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The Canada Recovery Benefit will cover the bulk of workers who don’t qualify for Employment Insurance, with both programs now paying a minimum weekly taxable benefit of $500.The Canadian Press

Ottawa has launched a massive real-time experiment in the labour market, as it maps out two very different paths for returning to jobs for hundreds of thousands of unemployed workers.

Under federal legislation passed last week, the Canada Recovery Benefit will cover the bulk of workers who don’t qualify for employment insurance, with both programs now paying a minimum weekly taxable benefit of $500.

But workers receiving the CRB face much more generous clawback rules that will allow them to keep a greater amount of wages they earn. And lower-paid workers, even those earning well above minimum wage, would not have any earnings clawed back – a sharp break from the rules of the EI system, where clawbacks begin on the first dollar earned.

Those divergent rules will give politicians, policy makers and economists insights over the next year – the span of the 12-month CRB – into which program performs best in encouraging unemployed workers to return to full-time paid work.

“It’s going to create a great experiment,” said Parisa Mahboubi, senior policy analyst with the C.D. Howe Institute, adding that more generous clawback regimes, such as that of the CRB, are generally more successful in encouraging people to return to work.

At the same time, the sharp differences in clawback rules raise questions of fairness, since a worker receiving the CRB and working part-time could end up with thousands of dollars more in income over the course of a year – without having made any EI contributions.

Much of that difference stems from the clawback threshold established under the CRB of $38,000 in annual income. Over that amount, recipients lose 50 cents in benefits for each dollar of earnings, until the benefits paid are erased. But for EI, the clawback of 50 cents on the dollar begins with the very first dollar earned, and eventually rises to a dollar-for-dollar deduction under EI’s complex formula.

Consider two workers, both who lost full-time jobs where they earned $16 an hour, and then began working a half-week at the same wage for the 26 weeks they are receiving benefits. One receives the CRB, the other EI. The CRB recipient gets to keep all of the $13,000 in benefits they are paid during that time, since their annual income would still be well below the $38,000 threshold. (Assuming they worked full-time for the other half of the year, they would have total annual income of $20,745, excluding benefits.)

But the worker receiving EI benefits is much worse off, losing more than a quarter of their benefit to clawbacks, even though the initial weekly minimum payment is the same, $500. Because the EI clawback kicks in at the first dollar earned, that worker will end up losing nearly $3,300 in benefits.

The government did not comment on the discrepancy between the rules of the two programs. But it has in the past noted that its designs have been in part dictated by the large volume of applicants to income-support programs and limitations in its processing systems.

The EI program does have some advantages over the CRB. For higher earners, EI benefits top out at $573 a week, a difference that adds up to nearly $2,000 over a 26-week claim period. However, the CRB’s more generous clawback provisions reverse that advantage for recipients maximizing their paid earnings under the respective rules of the programs. More significantly, EI benefits can extend much longer than the 26-week maximum payable under the CRB.

Stéphanie Lluis, an economics professor at the University of Waterloo, noted the EI system has previously had a CRB-like structure that exempted some earnings from being clawed back. But Prof. Lluis said that structure proved to be a barrier for recipients returning to work: Large numbers of people would work until their earnings brushed up against the threshold, but not much further. The clawback – in essence, an added 50-per-cent income tax – discouraged them from working more.

Prof. Lluis said the timing of the clawback is also important. EI recipients have their benefits reduced immediately. Under the CRB, there is no immediate reduction; instead, recipients have to repay the clawed-back amount when filing their annual income taxes. That calculation is also made on an annual basis for CRB recipients, conferring them additional advantage over EI claimants in situations where work hours vary significantly from week to week.

She said that structure makes sense for the CRB, since many self-employed workers receive large and sporadic contract payments that would distort any short-term clawback calculation.

So far, Ottawa has not given any indication whether it intends to extend the CRB beyond its mandated 12-month life. But David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, said the government has shown “clear interest” in incorporating the CRB into existing income support programs, pointing to last month’s Speech from the Throne that said “Canada needs an EI system for the 21st century, including for the self-employed and those in the gig economy.”

One key issue would be how to fund benefits for the self-employed and others now being covered by the CRB. Unlike EI recipients, most of those receiving the CRB have not made contributions through paycheque deductions. Nor have the companies that pay the self-employed, since they are defined as contractors, not employees. Mr. Macdonald said one option would be to institute a payroll tax for companies operating in the gig economy. For now, Ottawa is shouldering the costs of the CRB, as well as some of the additional costs being added to the EI system.

Prof. Lluis cautioned that any design will have to take into account the differences between employees and the self-employed, as well as the diversity within the latter group. Gig workers and entrepreneurs running incorporated companies are both self-employed but face much different work circumstances, she said.

That will mean that the results of the giant national experiment in income supports will have to be interpreted carefully, she said. “You’re comparing apples to bananas.”

Tax and Spend is a weekly series that examines the intricacies and oddities of taxation and government spending.

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