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Canada unemployment rate

Canada's Unemployment Rate

For decades prior to the 1981-82 recession, the national unemployment

rates of Canada and the United States had been nearly identical. Since then, a

persistent "unemployment rate gap" has emerged. Throughout most of the 1980s,

Canada's unemployment rate has consistently been about 2 percentage points

higher than in the United States. The gap developed in spite of very similar

economic performances across the two countries: the growth rate of real per

capita incomes has been virtually identical since 1976. However, now, well into

the 90s, the gap has widened much more significantly. In the last five years,

the United States average has actually fallen from 6.7% to 6.5%, with a current

rate of 5.2%, while the Canadian rate has and still remains at 9.4%, with a

current rate of 9.7%. This substantial difference in Canada's unemployment rate

can be attributed mostly to the safety net which the government provides,

including generous payments of unemployment insurance and other social services;

but also to the high payroll taxes; and the under performing Canadian economy.

There is no single reason for the persistent gap in the unemployment rates of

Canada and the U.S., but rather a combination of the above factors.

"No society can be flourishing and happy, of which the far greater part

of the members are poor and miserable." (Adam Smith) This is the theory behind

the creation of social services such as unemployment insurance and welfare

payments in many countries. The Canadian government provides a substantial

"social safety net" for its population. At first, this seems like a fair and

proper thing to do, as it is in the best interests of society as a whole.

However, when this generosity is taken advantage of by undeserving recipients,

problems and controversy arise. The problem of abuse of Canadian social services

has become prominent in 1996. The general consensus of organizations such as the

Fraser Institute and the OECD, is that Canada's generous social safety net is a

disincentive to work, which leads to dependence on the government, thus

resulting in increased unemployment. By comparing the social benefits provided

for Canadians and Americans, the cause of this gap in the unemployment rate

becomes apparent.

In general, the social benefits provided for Canadians are incredibly

generous, and unregulated in comparison to those of the U.S., resulting in a

dependency on them and creating a disincentive to work. Unemployment insurance

is a means of protecting workers who are out of work and looking for employment.

The unemployed workers receive cash payments, usually each week for a limited

period of time. Unemployment insurance is financed by the combination of

employer and employee contributions, of which the employer contribution (a form

of payroll tax) is slightly higher. Canada currently spends 70% as much on U.I.

as the United States, in spite of the fact that the total U.S. labour force is

about 11 times the size of Canada's. There are two principal differences

between the two U.I. systems. The first is that unemployment insurance is

operated at a state level in the United States. This means that the states

administer the insurance system and determine the benefits, while maintaining

certain standards according to federal law. The second is that in most cases the

insurance premium employers must pay is related to the extent to which their

employees use the system. In other words, there is an explicit insurance, or

experience rating feature built into the U.S. system. In Canada the opposite

occurs, with no penalty for employers who overuse the system. Unemployment

insurance is regulated by the federal government, it applies in all provinces

and territories, and covers about 97% of all Canadian workers. Due to the

differences between the two systems, one can understand how Canadians have a

more generous system and an easier time in claiming benefits.

The differences in the requirements for obtaining unemployment insurance,

also result in a more generous distribution of benefits in Canada. Over the

years, there have been many changes in these requirements in the U.S., making it

less accessible and desirable for the people. It is only recently that similar

changes have been undertaken in the Canadian system. In comparing the laws and

regulations of the two systems, it becomes apparent why Canadians have a greater

dependence on unemployment insurance. The system of U.I. distribution in the

U.S. requires workers of all states to be available, and able, to work to be

eligible for the benefits. Most states also require the recipients to actively

seek work. Although the rules are the same in Canada, the government is not as

efficient in its execution of them. The usual maximum period that unemployed

workers may collect benefits in the U.S. is 26 weeks, compared with 50 weeks in

Canada. Another important difference is the qualifying period in which the

individual must work before becoming eligible for a second claim. In the States

this period is 32 weeks after their last claim, while in Canada the time period

is strikingly low at 8 weeks. In the U.S., the benefit amount varies according

to conditions of eligibility, such as total household income. However, the

payment is usually equal to about half of the individual's average wage for a

set period prior to his/her unemployment. In Canada the rate is virtually the

same for all recipients with no regard to their circumstances. Recent work by

the Fraser Institute revealed that all recipients of U.I. are not equally in

need, and in fact over $10 billion in U.I. payments are made to families whose

incomes are above the national average family income of $53, 854.

Another factor resulting in greater dependence on the Canadian system,

is the probability one has of collecting unemployment compensation. The

likelihood of collecting U.I. is much lower in the U.S. than in Canada. Almost

every person that becomes unemployed in Canada collects U.I., whereas the

possibility is only about 30% that one can do so in the U.S. To the average

person, it would seem obvious that a person who quits their job should not be

eligible for U.I. This has been the case in the United States for many years,

but it was only recently that this was made a law in Canada. Therefore in past

years Canadian workers could simply quit their jobs and collect U.I. benefits

without question. However, the new regulation may not have as much of an impact

on the unemployment rate of Canada as one would think. It is speculated that

employers will band with their employees to produce "lay offs" as opposed to

"quits", therefore enabling employees to claim compensation. These differences

between the two systems, provide evidence of a much more generous, and less

regulated Canadian system of U.I. distribution. In fact, the Canadian system

acts as a disincentive to work, as people realize they can get paid for doing

nothing. To many people this is a more favourable option, thus resulting in an

increasing unemployment rate.

