Open Collections

UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

An empirical analysis of the effectiveness of Canada's unemployment insurance programme as an automatic… McLaney, William 1967

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1967_A4_5 M24.pdf [ 4.78MB ]
Metadata
JSON: 831-1.0102366.json
JSON-LD: 831-1.0102366-ld.json
RDF/XML (Pretty): 831-1.0102366-rdf.xml
RDF/JSON: 831-1.0102366-rdf.json
Turtle: 831-1.0102366-turtle.txt
N-Triples: 831-1.0102366-rdf-ntriples.txt
Original Record: 831-1.0102366-source.json
Full Text
831-1.0102366-fulltext.txt
Citation
831-1.0102366.ris

Full Text

AN E M P I R I C A L A N A L Y S I S OF THE  EFFECTIVENESS  OF CANADA'S UNEMPLOYMENT INSURANCE PROGRAMME AS AN AUTOMATIC S T A B I L I Z E R  by WILLIAM McLANEY B.Sc,  McGill University,  1965  A THESIS SUBMITTED I N P A R T I A L FULFILMENT THE REQUIREMENTS FOR THE DEGREE OF ' MASTER OF BUSINESS  ADMINISTRATION  i n t h e Department of Commerce a n d B u s i n e s s  Administration  We a c c e p t t h i s t h e s i s a s to the required  conforming  standard  THE UNIVERSITY OF B R I T I S H COLUMBIA September,  1967  OF  In presenting  t h i s thesis i n p a r t i a l f u l f i l m e n t of the  r e q u i r e m e n t s f o r an advanced degree a t t h e U n i v e r s i t y o f British freely  Columbia, I agree that  a v a i l a b l e f o r r e f e r e n c e and s t u d y .  agree that for  the L i b r a r y  permissionfor  extensive  s h a l l make i t I  further  copying of t h i s  thesis  s c h o l a r l y p u r p o s e s may be g r a n t e d b y t h e Head o f my  Department o r by h i s r e p r e s e n t a t i v e s .  I t i s understood  that  copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l  gain  s h a l l n o t be a l l o w e d w i t h o u t my w r i t t e n  Department o f  C Q tint Act  4-  %us>*;exs  The U n i v e r s i t y o f B r i t i s h C o l u m b i a V a n c o u v e r 8, C a n a d a  A DM  permission.  )x>)zT>tA  T>-QA>  - i -  ABSTRACT  D u r i n g r e c e n t y e a r s unemployment i n s u r a n c e come t o be r e c o g n i z e d a s a n a u t o m a t i c economy.  pro-  so a s t o a u t o m a t i c a l l y dampen b o t h  economic expansions little  s t a b i l i z e r i n the  T h i s i m p l i e s t h a t unemployment i n s u r a n c e  grammes o p e r a t e  has  and  contractions.  I n Canada, however,  e m p i r i c a l r e s e a r c h a i m e d a t d e t e r m i n i n g t h e mag-  n i t u d e o f t h i s dampening e f f e c t has I n an attempt  to f i l l  been  this void, this  undertaken.  s t u d y makes  e m p i r i c a l assessment of the e f f e c t i v e n e s s o f  an  Canada's  u n e m p l o y m e n t i n s u r a n c e programme a s a n a u t o m a t i c  sta-  bilizer. To into  t h i s the p e r i o d  1950-1965  was  b r o k e n down  i t s component p e r i o d s o f e c o n o m i c e x p a n s i o n  traction. war  do  T h i s p e r i o d was  economic c o n d i t i o n s .  o f t h r e e d o w n s w i n g s and  and  con-  c h o s e n t o r e f l e c t modern p o s t The  component p e r i o d s c o n s i s t e d  f o u r upswings.  were t h e n employed t o d e t e r m i n e  Three  techniques  the c o u n t e r c y c l i c a l  role  o f t h e programme d u r i n g e a c h o f t h e s e v e n p e r i o d s . Firstly, e a c h p e r i o d was  t h e change i n n a t i o n a l income d u r i n g  c o m p a r e d t o t h e c h a n g e s i n unemployment  i n s u r a n c e b e n e f i t s and periods.  F r o m t h i s was  c o n t r i b u t i o n s d u r i n g t h e same o b t a i n e d a measure o f the p o r t i o n  - i i -  o f any  change i n n a t i o n a l income o f f s e t by  changes i n b e n e f i t s and/or c o n t r i b u t i o n s . using  the  same p e r i o d s ,  Secondly,  a s i m p l e m u l t i p l i e r model  e m p l o y e d t o d e t e r m i n e what p o r t i o n o f any c h a n g e i n n a t i o n a l i n c o m e was ment i n s u r a n c e programme. b o t h h i s t o r i c a l d a t a and e f f e c t of  compensatory  potential  p r e v e n t e d by  the  For b o t h of these data adjusted  unemploy-  techniques  t o remove  c h a n g e s i n t h e programme were u s e d .  t h i r d l y , a c o r r e l a t i o n a n a l y s i s was mine whether b e n e f i t s and or inversely associated  employed to  the l e v e l of  the  And  c o n t r i b u t i o n s were  with  was  deter-  directly  economic  activity. The  r e s u l t s of t h i s study i n d i c a t e that  u n e m p l o y m e n t i n s u r a n c e programme has as  an  automatic s t a b i l i z e r during  contraction.  The  Moreover, the has  e f f i c a c y of the  doubled i n recent  a b o u t 27%  of  the the  contraction of  periods  of  for this  economic  scheme  has  effectiveness.  programme d u r i n g  downswings  y e a r s - i n c r e a s i n g f r o m a com-  p e n s a t o r y e f f e c t o f a b o u t lk% income d u r i n g  performed c r e d i t a b l y  b e n e f i t component o f t h e  been almost t o t a l l y r e s p o n s i b l e  Canada's  of  c o n t r a c t i o n of  the  change i n n a t i o n a l  1953-195^ t o  one  c h a n g e i n n a t i o n a l income d u r i n g  I96O-I96I.  of the  - iii  -  The programme h a s b e e n r e l a t i v e l y l e s s t i v e as an automatic mic  expansion.  effec-  s t a b i l i z e r d u r i n g p e r i o d s o f econo-  H o w e v e r , d u r i n g t h e l a s t two u p s w i n g s  a s i g n i f i c a n t c o m p e n s a t o r y e f f e c t was e x p e r i e n c e d . m a g n i t u d e o f t h i s e f f e c t l a y b e t w e e n 10% a n d 17% change i n n a t i o n a l 1960  income d u r i n g t h e e x p a n s i o n  of  The  of the 1958-  a n d b e t w e e n 5% ^ d 8% o f t h e c h a n g e i n n a t i o n a l a  Income d u r i n g t h e u p s w i n g o f I96I-I965.  - iv -  TABLE OF CONTENTS Page CHAPTER 1  INTRODUCTION Perspective Purpose o f t h e Study O u t l i n e o f the Study  CHAPTER 2  THE CONCEPT OF UNEMPLOYMENT INSURANCE Historical Evolution The C a n a d i a n Unemployment I n s u r a n c e Programme O b j e c t i v e s o f Unemployment I n s u r a n c e  CHAPTER 3  1 4 6 8 8 12 14  AUTOMATIC S T A B I L I Z A T I O N AND UNEMPLOYMENT INSURANCE 16 A u t o m a t i c S t a b i l i z a t i o n - An H i s t o r i c a l Perspective The C o n c e p t o f A u t o m a t i c S t a b i l i z e r s Unemployment I n s u r a n c e a s a n Automatic S t a b i l i z e r  CHAPTER 4  1  THE STUDY: METHODOLOGY  16 1 9 23 27  Introduction 27 Offsetting Effects 34 P r e v e n t i o n o f Change i n N a t i o n a l Income35 C o r r e l a t i o n o f C y c l i c a l Components 42 Adjustments 45 CHAPTER 5  THE STUDY: RESULTS  50  Introduction 50 Offsetting Effects 50 P r e v e n t i o n o f Change i n N a t i o n a l I n c o m e 5 6 C o r r e l a t i o n o f C y c l i c a l Components 63 Summary o f R e s u l t s 66 CHAPTER 6  DISCUSSION OF RESULTS Introduction Magnitude o f the S t a b i l i z i n g E f f e c t s During Expansions Comparison: U n i t e d S t a t e s and Canada A G e n e r a l Statement Limitations  69 69 70 74 79 81  -  V  -  Page CHAPTER ?  SUMMARY AND CONCLUSIONS Summary Implications Suggestions f o r Further Research  84 84 87 89  BIBLIOGRAPHY  91  APPENDICES  9^  - v i-  L I S T OF TABLES  TABLE I  TABLE I I  C h a n g e s i n unemployment i n s u r a n c e b e n e f i t s a s a p e r c e n t a g e o f t h e change i n n a t i o n a l income d u r i n g p e r i o d s o f economic expansion and c o n t r a c t i o n , h i s t o r i c a l a n d a d j u s t e d , I95O-I965.  51  Changes i n unemployment i n s u r a n c e c o n t r i b u t i o n s as a percentage o f t h e change i n n a t i o n a l income d u r i n g p e r i o d s o f economic expansion a n d c o n t r a c t i o n , h i s t o r i c a l and adjusted,  54  1950-1965.  TABLE I I I  TABLE I V  Combined c h a n g e i n unemployment i n surance b e n e f i t s and c o n t r i b u t i o n s as a p e r c e n t a g e o f t h e change i n n a t i o n a l income d u r i n g p e r i o d s o f economic e x p a n s i o n and c o n t r a c t i o n , h i s t o r i c a l a n d a d j u s t e d , 1950-1965. The r o l e o f unemployment i n s u r a n c e b e n e f i t s i n p r e v e n t i n g changes i n n a t i o n a l income d u r i n g p e r i o d s o f economic expansion a n d c o n t r a c t i o n , minimum a n d maximum p r e v e n t a t i v e e f f e c t s , h i s t o r i c a l and adjusted,  55  58  1950-1965.  TABLE V  The r o l e o f unemployment i n s u r a n c e c o n t r i b u t i o n s I n p r e v e n t i n g changes i n n a t i o n a l income d u r i n g p e r i o d s o f economic expansion and c o n t r a c t i o n , minimum a n d maximum p r e v e n t a t i v e e f f e c t s , h i s t o r i c a l and adjusted,  60  T h e r o l e o f t h e unemployment i n s u r a n c e programme i n p r e v e n t i n g changes i n n a t i o n a l income d u r i n g p e r i o d s o f economic expansion and c o n t r a c t i o n , minimum a n d maximum preventative e f f e c t s , h i s t o r i c a l and a d j u s t e d , 1950-1965.  62  Correlation coefficients f o r the r e l a t i o n s h i p between t h e c y c l i c a l i r r e g u l a r percentages o f n a t i o n a l i n come a n d unemployment i n s u r a n c e b e n e f i t s and contributions during periods o f economic expansion a n d c o n t r a c t i o n , h i s t o r i c a l d a t a , 1950-1965.  64  1950-1965.  TABLE V I  TABLE V I I  - v i i -  Page TABLE  VIII  TABLE I X  TABLE X  Summary o f r e s u l t s r e l e v a n t i n determining the effectiveness of C a n a d a ' s unemployment i n s u r a n c e p r o gramme a s a n a u t o m a t i c s t a b i l i z e r d u r i n g t h e economic expansions and contractions of the period 1 9 5 0 - 1 9 6 5 .  6?  Comparison o f t h e e f f e c t i v e n e s s o f Canada's and t h e U n i t e d S t a t e s ' u n employment c o m p e n s a t i o n programmes as a u t o m a t i c s t a b i l i z e r s d u r i n g p e r i o d s o f economic e x p a n s i o n and contraction, 1949-1965.  75  Comparison o f t h e c o e f f i c i e n t s o f correlation f o r the c y c l i c a l irregular p e r c e n t a g e s o f n a t i o n a l income a n d unemployment i n s u r a n c e c o n t r i b u t i o n s d u r i n g p e r i o d s o f economic expansions and c o n t r a c t i o n , Canada v s . U n i t e d States, 1949-1965.  L I S T OF FIGURE I  78  FIGURES  Simple model o f t h e b u s i n e s s and t h e a c t i o n o f a u t o m a t i c stabilizers.  cycle 21  CHAPTER 1 INTRODUCTION  Perspective The  b u s i n e s s c y c l e forms an i n t e g r a l p a r t o f  f r e e e n t e r p r i s e economies such as e x i s t i n Canada  today.  It  econ-  i s g e n e r a l l y taken f o r granted that periods of  omic e x p a n s i o n w i l l and v i c e v e r s a .  g i v e way  to periods of contraction  R e c e n t l y , however, t h e r e has  emerged  a c o n v i c t i o n t h a t severe economic c o n v u l s i o n s , such t h e one  as  e x p e r i e n c e d d u r i n g t h e d e p r e s s i o n o f 1929-1933*  1 are a t h i n g of the past.  The  feeling i s that  these  s e v e r e movements h a v e b e e n r e p l a c e d b y m i l d u p s w i n g s and  downswings i n economic  activity.  T h i s c o n f i d e n c e s t e m s f r o m a number o f The  most i m p o r t a n t o f t h e s e i n c l u d e r e c e n t  evidence, improved w i t h m o n e t a r y and of  economic knowledge and fiscal  1 - C l e m e n t , M.O. Southern P. 303.  historical experience  p o l i c y , the growing  g o v e r n m e n t e x p e n d i t u r e and  factors.  the e x i s t e n c e o f  importance an  "The C o n c e p t o f A u t o m a t i c S t a b i l i z e r s , " E c o n o m i c J o u r n a l , XXV ( J a n u a r y , 1959)»  - 2 -  automatic  c o u n t e r c y c l i c a l impact w i t h i n t h e f i s c a l  system.  This l a t t e r consideration refers to the exis-  tence  1  o f automatic  structure.  s t a b i l i z e r s w i t h i n today's  institutional  These a r e s i m p l y mechanisms which a u t o m a t i c a l l y  r e d u c e t h e f l o w o f i n c o m e o r money t o i n d i v i d u a l s a n d c o r p o r a t i o n s d u r i n g periods o f expansion and which i n -  2 crease  these  flows i n times  of contraction.  Along with the business has  come t o be r e c o g n i z e d  f r e e e n t e r p r i s e economies.  c y c l e , unemployment  as an accepted As a r e s u l t  f a c t i n modern unemployment  c o m p e n s a t i o n programmes h a v e b e e n i n t r o d u c e d countries throughout the world. a programme i s b a s e d o n i n s u r a n c e  Canada's v e r s i o n o f such p r i n c i p l e s a n d h a s come  t o b e known a s t h e u n e m p l o y m e n t i n s u r a n c e The  I n many  programme.  m a i n a i m o f t h i s programme i s t o p a r t i a l l y  compensate  w o r k e r s f o r wage l o s s e s r e s u l t i n g f r o m i n v o l u n t a r y u n employment.  H o w e v e r , b e c a u s e t h i s programme a u t o m a t i c a l l y  a f f e c t s t h e f l o w o f funds t o and from i n d i v i d u a l s and c o r p o r a t i o n s i n r e l a t i o n t o t h e l e v e l o f economic automatic  activity,  s t a b i l i z a t i o n has been a f o r t u i t o u s by-product.  1 - Ibid. 2 - E i l b o t t , P e t e r "The E f f e c t i v e n e s s o f A u t o m a t i c S t a b i l i z e r s , " American Economic Review, L V I ( J u n e , 1966), p . 450. n  - 3 -  This  s t a b i l i z a t i o n e f f e c t r e s u l t s f r o m an  t h e b e n e f i t p a y m e n t s and during  contractions  and  increase  an  The  and  a decrease i n  increase  contributions  a decrease i n b e n e f i t  i n contributions during  payments  expansions.  importance of automatic s t a b i l i z e r s  f r o m t h e i r p o l i t i c a l and cretionary controls.  in  stems  economic advantages o v e r  Discretionary  c o n t r o l s are  disthose  w h i c h r e q u i r e a p o l i c y d e c i s i o n b e f o r e coming i n t o e f f e c t . A u t o m a t i c mechanisms a v o i d volved  i n the  a n a l y s i s and  the  difficult  problems i n -  r e c o g n i t i o n o f e c o n o m i c movements, f o r e c a s t o f t r e n d s and  the  the  prescription  1 and  implementation of  time delays i n v o l v e d  corrective action. i n c a r r y i n g out  Further,  the  t h e s e s t e p s and  in  t a k i n g l e g i s l a t i v e a c t i o n , where n e c e s s a r y , i s a v o i d e d . As  an  not  be  tical  extreme c a s e , needed d i s c r e t i o n a r y a d j u s t m e n t s made b e c a u s e o f t h e  expectation  of adverse  poli-  repercussions. Because of these advantages, automatic  b i l i z a t i o n i s t o be measures g i v e n 1  may  preferred  t o the use  that other f a c t o r s are  of  equal.  sta-  discretionary The  most  - P e a r s e , P.H. " A u t o m a t i c S t a b i l i z a t i o n and the B r i t i s h T a x e s o n Income," R e v i e w o f E c o n o m i c S t u d i e s , X X I X ( F e b r u a r y , 1962), p. 124.  - 4 -  important o f these other f a c t o r s p e r t a i n s to the r e l a t i v e e f f e c t i v e n e s s o f a l t e r n a t e approaches. equal e f f e c t i v e n e s s , automatic  Given  s t a b i l i z a t i o n i s the  p r e f e r r e d compensatory mechanism. The p r e c e d i n g p a r a g r a p h s e s t a b l i s h two p o i n t s .  Firstly,  have attempted t o  automatic  stabilizers  a r e i m p o r t a n t t o t h e h e a l t h o f t h e economy. C a n a d a ' s u n e m p l o y m e n t i n s u r a n c e programme t h e o r e t i c a l l y , an automatic background  stabilizer.  Secondly,  i s , at least Keeping  this  i n m i n d , i t i s now p o s s i b l e t o d i s c u s s t h e  purpose  of this  study.  Purpose  o f the Study Although a p r i o r i  c o n s i d e r a t i o n s suggest  t h e u n e m p l o y m e n t i n s u r a n c e programme w i l l  that  function i n a  c o u n t e r c y c l i c a l manner, t h e y s a y n o t h i n g about t h e e f f i c a c y o f t h e programme a s a s t a b i l i z e r . study i s t o e m p i r i c a l l y determine  The p u r p o s e  of this  the e f f e c t i v e n e s s o f  C a n a d a ' s u n e m p l o y m e n t i n s u r a n c e programme a s a n a u t o m a t i c s t a b i l i z e r i n t h e economy.  1  T h i s o b j e c t i v e c a n be met  1 - The c o n c e p t o f a u t o m a t i c s t a b i l i z a t i o n d i f f e r s f r o m t h a t o f "economic s i g n i f l c a n c e " . The l a t t e r r e f e r s t o t h e i m p o r t a n c e o f unemployment i n surance b e n e f i t s r e l a t i v e t o o t h e r sources o f p u r c h a s i n g power i n a l l o w i n g i n d i v i d u a l s t o consume. A p p e n d i x I g i v e s d a t a r e g a r d i n g t h e economic s i g n i f i c a n c e o f t h e b e n e f i t s .  -  by  answering the  (1)  Has  t h e programme f u n c t i o n e d the  recent  questions; i n the d e s i r e d past?  What was  t h a t was  Have t h e  benefit  t h e m a g n i t u d e o f any  experienced?  stabilizing  What p o r t i o n o f a n y  programme and  what p o r t i o n t o t h e c o n t r i b u t o r y  during  effect  stabilizing  assigned  Has  per-  manner?  e f f e c t c a n be  (3)  counter-  c o n t r i b u t o r y c o m p o n e n t s o f t h e programme b o t h  formed i n t h i s (2)  -  f o l l o w i n g sets of  c y c l i c a l manner d u r i n g and  5  t o t h e b e n e f i t component o f  the  portion?  t h e programme b e e n r e l a t i v e l y more e f f e c t i v e  periods  of expansion o r c o n t r a c t i o n l n the  level  o f economic  activity?  (4)  Has  C a n a d i a n programme b e e n more o r l e s s e f f e c -  tive  than the  the  comparable U n i t e d  States'  compensation  programme? The  methodology designed f o r t h i s  t o answer these q u e s t i o n s .  study attempts  Given the answers, i t then  becomes p o s s i b l e t o make some j u d g e m e n t a s  to the  effective-  n e s s o f t h e programme a s a n a u t o m a t i c s t a b i l i z e r . i n t u r n w i l l a l l o w i m p l i c a t i o n s t o be t o government s t a b i l i z a t i o n  policies  drawn w i t h and  This regards  the f u t u r e  role  - 6 -  o f unemployment i n s u r a n c e .  I t must b e k e p t  i n mind,  however, t h a t any d i s c u s s i o n o f t h e f u t u r e r o l e o f t h e programme must i n c l u d e c o n s i d e r a t i o n n o t o n l y o f t h e s t a b i l i z a t i o n o b j e c t i v e but a l s o o f s o c i a l and m o t i vational  objectives.  O u t l i n e o f the Study The f i r s t  three chapters o f the study are ,  introductory i n nature. s c r i b e the importance and  Chapter  1 s e r v e s s i m p l y t o de-  o f the study, present i t s purpose  o u t l i n e the d i r e c t i o n i t takes.  the concept  Chapter  o f unemployment c o m p e n s a t i o n .  2 deals with  In particular,  C a n a d a ' s u n e m p l o y m e n t i n s u r a n c e programme a n d i t s r e l a t i o n t o t h e Unemployment I n s u r a n c e An attempt  i s made t o p l a c e t h e r o l e o f t h e programme  as an automatic  s t a b i l i z e r i n the perspective of i t s  numerous o b j e c t i v e s . concept  o f automatic  Chapter  heart o f the study.  3 attempts  Chapters  Chapter  certain  4, 5» a n d 6 f o r m t h e  k o u t l i n e s the three  techniques used to determine  countercyclical effectiveness. r e s u l t s o f the study.  to c l a r i f y the  s t a b i l i z e r s b y s e t t i n g up  classlficatory criteria.  pirical  A c t w i l l be d i s c u s s e d .  em-  t h e programme's  Chapter  5 presents the  The r e s u l t s o f e a c h  technique  a r e p r e s e n t e d i n d i v i d u a l l y b e f o r e t h e y a r e c o m b i n e d so  - 7-  as  t o a l l o w f o r m a t i o n o f some c o n c l u s i o n w i t h  t o t h e programme's  efficacy.  regards  Chapter 6 discusses  r e s u l t s i n terms o f c e r t a i n i n c o n s i s t e n c i e s and  these  limitations.  C h a p t e r 7 o f f e r s a summary a n d c e r t a i n c o n c l u d i n g These remarks d e a l w i t h the i m p l i c a t i o n s o f the i n terms o f f u t u r e government s t a b i l i z a t i o n and  sented.  study  policies  i n t e r m s o f t h e f u t u r e r o l e o f unemployment  Several suggestions  remarks.  insurance.  f o r further research are also  pre-  CHAPTER 2 THE CONCEPT OF UNEMPLOYMENT INSURANCE  Historical  Evolution The o r i g i n s o f unemployment i n s u r a n c e  schemes  c a n be t r a c e d , o n t h e one h a n d , t o t h e c u s t o m a r y p a y m e n t s by t r a d e u n i o n s o f " o u t o f work" b e n e f i t s t o t h e i r members a n d , o n t h e o t h e r h a n d , t o t h e f e u d a l  relation-  s h i p which gave t h e m a s t e r r e s p o n s i b i l i t y f o r t h e w e l f a r e  1 of h i s servants.  The f o r m e r t r a d i t i o n l e d t o t h e emer-  gence o f p r i v a t e i n s u r a n c e schemes, w h i l e t h e l a t t e r l e d t o employer's l i a b i l i t y  plans.  These employer p l a n s  were p a r t i c u l a r l y i m p o r t a n t t o t h e d e v e l o p m e n t o f modern programmes b e c a u s e t h e y w e r e b a s e d u p o n r e c o g n i t i o n o f t h e p r i n c i p l e t h a t t h e b u r d e n o f unemployment s h o u l d n o t be b o r n e s o l e l y b y t h e w o r k e r s . The t r a d e u n i o n schemes w e r e g e n e r a l l y comp u l s o r y f o r a l l members, w h i l e t h e e m p l o y e r schemes w e r e generally voluntary.  B e c a u s e t h e s e schemes w e r e  limited  e i t h e r to a s i n g l e union o r to a s i n g l e f i r m , the r i s k 1 - S c h w e i t z e r , P a u lH R. "Unemployment I n s u r a n c e i n C a n a d a , (unpublished Master's t h e s i s , McGill University, Montreal, p.  194l-1960 ,  I960),  1.  - 9 -  o f u n e m p l o y m e n t was n o t w i d e l y were q u i t e  vulnerable. This  for  s p r e a d a n d t h e schemes  s e r i o u s s h o r t c o m i n g l e f t t h e door open  government i n t e r v e n t i o n which t o o k t h e form e i t h e r  of  s u b s i d i e s t o e x i s t i n g programmes o r o f  and  a d m i n i s t r a t i o n o f government schemes.  establishment The  first  o f t h e s e programmes was e s t a b l i s h e d i n B e l g i u m i n  through allowance of s u b s i d i e s to m u n i c i p a l The f i r s t and  century. In order  2  1  programmes.  n a t i o n a l schemes were a d o p t e d b y F r a n c e ,  Denmark  1901  Norway  during the e a r l y years of the twentieth B r i t a i n e s t a b l i s h e d s u c h a programme  t h a t t h e r i s k w o u l d be a s w i d e l y  1911.  in  3  spread as  p o s s i b l e Host o f t h e s e programmes c a l l e d f o r c o m p u l s o r y p a r t i c i p a t i o n o f a l l i n d i v i d u a l s c o v e r e d b y t h e programme. I n Canada d i s c u s s i o n o f t h e e s t a b l i s h m e n t an unemployment i n s u r a n c e  programme  second decade o f t h e t w e n t i e t h  emerged d u r i n g t h e  century.  R o y a l Commission on I n d u s t r i a l R e l a t i o n s  1 - I b i d , p . 2.  2 - I b i d , p . 3. 3 - I b i d , p . 4.  of  I n 1919  the  recommended  - 10 -  t h a t a n I n q u i r y b e made i n t o t h e p o s s i b i l i t i e s o f implementing such a scheme.  1  In  1928,  and a g a i n i n  1929»  t h e S t a n d i n g C o m m i t t e e o f t h e House o f Commons o n I n d u s t r i a l and I n t e r n a t i o n a l R e l a t i o n s endorsed the  2 c o n c e p t o f unemployment i n s u r a n c e . in  1935»  Seven years  later,  The Unemployment a n d S o c i a l I n s u r a n c e A c t was  p a s s e d by t h e f e d e r a l government.  The A c t was m o d e l l e d  along the l i n e s of the B r i t i s h l e g i s l a t i o n of The 1935  1911.  A c t was l a t e r d e c l a r e d u n c o n s t i t u -  t i o n a l by t h e J u d i c i a l Committee o f t h e P r i v y  Council.  T h i s d e c l a r a t i o n emerged f r o m a n i n t e r p r e t a t i o n o f t h e B r i t i s h N o r t h A m e r i c a A c t w h i c h made unemployment i n surance a p r o v i n c i a l concern.  However, a R o y a l  o n D o m i n i o n P r o v i n c i a l R e l a t i o n s i n 1940 following  Commission  came t o t h e  conclusion: " I n o u r p u b l i c h e a r i n g s r e p r e s e n t a t i v e s from most p r o v i n c e s a n d many p u b l i c b o d i e s s u p p o r t e d t h e v i e w t h a t unemployment i n s u r a n c e s h o u l d be w i t h i n t h e j u r i s d i c t i o n o f t h e D o m i n i o n Parliament. We h a v e no h e s i t a t i o n i n so recommending."3  1 - Unemployment I n s u r a n c e C o m m i s s i o n , T h i r d A n n u a l R e p o r t f o r t h e F i s c a l Y e a r E n d i n g M a r c h 31* 1944, ( O t t a w a : Queen's P r i n t e r , 194-5) > P.  7.  2 - Ibid. 3 - B r o w n , R a y "Unemployment I n s u r a n c e a n d t h e N a t i o n a l Employment S e r v i c e , " T h e L a b o u r G a z e t t e , (September, p.  1950),  1527.  - 11 -  By J u n e 1940, curred with t h i s view. was,  a l l p r o v i n c i a l governments conThe  B r i t i s h North America  a s a r e s u l t , amended t o e n a b l e t h e f e d e r a l  Act  govern-  ment t o i m p l e m e n t a n a t i o n a l unemployment i n s u r a n c e scheme. was  L a t e r i n 1940  t h e Unemployment I n s u r a n c e A c t  p a s s e d a n d b y m i d 1941  t h e scheme h a d become  fully  operational. I t s h o u l d be n o t e d t h a t t h i s A c t p l a c e d more e m p h a s i s o n t h e r o l e o f t h e n a t i o n a l employment t h a n on t h e r o l e o f unemployment i n s u r a n c e . s t a t e d as  service  This  was  follows: "The p r i n c i p a l f u n c t i o n o f t h e A c t i s t o p r o v i d e a n employment s e r v i c e . The f u n d a m e n t a l o b j e c t i v e of the s e r v i c e I s to f i n d s u i t a b l e w o r k f o r e m p l o y a b l e p e r s o n s who d e s i r e employment. To t h e e x t e n t t h a t t h e r e i s f a i l u r e t o p l a c e i n s u r e d persons i n v o l u n t a r i l y une m p l o y e d , t h e A c t p r o v i d e s a i d b y way o f insurance b e n e f i t s . " 1  S u b s e q u e n t l y , t h e s e two equal  o b j e c t i v e s have been a c c o r d e d  importance. S i n c e 1940  many c h a n g e s i n t h e programme h a v e  b e e n made.  I n f a c t , i n 1955  A c t o f 1940  was  Insurance  r e p e a l e d and r e p l a c e d by a c o m p l e t e l y  r e v i s e d form o f the o l d A c t .  1  t h e Unemployment  - T h i r d Annual R e p o r t , op.  These changes d i d n o t ,  cit.,  p.  8.  - 12  -  h o w e v e r , a l t e r t h e g e n e r a l n a t u r e o f t h e unemployment Insurance  programme a n d w i l l  n o t be d i s c u s s e d a t t h i s  point. The C a n a d i a n Unemployment I n s u r a n c e  Programme  Three general types of p r o t e c t i o n a g a i n s t the r i s k o f unemployment a r e i n e x i s t e n c e t o d a y :  compulsory  i n s u r a n c e s c h e m e s , v o l u n t a r y i n s u r a n c e schemes a n d n o n 1  insurance  schemes.  The f i r s t two a r e c h a r a c t e r i z e d  by t h e p o o l i n g o f r i s k ,  c o n t r i b u t i o n s by employees o r  e m p l o y e r s o r b o t h , c l e a r e n t i t l e m e n t o f b e n e f i t s by  vir-  t u e o f c o n t r i b u t i o n s , t h e c o n t i n u i t y o f t h e scheme a n d t h e a b s e n c e o f a n y k i n d o f means t e s t .  The d i f f e r e n c e  b e t w e e n c o m p u l s o r y a n d v o l u n t a r y programmes h i n g e s the presence in  o r absence o f compulsion  t h e scheme.  on  to p a r t i c i p a t e  N o n - i n s u r a n c e programmes a r e s y s t e m s o f  unemployment a l l o w a n c e s  which a r e not based on  insurance  p r i n c i p l e s a n d w h e r e payment i s g e n e r a l l y s u b j e c t t o a means  test. U s i n g t h i s system o f c l a s s i f i c a t i o n Canada's  programme may be l a b e l l e d a c o m p u l s o r y i n s u r a n c e  1 - S c h w e i t z e r , o p . c i t . . p . 11.  scheme.  - 13 -  Further,  i t i s contributory i n nature.  F o r each  em-  p l o y e d w o r k e r a w e e k l y c o n t r i b u t i o n i s made t o t h e u n employment i n s u r a n c e f u n d . the  From t h e b e g i n n i n g , k0% o f  c o n t r i b u t i o n has been c o l l e c t e d from t h e employer,  k0% f r o m t h e e m p l o y e e a n d 20% f r o m t h e g o v e r n m e n t .  When  a n i n d i v i d u a l becomes u n e m p l o y e d h e i s a u t o m a t i c a l l y e n t i t l e d t o r e c e i v e b e n e f i t s from t h e fund f o r a c e r t a i n p e r i o d o f t i m e o r u n t i l he o b t a i n s  new e m p l o y m e n t .  B e n e f i t and c o n t r i b u t i o n r a t e s are both determined by the  individual's earnings. Numerous d e t a i l e d r e g u l a t i o n s s u r r o u n d t h e  a d m i n i s t r a t i o n o f t h i s programme. in  t h e 1955 A c t a n d d e a l w i t h  These a r e d e s c r i b e d  such c o n s i d e r a t i o n s  b e n e f i t and c o n t r i b u t i o n r a t e s , e l i g i b i l i t y  as  f o r coverage,  m e t h o d s o f m a k i n g c l a i m s , e x c e p t e d o c c u p a t i o n s a n d so o n . Since t h i s chapter attempts only t o give a broad overv i e w o f t h e w o r k i n g s o f t h e programme no d i s c u s s i o n o f these i s presented.  The i n t e r e s t e d r e a d e r may r e f e r t o  s e v e r a l government p u b l i c a t i o n s f o r d e t a i l e d  1  information.  1 - F o r example, R e p o r t o f t h e Committee o f I n q u i r y i n t o t h e Unemployment I n s u r a n c e A c t , ( O t t a w a : Queen's P r i n t e r , 19o2) a n d D o m i n i o n B u r e a u o f S t a t i s t i c s , Annual Report on B e n e f i t Years E s t a b l i s h e d and T e r m i n a t e d U n d e r t h e Unemployment I n s u r a n c e A c t , ( O t t a w a : Queen's P r i n t e r , v a r i o u s i s s u e s ) .  - 14 -  Objectives o f Unemployment Insurance This study deals with the r o l e of unemployment insurance as an automatic s t a b i l i z e r .  I t i s important  to bear i n mind, however, that s t a b i l i z a t i o n i s not the s o l e , o r even the primary, o b j e c t i v e of such programmes. A b r i e f review of the numerous alms of unemployment i n surance w i l l f a c i l i t a t e p l a c i n g the study i n i t s proper perspective. 1 Among the main o b j e c t i v e s a r e : (1)  The p r o v i s i o n of a measure of economic s e c u r i t y f o r  employees and t h e i r f a m i l i e s through p a r t i a l compensation f o r wage l o s s e s r e s u l t i n g from i n v o l u n t a r y unemployment, (2)  S t a b i l i z a t i o n of the business cycle through com-  pensatory adjustments to the f l o w of funds to and from i n d i v i d u a l s and corporations, (3)  A j u s t d i s t r i b u t i o n of the costs of unemployment,  (4)  The p r e s e r v a t i o n of work s k i l l s ,  (5)  Assurance of b e n e f i t s as a matter of r i g h t to those  r e g u l a r l y attached to the labour market, and  1 - L e s t e r , Richard A. The Economics of Unemployment Compensation (Princeton: I n d u s t r i a l R e l a t i o n s S e c t i o n , 1962) p. 4.  - 15 -  (6)  Maintenance o f normal economic  incentives.  In o t h e r words, a t the micro grammes a i m a t p r o m o t i n g  level  such  pro-  Individual social welfare.  A t t h e macro l e v e l t h e y a i m a t p r o m o t i n g w e l l being of the country.  t h e economic  A t t h e same t i m e , t h e y a r e  c o n s t r a i n e d by a need t o m a i n t a i n employee m o t i v a t i o n at  a productive l e v e l . Although  this  study i s concerned  only with  s t a b i l i z a t i o n , t h e s o c i a l and m o t i v a t i o n a l o b j e c t i v e s o f t h e programme must be k e p t i n m i n d . among o b j e c t i v e s i s n o t p o s s i b l e .  Complete c o n s i s t e n c y F o r example, an i n c r e a s e  i n b e n e f i t payments aimed a t i m p r o v i n g t h e e f f i c a c y of  C a n a d a ' s programme a s a n a u t o m a t i c  s t a b i l i z e r might  a d v e r s e l y a f f e c t employee m o t i v a t i o n . any recommendations a r i s i n g out o f t h i s other similar  As a  result,  s t u d y , o r any  s t u d y , must be e x a m i n e d i n t h e l i g h t o f  the t o t a l i t y of these  objectives.  CHAPTER 3 AUTOMATIC S T A B I L I Z A T I O N  AND UNEMPLOYMENT INSURANCE  A u t o m a t i c S t a b i l i z a t i o n - An H i s t o r i c a l I t was n o t u n t i l t h e m i d mists, on the basis of t h e o r e t i c a l that the f i s c a l  system e x e r t e d  Perspective  1940*s  that  econo-  arguments, proposed  an automatic s t a b i l i z i n g  1 i m p a c t o n t h e economy.  T h e c o n c e p t , h o w e v e r , may b e  t r a c e d t o an e a r l i e r p e r i o d i n t h e development o f economic thought. cept  Two s t r a n d s  i n t h e development o f a con-  o f automatic s t a b i l i z a t i o n assist  h i s t o r i c a l perspective.  i nplacing i t i n  T h e s e a r e (1) t h e c l a s s i c a l  c o n c e p t o f a u t o m a t i c i t y a n d (2) t h e d e v e l o p m e n t a n d elaboration of fiscal  policy.  T r a d i t i o n a l economic t h e o r y  dealt with the  m a r k e t f o r c e s u n d e r w h i c h t h e f a c t o r s o f p e r f e c t comp e t i t i o n governed the production goods w h i l e m a i n t a i n i n g  1  and d i s t r i b u t i o n o f  almost f u l l  - Clement, op. c i t . , p.  employment o f r e s o u r c e s .  303*  2 - K e i s e r , Norman F . "The D e v e l o p m e n t o f t h e C o n c e p t o f Automatic S t a b i l i z e r s , " Journal o f Finance, XI (December, pp.  1956),  429-431.  - 17 -  A  s i g n i f i c a n t degree of automatism i s i m p l i c i t  t h e o r e t i c a l o r i e n t a t i o n : given  in this  certain conditions,  c e r t a i n consequences a u t o m a t i c a l l y f o l l o w e d .  Admittedly  t h i s I n t e r p r e t a t i o n i s q u i t e d i f f e r e n t from that  given  to automatic s t a b i l i z e r s .  are  s i m i l a r i n that both are d e t e r m i n e d and  However, the  s a i d to operate under  prescribed  t i o n a r y changes.  The  concepts  r u l e s which exclude d i s c r e -  p r o p o s i t i o n that automatic  b i l i z e r s have a t h e o r e t i c a l c a r r y - o v e r  from  economic thought, t h e r e f o r e , appears q u i t e A s e c o n d s t r a n d c a n be  E a r l y economists v i r t u a l l y income and  ignored  of  ployment. of  full  finance  1  Keynes* a t t a c k on  e f f e c t s of At  changed t h i s .  As  the  fiscal same  theoretical orientation i t s e m p h a s i s on  the  full  em-  classical principles  employment e q u i l i b r i u m , b u d g e t i n g and 1  emergence  a c c e p t e d as normal p r o c e d u r e .  stemmed d i r e c t l y f r o m t h e  t r a d i t i o n a l economics w i t h  reasonable.  stabilization.  expenditure l e v e l s .  t i m e t h e b a l a n c e d b u d g e t was This  the  sta-  traditional  t r a c e d to the  o f f i s c a l p o l i c y a s a means o f e c o n o m i c  p o l i c y on  pre-  a r e s u l t there  public  emerged  the  - K e y n e s , J.M. The G e n e r a l T h e o r y o f E m p l o y m e n t , I n t e r e s t a n d Money (New Y o r k : H a r c o u r t and  B r u c e , 1936).  - 18 -  v i e w t h a t compensatory  f i s c a l and monetary p o l i c y  b e u s e d t o m a i n t a i n t h e economy a t p r o s p e r o u s  1  Hansen  2  and L e r n e r  w e r e , p e r h a p s , most  i n c a r r y i n g Keynes' t h i s development  c r e t i o n a r y element  levels.  instrumental  work i n t h i s d i r e c t i o n .  one  might  Taking  s t e p f u r t h e r by removing the  dis-  y i e l d s the concept o f automatic  stabilization. The  above p a r a g r a p h s have s i m p l y a t t e m p t e d  to p l a c e the concept o f automatic s t a b i l i z e r s p e r s p e c t i v e o f economic  thought.  into  No a t t e m p t h a s  made t o t h o r o u g h l y r e v i e w i t s h i s t o r i c a l  the  been  development.  T h i s would i n v o l v e d i s c u s s i o n o f the c o n t r i b u t i o n s o f c o n s i d e r a b l e number o f e c o n o m i s t s a n d w o u l d a p p e a r of p l a c e i n a study of t h i s s o r t .  out  F o r such a treatment  3 t h e r e a d e r may  r e f e r to Keiser's  d i s c u s s i o n o f the  subject. 1 - H a n s e n , A l v i n H. F u l l Recovery o r S t a g n a t i o n Y o r k : W.W. N o r t o n Company, 1938). 2 - L e r n e r , A.P. Debt,"  (New  " F u n c t i o n a l F i n a n c e and t h e F e d e r a l S o c i a l R e s e a r c h , X ( F e b r u a r y , 1943).  3 - K e i s e r , op. c i t .  a  - 19 -  The  Concept o f Automatic As  Stabilizers  stated previously, automatic  stabilizers  a r e mechanisms which a u t o m a t i c a l l y reduce  the f l o w of  i n c o m e o r money t o i n d i v i d u a l s and p e r i o d s o f e x p a n s i o n and which times of c o n t r a c t i o n . matic  corporations during  increase these flows i n  F u r t h e r development o f the  s t a b i l i z e r concept, however, i s n e c e s s a r y  adequately r e f l e c t  their  p r o c e e d by o u t l i n i n g  nature.  auto-  to  T h i s development  t h r e e c r i t e r i a w h i c h m u s t be  will met  b e f o r e a n y m e c h a n i s m c a n be c l a s s i f i e d a s a n  automatic  stabilizer.  The  writings  of  Clement.  (1) It  Hart  1  The  and  first  c r i t e r i a are taken from the  2  c r i t e r i a i s , perhaps,  the most o b v i o u s .  s t a t e s t h a t t h e m e c h a n i s m must a c t i n a  manner.  countercyclical  I n more d e t a i l , t h e d e v i c e m u s t ( a ) t e n d t o  p r o d u c e budget d e f i c i t s d u r i n g downswings and d u r i n g upswings,  o r (b) e x p a n d t h e c o m m u n i t y ' s s t o c k o f  money ( o r n e a r money) d u r i n g d o w n s w i n g s a n d d u r i n g upswings,  1 - H a r t , A.G.  surpluses  or  (c) t e n d to l o w e r the  reduce i t  public's  Money. D e b t and E c o n o m i c A c t i v i t y  edition;  New  2 - Clement, op. C i t .  Y o r k : P r e n t i c e H a l l , 1954)  (second p.  462.  -  demand f o r c a s h b a l a n c e s during upswings, or  20  -  d u r i n g downswings and  (d) a n y  combination  A p r e r e q u i s i t e of these t h a t t h e d e v i c e ' s a c t i o n be v a r i a b l e s that are fluctuations.  types  of  raise i t  these.  of e f f e c t s i s  c l o s e l y t i e d to o p e r a t i o n a l  s e n s i t i v e t o and  conform w i t h economic  F i g u r e 1 i l l u s t r a t e s the business  cycle,  w i t h the t r e n d l i n e r e p r e s e n t i n g s t a b i l i z a t i o n o b j e c t i v e s . A  c o u n t e r c y c l i c a l m e c h a n i s m w o r k s t o a s s i s t movements  t o w a r d t h e t r e n d l i n e and In theory,  i f the  c a n c e l movements away f r o m i t .  s t a b i l i z e r worked i n s t a n t a n e o u s l y  conformed p e r f e c t l y w i t h economic f l u c t u a t i o n s the pensatory  e f f e c t would r e s u l t o n l y d u r i n g the  of depression  and  prosperity.  and com-  periods  However, d e s p i t e a l a c k  o f e m p i r i c a l e v i d e n c e i t a p p e a r s l i k e l y t h a t i n most cases there i s a time l a g before  the  stabilizer  comes  2  into  1  effect.  - These f o u r s u b - c r i t e r i a a l l o w automatic s t a b i l i z e r s to work t h r o u g h f i s c a l , monetary o r e x p e c t e t i o i i a l mechanisms. S i n c e i t i s extremely d i f f i c u l t to q u a n t i f y t h e e f f e c t s o f t h e s e l a t t e r two m e c h a n i s m s , they are o f t e n overlooked. However, l i q u i d i t y p o s i t i o n s , e x p e c t a t i o n s and h a b i t s o f t e n have s i g n i f i c a n t i m p a c t s o n t h e economy. The study p r e s e n t e d h e r e makes no a t t e m p t t o q u a n t i f y t h e s e e f f e c t s so t h a t t h e e s t i m a t e s o f c o u n t e r c y c l i c a l e f f i c i e n c y that are developed w i l l tend t o be o n t h e l o w s i d e .  2 - Clement, op.  cit..  p.  311.  - 21 -  The  e f f e c t o f an a u t o m a t i c s t a b i l i z e r  c l o s e l y t o economic a c t i v i t y , because o f t h i s approximates entire  the desired  compensatory  linked  time l a g  e f f e c t over  the  cycle.  FIGURE  1*  S i m p l e model o f t h e b u s i n e s s c y c l e and the a c t i o n o f a u t o m a t i c s t a b i l i z e r s .  Level of Economic Activity  Stabilization Objective  Time  * This figure  i s adapted from Clement,  op.  c i t . , p.  308.  - 22 -  (2) its  A second c r i t e r i a r e q u i r e s  that the device  begin  c o u n t e r c y c l i c a l e f f e c t w i t h o u t w a i t i n g f o r a new  policy decision. maticity. lies  Since  This  c r i t e r i a i s necessary f o r auto-  the prime value  of these  stabilizers  i n t h i s automatism i t i s necessary that  administra-  t i v e d i s c r e t i o n be k e p t t o a minimum. (3)  The t h i r d  c r i t e r i a i s t h a t t h e mechanism d i s p l a y  "predictability of action".  1  This  c o n d i t i o n stems f r o m  the  f a c t that the e f f e c t i v e automatic s t a b i l i z e r  not  have h a r m f u l i n d i r e c t s i d e e f f e c t s .  of p r e d i c t a b i l i t y , the expectations  should  I n the absence  o f d e c i s i o n makers  may v a c i l l a t e a n d a s a r e s u l t " t h e s t a b i l i t y o f t h e 2 economy's i n t e r n a l r e s p o n s e m e c h a n i s m This,  diminishes".  i n t u r n , may c a u s e a n e f f e c t i v e s t a b i l i z a t i o n  p o l i c y t o become l e s s s a t i s f a c t o r y o r e v e n d a m a g i n g . It  may a p p e a r a t f i r s t ,  that this t h i r d  cri-  t e r i a i s one f o r e f f e c t i v e a u t o m a t i c s t a b i l i z a t i o n a n d that i t i s unnecessary i f e f f e c t i v e n e s s i s not a t i s s u e . However, a d v e r s e s i d e e f f e c t s on e x p e c t a t i o n s t u a l l y Impossible to quantify. 1 - I b i d , p. 2 -  Ibid.  306.  are v i r -  Consequently, i t cannot  - 23 -  "be a c c u r a t e l y d e t e r m i n e d w h e t h e r a n y than offset  the b e n e f i c i a l  considered.  To be c e r t a i n  effect  effects  such e f f e c t s  of the d e v i c e b e i n g  t h a t an o v e r a l l  compensatory  i s being experienced i t i s necessary that  adverse expectational effects  be e x p e r i e n c e d .  b i l l t y o f a c t i o n promotes such a  condition.  Unemployment I n s u r a n c e as an A u t o m a t i c Automatic  Predicta-  1  Stabilizer  By e x a m i n i n g C a n a d a ' s u n -  e m p l o y m e n t i n s u r a n c e programme i n t e r m s o f t h e s e  criteria  i s then p o s s i b l e t o determine whether o r not i t can  theoretically  1  no  s t a b i l i z e r s m u s t meet t h e t h r e e  c r i t e r i a developed above.  it  more  - The  be  c l a s s i f i e d as a s t a b i l i z e r .  I t should  d i s c u s s i o n of these c r i t e r i a helps to distinguish automatic s t a b i l i z e r s from formula f l e x i b l e stabilizers, discretionary stabilization policies and i n s t i t u t i o n a l s t a b i l i z e r s . Formula f l e x i b l e s t a b i l i z e r s a u t o m a t i c a l l y come i n t o effect when some e c o n o m i c v a r i a b l e g i v e s a d a n g e r signal. The d i f f e r e n c e b e t w e e n t h i s c o n c e p t and a u t o m a t i c s t a b i l i z e r s l i e s i n t h e f a c t that the automatic s t a b i l i z e r s are c o n t i n u a l l y o p e r a t i n g i n t h e economy w h i l e t h e f o r m u l a f l e x i b l e s t a b i l i z e r s come i n t o e f f e c t o n l y when some p r e d e t e r m i n e d s i g n a l i s g i v e n . Discret i o n a r y s t a b i l i z a t i o n p o l i c i e s d i f f e r from a u t o m a t i c s t a b i l i z e r s i n t h e i r need f o r p o l i c y decisions. Institutional s t a b i l i z e r s , or bulwarks, are i n s t i t u t i o n s which a c t to strengthen t h e economy a n d n e e d n o t n e c e s s a r i l y work i n a countercyclical manner. The m a g n i t u d e o f g o v e r n ment s p e n d i n g a n d t h e B a n k o f C a n a d a a r e e x a m p l e s of such bulwarks.  - 24 -  be  noted that t h i s  i s a t h e o r e t i c a l e x e r c i s e o n l y , and  that i n the f i n a l a n a l y s i s only empirical t e s t can allow t h e p o s i t i v e i d e n t i f i c a t i o n o f t h e programme a s a n a u t o matic  stabilizer.  