Public Policy for Equality and Opportunity: Evidence-based and Ethically Grounded

Inequality erodes opportunity, and limited opportunity exacerbates inequality. This vicious intergenerational cycle has brought inclusive growth into question, contributed to the rise of populist sentiment, and strained the social contract in many rich countries. The way forward for researchers and policy makers requires not only a clear understanding of the facts about what kind of inequality matters and how it matters, but also an ethical grounding that speaks to the outcomes and opportunities that are important to citizens not only in the here and now, but also in the next generation.

This is the argument I make in a keynote lecture that I have had the privilege to give, first on October 20th 2022 to the 8th Annual Congress de Economía y de Políticas Públicas, SobreMéxico in Mexico City, and second on November 17th 2022 to the Conference on Wealth Inequality and Intergenerational Mobility at the Vienna University of Economics and Business in Vienna.

Download the latest version of my presentation.

Watch the presentation .

Insurance principles offer three practical reforms for financing Employment Insurance

The Canadian federal government has promised to modernize Employment Insurance for the 21^st century and has been holding consultations to engage stakeholders and others. These have been full of suggestions for the expansion of coverage and benefits. But when it comes to financing the program the debate has been framed in terms of how to finance these suggestions, without a realization that the nature and structure of contributions are themselves also a part of the “modernization” of Employment Insurance.

There is a clear need to think not just about how to finance benefits by adjustments and tweaks to the existing contribution structure, but rather to also think about that structure and how it can itself be reformed to enhance program objectives.

The need for better insurance offers a guiding principle for reform and practical reforms

The challenges the Employment Insurance has faced during what is almost the first quarter of the 21^st century, if not for even a decade longer back to the early 1990s, are calling for better insurance, and these imply changes not just to the structure of benefits but also to contributions.

The most fundamental role of Employment Insurance is to provide workers with income insurance during periods of job disruption, and it is the insurance part of Employment Insurance that needs upgrading and modernization. As a result, a guiding insurance principle for “Modernization” should be to align the structure of contributions to the underlying nature and causes of the risks being covered.

This implies that contributions should be structured to most efficiently and equitably to cover:

• Job risks associated with employer decisions to manage human resources, whether through changes in hours, layoffs, or even business closures;
• Family risks associated with household decisions about respite, care-giving, and skills development; and
• Collective risks associated with the interconnectedness and uncertainty of a global economy, but also with social choices, the costs of which are often disproportionately shouldered by the unemployed.

Aligning contributions with these risks, with the nature and causes of unemployment, implies three straightforward and feasible reforms.

1. Employer contributions should be used to finance Regular Benefits, and employee contributions should finance “Special” Benefits and some fraction of Part II benefits associated with skills development. The shares of total program expenditures of each of these benefits implies that the ratio of employer to employee contributions should rise from $1.40 for every dollar of employee contribution to about $1.90. But these contribution rates should also evolve gradually over time by being based on the ratio of program expenditures on Regular Benefits to those on Special Benefits. If Special Benefits become a larger share of total Employment Insurance outlays, the employee contribution share should rise accordingly.
2. Contribution rates should be relatively stable and set at a level to finance benefits associated with the underlying trend unemployment rate, evolving gradually in a way that roughly corresponds to the evolution of frictional and structural unemployment. An average of monthly unemployment rates over the past seven years, a horizon consistent with the current funding rules, would currently imply a trend unemployment rate of 7%. An average over the past five years, consistent with the usual mandate of a newly elected government, would imply the same. This is only slightly higher than the 6.5% that both rules implied in January 2020, before the onset of the pandemic, and suggests relatively constant rates even in the aftermath of a shock as big as the pandemic.
3. The program should be based on tripartite funding with Federal government contributions from the Consolidated Revenue Fund covering the expansion of benefits needed in the face of big unexpected shocks like business cycle downturns and broad-based regional shocks that take the unemployment rate above its trend, or to compensate for the trade-offs made in social choices like fighting inflation. At the same time, the Federal balance sheet should be strengthened by the surpluses associated with lower than trend unemployment rates.

[ This post is based upon a presentation I made to a workshop organized by the Institute for Research on Public Policy on June 29th, 2022. My presentation was called “Principles and Practicalities in aligning Employment Insurance Benefits and Contributions”.

You can download and read the full paper that summarizes the presentation, and upon which this post is based. You can also read short summaries published by the CD Howe Institute on October 11th, 2002 as “Insurance Principles Make the Case for Stable Contribution Rates as a Part of Employment Insurance Modernization,” and on October 12th, 2022 as “Reality-based Employer EI Contributions.”

A version of this post was also published by the CD Howe Institute on October 13th, 2022 as “Insurance principles offer three practical reforms for financing EI.” ]

The Great Gatsby Curve poses three questions for economic theory, statistical measurement, and public policy

When comparing many countries, not just the rich but also across the entire globe, researchers have consistently found that the higher the level of income inequality about a generation ago, the more strongly children’s adult prospects are tied to their family backgrounds. This relationship between higher inequality and lower social mobility has become known as The Great Gatsby Curve.

Economic theory, statistical measurement, and public policy have all been most constructively informed by this picture when they explore

1. What kind of inequality matters?
2. What kind of social mobility do we care about?
3. Which cross-country comparisons are most judicious, from which policy learning is best informed?

