built-in
financial unfairness of the 60/40 premium
split, and the inability of businesses to get a
refund of EI over-contributions. The issue of
over-contribution, while administratively
complex, could be addressed by using
employer over-contributions to fund other
projects of benefit to employers, such as
training credits or other programs that have
demonstrated through proper metrics that
they are effective in getting people back to
work.
The matter of equalizing EI premiums is
slightly more complicated. While SMEs fully
support EI premium contributions being split
50/50 between employers and employees, the
means used to achieve this are not a simple
matter of shifting the burden. A straight
reduction in employer premiums would likely
necessitate an increase in employee
contributions, which would pit employers
against employees, rather than restore fairness
to the overall equation.
It is CFIB’s recommendation that any further
premium changes made in the future be
skewed towards employers, over a period of
time until the premiums have reached
equilibrium. This way, a fair premium ratio can
be eased into, without employees being
punished for the fundamental inequality of the
current system.
Finally, the EI system is heading into a period
of tremendous strain. The current premium
rates, which have been frozen until end of
2010, are based on an unemployment rate of

6.5 per cent. With unemployment projected to
be as high as 9 to 10 per cent by 2011, this
differential in unemployment rates will result
in an enormous shortfall in EI premiums. Each
percent of unemployment costs the EI system
approximately $1.1 billion, according to EI’s
Chief Actuary, which could mean an
immediate need to increase EI revenues by
more than $3 billion if unemployment
projections for 2011 are correct. Even if the
EI system remains unchanged, with no
additional costs added, premium rates will
likely need to increase by their maximum
amount ($0.15 for employees and $0.21 for
employers) for as much as the next three to
five years just to make up for this shortfall.
7
This would result in substantial payroll tax
increases, thereby slamming the brakes on
economic recovery just as it begins to take
hold.
As can be seen in Figure 4, even an optimistic
estimate of the premium increases required
after the current freeze is lifted, based on a
quick rebound in employment figures to pre-
2009 levels, will result in large increases to EI
costs for employers. A more conservative
estimate, based on a sluggish rebound in
employment, will result in a near doubling of
the current per-employee EI burden for
employers. In addition, as mentioned earlier,
none of this takes into account the additional
burden that may be imposed if the EI fund is
forced to recoup unfunded liabilities from the
rate freeze of 2009-2010, which would result
in a multi-billion dollar deficit and further
large premium increases. All of these
scenarios, it should be noted, are based on no
new costs being added to the current EI
7
A 2% differential in unemployment rates would result in a
nearly 40% increase in employer EI premium rates,
according to the 2009 EI Chief Actuary’s report.
system, such as reducing eligibility
requirements.
Add to this mix the year-over-year increase in
sickness benefits, which have averaged 6 per
cent a year due to demographic changes in the
working population, and the annual increase in
the Maximum Insurable Earnings (MIE), and
there is a real threat that the EI system is on
the verge of a major financial crisis. The
current economic context is simply not the
time to make piecemeal changes to EI benefits.
What is needed is a comprehensive reform of
the entire EI system that takes these financial
realities into account.
In conclusion, CFIB strongly believes that
short-sighted, “temporary” changes to EI based
on current economic conditions are unlikely to
result in a successful restructuring of the
program, and will likely only harm the overall
financial balance of the system. Rather than
making small changes to certain aspects of the
program, such as reducing or eliminating the
waiting period, or reducing the minimum
hours worked to qualify for benefits, a wide-
ranging, systematic review of the EI program
should be undertaken to rebuild the system in
a way that sets Canada on a path for growth
once the economy recovers. A renewed
emphasis on returning the unemployed to
work with marketable skills, rather than
shielding segments of the population from
market forces, must be a priority if the long-
term issues of demographic shift and endemic
shortages of qualified labour are ever to be
addressed. Making EI easier to qualify for and
collect without taking the inherent and
underlying shortage of qualified labour
affecting employers into account, will put a
stranglehold on economic growth when
conditions recover.