pirical  performing  s u c h em-  t e s t s i t i s a s s u r i n g t o have a t h e o r e t i c a l  work s u g g e s t i n g to  However, b e f o r e  frame-  what r o l e t h e programme c a n b e e x p e c t e d  play. T h e o r e t i c a l l y , t h e unemployment i n s u r a n c e  gramme m e e t s t h e c r i t e r i a c y c l i c a l manner. twofold:  that i t function i n a  pro-  counter-  A c t u a l l y t h e compensatory a c t i o n i s  (1) because c o n t r i b u t i o n s ( a f l o w o f funds from  i n d i v i d u a l s a n d c o r p o r a t i o n s ) a r e d e r i v e d f r o m t h e wagebill  o f covered  e m p l o y e e s , t h e y move p a r a l l e l t o t h e l e v e l  o f economic a c t i v i t y ; and (2) because b e n e f i t s ( a f l o w o f funds t o i n d i v i d u a l s ) a r e d e r i v e d from the l e v e l o f u n e m p l o y m e n t , t h e y move i n a d i r e c t i o n o p p o s i t e l e v e l o f economic a c t i v i t y .  tothe  Thus b y t h e v e r y n a t u r e o f  t h e programme a r e d u c t i o n i n t h e l e v e l o f e c o n o m i c ty  should,  activi-  t h e o r e t i c a l l y , be accompanied by a l o w e r i n g  o f t h e l e v e l o f c o n t r i b u t i o n s and by an i n c r e a s e i n t h e l e v e l o f b e n e f i t payments.  S i m i l a r l y , an increase i n the  l e v e l o f economic a c t i v i t y s h o u l d ,  t h e o r e t i c a l l y , be  accompanied by an i n c r e a s e i n the l e v e l o f c o n t r i b u t i o n s and  b y a r e d u c t i o n i n t h e l e v e l o f b e n e f i t payments.  - 25  -  F u r t h e r , because employers w i l l not  immediately  a d j u s t t h e i r w o r k f o r c e t o t h e economy's l e v e l o f  acti-  vity,  be-  i t appears l i k e l y ,  tween any  t h a t t h e r e w i l l be a l a g  change i n economic a c t i v i t y and 1  ment o f t h e s t a b i l i z i n g e f f e c t . f a c e d by  For  the n e c e s s i t y of d e c r e a s i n g  the  commence-  example, an production  employer  will  r e t a i n v a l u a b l e workers d e s p i t e the f a c t t h a t a p o r t i o n o f t h e i r time w i l l  be  idle.  This r e s u l t s from the  p l o y e r * s e x p e c t a t i o n t h a t bad  t i m e s w i l l be  b y g o o d t i m e s when t h e s k i l l s o f t h e s e vital.  of the business The meets the formulas a r e not  replaced  workers w i l l  T h u s , t h e a c t i o n o f t h e unemployment  programme a s a s t a b i l i z e r p r o b a b l y  and  a p p r o x i m a t e s movements  unemployment i n s u r a n c e  c o n d i t i o n s are  be  insurance  c y c l e more c l o s e l y , t h a n i f no  second c r i t e r i a .  em-  lag existed.  programme a l s o  C o n t r i b u t i o n and  benefit  stated i n legislation  and  subject to the d i s c r e t i o n of i n d i v i d u a l s o r  groups of i n d i v i d u a l s .  O n l y when t h e  r e g u l a t i o n s i s a t i s s u e can o f f i c i a l s  i n t e r p r e t a t i o n of interfere.  These  i n t e r f e r e n c e s are of minor s i g n i f i c a n c e . 1  - R e j d a , G e o r g e E. "Unemployment I n s u r a n c e a s a n A u t o m a t i c S t a b i l i z e r " , J o u r n a l o f R i s k and I n s u r a n c e , X X X I I I ( J u n e , 1966) pp. 205-208.  -  The the  26  c r i t e r i a of  met  by  programme.  are  q u i t e p r e d i c t a b l e and  -  s t a b i l i t y of a c t i o n i s also  The  workings of subject  the  programme  t o change o n l y  through  a d d i t i o n s o r amendments t o t h e Unemployment I n s u r a n c e Act. the to  A l t h o u g h changes d u r i n g d i r e c t i o n o f c h a n g e was  increase  Benefit  part of  and  should  predictable.  not  In theory,  corporate  then, the  The  t e s t , h o w e v e r , m u s t be provide  be  quantitative  a c t as a n a u t o m a t i c  t h e means b y  e f f i c a c y of the  derived.  Chapters 4,  assessment.  outlays, they,  ex-  small similarly,  C a n a d i a n unemployment  programme s h o u l d  can  contributions.  expectations.  insurance  ment o f t h e  Changes t e n d e d  have a d v e r s e e f f e c t s on  h a v e minimum e f f e c t s o n  does not  frequent,  because c o n t r i b u t i o n s form such a  i n d i v i d u a l and  final  1 9 5 0 ' s were  l e v e l o f b o t h b e n e f i t s and  increases  pectations  should  the  the  empirical.  stabilizer.  Theory  which q u a n t i t a t i v e  programme a s 5i  and  a  assess-  stabilizer  6 provide  such  a  CHAPTER 4 THE STUDY:  METHODOLOGY  Introduction  1 Eilbott  p o i n t s o u t t h a t two q u i t e d i f f e r e n t  a p p r o a c h e s t o t h e measurement o f t h e q u a n t i t a t i v e i m p a c t of an automatic s t a b i l i z e r  may b e e m p l o y e d .  The f i r s t  a p p r o a c h a t t e m p t s t o d e t e r m i n e what p o r t i o n o f a n y c h a n g e i n the v a r i a b l e being economic a c t i v i t y the  stabilizer.  used t o represent  thelevel of  i s o f f s e t b y a n o p p o s i n g change i n The s e c o n d a t t e m p t s t o d e t e r m i n e what  p o r t i o n o f a p o t e n t i a l change i n t h e v a r i a b l e economic a c t i v i t y stabilizer. any  representing  i s prevented from o c c u r r i n g by t h e  In this  case t h e s t a b i l i z e r  change i n economic a c t i v i t y  i s said to l i m i t  rather than simply  t o p a r t i a l l y o f f s e t a n y change t h a t h a s a l r e a d y  acting  occurred.  T h e s e two a p p r o a c h e s f o r m t h e b a s i s o f t h e m e t h o d o l o g y t o be e m p l o y e d i n t h i s  study.  I n terms o f t h e unemployment I n s u r a n c e  pro-  gramme t h e c o n t r a s t b e t w e e n t h e s e two f o r m u l a t i o n s i s 1 - Eilbott,  o p . c i t . p . 450.  - 28 -  r e a d i l y apparent.  One  works from the p o s i t i o n t h a t  change i n economic a c t i v i t y w i l l unemployment  a  l e a d t o a change i n  b e n e f i t s a n d c o n t r i b u t i o n s . The  other  p r o p o s e s t h a t changes i n t h e l e v e l o f b e n e f i t s  and  c o n t r i b u t i o n s a f f e c t p r i v a t e and c o r p o r a t e spending and t h u s movement i n e c o n o m i c a c t i v i t y . is  The k e y  difference  i n t e r m s o f w h i c h c h a n g e i s t o be l a b e l l e d t h e c a u s e  a n d w h i c h i s t o be l a b e l l e d t h e e f f e c t . It propositions  i s i n t u i t i v e l y c l e a r that both of these have v a l i d i t y .  b e n e f i t s and c o n t r i b u t i o n s activity. can  i n the l e v e l of  can cause changes i n economic  A t t h e same t i m e c h a n g e s i n e c o n o m i c  a n d do l e a d t o c h a n g e s i n t h e b e n e f i t a n d  bution levels. ful  Changes  activity  contri-  Due t o t h i s i n t e r d e p e n d e n c e i t i s u s e -  t o employ b o t h a p p r o a c h e s i n f o r m i n g a methodology  to determine the c o u n t e r c y c l i c a l e f f e c t i v e n e s s of unemployment  Canada's  i n s u r a n c e programme.  Before d e s c r i b i n g i n d e t a i l the methodology r e s u l t i n g f r o m t h e a d o p t i o n o f t h e s e two a p p r o a c h e s , i t will  be c o n s t r u c t i v e  employed.  t o d e s c r i b e t h e t y p e o f d a t a t o be  Net n a t i o n a l income a t f a c t o r c o s t i s u s e d  t o r e p r e s e n t t h e l e v e l o f economic a c t i v i t y .  This  v a r i a b l e a d e q u a t e l y r e f l e c t s t h e a c t i v i t y o f t h e economy  -  and  29 -  i s a common c h o i c e i n s t u d i e s o f t h i s t y p e .  Further,  n a t i o n a l i n c o m e r e p r e s e n t s t h e sum o f i n c o m e r e c e i v e d f o r productive s e r v i c e s rendered. ments such a s unemployment g i v e n a s payment  insurance b e n e f i t s are not  f o r productive services their  I s n o t i n c l u d e d i n n a t i o n a l income. attempts  S i n c e t r a n s f e r pay-  t o determine  value  Since t h i s  study  what p o r t i o n o f a n y change i n  t h e l e v e l o f economic a c t i v i t y i s p r e v e n t e d o r o f f s e t b y unemployment necessary  b e n e f i t s and c o n t r i b u t i o n , i t i s  t h a t t h e v a r i a b l e chosen t o represent the  l e v e l o f a c t i v i t y does n o t i n c l u d e t h e v a l u e o f t h e s e benefits.  N a t i o n a l income i s t h e n a p a r t i c u l a r l y  useful  measure o f economic a c t i v i t y f o r t h e p u r p o s e s o f t h i s study. Q u a r t e r l y time  s e r i e s d a t a were e m p l o y e d f o r  b o t h n a t i o n a l i n c o m e a n d t h e unemployment b e n e f i t s and c o n t r i b u t i o n s .  insurance  Annual data a r e too crude  and  do n o t a d e q u a t e l y r e f l e c t t h e d y n a m i c s o f r e c e s s i o n s  and  expansions.  S w i n g s i n t h e economy d u r i n g t h e p e r i o d  under c o n s i d e r a t i o n d i d not c o i n c i d e with calendar  year  t u r n i n g p o i n t s and a t times l a s t e d l e s s than a year. T h e u s e o f q u a r t e r l y d a t a made i t n e c e s s a r y seasonally adjusted values f o r the three  t o have  series.  - 30 -  C h o i c e o f t h e t i m e p e r i o d 1950  t o 19&5 r e -  s u l t e d p r i m a r i l y from a d e s i r e t o r e f l e c t mic  conditions.  o f 1950  The e x a c t d a t e s o f t h e f i r s t  to the fourth quarter  limitations. tabulated  When r e s e a r c h  adjusted  d a t a f o r unemployment since the f i r s t  s e t t h e lower l i m i t on t h e time was o r i g i n a l l y  I966 was n o t a v a i l a b l e , I965 was t a k e n a s t h e u p p e r for  quarter period.  undertaken complete  data  so t h a t t h e l a s t q u a r t e r o f l i m i t of the period.  These  l i m i t a t i o n s a r e not thought t o prevent adequate s e n t a t i o n o f modern p o s t w a r economic All  r a w d a t a was o r i g i n a l l y  Dominion Bureau o f S t a t i s t i c s the f e d e r a l government. t a k e n from v a r i o u s  compiled by t h e  (D.B.S.), an agency o f  D a t a o n n a t i o n a l Income was  i s s u e s o f t h e D.B.S. p u b l i c a t i o n  D a t a o n unemployment i n s u r a n c e  II,  by  National  Quarters.  b e n e f i t s and c o n t r i b u t i o n s  s u p p l i e d t o t h e a u t h o r b y D.B.S. i n p e r s o n a l  pondence.  repre-  conditions.  N a t i o n a l A c c o u n t s , Income a n d E x p e n d i t u r e s ,  was  data  The D o m i n i o n B u r e a u o f S t a t i s t i c s h a s  seasonally  This  quarter  o f 19&5 r e s u l t e d f r o m  b e n e f i t s and c o n t r i b u t i o n s o n l y o f 1950.  postwar econo-  corres-  income d a t a i s r e p r o d u c e d i n A p p e n d i x  b u t i n c o m p l i a n c e w i t h a D.B.S. r e q u e s t ,  data on  b e n e f i t s and c o n t r i b u t i o n s a r e not reproduced.  - 31 -  The p e r i o d 1950 of  methodology employed r e q u i r e d t h a t t h e  t o 19^5  b e "broken i n t o its component p e r i o d s  economic e x p a n s i o n and c o n t r a c t i o n .  was  The t o t a l  marked o f f by t h e t u r n i n g p o i n t s o f t h e b u s i n e s s  c y c l e s d e v e l o p e d b y E . J . Chambers ( f o r t h e p e r i o d to  period  1953)  (for The  a n d t h e F e d e r a l Department o f Trade  theperiod  1954  to  1 2 3 4 The  TROUGH Jan. June  1950 1954  1958 M a r . 1961 Apr.  a n d Commerce  1965).  f o l l o w i n g c y c l e s were CYCLE  1950  1  established: TROUGH  PEAK  1953 A p r . 195? Jan. i960 Dec. 1965  May  June  1954  1958 M a r . 1961 Apr.  trough o f the f i r s t cycle a c t u a l l y occurred i n  O c t o b e r 1949  b u t due t o t h e l i m i t a t i o n I n d a t a  a b o v e I t was t a k e n t o b e J a n u a r y 1950  mentioned  f o r t h e purpose  of  the study.  at  t h e t i m e o f w r i t i n g i s d i s c o n t i n u e d a s o f December  1965.  Also, the expansion being experienced  I t i sfelt  that these approximations w i l l not  s i g n i f i c a n t l y a l t e r the r e s u l t s o f the study.  1 - Hay, K e i t h A . J . " E a r l y T w e n t i e t h C e n t u r y B u s i n e s s . C y c l e s i n Canada", Canadian J o u r n a l o f Economics a n d P o l i t i c a l S c i e n c e , X X X I I ( A u g u s t , 19bb) p . 3o2.  - 32 -  The above c y c l e s y i e l d the f o l l o w i n g expansions and c o n t r a c t i o n s : EXPANSIONS 1) 1st quarter  1950  2nd quarter  1953  2) 2nd quarter  1954  2nd quarter  1957  3) 2nd quarter  1958  1st quarter  i960  4) 1st quarter  1961  4th quarter  1965  1) 2nd quarter  1953  2nd quarter  195^  2) 2nd quarter  1957  2nd quarter  1958  3) 1st quarter  i960  1st quarter  I96I  CONTRACTIONS  An a t y p i c a l s i t u a t i o n r e q u i r e d the shortening o f the second c o n t r a c t i o n . Although most i n d i c a t o r s showed an economic c o n t r a c t i o n from A p r i l 1957 to A p r i l 1958,  n a t i o n a l income a c t u a l l y Increased by $1 b i l l i o n  during the p e r i o d .  The l a r g e s t part o f t h i s increase  r e s u l t e d from advances i n n o n - m i l i t a r y and m i l i t a r y wages and from a s i g n i f i c a n t increase i n the f i g u r e f o r inventory e v a l u a t i o n adjustment.  1  Wage values apparently  Dominion Bureau o f S t a t i s t i c s , N a t i o n a l Accounts, Income and Expenditures, by Quarters 1947-1961, (Ottawa: Queen's P r i n t e r , 1962).  - 33 -  increased  due t o a n i n f l a t i o n a r y f a c t o r d e s p i t e a r e -  cession i n the productive  sector.  The i n v e n t o r y  valuation  adjustment value, being  q u i t e a r b i t r a r y , o f t e n moves  i n a d i r e c t i o n opposite  t o t h e movement i n e c o n o m i c  activity. Since  t h e methodology employed i n t h i s  compares t h e d e c r e a s e i n n a t i o n a l income d u r i n g tractions to increases  study con-  i n b e n e f i t s and decreases i n  c o n t r i b u t i o n s , a downswing n o t r e f l e c t e d i n n a t i o n a l i n come c a n n o t be u s e d . crease  N a t i o n a l income d i d , however, d e -  b e t w e e n t h e t h i r d a n d f o u r t h q u a r t e r s o f 1957  so t h a t t h i s p e r i o d may b e s u b j e c t e d  to the test. A l -  t h o u g h s u c h a s h o r t p e r i o d d o e s n o t a l l o w t o o much r e l i a n c e t o be p l a c e d o n t h e r e s u l t s , t h i s p e r i o d i s t a k e n t o r e f l e c t t h e second c o n t r a c t i o n .  The t h r e e  t r a c t i o n s t o be u s e d t h r o u g h o u t t h e s t u d y  a r e then as  follows:  \  CONTRACTIONS 1)  2nd q u a r t e r  1953  -  2nd  quarter  1954  2)  3rd q u a r t e r  1957  -  4th  quarter  1957  3)  1st q u a r t e r  i960  -  1st  quarter  1961  con-  - 34 -  To d a t e t h i s c h a p t e r h a s d i s c u s s e d l o g i c a l considerations  common t o e a c h o f t h e v a r i o u s  types o f a n a l y s i s performed i n the o v e r a l l Attention  t y p e s o f a n a l y s i s were p e r f o r m e d .  Basically,  three  Each o f these  will  described.  Offsetting  Effects As  discussed  c y c l i c a l effectiveness any  research.  i s now t u r n e d t o a more d e t a i l e d d e s c r i p t i o n  o f t h e s p e c i f i c techniques employed.  