Recession Watch Bulletin

Issue 3 ― Fall 2009

This is the third in a series of analytical reports from the Social and Economic Policy Department of the Canadian Labour Congress looking at the impacts of the global economic crisis on the jobs, wages, and economic security of working Canadians.

One Year In and Still Waiting for a Recovery

Canada’s “Great Recession” began in October 2008, the month in which the global economy fell off a cliff and the national unemployment rate began to rise rapidly from 6.3%. Even before the recession, of course, there had been major layoffs in manufacturing because of a high Canadian dollar and an already slowing U.S. economy.

The year from October 2008 to October 2009 saw a major deterioration in Canada’s job market. And the worst is not yet over. Most commentators expect that the job market will continue to worsen for a while, even if economic growth begins to recover. As of October 2009, the pace of job loss was slowing, but unemployment was still rising. Many commentators expect the national rate to go over 10% this winter.

Table 1 summarizes some key changes over the first year of recession, October 2008 to October 2009.

The national unemployment rate rose from 6.3% to 8.6%, increasing by 3.0 percentage points for men (to 9.8%) and by 1.6 percentage points for women (to 7.3%). The gender differences reflect the fact that, by far, the biggest job losses to date have been in blue-collar jobs.

The number of unemployed has increased by 436,000, almost 1.6 million. The rise in the unemployment rate has been particularly rapid among young workers, usually the last hired and first to be laid off. The youth unemployment rate has jumped from 12.2% to 15.6% and, as noted below, many young people have dropped out of the job market.

As of October 2009, more than one in five (20.6%) of the unemployed had been out of work for more than six months, up from 14.1% a year earlier. The rise in long-term unemployment means that many laid-off workers have been or will soon exhaust their Employment Insurance benefits.

As the recession has deepened, more workers have dropped out of the labour force. The overall participation rate has slipped from 67.8% to 67.0%, driven by a very steep decline in the participation rate of young people aged 15 to 24 (down 3.7 percentage points from 67.6% to 63.9%). Meanwhile, the participation rate has increased (up 0.7%) for workers aged 55 and over, perhaps reflecting lost retirement savings, as well as an ageing workforce.

The total number of employed persons in Canada has fallen by 399,900, led by a 2.7% fall in full-time employment and a 0.7% fall in part-time employment. The proportion of the workforce in part-time jobs has risen a bit from 18.6% to 18.9%. And the proportion of part-timers who want to work full-time has jumped from 21.4% to 26.7%.

Statistics Canada has reported (November Economic Observer) that the overall fall in employment (not seasonally adjusted) from October 2008 to October 2009 was -2.1%. The decline was much greater for recent immigrants who landed within the past five years (down 12.9%), and Aboriginal Canadians living off reserve (down 4.0%).

As new hiring has dried up, the number of self-employed workers has increased by 104,000. More than one in ten people in the workforce (10.3%) are now “solo” self-employed, meaning that they work by themselves and have no employees. This is usually the most insecure and badly paid kind of self-employment.

The number of private sector employees has fallen by 450,000 or by 4.1%. The percentage decline in full-time private sector employees has been even greater, down by 4.4% (data not seasonally adjusted). In other words, more than one in twenty-five private sector jobs have been lost since the Great Recession began. The number of public sector employees has fallen by 55,000 or by 1.6%.

All of the net job losses have been in permanent jobs, while the number of temporary jobs has increased slightly (up 0.7% October to October, data not seasonally adjusted).

The “real” unemployment rate ― which takes into account labour force dropouts and involuntary part-time workers ― has risen from 8.0% to 10.4%. This measure does not take into account the rise in self-employment which also reflects a very weak job market.

By industry (see Appendix Table 1), the goods-producing sector has been hit by far the hardest. Almost all of the lost jobs were in manufacturing (down 218,000 or 11.0%), construction (down 72,500 or 5.8%), transportation and warehousing (down 51,000 or 5.8%), and primary industries (down 37,000 or 11.1%). Job losses in private services to date have been limited.

While the national unemployment rate rose by 2.3 percentage points over the past year, just four provinces had above average increases (see Appendix Table 2). They were Alberta (up 3.8 percentage points, from 3.7% to 7.5%), British Columbia (up 3.1 percentage points, from 5.2% to 8.3%), Newfoundland and Labrador (up 3.2 percentage points, from 13.8% to 17.0%), and Ontario (up 2.6 percentage points, from 6.7% to 9.3%). (Appendix Table 3 provides unemployment rates by economic region.)

In October 2009, average hourly earnings were, at $22.35 per hour, up a bit (3.3%) from $21.64 per hour in October 2008. While this seems like good news, it likely reflects major job losses among lower paid young workers, rather than wage increases for those who are still working. In the third quarter of 2009, public sector wage settlements averaged 2.1%, and private sector settlements averaged just 1.5%.

