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How can obstacles to investment in physical and human capital be tackled?
Vibrant competition provides the pressure for faster productivity growth, which comes about, in part, through capital deepening, i.e. the process of augmenting the amount of capital available for each hour worked. Although significant progress has already been made on reducing the impact of taxation on the user cost of capital through various measures announced over the past few years, some business tax distortions that inhibit investment could be removed, namely by:
However, such moves would need to be taken within the present prudent fiscal framework.
Productivity growth also depends on improvements in human capital. Canada already has a well educated adult population and an education system that delivers excellent achievement overall. Boosting the skills of those who are already well qualified would possibly make the largest contribution to human capital growth. But it is less clear how public policies effectively contribute to that process: the analytical and empirical underpinnings are currently being re-examined by the authorities. In the meantime, greater efforts are clearly needed to provide help for those Canadians who have fallen through the cracks of the education system and who have not obtained even a high school qualification and thus have both a lower earnings capacity and higher unemployment risk. Their difficulties are closely related to improving their basic literacy skills, but the quality of the programmes available for helping them is mixed. Programmes to meet the needs of this low skilled group need to be redesigned to make them more effective. Improving the efficiency of such investments could pay significant returns over time through better labour market outcomes, especially for younger people.
What more could be done to encourage people to work?
Rising living standards depend not only on productivity growth but also on the average hours worked by each member of society. Although employment rates are generally high by OECD standards, Canada’s structural unemployment rate remains persistently elevated at around 7 per cent of the labour force, and seasonal unemployment claims are significant. The parameters of federal Employment Insurance (EI) could be adjusted in several ways to address pockets where unemployment is persistent, namely by:
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Adopting more effective case management techniques and activation requirements (especially for workers who are frequent users). They should be oriented towards addressing the skill gaps that currently limit such users’ options in the labour market.
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Reconsidering the present rules that offer more generous unemployment benefits in regions where unemployment is high so as to achieve a better balance between providing stronger incentives for job search and a fair access to benefits among regions.
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Addressing the present favourable treatment of seasonal, full time work for those working close to the minimum qualifying hours, especially in high unemployment areas.
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Incorporating experience rating of employers into their premium rates. This would effectively eliminate the significant subsidy that arises because EI is used disproportionately and repeatedly by some firms for seasonal and short term layoffs at the expense of other employers. This would internalise these costs without reducing income protection to those who become unemployed.
Regional variations in the EI disincentives index
As at mid-2003
Note: The index is compiled using the parameters of the regular (unemployment) benefits of the Employment Insurance scheme on the assumption that individuals who choose intermittent employment and unemployment use the rules to optimise their choice of duration of employment and unemployment. The average disincentive across Canada in 1970 was set to equal 100. The methodology is presented in
Sargent (1995).
Source: Department of Finance Canada.
Another weak spot in Canadian policies that affect the labour supply concerns “welfare traps”. The incentives to move from social assistance to work have improved since the mid-1990s, in large part because of the introduction of the National Child Benefit (NCB), which does not depend on work status. But a range of other in-kind benefits are still linked to social assistance, including subsidised health care and housing. Greater use could be made of back to work benefits, accompanied by more effective job oriented case management, to both encourage and facilitate the shift from welfare into work. Although the NCB has reduced the extremely high effective marginal tax rates (EMTRs) faced by families in moving from welfare to work, it has increased EMTRs for some low to middle income working families, which are disproportionately headed by lone parents. As a result, many of these households remain persistently below income levels where EMTRs fall back to more moderate values. The problem is exacerbated by means tested provincial programmes, and all levels of government need to engage together in a concerted effort to address the disincentives associated with these stacked claw back rates. This exercise may need to be embedded within a broader assessment of tax and benefit arrangements as instruments for dealing with equity concerns.
Labour supply could also be boosted by greater participation by those in older age groups. Although significant numbers of Canadians already work into their late 60s and even their early 70s, surveys suggest that higher proportions would follow suit, at least part time, if they did not suffer a financial penalty for doing so, as is currently the case under the Canada and Quebec Pension Plans (CPP/QPP) and many employer sponsored pension plans. The CPP and QPP (and possibly other retirement income programmes, such as Old Age Security) should be changed to make actuarially neutral adjustments for early or late commencement of benefits. Furthermore, the requirement to stop working in order to start drawing an early pension should be lifted. A proposal along these lines, already made to eliminate obstacles to work from the QPP, deserves support and should be extended to the CPP as well. Changes to public pension plans along these lines could accommodate the trend towards more varied patterns of work and retirement and could also have a significant signalling effect by encouraging employer-sponsored pension plans to similarly revisit their early retirement incentives in anticipation of projected future labour shortages. A further constraint on some of those wishing to continue working is contractual mandatory retirement provisions in collective agreements. For those people, searching for a new job may involve costs and frustration, and their new wages may be lower, because firm specific skills have little value to other potential employers. On balance, it would be helpful to extend the ban on compulsory retirement that already applies in the federal civil service and some provinces across the rest of the country.
Lifetime allocation of time across OECD countries
Years
Source: Burniaux et al. (2003).
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