now be  methodo-  p r e v i o u s l y one a p p r o a c h t o c o u n t e r i s t o m e a s u r e what p o r t i o n o f  change i n n a t i o n a l income i s o f f s e t b y an o p p o s i n g  change i n t h e s t a b i l i z e r .  To do t h i s a t e c h n i q u e  t o t h a t o f R e j d a was e m p l o y e d . income were f i r s t  1  similar  Changes i n n a t i o n a l  compared t o changes i n unemployment  i n s u r a n c e b e n e f i t s a n d t h e n t o changes i n unemployment insurance contributions during expansion and c o n t r a c t i o n  the periods  o f economic  e s t a b l i s h e d above.  The com-  p a r i s o n p e r f o r m e d y i e l d e d t h e p e r c e n t a g e o f any change in  n a t i o n a l income o f f s e t b y a change i n t h e l e v e l o f  c o n t r i b u t i o n s and b e n e f i t s . income i n c r e a s e d  F o r example, i f n a t i o n a l  by $200 m i l l i o n d u r i n g  1 - R e j d a , op. c i t .  an expansion  - 35 -  a n d b e n e f i t s d e c r e a s e d b y $20  m i l l i o n o v e r t h e same  p e r i o d , the o f f s e t t i n g e f f e c t of the b e n e f i t s are be 10$  to III  o f t h e change i n n a t i o n a l income.  demonstrates  said  Appendix  i n more d e t a i l t h e c a l c u l a t i o n s i n -  volved i n using t h i s technique. P r e v e n t i o n o f Change I n N a t i o n a l Income The the  second approach  to the effectiveness of  u n e m p l o y m e n t i n s u r a n c e programme a s a n a u t o m a t i c  s t a b i l i z e r attempts to determine the percentage o f p o t e n t i a l c h a n g e i n n a t i o n a l income p r e v e n t e d b y a c t i o n o f t h e programme.  a  the  Again the e f f e c t i v e n e s s of  b e n e f i t s and c o n t r i b u t i o n s were a n a l y z e d s e p a r a t e l y d u r i n g b o t h the expansions and c o n t r a c t i o n s o f the p e r i o d . A s i m p l e m u l t i p l i e r model based on s i m i l a r t o t h o s e o f Musgrave and M i l l e r was  and  used to determine t h i s p r e v e n t i o n e f f e c t .  m o d e l may  be d e s c r i b e d m a t h e m a t i c a l l y a s  For benefits  A  B  =  _ 1  1  approaches Eilbott  2  This  follows:  -cE-or-o _____  <) A  I - cAX - cE_ r AY B  B  - M u s g r a v e , R i c h a r d A. a n d M i l l e r , M e r t o n H. " B u i l t - i n F l e x i b i l i t y " , American Economic Review. X X X V I I I ( M a r c h , 1948).  2 - E i l b o t t , op. c i t .  - 36 -  cE r c  For c o n t r i b u t i o n s  =  c  + iE r c  c  I - cAX - i 4 Z + c E r AY AY ° r  C  r  +- i E r C  C  r  n  wHe're Ag <= the percentage of p o t e n t i a l change i n n a t i o n a l income prevented by a change i n b e n e f i t s , A  c  =  the percentage of a p o t e n t i a l change i n  n a t i o n a l income prevented by a change i n c o n t r i b u t i o n s , c  =  the marginal propensity to consume out of  disposable income, i  »  the marginal propensity to i n v e s t out of  r e t a i n e d corporate Eg «  earnings,  the income e l a s t i c i t y of b e n e f i t s over a  p e r i o d o f time, E  c  =  the income e l a s t i c i t y of both employee and  employer c o n t r i b u t i o n s over a p e r i o d of time, r  g  =  the r a t i o of b e n e f i t s to n a t i o n a l income  a t the beginning of the p e r i o d , r  c  =  the r a t i o of both employee and employer  c o n t r i b u t i o n s t o n a t i o n a l income a t the beginning of the p e r i o d ,  - 37 -  AX  AY  -  t h e p e r s o n a l s h a r e o f t h e change i n n a t i o n a l  ~  t h e c o r p o r a t e s h a r e o f t h e change i n n a t i o n a l  income,  Mi AY income.  an(  3-  D e r i v a t i o n o f t h e b e n e f i t component o f t h e m o d e l may b e s t s e r v e t o e x p l a i n what i s i n v o l v e d i n t h e use o f t h i s type o f model. H o l d i n g a l l economic v a r i a b l e s c o n s t a n t t h e l e v e l o f unemployment  except  insurance b e n e f i t s , the expression  f o r a c h a n g e i n i n c o m e b e t w e e n two p e r i o d s may be r e presented by the f o l l o w i n g m u l t i p l i e r AY where equals  AY  -  A l  + cZAY  +  model:  c(r Y 1  1  (1)  - r Y ) 2  2  e q u a l s Y-^ - Y g , o r t h e c h a n g e i n i n c o m e ; A I - l£»  o r t h e change i n i n v e s t m e n t ; c e q u a l s  t h e m a r g i n a l p r o p e n s i t y t o consume o u t o f d i s p o s a b l e i n c o m e ; Z e q u a l s AX,  o r t h e p e r s o n a l s h a r e o f t h e change  AY  i n i n c o m e a n d r-j_ a n d r  2  are the r a t i o s  of benefits to  i n c o m e i n t h e two p e r i o d s . The i n c o m e e l a s t i c i t y is  (E ) of the benefits £  (B)  t h e r a t i o o f t h e p e r c e n t a g e change i n b e n e f i t s t o t h e  p e r c e n t a g e change i n income.  T h i s may be e x p r e s s e d  as  - 38 -  Eg  - AB Y  x  B  AY  (2)  x  S o l v i n g f o r AB gives AB  =  E . .. AY ,. .. B 1 fi  Y  Now  AB  =  r  Y  x  So s u b s t i t u t i n g (3) AY  =  But by d e f i n i t i o n  x  l -  r  41 +- cZAY +  B  n  Solving  Y  (4)  g  cEL °  £YB, 1  Y 1  (5)  » r^  l  So s u b s t i t u t i n g (6) i n t o (5) -  2  i n t o (1) gives  Y  AY  (3)  yields  A l + cZAY + °E r AY B  B  (7)  (?) f o r AY gives AY  =  _  Al  1 - cZ - c g:r  (8)  E  B  As a convenient measure of c o u n t e r c y c l i c a l one may use the expression  effectiveness  - 39 -  M Ag w h e r e AY  =  refers  under discussion  -  1  i s the the  (9)  a  to a change i n income f o r the and  employment b e n e f i t s countercyclical  _Y  AY do  not  r a t i o of the  decline  to the  Ag  no  decline benefit  i s then the  c h a n g e i n i n c o m e p r e v e n t e d by  no  , then,  the  in  (or i n system  fraction  of  existence of  un-  benefits. (8)  Substituting zero f o r  into  (9)  w i t h Eg  equal  to  yields A  B  »  1  -  Al  1  - cZ-  (10)  cEgrg  Al 1  rearranging A  -  cZ  yields  B  •  ,-.cE r B  1 and  AY AY  un-  ( o r i n c r e a s e ) i n income  s y s t e m had  countercyclical^,  employment  There i s then  ET, e q u a l s z e r o .  system under c o n s i d e r a t i o n  acting  t o a s y s t e m where  exist.  e f f e c t and  c r e a s e ) i n income i f the  the  refers  a  system  substituting  Z  - cZ =  AX AY  -  (11)  B  cEgrg  -  A  B  40  -  - °V  -  B  (a)  AY Equation A w i l l  ^  B  be u s e d t o d e t e r m i n e t h e p e r c e n t a g e o f  any p o t e n t i a l change i n income p r e v e n t e d by t h e b e n e f i t s . E q u a t i o n B, which i s d e r i v e d  i n Appendix  IV, i s used  t o d e t e r m i n e t h e p e r c e n t a g e change p r e v e n t e d by t h e contributions.  U s i n g t h e same q u a r t e r l y d a t a f o r n a t i o n a l  income a n d unemployment b e n e f i t s and c o n t r i b u t i o n s and the  same b u s i n e s s c y c l e s a s w e r e u s e d i n t h e f i r s t  a n a l y s i s t h e f o l l o w i n g s t e p s were p e r f o r m e d t o d e t e r m i n e A g a n d A^: (1)  Income e l a s t i c i t i e s w e r e d e r i v e d  by computing the  p e r c e n t a g e changes i n t h e l e v e l s o f b e n e f i t s and c o n t r i b u t i o n s between t h e I n i t i a l  and t e r m i n a l  each expansion and c o n t r a c t i o n .  quarters of  The r a t i o s o f t h e s e  p e r c e n t a g e s t o t h e p e r c e n t a g e change i n n a t i o n a l during  t h e same p e r i o d w e r e t h e n d e t e r m i n e d .  t h i s process y i e l d s an a r c e l a s t i c i t y v a l u e s o f Ag a n d A of  the s t a b i l i z e r  c  Since  the resultant  measure t h e average  o v e r the complete  income  effectiveness  period.  - 41 -  (2)  R a t i o s o f b e n e f i t s and c o n t r i b u t i o n s t o n a t i o n a l  income a t t h e b e g i n n i n g o f t h e p e r i o d were e s t a b l i s h e d . The use o f t h e b e g i n n i n g q u a r t e r s r e s u l t s f r o m t h e der i v a t i o n o f the model. (3)  The c o r p o r a t e s h a r e o f n a t i o n a l i n c o m e was o b t a i n e d  b y r e l a t i n g t h e change i n c o r p o r a t e p r o f i t s b e f o r e  taxes  ( a f t e r a d j u s t i n g f o r changes i n i n v e n t o r y v a l u a t i o n ) d u r i n g t h e p e r i o d under c o n s i d e r a t i o n t o changes i n n a t i o n a l i n c o m e o v e r t h e same p e r i o d . as a percentage  T h i s i s measured  so t h a t t h e p e r s o n a l s h a r e o f n a t i o n a l  income i s o b t a i n e d by s u b t r a c t i n g t h e c o r p o r a t e from (4)  share  100$. F i n a l l y , t h e m a r g i n a l p r o p e n s i t i e s were  values. I • 0.5  assigned  Two s e t s o f v a l u e s w e r e e m p l o y e d : c * a n d c • 0.8;  i = 0.3.  0.9;  The f o r m e r may be  con-  s i d e r e d t o be t h e maximum p o s s i b l e v a l u e s ; t h e l a t t e r may b e t a k e n a s minimum v a l u e s .  1  S i n c e Ag a n d A  c  are  i n c r e a s i n g f u n c t i o n s o f c and i these v a l u e s y i e l d the maximum a n d minimum p o s s i b l e v a l u e s f o r t h e p r e v e n t i o n o f a p o t e n t i a l c h a n g e i n n a t i o n a l Income. v a l u e s may be t h o u g h t p e r i o d and need n o t be  1 - I b i d , p.  455.  The c a n d i  o f as average v a l u e s over the fixed.  - 42  It  i s noted that i n contrast  technique described which the  -  a u t o m a t i c s t a b i l i z e r must  Single values for  no  assigning  the  and  to the  i s avoided.  C o r r e l a t i o n of C y c l i c a l  insurance  c a n be 1.  i n t h e use  of  an  this  s h i p o f u n e m p l o y m e n t i n s u r a n c e b e n e f i t s and t o n a t i o n a l i n c o m e c a n be a n a l y s i s of the  quarterly series. relationship  1  obtained  cyclical  I n the  (negative  1  For  of  model.  relationcontributions  c a s e o f b e n e f i t s an  corre-  each inverse  national  income  That i s , b e n e f i t s ,  should increase  as  national  d e c r e a s e when n a t i o n a l i n c o m e i n -  c o n t r i b u t i o n s the  - R e j d a , op. c i t .  example  components o f  correlation) with  i f a c t i n g as a s t a b i l i z e r ,  creases.  variables  by p e r f o r m i n g a  indicates a countercyclical effect.  i n c o m e d e c r e a s e s and  Since  Components  A d d i t i o n a l e v i d e n c e i n d i c a t i n g the  lation  obtained  values of these  Appendix V gives  calculations involved  within  fall.  s p e c i f i c v a l u e s t o c and  consensus e x i s t s as  specificity  first  t h i s t e s t y i e l d s a range  e f f e c t i v e n e s s o f the unemployment  programme a s a n  o n l y by  to the  reverse  i s true.  A  - 43 -  direct relationship (positive correlation) with income i n d i c a t e s a c o u n t e r c y c l i c a l e f f e c t . contributions  should increase  income i f a c t i n g as coefficient  That i s ,  decrease with  a stabilizer.  As  the  effect i s taking To  can  national  correlation  (r) approaches 1 f o r c o n t r i b u t i o n s  f o r b e n e f i t s , one  series  and  national  be more c e r t a i n t h a t a  and  -1  stabilization  place.  obtain  the  c y c l i c a l components o f  ( n a t i o n a l income, b e n e f i t s  and  the  three  contributions)  the  1 c y c l i c a l r e s i d u a l technique consists of  c o m p o n e n t s as  where  and  1  employed.  T h i s method  e l i m i n a t i n g s e a s o n a l v a r i a t i o n and  f r o m each s e r i e s and  form as  was  obtaining  residuals.  the  cyclical  T h i s may  be  trend  irregular  shown i n e q u a t i o n  follows: (1)  T x S x C X l * S  (2)  T x C x  1  * T  =  «  T x C x l  C x i  T  »  the  trend  component,  S  «  the  s e a s o n a l component,  C  «  the  cyclical  1  =  the  Irregular  component, component.  - C r o x t o n , F r e d e r i c k E. .and Cowden, D u d l e y J . Applied G e n e r a l S t a t i s t i c s (second e d i t i o n ; Englewood C l i f f s : P r e n t i c e H a l l , 1955)» pp.  3°7-38?.  - ij4  Since seasonally removed. this the by  -  the data used i n t h i s  adjusted  o n l y the  component.  An  removing the  i r r e g u l a r component.  used f o r t h i s purpose.  study.  improve  1  ponents of the  technique  A 1,  2,  1 moving  Since  no  improve-  e l i m i n a t e d from  three  the i r r e g u l a r  the  c y c l i c a l i r r e g u l a r com-  series, correlationcoefficients  f o r n a t i o n a l income and  b e n e f i t s and  for national  c o n t r i b u t i o n s were d e t e r m i n e d f o r each o f t h e  e x p a n s i o n s and  two  p e r i o d was  short  be  too  of the  a p p l i e d to the  s q u a r e s t e c h n i q u e was  (one  contractions. quarter)  Because  The  employed to o b t a i n these  c i t . , p.  202.  income four the  t h i s technique  c o n t r a c t i o n o f 1957.  Ibid.  2 - R e j d a , op.  the  removed.^  Having obtained  1 -  made t o  I n most s t u d i e s o f t h i s n a t u r e ,  component i s n o t  be  used to c a l c u l a t e  a t t e m p t was  ment r e s u l t e d t h i s a d j u s t m e n t was  not  to  c o r r e l a t i o n c o e f f i c i e n t s r e s u l t i n g from t h i s  a v e r a g e was  and  already  t r e n d component h a d  A l i n e a r r e l a t i o n s h i p was  trend  s t u d y was  could  least coefficients.  -  45  -  Adjustments The volves butions  methodology o u t l i n e d i n t h i s chapter i n -  c o m p a r i s o n o f the l e v e l o f b e n e f i t s and e x i s t i n g a t the beginning  e x p a n s i o n s and To  and  end  of  contrispecific  contractions.  date the  i m p l i c i t assumption that  any  change i n t h e s e l e v e l s r e f l e c t s a change l n t h e l e v e l economic a c t i v i t y has  b e e n made.  However, a  portion  o f t h e s e changes have r e s u l t e d from s p e c i f i c c h a n g e s i n t h e Unemployment I n s u r a n c e Almost without e x c e p t i o n increased  the  coverage of the A c t ,  r a t e s and/or i n c r e a s e d  and  contributions paid.  non-recurring  Act.  t h e s e changes have  1  increased  benefit  contributions rates.  resulted i n a secular increase  i n the  This  amount o f  During expansions,  f o r these changes i n the A c t  to overstate  s t a b i l i z i n g e f f e c t s of  and  understate  During the  the  the opposite  fits  is  1 - One  will  tend  benefits.  i s true -  e f f e c t s of contributions i s understated  benefits  contributions  s t a b i l i z i n g e f f e c t s of  contractions  has  therefore,  data uncorrected the  of  and  the  that of  bene-  overstated.  e x c e p t i o n was a t i g h t e n i n g o f r e g u l a t i o n s r e g a r d s t o c l a i m s o f m a r r i e d women.  with  - 46 -  The employment o f u n a d j u s t e d d a t a y i e l d s a picture  of the actual h i s t o r i c a l  effectiveness  o fthe  u n e m p l o y m e n t i n s u r a n c e programme a s a n a u t o m a t i c bilizer.  