Prospects for Recovery in the Job Market

As of mid-November 2009, the prospects for an economic recovery are still very fragile and uncertain. The Bank of Canada and most economic forecasters think that Gross Domestic Product has begun to grow modestly, and that growth will pick up in 2010. The world economy seems to have bottomed out, lifted by growth in China and by the first signs of a recovery in the U.S. due to very low interest rates and the Obama stimulus package. That said, it is clear that any recovery in the global economy is extremely fragile, and depends almost entirely upon the extraordinary measures taken by governments to offset the impacts of the financial crisis and the collapse of household consumption and private sector investment. The International Monetary Fund and governments themselves at the recent G20 Summit have stated that stimulus measures must continue through 2010 if the world is not to fall back into recession. Many fear a “double dip” recession if and when support for the economy is unwound before there is a real recovery in the private sector.

The prospects for a recovery in Canada are particularly uncertain. A global recovery will have some positive impacts on exports and the resource sector. But, there are two huge problems. There is unlikely to be a significant recovery in the United States so long as unemployment remains above 10%, and the Canadian dollar is, at near parity with the U.S. dollar, highly overvalued. This will hit those parts of the Canadian economy which depend upon exports to the U.S., especially the very hard-hit manufacturing sector. That leaves the economy dependent upon continued high levels of public investment, and on the impacts of low interest rates on housing and consumer spending.

Recoveries in the job market following recessions tend to be very slow. That is because the economy must grow at a certain rate just to absorb new entrants to the workforce, and to take into account the growth of output per worker (productivity). Productivity tends to grow by about 1% per year, and the labour force is still growing by more than 1% per year (1.4% in 2009), so economic growth must be significantly above 2% to just begin to draw down unemployment. The latest economic forecast from the TD Bank (September) is for the national unemployment rate to go above 9% by the end of 2009, and to remain above 9% until the end of next year. That number could be worse if employers are slow to turn any recovery of business into new hiring, and if the economy just bottoms out rather than recovers.

Amidst all these uncertainties, it is very important not just to continue but also to increase public investment, and to maintain very low interest rates. Indeed, the Bank of Canada could and should go further to bring down the Canadian dollar.

Access to Employment Insurance

The economic crisis, the first since major cuts were made to our EI program in the mid-1990s, has been an extreme “stress test” for Canada’s EI program. The program has failed and needs to be fixed.

Since the crisis began in October 2008, there has been a modest rise in the proportion of all unemployed workers collecting regular EI benefits, driven by two key factors. First, the initial stages of the downturn were marked by major layoffs of workers who had typically been in stable employment before becoming unemployed. Before the recession, proportionately more of the unemployed were new entrants and re-entrants to the workforce who need 910 hours of work (almost six months of full-time work) to get into the system. This requirement disqualifies many young workers, as well as parents (almost all women) returning to work after a leave, as well as recent immigrants.

Second, the EI system automatically responds to downturns, though with an important lag, because entrance requirements and the duration of benefits depend on the local unemployment rate (based on a three-month moving average). By mid-2009, the entrance requirement to qualify for EI had fallen compared to October 2008 in about 40 of the 58 EI Regions, accounting for over 80% of workers.

The responsiveness of the system to a higher unemployment rate is, however, gradual. Many industrial workers lost their jobs before the recession and in its early stages when unemployment rates were low, and their claims were approved and their duration established on the basis of a low unemployment rate. By contrast, those who lost their jobs from mid-2009 found it somewhat easier to qualify, and will qualify for longer periods of benefits.

Even as the system became somewhat easier to access, many, many unemployed workers have fallen through the cracks. In fact, the number of unemployed workers not in receipt of EI benefits has jumped by about one-third.

The performance of the EI system has also varied considerably by region and by province. The biggest increases in claims over 2009 compared to 2008 have been in Alberta, British Columbia, and Ontario in that order, but the former two began the recession with low unemployment rates. The ratio of EI beneficiaries to unemployed ― the B/U rate ― continues to vary a lot between provinces. Most strikingly, the rate is very low in Ontario ― just 40.1% in July 2009 ― even though Ontario had an unemployment rate of 9.3% in July. This may be due to the relatively high proportion of recent immigrants in Ontario, especially the Greater Toronto Area, many of whom may have not been able to get over the 910-hour new entrant hurdle. The B/U rate is also still extremely low (38.6%) in Alberta. And the B/U rate has increased much more sharply among men than among women.