Many of the implemented social programs in Canada have proven to be

ineffective in the goals they were meant to achieve. Well meaning programs keep

jobs from being created and stop people from taking jobs that do exist. Another

disincentive to work, for Canadians, is the welfare trap. "It traps the

recipient into dependency, and it traps the government into perpetuating

dependency." Welfare is simply a redistribution of the country's wealth

obtained from taxes. The government of Canada views their redistributionist

spending as part of a social contract. The government encourages and supports

economic growth through a mixed public and private market economy, and

compensates those that don't share "equally" in the generated wealth through

social spending, including welfare. Governments resist any action that could

make anyone less well off, even if only for a short period of time, as this

would violate the contract. The net result of implementing these types of

social programs is an increasing unemployment rate.

In 1994, more of Ontario's population received social assistance per

capita than received assistance in the United States. In Ontario, one in eight

people are enrolled in social assistance, and one in five children live in

families which are receiving social assistance. According to some reports, one

in three children in metropolitan Toronto are being raised on welfare. A report

by the Economic Council of Canada pointed out that a growing number of people

are becoming dependent on social programs, and that the system is not helping

recipients help themselves. In 1985, Ontario had the lowest percentage of its

population (5.4%) collecting social assistance of all the provinces. By 1994,

Ontario had the highest percentage of its population on social assistance of any

province. "It is not clear how much dependency the system creates or encourages,

however there is ample evidence that the number of people using the system has

increased and that they are staying on the system longer" , reported Paul Storer

of RBC Dominion Securities. Therefore, it is evident that a decrease in the

dependency of the population on welfare would result in a decrease in the

unemployment rate. However, as is the case with many other government programs,

once they are implemented they are hard to remove.

Welfare has become a very costly government program, which serves only

to attract new recipients every year. The welfare system originally dealt with

those who were unable to work; then sole-support parents were made eligible,

followed by people who couldn't find employment. "Welfare has now become

responsible for failed educational systems, failed marriages, failed

contraceptives, failed personal finance planning, and a failed economy."

Governments even manage to make trying to get off welfare difficult. To leave

welfare, a "client" must give up the certain benefit of a government check for

the uncertain return of work. A client faces a dollar for dollar deduction in

B.C. and a $0.75 to the dollar deduction in Ontario from welfare income for

every dollar earned privately. This reduces the incentive to learn new skills

which could prove helpful in finding long-term employment, therefore causing

dependency on government assistance. This dependency means more of the labour

force is settling for government payments, thereby causing an increase in the

unemployment rate. The United States does not have this problem of dependency,

as it's system of welfare is once again stricter, and less generous, causing the

people to be more self-sufficient as a whole.

Too many Canadians are dependent on social programs such as unemployment

insurance and welfare, which cause a growing unemployment rate. These programs

are a disincentive to work. When comparing the benefits provided for Canadians,

with those provided for Americans, it is evident why there is such a large gap

in the unemployment rates of the two countries. The gap is the result of the

less generous payments of social benefits, and stricter enforcement of

eligibility conditions in the U.S. Therefore, one can assume that a trend in

the Canadian system towards that of the American could prove to be instrumental

in the decline of the unemployment rate. However, as with many other government

implemented programs it is hard to take away from society what they have already

become accustomed and dependent upon.

A lesser contributing factor to the unemployment rate is the effect of

payroll taxes. When government imposes or increases a payroll tax, the cost to

employers of creating or maintaining a job goes up; thus resulting in a decrease

in the demand for labour. Payroll taxes are a major component of the tax system

in all industrial countries. Most taxes are instituted to help finance social

security programs, such as pensions and unemployment insurance, these are

referred to as "social security taxes." With payroll taxes of this type, a link

exists between the taxes paid and the benefits or benefit entitlements available

to the worker. Many governments also levy general revenue type payroll taxes.

These are not linked to specific benefit entitlements for workers; the tax

revenues collected simply go into consolidated government revenues. The tax base

for general revenue payroll taxes is usually defined as aggregate employer

payrolls.