T h i s knowledge i s u s e f u l ,  sta-  but because o f t h e  e f f e c t s o f t h e n o n - r e c u r r i n g changes i n t h e A c t p r e d i c t i o n of  the future  r o l e o f t h e programme i s i m p o s s i b l e .  By  removing t h e e f f e c t s o f these changes an e s t i m a t e o f the  future  r o l e c a n be made a s s u m i n g t h a t  not  be c h a n g e d d u r i n g t h e f u t u r e  For  t h i s reason estimates o f the countercyclical  period  the Act w i l l  being  n e s s o f t h e programme w i l l be made u s i n g d a t a to  was n o t f e a s i b l e t o make e x a c t  f o r c h a n g e s i n t h e programme d u r i n g t h e  any  effective-  adjusted  r e m o v e t h e e f f e c t o f c h a n g e s i n t h e programme. It  It  considered.  i svirtually increase  activity.  195O-I965  period.  i m p o s s i b l e t o d e t e r m i n e what p o r t i o n o f  ( o r decrease) i n b e n e f i t s  levels i sattributable what p o r t i o n  adjustments  or  contribution  t o c h a n g e s i n t h e programme a n d  i sattributable  t o changes i n economic  H o w e v e r , a t a minimum t h e d i r e c t i o n o f t h e  e f f e c t o f a n y c h a n g e i n t h e programme c a n b e d e t e r m i n e d , and  b y e s t i m a t i n g i t s m a g n i t u d e a more u s e f u l  estimate  of  t h e e f f i c a c y o f t h e u n e m p l o y m e n t i n s u r a n c e programme  as  an automatic s t a b i l i z e r  i n t h e economy c a n b e o b t a i n e d .  -  The the  47  s i g n i f i c a n t changes i n t h e A c t d u r i n g  period 1950-19&5  a n <  * t h e a d j u s t m e n t s made t o o f f s e t  t h e s e changes a r e o u t l i n e d (1)  -  below:  The e x p a n s i o n o f 1 9 5 0 - 1 9 5 3 ?  The i n t r o d u c t i o n o f  supplementary b e n e f i t s payable to persons unable to q u a l i f y f o rregular b e n e f i t s r e s u l t e d i n an increase o f about  $5 m i l l i o n i n b e n e f i t p a y o u t s .  A t t h e same t i m e  1  b e t w e e n J a n u a r y 1 9 5 0 a n d J u l y 1 9 5 2 b e n e f i t r a t e s were 2  increased  by about  2 5 $ o r $6 m i l l i o n .  Adjustment f o r  t h e s e c h a n g e s i n t h e programme r e q u i r e d r e d u c i n g t h e change i n b e n e f i t l e v e l d u r i n g Also, during were i n c r e a s e d  by about  the p e r i o d by $ 1 1 m i l l i o n .  this period contribution rates 2 0 $ o r $5 m i l l i o n .  The c h a n g e  i n t h e c o n t r i b u t i o n l e v e l was, t h e r e f o r e , d e c r e a s e d b y this  amount.  (2)  The c o n t r a c t i o n o f 1 9 5 3 - 1 9 5 4 :  The programme d i d  n o t s i g n i f i c a n t l y c h a n g e a n d no a d j u s t m e n t s  were  necessary.  1  - D o m i n i o n B u r e a u o f S t a t i s t i c s , A n n u a l R e p o r t o n ,, B e n e f i t . Y e a r s „EstaJ^lls|ied^an^T§TOlnatea U n d e r t h e Unemployment I n s u r a n c e A c t , 1950, (Ottawa: Queen's P r i n t e r , 1951).  2 - Dominion,. B u r e a u , o f . . S t a t i s t i c s , S t a t i s t i c a l - R e p o r t o n t h e . O p e r a t i o n . , o f t h e Unemployment I n s u r a n c e A c t , J u l y 19fe0t ( O t t a w a : Queen's P r i n t e r , i960). 3 - Ibid.  - 48 -  (3)  The expansion o f  1954-1957:  The complete r e v i s i o n  of the Act that occurred i n 1955 made i t v i r t u a l l y imp o s s i b l e to a c c u r a t e l y estimate the necessary adjustments. A rough a n a l y s i s o f the new b e n e f i t classes and of the number o f a d d i t i o n a l workers covered a f t e r the r e v i s i o n ( i n c l u d i n g parts o f the a g r i c u l t u r a l labour f o r c e , f o r e s t r y workers, h o r t i c u l t u r a l workers, municipal policemen and fishermen) y i e l d e d a rough estimate of a 20% increase i n the b e n e f i t s and c o n t r i b u t i o n s  1  during the period.  I n absolute terms t h i s necessitated reducing the change i n b e n e f i t s over the period by $11 m i l l i o n and reducing the change i n c o n t r i b u t i o n s by $8 m i l l i o n .  (4)  The c o n t r a c t i o n o f  1957*  A one month extension o f  the supplementary b e n e f i t payments during the f u u r t h quarter o f 1957 was estimated to have increased the 2 b e n e f i t payout o f the quarter by #10 m i l l i o n . $10 m i l l i o n was,  This  t h e r e f o r e , subtracted from the a c t u a l  change i n b e n e f i t payments. 1 - Report of the Committee,of. Inquiry i n t o the Unemployment Insurance Act (Ottawa: Queen's P r i n t e r , 1962). 2 - Ibid.  - 49 -  (5)  The e x p a n s i o n o f  I958-1960:  An i n c r e a s e i n b e n e f i t  c a t e g o r i e s was a p p r o x i m a t e l y o f f s e t  by a t i g h t e n i n g o f t h e  r e g u l a t i o n p e r t a i n i n g t o m a r r i e d women  1  s o t h a t no a d -  j u s t m e n t , was made t o t h e b e n e f i t f i g u r e . r a t e s w e r e i n c r e a s e d b y a b o u t J0% o r $15 t h e p e r i o d s o t h a t i t was n e c e s s a r y i n the c o n t r i b u t i o n l e v e l by t h i s  Contribution 2 million  during  t o reduce t h e change  amount.  (6) The c o n t r a c t i o n o f i960 a n d t h e e x p a n s i o n o f 1961 1965s The programme d i d n o t c h a n g e t o a s i g n i f i c a n t e x t e n t a n d no a d j u s t m e n t s were  necessary.  A g a i n , i t s h o u l d be s t r e s s e d t h a t a l l t h e s e adjustments of  a r e based on crude  c h a n g e s i n t h e programme.  estimates o f t h e magnitude Despite t h i s , i t i s f e l t  t h a t t h e a d j u s t e d d a t a a r e somewhat more u s e f u l t h a n t h e historical  data. T h i s chapter has d e s c r i b e d the type o f data  and  the techniques used i n t h i s study t o evaluate t h e  e f f e c t i v e n e s s o f Canada's unemployment i n s u r a n c e gramme a s a n a u t o m a t i c  stabilizer.  chapter present s p e c i f i c techniques. of  Ibid.  2 - Ibid.  The a p p e n d i c e s  tothe  examples o f t h e u s e o f t h e s e  The f o l l o w i n g c h a p t e r p r e s e n t s t h e r e s u l t s  t h i s r e s e a r c h methodology.  1 -  pro-  CHAPTER 5 THE STUDY?  RESULTS  Introduction This chapter willpresent the r e s u l t s o f the a n a l y s i s described i n the previous chapter.  Firstly,  the tabulated r e s u l t s o f the three s p e c i f i c  techniques  will  be i n d i v i d u a l l y e x h i b i t e d a n d d e s c r i b e d .  And  secondly, a comparison o f the three sets o f data b e made.  Chapter 6 d i r e c t s i t s e l f  these r e s u l t s ,  will  to a discussion of  i n the l i g h t of the primary o b j e c t i v e  of empirical determination o f the effectiveness of the C a n a d i a n u n e m p l o y m e n t i n s u r a n c e programme a s a n  automatic  stabilizer. Offsetting  Effects T a b l e 1 shows t h e r e l a t i o n s h i p b e t w e e n c h a n g e s  in  n a t i o n a l i n c o m e a n d c h a n g e s i n unemployment  b e n e f i t s during the f o u r expansions o f t h e 1950  t o 1965  period.  insurance  and t h r e e c o n t r a c t i o n s  R e s u l t s shown a r e b a s e d o n  b o t h h i s t o r i c a l and a d j u s t e d v a l u e s o f t h e changes i n benefit  level.  - 51 -  TABLE 1 C h a n g e s i n unemployment i n s u r a n c e b e n e f i t s a s a p e r c e n t a g e o f t h e change i n n a t i o n a l income d u r i n g periods o f economic e x p a n s i o n and c o n t r a c t i o n , h i s t o r i c a l a n d a d j u s t e d , 1950-1965.  Change i n b e n e f i t s a s a percentage o f the change i n n a t i o n a l income  Period Expansions  Historical  1st q u a r t e r  1950 - 2nd q u a r t e r  2nd  195^ - 2nd  M  2nd  "  1958 - 1st  1st  "  1961 - 4th  "  1953  1957  w  "  Adjusted  -0.67$*  0.07$  -0.55$  0.31$  i960  3.  3.45$  1965  1.  1.77$  Contractions 2nd q u a r t e r  1953 - 2nd q u a r t e r  3rd  "  1957 - 4th  1st  "  i960 - 1st  M  "  1954  1957 1961  13.82$  13.82$  32.35$  17.65$  24.55$  24.55$  * A negative value indicates a d e s t a b i l i z i n g effect; a positive value indicates a s t a b i l i z i n g Table 1 reveals all  7 periods  theadjusted,  show t h a t unemployment the  desired  several  effect.  salient points.  a n d more r e l e v a n t ,  In  data  i n s u r a n c e b e n e f i t s have produced  compensatory e f f e c t s .  The d e s t a b i l i z i n g  - 52 -  e f f e c t s shown b y t h e h i s t o r i c a l d a t a d u r i n g  the  first  two e x p a n s i o n s o f t h e p e r i o d r e s u l t e d f r o m c h a n g e s i n the  programme w h i c h i n c r e a s e d  As p o i n t e d during  t h e b e n e f i t payment  o u t e a r l i e r , when t h i s t y p e o f c h a n g e  level. occurs  a period of expansion the c o u n t e r c y c l i c a l e f f e c t i v e -  n e s s o f t h e programme i s u n d e r s t a t e d .  I n these  two  p a r t i c u l a r cases understatement produced an apparent destabilizing  effect.  Another c r i t i c a l point  r e l a t e s to the c r e d i t a b l e  performance o f the b e n e f i t s as an automatic during  the three  contractions.  1  c o m p e n s a t o r y e f f e c t s o f 13.82$, spectively during  the three  These f i g u r e s a l s o p o i n t in  the effectiveness  stabilizer  Adjusted data  reveal  17.65$, a n d 24.55$ r e -  contractions  considered.  to a substantial  improvement  of the b e n e f i t s during  b e t w e e n t h e e a r l i e s t a n d most r e c e n t  downswings  contractions  con-  sidered.  1 - I t s h o u l d be n o t e d t h a t b e c a u s e t h e p e r i o d t a k e n to represent the c o n t r a c t i o n of ext e n d e d f o r o n l y one q u a r t e r , l e s s r e l i a n c e s h o u l d be p l a c e d o n t h e r e s u l t s o f t h i s p e r i o d t h a n o n t h o s e o f t h e o t h e r two c o n t r a c t i o n s .  1957-1958  - 53 -  T h i r d l y , T a b l e 1 i n d i c a t e s t h a t unemployment i n s u r a n c e b e n e f i t s have been r e l a t i v e l y  ineffective  as  automatic  stabilizers  d u r i n g p e r i o d s o f economic ex-  pansion.  The maximum amount o f a n y i n c r e a s e i n n a t i o n a l  income o f f s e t by a decrease  i n benefits occurred during  1958-1960 u p s w i n g when a c o u n t e r c y c l i c a l e f f e c t 3.45$ was e x p e r i e n c e d . I t a p p e a r s t h a t t h e b e n e f i t  the  p o n e n t o f t h e unemployment i n s u r a n c e programme a powerful  stabilizer  during expansionary  two e a r l i e r  i s not  experienced  than during the  ones.  Table Table  com-  periods.  H o w e v e r , a s u b s t a n t i a l l y l a r g e r e f f e c t was d u r i n g t h e two most r e c e n t e x p a n s i o n s  of  I I presents data comparable t o t h a t o f  I f o r t h e c o n t r i b u t o r y component o f t h e programme.  T h a t i s , i t shows t h e r e l a t i o n s h i p b e t w e e n c h a n g e s i n n a t i o n a l i n c o m e a n d c h a n g e s i n unemployment c o n t r i b u t i o n s during the f o u r expansions t r a c t i o n s of the period. and  Table  and t h r e e  R e s u l t s based on  adjusted data are again I I suggests  insurance  historical  shown. t h a t unemployment  c o n t r i b u t i o n s have not been e f f e c t i v e as an stabilizer or  d u r i n g e i t h e r p e r i o d s o f economic  contraction.  con-  insurance  automatic expansion  The maximum c o m p e n s a t o r y e f f e c t  occurred  d u r i n g t h e most r e c e n t c o n t r a c t i o n and i t s m a g n i t u d e  - 54 -  TABLE I I C h a n g e s i n unemployment i n s u r a n c e c o n t r i b u t i o n s a s a p e r c e n t a g e o f t h e change i n n a t i o n a l income d u r i n g p e r i o d s o f economic expansion a n d c o n t r a c t i o n , h i s t o r i c a l a n d a d j u s t e d , I95O-I965.  Change i n b e n e f i t s a s a p e r c e n t a g e o f t h e change i n n a t i o n a l income.  Period Expansions  Historical  Adjusted  1st q u a r t e r 1950 - 2nd q u a r t e r 1953  0.94$*  0.60$  2nd  "  1954 - 2nd  "  1957  0.62$  0  2nd  *  1958 - 1st  "•  i960  4.08$  1.72$  1st  "  1961 - 4th  "  1965  0.36$  0.36$  0  0  Contractions 2nd q u a r t e r 1953 - 2nd q u a r t e r  3rd  1957 - 4th  M  1st  "  i960 - 1st  * P o s i t i v e values  1954  "  1957  0  0  ... "*  ...1961.  2.73$  2.73$-  indicate stabilizing  effects.  was o n l y 2.73$ o f t h e c h a n g e i n n a t i o n a l i n c o m e .  During  t h e o t h e r two c o n t r a c t i o n s a n d d u r i n g t h e e x p a n s i o n o f 1954-1957 no o f f s e t t i n g e f f e c t s w e r e e x p e r i e n c e d . ever,  i n no p e r i o d was a d e s t a b i l i z i n g e f f e c t  How-  experienced.  A t r e n d toward improved e f f e c t i v e n e s s over time appears t o have  occurred.  - 55 -  Table I I I combines the b e n e f i t and c o n t r i b u t a r y components of the programme and shows the r e l a t i o n s h i p between t h e i r net changes and changes i n n a t i o n a l income. This t a b l e i n d i c a t e s the e f f e c t i v e n e s s o f the complete unemployment insurance programme as an automatic s t a bilizer.  I n short, Table I I I combines the data o f Tables  I and I I .  TABLE I I I Combined change i n unemployment insurance b e n e f i t s and c o n t r i b u t i o n s as a percentage of the change i n n a t i o n a l income during periods of economic expansion and cont r a c t i o n , h i s t o r i c a l and adjusted, 1950-1965.  Period , ...  ..  ,  Expansions  Combined change i n benef i t s and c o n t r i b u t i o n s as a. percentage, of the change i n n a t i o n a l Income Historical  Adjusted  1st quarter 1950 - 2nd quarter 1953  0.27$*  0.67$  2nd  1957  0.07$  0.31$  M  1954 - 2nd  "  2nd  "  1 9 5 8  - 1st  "  I 9 6 0  7.53$  5.17$  1st  "  I 9 6 I  -  "  1965  2.13$  2.13$  2nd quarter 1953 - 2nd quarter 1954  13.82$  13.82$  3rd  "  1957 - 4th  M  1957  32.35$  17.65$  1st  *_  i960 ^. 1st  M  1961  27.28$  27.28$.  4th  Contractions  * P o s i t i v e values i n d i c a t e s t a b i l i z i n g e f f e c t s .  - 56 -  This table simply serves some o f t h e p o i n t s made e a r l i e r . may  be  summarized as f o l l o w s :  programme has  The  to f u r t h e r c l a r i f y The  overall picture  unemployment  p e r f o r m e d c r e d i t a b l y as an  s t a b i l i z e r d u r i n g economic downswings. performance has  improved over time  r e c e n t d o w n s w i n g was  expansions,  latively 1960,  In addition t h i s compen-  d u r i n g the most  about double the o f f s e t t i n g  o f t h e programme d u r i n g t h e f i r s t During  automatic  so t h a t t h e  s a t o r y e f f e c t s o f 2?.28$ e x p e r i e n c e d  insurance  contraction considered.  h o w e v e r , t h e programme h a s  ineffective.  effects  been r e -  Only d u r i n g the upswing o f  when a c o u n t e r c y c l i c a l e f f e c t o f 5-17$  was  1958ex-  p e r i e n c e d , d i d t h e programme assume a r o l e o f a n y portance.  