Tom Walker, The Vancouver Sun, Friday, October 25, 1996.

The jobless rate will stay high until government eases payroll taxes

Last week's visit to our province by Jeremy (The End of Work) Rifkin was a reminder, for me, that we Canadians are not asking the right questions about job-creation because we have excluded a major job-killer as a critical consideration in our inquiries. Simply put, the payroll taxes that pay for Canada's major income security programs offer a tax break to employers who choose to use overtime instead of creating jobs. Nobody in our federal government seems to be asking "why?" or even insisting on an accurate count of the casualties.

The growing use of overtime by employers directs work away from those who most need a working life and the income work provides -- Canada's unemployed. And this, I believe, has created a malignant policy spiral: regressive taxation creates income inequality and unemployment, which drives up social program costs, which -- in turn -- creates a need for yet higher, and often more regressive, taxes.

Contributions to the federal income-security programs - by both employer and employee - stop once an employee's income reaches a certain level, called a 'contributions ceiling'. So, yes, the government is right to consider ceilings a break for middle-income earners.

But employers' contributions also stop at the same (employee) income ceiling. Earnings above the ceiling are payroll tax free for employers as well as for employees. When the resulting payroll tax savings are added to savings on other non-wage labor costs -- such as training costs, medical premiums and private pensions -- it is cheaper for an employer to put an existing employee on overtime than to hire a new employee to do the work that must be done.

Here's how the 1994 report of the federal government's Advisory Group on Working Time and the Distribution of Work put it: "Three factors underlie business decisions to require people to work long hours: The fixed cost of hiring an additional person such as recruitment costs, training costs, and benefit packages . . . Paid time-off is the largest component [of fixed costs], especially vacation time; Employer-sponsored pension and related plans ... are the next largest component;... legislated payroll taxes for unemployment insurance, provincial health care, workers compensation and the Canada/Quebec Pension Plan [are third]."

It's not a recent discovery that Canada's social programs place a disproportionate burden on lower-middle income earners. In 1974, Kenneth Bryden, commented on the tax structure of the CPP in OldAge Pensions and Policy Making:

"...with the expansion of the public pension programs, the market ethos provided a rationalization from new taxes or increases in old taxes which added significant elements of regressivity to the tax structure. The real effect of these tax changes has been that those in the lower-middle-income range and below have been required to assume a disproportionate share of the burden of income maintenance for those who have been reduced by age to the bottom of the income scale."

In its 1993 White Paper on Employment, the European Commission suggested that, in some countries in Europe -- where social-security payroll taxes are, admittedly, quite a bit higher than in Canada -- a reduction of 30 to 40 per cent in non-wage costs for low- wage earners could reduce the unemployment rate by two percentage points.

But, in Canada, instead of acting to cut non-wage costs for low wage earners, recent changes have increased these costs at the low-wage end and lowered them for higher income earners. Recent changes to (un)employment insurance extend benefits to people working less than 15 hours a week, but they do so by charging premiums on a hourly, rather than weekly, basis. Presumably, this will add more lower-income workers to the tax base. Whether many of these part-timers will ever qualify for benefits is questionable.

At the same time, a bill accompanying the new employment-insurance plan lowers the maximum.insurable earnings level from $42,380 to $39,000 and freezes it at this level until the year 2000. The purpose of this change is to bring the maximum closer in line with the average industrial wage. The unintended effect may be to add just a bit more incentive for employers to use overtime.

When he was in Vancouver, Jeremy Rifkin talked about a French government plan to fight unemployment by shortening work hours. The government promises to cut payroll taxes for employers who voluntarily go along with the plan. In Canada, we have a plan that does just the opposite -- it subsidizes employers to lengthen work hours and thereby create unemployment.

The march of folly winds its way through all times, all places. When the Americans were in Vietnam, policy makers based their choices on the certainty that the U.S. would win the war, was winning the war and had to win the war. The evidence consistently showed otherwise, but that was never allowed to sway the basic premise of policy-making - the alternative was simply unthinkable.

Today, Canada's social programs are being reformed on the premise that market principles are pre-eminent, will be pre-eminent and must be pre-eminent. If unemployment is high, so the reasoning goes, it's because the market dictates that it must be so. If work hours are getting longer, again it's just the market that requires longer hours. There is only one thing wrong with this premise - the evidence shows otherwise.