Playing Chicken over Employment Insurance

It is often said that the hardest part of playing chicken is knowing when to flinch. I can recall my first exposure to the game of “chicken” was at age ten one winter while visiting a friend’s house. We decided to go sledding at a hill near his home. It was a steep hill, and at the bottom there was a solid wooden fence with the trail splitting in two just in front. Sledders who were near the end could either turn left or right. There were older kids playing chicken at the hill where the first to turn was the loser. If we wanted a turn sliding down the hill, we could either play chicken or go home. My friend went first, as it was his neighbourhood. So he took his “crazy carpet” (basically a sheet of plastic with handles that could go very fast without much control) and took off down the steep hill. Sure enough, as the older kid turned to the right and to safety, my friend could not turn left in time, lost control, and smashed into the fence at a high speed. Needless to say, that was the end of the day’s activities, and our last time sledding at that hill.

I see many parallels in the posturing taking place in the Canadian Parliament between the Liberals and Conservatives over Employment Insurance. Michael Ignatieff seems to have found what he believes to be his winning issue, his “crazy carpet”, and is willing to risk collapsing the government unless the government drops the EI hours worked requirement to a foolish 350 hours (a policy which ironically would only affect less than 5% of the population in the next several months). Perhaps Iggy has been too busy researching his own genealogy to read up on Canadian History, because there is a good reason that the current EI restrictions are in place. It is because of something defined in economics as “moral hazard”; which is to say the effect of an insurance policy that actually increases the probability of incurring a loss. Once upon a time in the infancy of universal Employment Insurance, requirements were quite loose compared to today. Evidently the lure of being paid not to work created a disincentive to work in a significant proportion of the population. Whether people will admit it or not, a lot would rather be paid slightly less not to work than paid slightly more to work.

This is not to say that all repeat claimants of Employment Insurance fit into this class of people. There are people who are not significantly skilled and have difficulty retaining employment for long periods of time. There are people with physical or mental dysfunctions who also have difficulty staying employed by no fault of their own. I once worked at a job with a guy who had terrible body odour, where most of the work was indoors. He was a good worker and well groomed, he just had this genetic horrific funk that drove people crazy. Eventually my boss made up an excuse to lay him off, even though the real reason was B.O. I worked with people who were laid off for being annoying, people laid off for being stupid, and I was once laid off for refusing to do unsafe work. My employer wanted me to rewire his warehouse despite the fact that I had no training what-so-ever in electronics. At the end of the day I was called into the boss’s office and he apologized that he had no work left for me to do (it was a summer job at “general maintenance”).

I confess that I do have difficulty reconciling how to best avoid moral hazard while not punishing people who get laid off frequently through no fault of their own. As someone with a degree in Mathematical Economics, I do spend a lot of time trying to figure out a way numerically to be able to weed out the leaches from the vulnerable, and maybe you can’t. All that you can do is set the system to an equilibrium value where you discourage the destructive behavior without punishing the good intentioned. All I can say with certainty is that the equilibrium is NOT 44 days of work for a year of benefits. That my friends is what we call a moral hazard.