Watch this interview produced by the Institute for New Economic Thinking ,who gave me the opportunity to explain what the Great Gatsby is, and highlight how it offers a constructive framework for deeper conversations about the relationship between inequality and social mobility.

What will COVID Mean for the Future of Fiscal and Social Policy?

It is the stated goal of the Canadian federal government to foster “a strong and inclusive labour market that provides every Canadian with opportunities for a good quality of life.” The legacy of COVID has, however, led to policy incoherence, with some significant reforms directly putting this goal into question.

The Canada Emergency Wage Subsidy: First steps, missteps, and next steps

The Canada Emergency Wage Subsidy can reasonably thought of as an experiment not to be repeated. This post is an excerpt from the conclusion to my forthcoming paper called “The Canada Emergency Wage Subsidy: First steps, missteps, and next steps.” Download a copy and read the full paper.

The Canada Emergency Wage Subsidy as an employer-based response to the pandemic intended to prevent business closures and prevent layoffs was certainly a program constructed in haste, but perceived to be necessary in the face of limits in the capacity of better designed existing programs, particularly the national unemployment insurance program.

Even so, the program was not informed by fundamental lessons from economic theory. It was not addressed to the fixed costs that actually determine business closures; it did not recognize that a subsidy nominally directed to worker payroll can be shifted to other purposes; and it was not, or in principle could not be, targeted on the margin, on businesses that would indeed have closed in the absence of support. This implies that the job losses actually prevented are much lower than the actual payroll covered, each person-month of employment saved costing $25,000 according to one estimate.

Income support of this magnitude paid directly to affected workers would likely not be considered politically acceptable among informed citizens, and it is therefore hard to imagine that the program would pass any reasonable cost-benefit analysis.

Going forward it will also be important to recognize the practical considerations that shaped, and perhaps even motivated, this program. Their downsides should be recognized. They call for policy makers to be as concerned with program delivery as they are with program design, offering ongoing investments in the modernization of physical and human capacity to deliver benefits.

One positive consequence of the Canadian experience is that these investments have been promised to overcome limitations in the capacity of the country’s unemployment insurance program. The expectation should be that in the future this program will play an even bigger role should it be necessary, particularly provisions within it designed to promote work-sharing which reduces the reliance on layoffs by offering benefits for adjustments to work-hours.

The practical experiences during the pandemic also call for policy makers to recognize that programs may interact and should be designed to complement each other. Other programs, notably the Canada Emergency Response Benefit, making real-time direct payments to individuals suffering income losses, were in some measure a substitute for the Canada Emergency Wage Subsidy, which was slower out of the starting gate and undersubscribed when it mattered most to the most vulnerable businesses during the first weeks and month of the pandemic. Success in making direct transfers to individuals to some degree made the wage subsidy less relevant, delays in getting it off the ground made it less necessary.

Finally, the practical considerations of public policy also call for policy makers to avoid policy drift, the development of vested interests that can prolong the duration of a program after its need has passed, or pervert its intent by informing it design. This calls for increased reliance on programs designed as automatic stabilizers, rather than on discretionary interventions.

[This post was updated on December 9th, 2021 with a link to the final version of the paper, also available here: https://milescorak.files.wordpress.com/2021/12/corak-2021-american-enterprise-institute-canada-emergency-wage-subsidy.pdf ]

The Great Gatsby, then and now

This post is excerpted and adapted from my introduction to The Century Press edition of F. Scott Fitzgerald’s The Great Gatsby. I’m grateful to the Press for the opportunity to introduce this great novel from an economist’s perspective, and to be part of its handsome leather bound and letterpress first edition. Go to https://www.centurypress.ca/products/the-great-gatsby-pre-order to learn more about a book that is as much pleasure to hold as it is to read.

“Our faith in possibility may be glorious, but it’s easy to forget that one possibility is always failure,” writes Sarah Churchwell, introducing the chapter in her 2014 book discussing Fitzgerald’s high expectations as he awaited the reviews of what he felt was his greatest work, a novel that he anticipated would vault him into the pantheon of American literature.

The reviews were not good: “F. Scott Fitzgerald’s Latest A Dud”; “a strange mix of fact and fancy”; “not a great novel … neither profound nor imperishable … [but] timely and seasonable.” The Fitzgerald scholar’s book, Careless People: Murder, Mayhem, and the Invention of The Great Gatsby, which is my source for these excerpts, uses the reviews at the time to support her insightful thesis, that The Great Gatsby can be seen as solidly situated in a specific time and place, with characters and plot having real-life counterparts.

Fitzgerald’s year in New York City—the places, the people, and even the lurid stories of a double murder in nearby New Jersey that was fodder for the papers—was easily recognized by his circle of friends and acquaintances writing those reviews. To them the novel must have appeared as much diary as it did fiction, as much journalistic as imaginative narrative. Been there, done that.

Yet as the decades passed, as gossip and headlines faded from memory, Fitzgerald’s book did not fade, and a century later it continues to resonate. To appreciate why, Churchwell’s thesis should be taken further: The Great Gatsby can be seen as solidly situated in a specific economic time and place, it is not just character, but also underlying strictures of social inequality, that drive the novel’s hapless protagonist to his ending. The novel remains as relevant to our age as it did for the Jazz Age because Gatsby’s economic time and place are also our times and places.

The story helps Americans, indeed citizens of all countries facing the challenges of rising inequality, wonder all the more about the hollowness of the metaphor legitimizing it, of the unkept promise of the American Dream.