NCPA - National Center for Policy Analysis

Unemployment Benefits Discourage Work By Canadians

February 7, 1997

Every year since 1981, Canada's unemployment rate has exceeded that of the United States. Analysts say that some of that difference is caused by more generous Canadian unemployment insurance, which rewards workers for staying at home.

  • In the first three quarters of 1996, Canada's unemployment rate averaged 9.6 percent -- compared to a U. S. rate of only 5.4 percent.
  • Although Canada's economic growth is slow, real output between 1989 and 1996 did grow at an average of 1.5 percent per year.

Economist Pierre Fortin of the University of Montreal estimates that approximately 1.5 percentage points of the current 4.2 point gap in unemployment rates is due to the differences in U. S. and Canadian unemployment insurance systems.

One measure of how much Canada is subsidizing unemployment is calculated by using the total benefits one could receive -- taking maximum advantage of the system -- as a percent of the amount one earned while working to qualify.

  • By this measure, Canada had a 72 percent subsidy in 1994 -- compared to about 33 percent for the U. S.
  • In 1994, 72.3 percent of unemployed people in Canada drew the subsidy -- compared to 34.3 percent in the U. S.
  • Since higher unemployment benefits must somehow be paid for, it is small wonder that Canada's average top marginal tax rate in 1991-92 was 55.5 percent -- compared to 38.5 percent in the U. S.

Source: "David R. Henderson (Hoover Institution), "Canada's High Unemployment Is No Mystery," Wall Street Journal, February 7, 1997.

 

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