Entrance requirements in terms of hours worked continue to exclude many unemployed workers from benefits. About 10% of all unemployed workers in recent years worked before becoming unemployed, but did not have enough hours of work to qualify for benefits. That amounts to about 160,000 unemployed workers in any given month today, and a much higher number over the course of a year. Studies by HRSDC of a proposal to temporarily drop the entrance requirement to 360 hours from the current range of 420 to 700 hours, depending upon the local unemployment rate, showed that this would bring about 184,000 more workers into the system over a year at a cost of $1.14 billion. (This proposal would still have imposed a 910-hour requirement or about six months’ full-time work on new labour force entrants and re-entrants, and would have let workers with relatively low qualifying hours into the system for only 14 to 36 weeks, depending on the local unemployment rate.)

The sudden entry of some relatively well-paid workers into the ranks of the unemployed has modestly increased the average weekly regular EI benefit. This rose from $321.88 in July 2008 to $347.87 in July 2009, an increase of 8.1%. This is, however, still well below the current maximum weekly benefit of $447 because many claimants ― especially women and younger workers ― were earning well below average incomes before the crisis. Also, earnings are averaged over a six-month period. Often, workers experience a period of interrupted and thus lower earnings due to short time working before a layoff, lowering their weekly EI benefit. Also, many workers take part-time and/or temporary lower paid work while on claim, establishing the basis for a later claim, but the later claim will be at a much lower benefit level than a first claim. Average benefit levels are clearly barely sufficient to support a single person, let alone a family, and basically match earnings from a full-time job at minimum wage.

On top of unemployed workers who never qualify for benefits, many unemployed workers collect benefits for a while but exhaust a claim before finding a new job. Workers who entered the EI system in the early stages of the crisis in late 2008 were starting to run out of benefits in significant numbers by the fall of 2009, and the number of exhaustees will soar in the months ahead.

Before the recession, more than one in four (27.9%) of claimants exhausted their benefits (29.9% of women and 26.5% of men) and more than one in three (34.3%) older workers exhausted their benefits.¹ Currently, claimants are eligible for between 19 weeks and 50 weeks of benefits depending upon how many hours of work they put in in the 52-week qualifying period before a claim and the regional rate of unemployment. (This includes the temporary five weeks of benefits added to the system in all regions in the 2009 Budget.) In an “average” region with an unemployment rate of 8% to 9% ― the same as the average national rate ― eligibility ranges from 23 to 47 weeks depending upon the number of hours worked in the previous year. More than 1,820 hours or essentially a history of working in a full-time, permanent job are required to get the maximum 47 weeks of benefits. (The 50-week maximum only applies in regions with an unemployment rate above 12%.)

It can be estimated that a new EI claimant today will, on average, qualify for about 38 weeks or nine months of benefits. That is the average of 31 weeks before the recession (2006-07), plus the extra five weeks added in the last Budget, plus the extra two weeks generated on average by a two-percentage-point rise in the national unemployment rate.

We can expect that the total number of new regular claims in 2009 will hit about two million. If the exhaustion rate were to remain the same as in 2006-07, we could eventually see some 500,000-plus exhausted claims in late 2009 and into 2010. It is open to question if the exhaustion rate will remain the same as before the recession. On the one hand, a higher unemployment rate automatically triggers somewhat longer benefit periods, and five weeks have been temporarily added for two years. About 400,000 workers were expected by HRSDC to qualify for the extra five weeks in 2009-10. On the other hand, it will be far harder than in 2006-07 for those on claim to find a new job before their eligibility period comes to an end.

At this point in the recession, jobs are still very hard to find. Between the start of the recession and September 2009, the average duration of a spell of unemployment has risen from 13.6 to 17.0 weeks, and more than one in five unemployed workers in September had been out of work for more than six months, clearly placing those on EI at risk of running out in the very near future if, in fact, they have not already exhausted.

While no direct data are available on the number of exhaustees, the number of EI regular beneficiaries may appear to have peaked by the summer of 2009, even though the number of unemployed workers has continued to rise (see Chart 1). The gap between the number of unemployed workers and the number of regular EI beneficiaries has greatly increased in the Windsor CMA since May 2009, as shown in Chart 2. This is almost certainly because many unemployed workers in communities like Windsor, which entered the recession with a high unemployment rate, have exhausted their benefits.

In response to the reality of many unemployed workers exhausting their benefits, the Conservative government legislated in November to further extend EI benefits by five to 20 extra weeks of benefits on a temporary basis, but only for a small subgroup of claimants. The government estimates that 190,000 workers, so-called “long tenure” workers, will qualify over the short life of the program at a cost of just under $1 billion. The payments will be made over the final months of 2009, 2010, and until the fall of 2011. A “guesstimate” is that only about one in five potential exhaustees will qualify for this additional extension. (If there are three million claims in 2009 and the first half of 2010, and the exhaustion rate is 30%, close to one million claims will be exhausted.)