"We must recognize that these payroll taxes are job killers, they are

taxation by stealth" , stated Fazil Mihlar of the Fraser Institute on the

adverse effects of payroll taxes on the employment rate. There is concern in the

business community over the effects of Canada's rapidly rising payroll taxes on

job creation. A spring poll produced by the Fraser Institute concluded that high

payroll and personal income tax levels are the biggest obstacle to job growth in

Canada. Payroll taxes have risen dramatically over recent years. This increase

has caused employers to reconsider their need for new employees, and has

discouraged the employment of young, inexperienced workers. In comparing the

payroll taxes of Canada and the U.S., all of Canada's component taxes are higher,

with the exception of social security levies which are higher in the U.S. by

only 0.9%. A recent study by the OECD concluded that a 1% increase in average

payroll tax permanently lowers employment by 0.32%, which translates into about

50,000 jobs. From the 1980s to the early 1990s payroll taxes increased

substantially in Canada; this is evident from looking at the figures of payroll

taxes as a percentage of GDP. In 1980 they accounted for 3.3% of GDP, while in

1990, they accounted for 5.2% of GDP. There is compelling evidence that these

steep increases in payroll taxes raised labour costs, therefore decreasing the

demand for employment, thus causing an increase in the Canada/U.S. unemployment

rate gap.

The Canadian government makes it difficult for companies to increase

their demand for labour. Not only must they pay a certain amount of their

profits to the government in the form of payroll taxes, but there is a defined

minimum wage which they must pay each employee. The average minimum wage for

Canada as of October 1, 1996 was set at $6.35 Cdn. This minimum wage is quite

generous in comparison to other countries, in particular the U.S., whose average

minimum wage for the same date was set at $5.25 Cdn. Therefore, the cost of

hiring a new employee can sometimes prove to have a negative effect on

profitability, rather than positive, as the cost of employing him/her may be

greater than the amount of incremental earnings that he/she could bring to the

company. The result of a set minimum wage may be a disincentive in the hiring of

employees unless they are absolutely necessary, therefore contributing to a

decreased supply in jobs and an increase in the unemployment rate.

One can conclude that Canada's higher unemployment rate is a direct

result of the higher payroll taxes, and the higher fixed amount of minimum wage

that companies are obligated to pay their employees. One can also conclude, that

much could be done for job creation, and a reduction in the unemployment rate,

if the federal, and provincial, governments cut payroll taxes, and reduced the

minimum wage.

Another factor leading to a decrease in job supply, and a high

unemployment rate in Canada, is its underperforming economy. This under

performance can be attributed to the recession which hit the country in the

early 90s. The most appropriate way of measuring the success of an economy is by

its GDP (Gross Domestic Product). After the recession Canada's real GDP figures

showed a positive trend of increase, however the years of 1995 and 1996

displayed a decline in the average increases. This decline can be attributed to

a lack of consumer spending, and fiscal drag, which occurs when governments rein

in their deficits. In contrast, the U.S. economy is booming. As in Canada,

there is a trend of increasing GDP, with two noteworthy differences: the first

is that the average rates of increase over the years is much greater than those

in Canada; and the second is that they have been increasing steadily with no

decline in the level of growth in recent years.

The net result of an under performing economy, like that of Canada, is a

decrease in the demand for goods and services, and therefore a reduction in the

demand for labour, causing the unemployment rate to rise. The economic downturn

in the early 90s took a substantial toll on employment. Between the years of

1990 and 1992, the number of jobs fell by about 330,000, and full-time

employment shrank by 460,000. There has been an increase in the number of jobs

created in the private sector since 1992, however the pace has not been fast

enough to make a notable difference in the unemployment rate. Canada's economy

is operating well below full capacity, with real output running about 3% below

the level if all resources were fully employed. This is known as an output gap

of 3%. Employment gains are closely tied to output growth, therefore Canada's

high unemployment rate may be explained by looking at its poor economic

performance.

Canada's somewhat sluggish output growth has caused many large

corporations to downsize, as they do not have need for large numbers of

employees. This recent trend of corporate downsizing, combined with several

years of high unemployment, have aggravated fears about job security, and

lessened consumer confidence and spending. People are now saving their money,

which in essence is actually destroying their own jobs, as it contributes to the

need for corporate downsizing.

The United States has had nothing but success coming out of the most

recent recession. Their economy is booming, their resources are being employed

to their full capacity, and they have an envious unemployment rate. In

comparison, the Canadian economy has been very slow in its recovery. As a result

of corporate downsizing, and peoples' reluctance to invest their money in the

Canadian economy, Canada has been experiencing a lengthy economic downturn,

resulting in a decreased demand for labour. Therefore, by looking at the

economic performances of Canada and the U.S., one can understand the reasons for

the prominent differences in their unemployment rates.

As with many economic phenomenon, there is no single explanation for the

gap in unemployment between the U.S. and Canada. It is evident that Canada has

many contributing factors affecting its high unemployment rate, although most

seem to be rooted in government policies and programs. Some argue that a cut in

such government instituted programs is the only way to initiate a decline in the

unemployment rate, while others disagree maintaining that this would be

undemocratic and would violate the social contract. The United States has a much

less generous offering of social assistance, and lower payroll taxes and minimum

wage rates, however this has not affected the people in a negative way. In fact,

there is substantial evidence that their economy is booming, proving that it is

possible to have a fruitful society with lower government subsidies. It is not

until there is a cut back in these programs, that the Canadian unemployment rate

will drop. Any change, calls for significant measures, with real impacts on

peoples' lives. However, until this happens, the unemployment rate gap between

Canada and the U.S. will remain present and lasting.



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