Recommendations
• Do Not Reduce Qualifying Hours:
Given the immense financial pressures
facing the EI system as a whole in the
next few years, avoid permanent or
temporary changes to the EI system
that make it easier to qualify for EI
benefits.
• Monitor The Progress Of Training
Programs
Create real metrics that measure the
true cost and benefit of each labour
market program funded by EI
revenues and publicly report the
findings on an annual basis. This
should be applied to both federal and
provincial initiatives.
• Focus On Training That Works
Create incentives for on-the-job
informal training focused on the needs
of the employer, as this is the most
effective means to get people trained
and back to work. Fund it by shifting
resources from failed labour market
programs into a three-year training
credit pilot project with proper
metrics and measurement. An example
of this type of program can be found
in the appendix.
• Make Pilot Projects Accountable
Overhaul the entire process of
monitoring and assessing pilot
projects so that they function as
intended as temporary measures to
test a new policy or process. This
review should include specific
measures to either eliminate or make
the process/policy permanent once
the pilot phase is complete.
• Restore Fairness To Premiums
Gradually move towards a 50/50 split
in EI premiums between employers
and employees. This can be achieved
by skewing future premium changes in
favour of employers over a period of
time, until there is equity among
employer and employee contributions
to EI.
• Refund Employers Who Overpay
Refunds of employer over-
contributions can be administratively
complex, so if a solution cannot be
found we recommend that the
amounts associated with employer
over-contributions be used towards
other projects of benefit to employers,
such as funding a reduction of the
premium split differential to 50/50,
funding training credits, or programs
that have demonstrated through
proper metrics that they are effective
in getting people back to work.
• Make Lasting Changes to EI
Conduct a wide-ranging systematic
review of the EI program with an
emphasis on quickly and effectively
returning the unemployed to work
with marketable skills while taking
into account the financial pressures
facing the EI system and Canada’s
economy.
• Truly Freeze Premiums
Ensure that the entire cost of the
2009-2010 premium freeze is funded
via special stimulus funds from

general revenues, so that employers
and employees are not faced with
many years of crippling premium
increases just when the economy
begins to recover.
• Ensure CEIFB Is Properly Funded
Despite years of EI account surpluses
totalling $57 billion, the CEIFB fund
has only been allocated $2 billion in
start-up funds, which is not even
enough to cover one year’s worth of
the current estimated deficit. The
CEIFB must be given the proper
funding to withstand the current
economic downturn (in the order of
$10-15 billion dollars), so that
shortfalls are not paid for by higher
premiums.
• Freeze The MIE Until Fund Recovers
As long as the EI account is running
enormous deficits, the maximum
insurable earnings (MIE) should be
frozen at its current rate of $42,300.
Indexing the MIE results in higher EI
costs for employers even when rates
are frozen, and further MIE increases
will only add to the cost of EI benefits
as the system recovers from this
recession.
• Freeze Premiums Until Surplus Is
Repaid In Full
The EI account is owed as much as $57
billion dollars in misallocated
surpluses over the last fifteen years. EI
rates should be frozen, regardless of
the unemployment levels or cost of
the EI system, until such a time as this
money has been repaid from general
revenues. There is a moral obligation
on behalf of the employers and
employees of Canada for the
government to account for this money.

Appendix
Canada’s Training Ground: SMEs’ $18 Billion
Investment in the Nation’s Workforce.
CFIB research report, released May 28th
, 2009.
A full copy of the report can be found here:
http://www.cfib.ca/research/reports/rr3083.p
df.
In order to design a training tax credit that will
work for small business, CFIB proposes the
following principles:
1. Any tax credit should recognize the
importance of informal training in the
workplace, not just formal training.
2. Any tax credit must be broad-based rather
than confined to certain sectors.
3. While apprenticeship training is well
regarded by SMEs, any training incentive
should not be confined to Red Seal trades or
the current trades under provincial systems.
Incentives currently exist for apprenticed
trades.
4. Any tax credit should focus on SMEs, since
they serve as the training grounds for the
larger economy by hiring greater numbers of
inexperienced workers.
5. A tax credit should be administratively
simple and should take advantage of
existing government reporting and filing
requirements when possible (such as EI
premium forms).
6. To every extent possible, a tax credit for
businesses should be refundable or linked to
payroll-based taxes such as EI premiums.
7. A training tax credit should focus on the
needs of employers, but could be made
payable to employees. If an employer were to
sign off that certain training and employment
milestones were met, (e.g. working for a six-
month period without legitimate absences, or
completing a period in a mentoring
relationship), government could direct
financial support to the worker.
8. Any incentive should be processed and paid
quickly to respect small business cash flow
issues and keep a tight link to training
expenses.
9. Promotion of any tax credit is critical to
ensure that small business owners, who can
benefit from the tax credit, are made aware of
the program.
10. No tax credit program should have a new
tax created to help pay for the incentives. A
training tax would inhibit rather than
encourage training in small business as
occurred in Quebec.

Perspective on the Employment Insurance System

More Related Content

What's hot (18)

Viewers also liked (15)

Similar to Perspective on the Employment Insurance System (20)

Recently uploaded (20)

Perspective on the Employment Insurance System