However, a t r e n d t o w a r d improvement i s a p p a r e n t  when t h e o f f s e t t i n g e f f e c t s e x p e r i e n c e d two  expansions  t h e two  im-  a r e compared t o t h o s e  most r e c e n t  d u r i n g the  experienced  first  during  ones.  P r e v e n t i o n o f Change l n N a t i o n a l Income The  second technique  employed aimed a t  de-  t e r m i n a t i o n o f the p e r c e n t a g e o f change i n n a t i o n a l i n come p r e v e n t e d Due  by t h e unemployment I n s u r a n c e  programme.  t o the n a t u r e o f the methodology employed d a t a i s  - 57 -  presented  i n the form of a range of p o s s i b l e  effects.  The  preventative  a c t u a l compensatory e f f e c t l i e s  w i t h i n t h i s range.  Tables  s u l t s of t h i s technique  I V , V,  and VI  somewhere  show t h e  re-  f o r each o f the expansions  and  1 two  of the c o n t r a c t i o n s  of the p e r i o d  s u l t s b a s e d on b o t h h i s t o r i c a l and t h e b e n e f i t s and  1950-1965*  adjusted data  c o n t r i b u t i o n s are given  Re-  for  i n each t a b l e .  T a b l e I V shows t h e p e r c e n t a g e o f c h a n g e s i n n a t i o n a l income p r e v e n t e d insurance  changes i n unemployment  b e n e f i t s d u r i n g f o u r e x p a n s i o n s and  t r a c t i o n s of the these  by  I950-I965 p e r i o d .  results clearly parallel  the o f f s e t t i n g technique. ences are a l s o  I n most  those  At the  that a l l periods  instances  a r r i v e d a t by  same t i m e ,  first  some  a t the s i m i l a r i t i e s ,  yielded desired countercyclical effects.  differ-  For example, both  the  programme, The  two  same r a n k i n g t o t h e m a g n i t u d e o f t h e  during various periods.  tests effect  techniques  showed t h e g r e a t e s t e f f e c t d u r i n g u p s w i n g s d u r i n g - As  using  i t i s noted  s u b j e c t e d t o t h e t e s t showed t h a t  b e n e f i t s , when a d j u s t e d f o r c h a n g e s i n t h e  1  con-  apparent.  Looking  a l s o g i v e the  two  the  e x p l a i n e d i n C h a p t e r 4 t h i s t e s t c o u l d n o t be a p p l i e d t o t h e c o n t r a c t i o n o f I960-I96I.  - 58 -  TABLE IV The r o l e of unemployment insurance b e n e f i t s I n preventing changes i n n a t i o n a l income during periods o f economic expansion and contraction, minimum and maximum preventat i v e e f f e c t s , h i s t o r i c a l and adjusted, 1950-1965* P r e v e n t a t i v e e f f e c t s as a percentage of the change i n n a t i o n a l income  Period  Historical Min. Max.  Adjusted Min. Max.  1st quarter 1950- 2nd quarter 1953  -1.78$* -2.84$  0.17$ 0.28$  2nd  "  1954- 2nd  "  1957  -1.39$  2nd  "  1958- 1st  "  i960  7.28$ 10.32$  7.28$ 10.32$  1st  "  1961- 4th  "  1965  4.28$  4.28$  2nd quarter 1953- 2nd quarter 1954  13.01$  14.47$ 13.01$ 14.97$  3rd  "  1957- 4th  H  27.53$  31.24$ 17.17$ 19.87$  1st  "  1960- 1st  "  Expansions  -2.16$ 6.47$  0.78$  1.19$ 6.47$  Contractions  2.957  1961  -  -  -  * A negative value i n d i c a t e s a d e s t a b i l i z i n g e f f e c t ; a p o s i t i v e value i n d i c a t e s a s t a b i l i z i n g e f f e c t . 1958-1960 p e r i o d and the l e a s t e f f e c t during the 1950-1953 period.  A second s i m i l a r i t y l i e s i n the f a c t that both  - 59 -  t e s t s r e v e a l b e n e f i t s t o h a v e b e e n r e l a t i v e l y more s t a b i l i z i n g during final parallel  downswings t h a n d u r i n g  the  pansions than during  earlier  the  two  two  most r e c e n t  most s t r i k i n g d i f f e r e n c e l i e s  during periods  during  t h i s m u l t i p l i e r methodology to the  the  This  to the  t h e l a s t two  second d i f f e r e n c e stems from the  1961.  r e s u l t s I n an  the o f f s e t t i n g t e c h n i q u e .  to the  two  This  Is  expansions. of  c o n t r a c t i o n of  i n a b i l i t y to  however, apparent between the  sub-  benefits  inapplicability  1960-  substantiate  improved e f f e c t i v e n e s s over time during  i n d i c a t e d by  i n the  o f expanding economic a c t i v i t y .  particularly noticeable  ex-  ones.  s t a n t i a l l y more e f f e c t i v e r o l e a s s i g n e d  A  A  i n d i c a t e s a more e f f e c t i v e c o m p e n s a t o r y  r o l e f o r the b e n e f i t s during  The  upswings.  contractions  This  trend  contractions  was,  subjected  test. T a b l e V shows t h e p e r c e n t a g e c h a n g e i n n a t i o n a l  income p r e v e n t e d by  changes i n the l e v e l of  Insurance c o n t r i b u t i o n s .  I t presents  to t h a t o f Table IV, f o r the the  unemployment  d a t a comparable  c o n t r i b u t o r y component  of  programme. A g a i n , e x c e p t f o r t h e more e f f e c t i v e r o l e  assigned  to the  r e s u l t s are  c o n t r i b u t i o n s during upswings, these  q u i t e s i m i l a r to those a r r i v e d at  through  - 60 -  TABLE V T h e r o l e o f unemployment I n s u r a n c e c o n t r i b u t i o n s i n p r e v e n t i n g changes i n n a t i o n a l income d u r i n g p e r i o d s o f e c o n o m i c e x p a n s i o n a n d c o n t r a c t i o n , minimum a n d maximum p r e v e n t a t i v e e f f e c t s , h i s t o r i c a l a n d a d j u s t e d ,  1950-1965.  P r e v e n t a t i v e e f f e c t s as a p e r c e n t a g e o f t h e change i n n a t i o n a l , income  Period  Expansions  1st quarter  Historical Min. Max.  1950- 2nd q u a r t e r 1953  Adjusted Min. Max.  1.88$*  4.10$  1.22$  2.68$  0  0  2nd  «  1954- 2nd  n  1957  1.22$  2.65$  2nd  "  1958- 1 s t  11  i960  6.94$  13.74$  3.03$  6.27$  1st  "  1961- 4th  11  1965  0.71$  1.54$  0.71$  1.54$  0  0  0  0  0  0  0  Contractions  2nd q u a r t e r  1953- 2nd q u a r t e r 1954  3rd  "  1957- 4 t h  n  1957  0  1st.  "  1960- 1 s t  11  1961  .. - .  * P o s i t i v e values use  indicate stabilizing  of the o f f s e t t i n g technique  c o n t r i b u t i o n s were c o m p l e t e l y  ... .  effects.  (see Table I I ) .  i n e f f e c t i v e as a  during both contractions considered, i n t h e i r e f f e c t during expansions.  The stabilizer  and were n o t p o t e n t Only during the  -  - 61 -  1958-1960  e x p a n s i o n , when b e t w e e n  the p o t e n t i a l  3.03  a n d 6,27%  i n c r e a s e i n n a t i o n a l i n c o m e was  of  prevented,  i s an e f f e c t o f any magnitude i n d i c a t e d . T a b l e VI combines t h e b e n e f i t and c o m p o n e n t s o f t h e unemployment  contributory  i n s u r a n c e scheme t o g i v e  a n i n d i c a t i o n o f t h e o v e r a l l e f f e c t i v e n e s s o f t h e programme as an a u t o m a t i c s t a b i l i z e r .  I t shows t h e p e r c e n t a g e  change i n n a t i o n a l income p r e v e n t e d by t h e combined e f f e c t s o f t h e unemployment  i n s u r a n c e b e n e f i t s and  contri-  butions. T h i s t a b l e i n d i c a t e s t h a t t h e programme f u n c t i o n e d c r e d i t a b l y as an a u t o m a t i c s t a b i l i z e r d u r i n g b o t h contractions considered. significant,  A l s o , somewhat l o w e r , b u t  c o m p e n s a t o r y e f f e c t s were e x p e r i e n c e d d u r i n g  t h e two r e c e n t e x p a n s i o n s .  I n comparing these  to those a r r i v e d a t u s i n g the o f f s e t t i n g and  still  results  technique,  shown i n T a b l e I I I t h e m a i n d i f f e r e n c e a g a i n  lies  i n the g r e a t e r e f f e c t i v e n e s s that the m u l t i p l i e r approach a s s i g n s t o t h e programme d u r i n g e x p a n s i o n s .  I t appears  t h a t a t r e n d toward improvement o v e r time i s c o n j e c t u r a b l e from the data.  - 62 -  TABLE V I The r o l e o f t h e u n e m p l o y m e n t i n s u r a n c e programme i n p r e v e n t i n g changes i n n a t i o n a l income d u r i n g p e r i o d s o f e c o n o m i c e x p a n s i o n a n d c o n t r a c t i o n , minimum a n d maximum p r e v e n t a t i v e e f f e c t s , h i s t o r i c a l a n d a d j u s t e d , 1950-1965-  P r e v e n t a t i v e e f f e c t s as a p e r c e n t a g e o f t h e change i n national.income.  Period  Expansions  1st  Historical . Min. Max.  q u a r t e r 1950-  2nd q u a r t e r  1953  0.10$* 1.26$  2nd  "  1954- 2nd  "  1957  -0.17$  2nd  "  1958- 1st  •  i960  14.22$  1st  "  1961- 4th  1965  4.99$  H  Adjusted .Min...Max.  0.49$  1.39$  2.96$  0.78$  1.19$  24.06$ 10.31$ 16.59$ 8.01$  4.99$  8.01$  Contractions 2nd q u a r t e r 1953-  3rd  1st  "  "  2nd q u a r t e r  1957- 4th  i960- 1st  * A negative value p o s i t i v e value  1954  13.01$ 14.97$ 13.01$ 14.97$  "  1957  27.53$ 31.24$ 17.17$ 19.87$  "  196I  indicates a destabilizing effect;  indicates a stabilizing  effect.  a  - 63 -  Correlation of C y c l i c a l The t h i r d cyclical  Components  t e s t performed c o r r e l a t e d the  i r r e g u l a r p e r c e n t a g e o f n a t i o n a l income  both the c y c l i c a l  i r r e g u l a r percentage of  i n s u r a n c e b e n e f i t s and c o n t r i b u t i o n s .  unemployment  For benefits  negative correlation indicates a s t a b i l i z i n g for  with  a  effect;  contributions a positive correlation indicates a  stabilizing  effect.  Table V I I presents the r e s u l t s of  this test.  Only h i s t o r i c a l  l e v e l s o f b e n e f i t s and O f t h e 12 the  desired  the  expansion of  period  1  effect.  1958-1960  subjected  causing  contributions.  v a l u e s o f r c o m p u t e d , 10  stabilizing  programme was  d a t a were e m p l o y e d f o r t h e  indicate  The e x c e p t i o n  during  i s r e a d i l y explained.  The  t o s e v e r a l changes d u r i n g  an i n c o n s i s t e n c y  the  i n t h e r e l a t i o n s h i p be-  tween t h e c y c l i c a l  i r r e g u l a r percentages of the n a t i o n a l  income and b e n e f i t  series.  These changes caused  a n d n a t i o n a l i n c o m e t o move t o g e t h e r d u r i n g of the quarters not  of the period.  the  T h i s , however,  p r e c l u d e an o v e r a l l s t a b i l i z i n g  benefits majority  does  effect during  the  1 - C o e f f i c i e n t s c o u l d n o t be d e t e r m i n e d f o r t h e p e r i o d o f 1957 b e c a u s e t h e p e r i o d was t o o s h o r t .  - 64 -  TABLE V I I  C o r r e l a t i o n c o e f f i c i e n t s f o r t h e r e l a t i o n s h i p between t h e c y c l i c a l i r r e g u l a r p e r c e n t a g e s o f n a t i o n a l income a n d unemployment i n s u r a n c e b e n e f i t s a n d c o n t r i b u t i o n s d u r i n g p e r i o d s o f economic expansion and c o n t r a c t i o n , h i s t o r i c a l d a t a 1950-1965. Value of r Value o f r f o r contrifor benefits..butions  Period Expansions 1st  q u a r t e r 1950-  2nd  "  2nd  tt  1st  "  2nd q u a r t e r  1953  .59*  .48**  1954- 2nd  "  1957  .86  .29  1958- 1st  "  i960  .52  .13  n  1965  .86  -.60  1954  -.78  .98  -.61  .67  1961- 4th  Contractions 2nd q u a r t e r 1953-  3rd  1st  "  "  2nd q u a r t e r  1957- 4th  i960- 1st  M  M  1957  I96I  For b e n e f i t s a negative value  indicates a  stabilizing  e f f e c t and a p o s i t i v e value i n d i c a t e s a d e s t a b i l i z i n g effect. * For contributions a positive value indicates a lizing  stabi-  e f f e c t and a n e g a t i v e v a l u e i n d i c a t e s a de-  stabilizing  effect.  - 65 -  p e r i o d so l o n g a s t h a t when t h e v a l u e s  moved i n o p p o s i t e  d i r e c t i o n s t h e d i f f e r e n c e s b e t w e e n them w e r e t h a n when t h e y moved t o g e t h e r . a p p e a r s t o have o c c u r r e d  greater  T h i s u n u s u a l movement  as a r e s u l t o f changes i n t h e  programme. The e x c e p t i o n  during  i s less r e a d i l y explained subjected  t h e I96I-I965 u p s w i n g  s i n c e t h e programme was n o t  t o s i g n i f i c a n t change d u r i n g  the period.  w e a k n e s s i n t h e m e t h o d o l o g y may, h o w e v e r , e x p l a i n unusual r e s u l t .  A this  A s s t a t e d i n C h a p t e r 3» i n a r r i v i n g  at the c y c l i c a l i r r e g u l a r percentages, a s t r a i g h t l i n e r e l a t i o n s h i p was u s e d t o remove t h e t r e n d I n l a t e 1959 a s h a r p i n c r e a s e butions  component.  i nthe level of contri-  caused a break i n t h e t r e n d .  After this  break,  a new s t r a i g h t l i n e r e l a t i o n s h i p a p p e a r s t o h a v e e m e r g e d . I n r e m o v i n g t h e t r e n d component, t h e r e f o r e , t h e t o t a l p e r i o d s h o u l d h a v e b e e n d i v i d e d i n t o two p e r i o d s  (1950-  1959 a n d I96O-I965)with two d i f f e r e n t s t r a i g h t l i n e The e x c e p t i o n a l  trends.  r e s u l t may r e a d i l y h a v e b e e n c a u s e d b y  t h i s methodological  inadequacy.  Table V I I i n d i c a t e s that t h e a s s o c i a t i o n between t h e c y c l i c a l  component o f n a t i o n a l i n c o m e a n d  b e n e f i t s i s somewhat g r e a t e r t h a n t h a t b e t w e e n t h e c y c l i c a l  -  66  -  component o f n a t i o n a l income and c o n t r i b u t i o n s . the a s s o c i a t i o n f o r both  s e r i e s appears to have been  stronger during c o n t r a c t i o n s than during Both o f these r e s u l t s are congruent two  other techniques.  Also,  expansions.  with those of  the  I t s h o u l d be n o t e d a g a i n , h o w e v e r ,  that the strength of the r e l a t i o n s h i p  i s not a good  i n d i c a t i o n of the s i z e of a s t a b i l i z i n g e f f e c t . correlation coefficient  s h o u l d be u s e d o n l y a s an  c a t i o n as t o whether o r n o t compensatory e f f e c t s experienced.  U s e d i n t h i s manner t h i s t e s t  f u r t h e r evidence  The  to support  indiwere  yields  t h e n o t i o n t h a t t h e unem-  p l o y m e n t i n s u r a n c e programme f u n c t i o n s i n a  counter-  c y c l i c a l manner. Summary o f R e s u l t s T a b l e V I I I r e t a b u l a t e s t h e most r e l e v a n t d a t a from Tables 1  to V I I from the v i e w p o i n t of e v a l u a t i n g  C a n a d a ' s u n e m p l o y m e n t i n s u r a n c e programme a s a n stabilizer.  Except  automatic  f o r the c o r r e l a t i o n c o e f f i c i e n t s a l l  v a l u e s a r e b a s e d on a d j u s t e d d a t a f o r b e n e f i t s and butions. (1)  The  The  r e s u l t s may  be  summarized as  programme h a s p e r f o r m e d  follows:  c r e d i t a b l y as a  l i z e r during periods of contraction.  The  contri-  stabi-  b e n e f i t component  T A B L E  Vlll  Summary of r e s u l t s relevant i n determining the effectiveness o f Canada's unemployment insurance program as an automatic s t a b i l i z e r during the economic expansions and con1950  t r a c t i o n s of the p e r i o d  BENEFITS  PERIOD Expansions  OffSetting effects  -  1965.  CONTRIBUTIONS  Range of preventative effects  r for cyclical comp.  