To be eligible for the second round of extended benefits, a worker must have initiated a claim after January 4, 2009, thus excluding the many workers who lost their jobs in late 2008. Eligibility for the extended benefit will be rapidly phased out between June and September of 2010. To qualify, a worker must also have been paying into the system (defined as paying at least 30% of the maximum premium) for at least seven of the past ten years. The maximum additional 20 weeks goes to those who have been paying in even longer, for at least 12 of the past 15 years. Finally, to qualify, a worker must have claimed no more than 35 weeks of regular EI benefits over the last five years. This temporarily re-introduces an element of experience-rating into the EI system.

The target group was, very explicitly, older workers who have made very limited use of the EI system in the past ― meaning younger workers, many women, workers in high unemployment regions, workers in seasonal industries, and many industrial workers will not qualify. The 35-week cutoff will exclude many industrial workers who have been temporarily laid off to reduce inventories, to allow for retooling of plants and other normal workforce fluctuations in operations. It will also exclude many claimants in provinces which experienced relatively high unemployment rates over the past five years ― notably Atlantic Canada, Quebec, and rural and northern regions in other provinces ― as well as the many workers impacted by the manufacturing and forest industry jobs crisis which began well before the Great Recession.

The 35-week cutoff makes an invidious and unsupported distinction between the “deserving” and the “undeserving” unemployed based on previous use of the system, ignoring the fact that any EI claim has to be based on an employer layoff as opposed to any choice exercised by a worker. (Workers who quit or are fired from a job are ineligible under the rules which have been in place for the past decade.)

As shown in the Table, the latest government forecasts show that the EI Account will move into a large deficit position in both 2009-10 and 2010-11. EI premium revenues are forecast to decline slightly in 2009-10, and to increase only slightly in 2010-2011. This flows from the government’s decision to freeze EI premiums in 2009 and 2010, at $1.73 per $100 of insured earnings for employees. The Chief Actuary for EI recently calculated that EI premiums would have to rise by 41% in 2010 to cover the cost of the program had it not been for the premium freeze.

Meanwhile, EI expenditures will jump by almost $6 billion or by 36% this fiscal year to over $22 billion, and will stabilize at that much higher level next year.

It is notable that the percentage increase in EI expenditures this fiscal year is about the same as that between 1990 and 1991, when the unemployment rate rose by about the same amount (from 8.1% to 10.4%). However, the level of spending is much lower. In today’s (2009) dollars, EI expenditures rose to $26.2 billion in 1991, the first year of recession, compared to $22.1 billion today (2009-10), even though there were fewer unemployed workers in absolute numbers in 1991 (1.5 million compared to 1.6 million).

The premium freeze will end in 2011, by which time the EI Fund will have incurred a huge deficit compared to its position going into the recession. The Fund ― which is integrated with the Public Accounts of Canada but exists on paper as a separate government account ― had a cumulative surplus of about $55 billion in 2008-09. However, under current legislation, this is ignored for premium-setting purposes. Starting in 2011, premiums will have to be raised to cover the approximate $10-billion “recession deficit” in the EI Fund, minus the $2.9 billion the government will pay into the Fund next year to cover the cost of some EI measures. (The government is paying for the temporary five-week extension of benefits and increased EI spending on various training programs, but not for the cost of the premium freeze, higher EI expenditures resulting from higher unemployment, and extended benefits for long tenure workers.) If nothing is done, the stage is set for at least several years of premium increases from 2011 in order to bring the EI Account back into balance. Premiums are likely to rise by the 15% maximum amount allowed over several years of what may prove to be times of continuing high unemployment and slow growth. (It remains open to the government to impose any premium rate it chooses, notwithstanding any decision of the EI Financing Board. The latter is mandated to set a rate to match premiums and spending, and to pay the government back any funds owing.)

The CLC has long called for an EI program with a single national entrance requirement of 360 hours, and eligibility for up to 50 weeks of benefits based on 60% of the best 12 weeks of earnings in the qualifying period. As detailed in a recent CCPA report by Lars Osberg, “Canada’s Declining Social Safety Net: The Case for EI Reform,” our EI program is one of the least generous in the high income countries and excludes many unemployed workers from benefits completely. The “stress testing” of the current system has shown that current entrance requirements continue to exclude many workers, and average benefits remain very low.

A major challenge facing Canadians is the prospect of very large numbers of unemployed workers exhausting their EI benefits today and over the coming months. Many will, after using up their financial assets, be forced to turn to provincial social assistance programs. In the United States, the federal government has ― as is usually the case in periods of very high unemployment ― temporarily extended benefits by up to 33 weeks in states with very high unemployment rates.

Extending benefits would result in higher EI benefit costs until such time as high unemployment rates begin to decline. However, these benefits are a highly effective form of temporary economic stimulus, flowing directly to the principal victims of the recession and to especially hard-hit communities. The huge surplus accumulated in the EI Account before the recession can and should be drawn upon if it is needed.

AJ:jc:cope 225 • November 30, 2009

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Appendix