MICROECONOMICS

“...we pledge to carry out practical reforms, consistent with the specific situation in each of our countries, aimed at achieving a high level of employment and widely-share prosperity: these include tax and social system reforms to ensure that “work pays,” particularly for the least well- off; lowering social security charges which place a burden on low-skilled jobs, in countries with high indirect labour costs; and improving public employment agencies.”

(a) Labour supply - Score: +1
The federal government has been very effective in meeting this commitment. There have been four initiatives: reform to the unemployment insurance scheme, welfare cuts and child tax benefits and working .income supplement.

The objective of these policies has been to increase the opportunity cost of not working or to reduce the cost of working and thereby to increase the incentives for the unemployed to seek work. In the short term, these measures are expected to actually increase the unemployment rate. This is because the policies can be expected not only to induce more concerted job search by those already in the labour force, but also to induce entry into the labour force by those not currently looking for work. Unless the number of employed increases faster, the resulting increase in the labour force will register as an increase in the unemployment rate. Only in the longer term - when a larger labour participation rate also induces moderated wage demands - are these policies expected to reduce the unemployment rate.

---Unemployment Insurance Reform--

A major overhaul of Unemployment Insurance (now called Employment Insurance) has now been in progress since 1995. The main thrust of the changes have been to reduce both the access to and magnitude of benefits. Rules on eligibility have been tightened to exclude workers who are temporarily laid off as well as workers who quit voluntarily. The overhaul of the scheme has contributed to a large fund surplus subsequently allowing for a small decrease in premium rates in 1996 paid by both the employer and the employee. This translates into higher net incomes for employees further increasing the incentive to enter the labour force.

----Welfare cuts---

In Canada, welfare support is the fiscal and administrative responsibility of the provincial government. Over recent years, the provincial governments sector has also faced large fiscal deficits. The weak performance of the economy, the high unemployment rate and the burgeoning numbers on welfare have all made contributions. The provincial sector fiscal deficits have been exacerbated by the cuts to federal transfers to the provinces. The provincial government sector has responded with large cuts to welfare support. In the extreme case, the Ontario government has cut welfare support by 22%. The objective of this policy is to move the long term unemployed back into the labour force.

---Child tax benefits and Working Income Supplement---

The child tax credit was enhanced in the February 1997 federal budget for fiscal 1997/98. The Working Income Supplement was introduced in the 1996/97 budget. It supplements the income of the working poor. The objective of these policies is to reduce the cost of entering the labour force. This is particularly the case for single mothers for whom alternative child care is a major expense.

(b) Labour demand - score 0

The performance of the federal government on this commitment is mixed. This is because while the government has reduced unemployment insurance premiums, it has also increased pension contribution rates. The Federal government reduced the unemployment insurance premiums in 1996 and 1997 from 3% to 2.9% of insurable income. The pension contribution rate is to be increased from 5.6% of insurable income in 1996 to 9.9% in 2003, with most of the tax increase postponed until closer to 2003. Arguably, the two measures offset each other so that the net result looks mixed.

This commitment aims to increase employment by promoting employers' incentive to hire or retain employees. The main focus of attention in Canada has been on payroll taxes. Since the contributions are capped, the taxes are less onerous on high income earners. These taxes are borne by both the employer for employing and the employee for working. The argument is that this reduces both the demand for and the supply of labour and so results in higher labour costs and consequently lower employment and higher unemployment.

The empirical evidence supported by Finance Canada is that reducing payroll taxes has only a limited and short-term impact on the demand for labour. This is because in the longer term it is the worker who ultimately bears the brunt of the tax. The portion of the tax directly levied on the employer is ultimately passed onto the worker in the form of lower wages.

(c) Labour institutions - score: +1

The evaluation here is mixed. The federal government in conjunction with the provincial governments has been very active in setting up public sector employment agencies as well as raining programs. However, it is not at all clear that these programs have been at all effective.