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The 2010 federal budget projects a $5-billion shortfall of EI premiums compared to EI expenses for 2010-11. Under the mandate of the new Canada Employment Insurance Financing Board, this shortfall will have to be recovered over the next few years with higher premiums. Is an increase to EI premiums as large a concern as critics have suggested?
First, some perspective. Here is a graph of the EI premium rates going back to 1980.
The maximum increase that can be imposed in one year is 0.15 per cent for employees, and 0.21 per cent for employers. Moreover, the 0.15 per cent increase only applies to earnings up to $43,200, meaning that the maximum hike to EI faced by workers will be $65 -- or just $1.25 a week. Someone in British Columbia earning $43,200 will pay on the order of $7,000 in income taxes in 2010 (not to mention HST!). It's hard to justify the words like 'steep' and 'sharp' that have been thrown around to describe this EI premium increase. This is a very small share of a family's tax burden. Sure, every dollar counts, but words like 'steep' and 'sharp' should be kept for things that are actually steep and sharp.
The impact on the labour market of an EI premium increase is likely to be minimal. Really, we are talking about a 0.15 per cent increase in the tax rate on earned income. Even if you thought that marginal labour supply reacted strongly to taxes (and most economists actually think this elasticity is quite small), it would be hard to see a 0.15 per cent increase having a large impact. The change in labour supply will be a penny's throw from zero.
On the labour demand side, employers have fear-mongered about the impact of payroll taxes. Few economists are so easily scared. When any tax goes up, the impact is felt either through price changes or quantity changes. For payroll taxes, the evidence strongly suggests that most of the impact is on prices -- which means that higher EI premiums on employers will mostly lead to lower wages for employees, not increased cost for businesses. That may not make workers happy, but it doesn't substantiate the claims of hundreds of thousands of job losses from hard-pressed employers. And again, we're talking about a 0.21 per cent increase.
The principles of transparency, independence, and budget-balancing for EI rate-setting were showcased in the Liberal budget of 2005, and put into practice in 20`08 by the Conservatives with the initiation of the Canada Employment Insurance Financing Board. This new structure largely followed the advice of everyone -- from the Canadian Labour Congress to the Canadian Restaurant and Food Services Association -- to have a separate, transparent fund for EI. This advice came out of the experience of the massive EI shortfalls of the 1980s and surpluses of the 1990s. It appears that this support is melting under the tiniest of upward rate pressure.
Perhaps this new EI rate-setting structure was a mistake. But those critics of the EI premium increase ought to be pressed for their alternative for the setting of EI premiums. Simplistic opposition to rate increases might make for good populist sound bites, but good policy demands more substance.
Kevin Milligan is Associate Professor of Economics at the University of British Columbia