COMBINED  Offsetting effects  Range of preventative effects  r for cyclical components  Offsetting effects  1.22 -2.68%  +.43  0.67%  1.39 - 2.96%  0  +.29  0.31%  O.78 - 1.19%  Range of preventative effects  1st qu. 1950- 2nd 1953  0.07$  0.17-0.28%  -.59  0.60%  2nd <iu. 195^- 2nd 1957  0.31$  0.78-1.19%  -.86  0  2nd qu. 1958- 1st i960  3-^5%  7.28-10.32%  +.52  1.72%  3.03 -6.27%  +.13  5.17%  10.31 - 16.59$  1st qu. 1961- 4th 1965  1.77*  k.2Q- 6.47%  -.86  0.36%  0.71 -1.54%  -.60  2.13%  4.99 - 8.01%  2nd qu. 1953- 2nd 1954  13.82%  13.01-14.97%  -.78  0  0  +.98  13.82%  13.01 - 14.97%  3rd qu. 1957- 4th 1957  17.65$  17.17-19.87%  -  0  0  -  17.65%  17.17 - 19.87$  1st qu. I960- 1st 1961  24.55%  -  -.61  2.73$  -  +.67  27.28%  Contractions  -  - 68 -  o f t h e scheme h a s b e e n a l m o s t t o t a l l y r e s p o n s i b l e f o r this  effectiveness.  Further, the e f f i c a c y of the pro-  gramme d u r i n g d o w n s w i n g s i n c r e a s e d f r o m a  stabilizing  e f f e c t o f about 14$ o f t h e change i n n a t i o n a l income during the contraction of 28$  one o f a b o u t  o f t h e change i n n a t i o n a l income d u r i n g t h e c o n -  traction of (2)  1953-195^ t o  1960-1961.  The programme h a s b e e n a r e l a t i v e l y l e s s  s t a b i l i z e r during periods of expansion.  effective  However,  during  . t h e l a s t two e x p a n s i o n s a s i g n i f i c a n t c o m p e n s a t i o n was experienced. of  t h e m u l t i p l i e r model g i v e a f a i r  situation. and  This i s p a r t i c u l a r l y true I f the r e s u l t s  17$  i n d i c a t i o n o f the  I f so a s t a b i l i z i n g e f f e c t o f b e t w e e n  o f t h e c h a n g e i n n a t i o n a l i n c o m e was  during the  1958-1960  upswing.  10$  experienced  I f the o f f s e t t i n g  gives a better indication the s t a b i l i z i n g effect  technique during  t h i s p e r i o d i s r e d u c e d t o a b o u t 5$ o f t h e c h a n g e i n n a t i o n a l income.  The d i f f e r e n c e b e t w e e n t h e r e s u l t s  of the o f f s e t t i n g and m u l t i p l i e r techniques resolved before  must b e  a u s e f u l statement about t h e e f f i c i e n c y  o f t h e programme a s a n a u t o m a t i c s t a b i l i z e r d u r i n g e x p a n s i o n s c a n b e made. resolution.  Chapter 6 w i l l attempt such a  CHAPTER 6 DISCUSSION OF RESULTS  Introduction T h i s chapter o f f e r s a general statement as t o t h e e f f i c a c y o f C a n a d a ' s unemployment gramme a s a n a u t o m a t i c  stabilizer.  insurance  Before  such a  prostate-  ment was p o s s i b l e , h o w e v e r , t h e c o n f l i c t b e t w e e n t h e magnitude o f the s t a b i l i z i n g d u r i n g expansions  indicated  by t h e m u l t i p l i e r and o f f s e t t i n g t e c h n i q u e s  h a d t o be  resolved.  To  Such a r e s o l u t i o n i s p r e s e n t e d .  i n the development o f the g e n e r a l statement,  assist  the e f f e c t i v e -  n e s s o f C a n a d a ' s programme i s c o m p a r e d t o t h a t o f t h e U n i t e d S t a t e s ' programme.  T h i s g i v e s some s o r t o f y a r d -  s t i c k b y w h i c h t h e C a n a d i a n programme c a n b e Finally,  evaluated.  C h a p t e r 6 g i v e s a n i n d i c a t i o n o f how t h e v a r i o u s  l i m i t a t i o n s o f the study e f f e c t the conclusions  that  have been drawn w i t h r e g a r d s  counter-  cyclical effectiveness.  t o t h e programme's  - 70 -  Magnitude of the S t a b i l i z i n g E f f e c t s During I n the previous the m u l t i p l i e r technique  C h a p t e r , i t was  Expansions  noted  that  indicates a stabilizing  effect  d u r i n g e x p a n s i o n s much g r e a t e r t h a n t h a t I n d i c a t e d  by  the o f f s e t t i n g technique.  the  d i f f e r e n c e c a n be  As E i l b o t t  e x p l a i n e d by  1  points out,  reference  to the  z e r s i m p a c t o n t h e economy's o v e r a l l m a r g i n a l  stabili-  propensity  2 to  save  o u t o f n a t i o n a l income (m.p.s.).  The  resolution  3 now  presented  f o l l o w s the argument o f E i l b o t t  quite  closely. The  e f f e c t i v e n e s s o f t h e programme a s a  l i z e r depends on  i t s impact on  p r o p e n s i t y t o save out  t h e economy's  o f n a t i o n a l income  marginal  (m.p.s.).  B e c a u s e o f t h e programme's a c t i o n a s a s t a b i l i z e r , government's budget i s pushed toward a s u r p l u s p e r i o d s of r i s i n g income. becomes a n e t 1  saver  - E i l b o t t , op.  2 - The  and  c i t . p.  The  stabi-  the  during  government, t h e r e f o r e ,  i n c r e a s e s t h e economy's o v e r a l l 460.  economy's o v e r a l l m a r g i n a l p r o p e n s i t y t o s a v e i s a weighted average of the i n d i v i d u a l , government a n d c o r p o r a t e s e c t o r s ' m a r g i n a l p r o p e n s i t i e s to save.  3 - E i l b o t t , o p . c i t . . pp. 460-461.  - 71 -  m.p.s.  Similarly  during periods of f a l l i n g  budget i s pushed toward  i n c o m e thd.  a d e f i c i t and t h e o v e r a l l  m.p.s.  decreases. The  v a l u e o f t h e economy's m u l t i p l i e r  i s the  r e c i p r o c a l o f t h e m.p.s. so t h a t when t h e unemployment i n s u r a n c e programme i n c r e a s e s t h e m.p.s. d u r i n g it  dampens t h e m u l t i p l i e r .  The d e c r e a s e  expansions,  i n the value  o f t h e m u l t i p l i e r d e p e n d s o n two f a c t o r s ; (1)  The a b s o l u t e i n c r e a s e e f f e c t e d o n t h e m.p.s. a n d  (2)  The i n i t i a l v a l u e o f t h e m.p.s.  A n e x a m p l e may  serve to c l a r i f y t h i s p o i n t : "For example, the s t a b i l i z e r s reduce t h e v a l u e o f t h e m u l t i p l i e r f r o m 3-1/3  "to 2% a n d d i m i n i s h p o t e n t i a l  i n c o m e c h a n g e s b y 25 p e r c e n t , i f t h e y i n c r e a s e t h e m.p.s. f r o m 0.3 0.2  t o 0.4.  I f they r a i s e  i t s v a l u e f r o m 0.1  to  t h e y l o w e r t h e m u l t i p l i e r f r o m 10 t o 5 n d dampen &  i n c o m e c h a n g e s b y 50 p e r c e n t .  Consequently,  t h e m.p.s. t h e g r e a t e r t h e i m p a c t stabilizers.  1 , 1  1 - I b i d , p.  461.  the lower  of a given set of  - 72 -  I n terms o f t h i s study,  where o n l y o n e s t a b i l i z e r i s  under c o n s i d e r a t i o n , the l a s t "consequently,  the lower  s e n t e n c e may be r e p h r a s e d  -  t h e m.p.s. t h e g r e a t e r t h e i m -  p a c t o f t h e unemployment i n s u r a n c e  programme".  I n g e n e r a l , a h i g h e r m.p.s. h a s c h a r a c t e r i z e d economic c o n t r a c t i o n s t h a n economic expansions.  The  corporate  s e c t o r absorbs a l a r g e share o f d e c l i n e s i n 1 n a t i o n a l income w h i l e m a i n t a i n i n g d i v i d e n d payments r e 2 l a t i v e l y constant. the marginal i s lower  This leads  propensity  to invest out o f retained  than the marginal  disposable  The c o r p o r a t e  s e c t o r a b s o r b s a much s m a l l e r  i n c r e a s e i n income  3  and a l s o r a i s e d  t h e c o n t r a c t i o n o f 1953-1954 t h e c o r p o r a t e s e c t o r a b s o r b e d a b o u t 67$ o f t h e d e c l i n e i n n a t i o n a l income; d u r i n g t h e c o n t r a c t i o n o f 1957 i t a b s o r b e d a b o u t 60$; a n d d u r i n g t h e c o n t r a c t i o n o f I96O-I96I i t a b s o r b e d a b o u t 124$.  2 - E i l b o t t , op. c i t . . 3 - During  p r o p e n s i t y t o consume o u t o f  s i t u a t i o n i s q u i t e d i f f e r e n t d u r i n g ex-  share o f the o v e r a l l 1 - During  earnings  income. The  pansions.  t o a h i g h m.p.s. s i n c e  p . 461.  t h e e x p a n s i o n o f 1950-1953 t h e c o r p o r a t e s e c t o r a b s o r b e d o n l y a b o u t 13$ o f t h e i n c r e a s e i n n a t i o n a l income; d u r i n g t h e e x p a n s i o n o f 1954-1957 i t a b s o r b e d a b o u t 1 4 $ ; d u r i n g t h e e x p a n s i o n o f 1958-1960 i t a b s o r b e d a b o u t 19$; a n d d u r i n g t h e e x p a n s i o n o f 196I-I965 i t a b sorbed about 14$.  - 73 -  dividends. pansions  1  The m.p.s. w a s , t h e r e f a r e , l o w e r d u r i n g e x -  and a l l o w e d  smaller absolute  m a g n i t u d e to h a v e a s i z e a b l e  increases i n i t s  impact.  T h i s r e s o l u t i o n may be p h r a s e d more The downswings o f t h e p e r i o d w o u l d have b e e n m i l d e v e n i n t h e a b s e n c e o f t h e programme's  simply. relatively  stabilizing  e f f e c t because o f t h e c u s h i o n i n g e f f e c t o f t h e corporate sector.  T h u s , m i l d d o w n s w i n g s w e r e made e v e n l e s s  b y t h e programme.  During  expansions,  severe  however, t h e i n d i -  v i d u a l s e c t o r absorbed a r e l a t i v e l y l a r g e r part o f i n creases  i n n a t i o n a l i n c o m e so t h a t a s m a l l e r  effect resulted.  The i m p a c t o f t h e programme i s , t h e r e -  f o r e , enhanced d u r i n g expansions technique,  cushioning  o v e r what t h e o f f s e t t i n g  w h i c h i g n o r e s t h e m a g n i t u d e o f t h e m.p.s.,  indicates. T h i s f a c t o r s h o u l d n o t b e i g n o r e d , so t h a t t h e m u l t i p l i e r m o d e l a p p a r e n t l y a s s i g n s t h e more stabilizing  e f f e c t t o t h e unemployment  gramme d u r i n g e x p a n s i o n s .  realistic  insurance  pro-  In a r r i v i n g at a general  statement as t o the c o u n t e r c y c l i c a l e f f i c a c y o f the programme c o n c l u s i o n s f o r p e r i o d s o f e x p a n s i o n  1 - E i l b o t t , op. c i t . ,  p. 461.  will,  therefore,  - 74 -  be based on t h e f i n d i n g s o f the m u l t i p l i e r model.  The  s i m i l a r i t y o f t h e r e s u l t s y i e l d e d b y t h e two t e c h n i q u e s during  c o n t r a c t i o n s , make i t u n n e c e s s a r y t o c h o o s e b e -  t w e e n t h e two f o r t h e s e Comparison:  periods.  United States  and Canada  In addition to evaluating countercyclical effectiveness of  compensatory movements,it  effectiveness  t h e programme's  i n terms o f the magnitude i s u s e f u l t o judge i t s  r e l a t i v e t o t h a t o f a c o m p a r a b l e programme.  1  Rejda  used the o f f s e t t i n g and c o r r e l a t i o n t e c h n i q u e s  described  i n Chapter 4 to t e s t the e f f i c a c y o f the  United States'  u n e m p l o y m e n t c o m p e n s a t i o n programme.  By comparing Rejda's r e s u l t s w i t h it  i s then possible  tiveness  those o f t h i s study  t o throw f u r t h e r l i g h t on the e f f e c -  o f t h e C a n a d i a n programme. T a b l e s I X and X p r e s e n t such a comparison.  The p e r i o d s o f e x p a n s i o n a n d c o n t r a c t i o n e m p l o y e d two  studies  correspond quite c l o s e l y .  are  based o n u n a d j u s t e d v a l u e s o f t h e changes  employment b e n e f i t s and c o n t r i b u t i o n s . 1 - R^Jda, o p . c i t .  i n the  Rejda's r e s u l t s i n un-  Since the United  - 75 -  TABLE I X Comparison o f t h e e f f e c t i v e n e s s o f Canada's and t h e U n i t e d S t a t e s ' unemployment c o m p e n s a t i o n programmes a s a u t o m a t i c s t a b i l i z e r s d u r i n g p e r i o d s o f economic e x p a n s i o n and c o n t r a c t i o n 1949 - 1965. Country  Period  Effects Effects Cornof o f Conbined Benefits tributions Effects  .  Expansions US  4th q u a r .  1949- 3rd q u a r .  1953  0.16$* 0.34$  0.50$  Can.  1st  n  1950- 2nd  11  1953  0.07$  0.60$  0.67$  US  3rd  11  1954- 3rd  11  1957  0.79$  0.74$  1.53$  Can.  2nd  1954- 2nd  n  1957  0.31$  US  2nd  11  1958- 2nd  11  i960  3.12$  1.85$  4.97$  Can.  2nd  11  1958- 1st  11  i960  3.45$  1.72$  5.17$  US  1st  n  1961- 1st  11  1964  1.85$  2.69$  4.54$  Can.  1st  it  1961- 4th  11  1965  1.77$  0.36$  2.13$  II  0  0.31$  Contractions US  3rd  11  1953- 3rd  11  1954 24.13$  Can.  2nd  n  1953- 2nd  11  1954 13.82$  US  3rd  •1  1957- 2nd  11  1958 23.10$  Can.  3rd  11  1957- 4th  11  1957 17.65$  US  2nd  11  1960- 1st  11  1961 27.71$  2.00$ 29.71$  Can.  1st  n  1960- 1st  11  1961 24.55$  2.73$ 27.28$  * P o s i t i v e values Indicate  stabilizing  effects.  4.27$ 2 8 . 4 0 $ 0  13.82$  1.00$ 24.10$ 0  17.65$  - 76 -  States*  programme h a s b e e n q u i t e s t a b l e t h i s i s n o t  serious l i m i t a t i o n .  T a b l e IX, however, employs  a  ad-  j u s t e d data f o r the Canadian v a l u e s because they  are  b e l i e v e d t o be more r e l e v a n t f o r t h i s t e s t d e s p i t e t h e fact  t h a t t h e U.S.  data i s unadjusted.  a p p l i e d the c o r r e l a t i o n  Since  technique only to the  Rejda contri-  1 b u t o r y component o f t h e programme, to  comparison  t h i s component o f t h e programme i n T a b l e Table  IX suggests  X.  t h a t b o t h programmes h a v e  been about e q u a l l y i n e f f e c t i v e during periods of expansion. t h a t the o f f s e t t i n g  is limited  as a n a u t o m a t i c I t s h o u l d be  remembered  technique understates the  ness because I t i g n o r e s the f a c t  stabilizer  effective-  t h a t the m a r g i n a l  pro-  p e n s i t y t o save out o f n a t i o n a l income has been r e l a t i v e l y low during expansions.  However, a t t h i s p o i n t i t i s  r e l a t i v e e f f e c t i v e n e s s and  not the magnitude o f the  that i s being considered.  During the f i r s t  effect  two c o n t r a c t i o n s  c o n s i d e r e d t h e U n i t e d S t a t e s ' programme a p p e a r s t o h a v e been s u b s t a n t i a l l y  more e f f e c t i v e  than the  Canadian  1 - T h i s t e c h n i q u e was u s e d b y R e j d a o n l y i n a n a t t e m p t to determine i f m e r i t r a t i n g caused the cont r i b u t o r y component o f t h e U n i t e d S t a t e s ' programme t o be d e s t a b i l i z i n g .  - 77 -  programme.  D u r i n g t h e downswing o f  1953-1954  the  s t a b i l i z i n g e f f e c t was a b o u t d o u b l e i n t h e U n i t e d S t a t e s a b o u t 28$ o f t h e c h a n g e i n n a t i o n a l i n c o m e c o m p a r e d t o about 14$ i n Canada. t h e programmeswere  D u r i n g t h e most r e c e n t  roughly  e q u i v a l e n t i n terms o f t h e i r  o f f s e t t i n g e f f e c t s - a b o u t 30$ Income  downswing  of t h e c h a n g e i n n a t i o n a l  i n t h e U n i t e d S t a t e s a n d a b o u t 27$  i n Canada.  T h u s , r e l a t i v e t o t h e U n i t e d S t a t e s s programme 1  there  has been a s u b s t a n t i a l improvement d u r i n g c o n t r a c t i o n s i n C a n a d a ' s programme o v e r  time.  T h i s l a s t f i n d i n g was t o be e x p e c t e d .  Over  t h e p e r i o d u n d e r c o n s i d e r a t i o n t h e C a n a d i a n programme was g r e a t l y e x p a n d e d i n c o v e r a g e r e l a t i v e t o t h e U n i t e d S t a t e s programme.  Since the l e v e l o f coverage has  l e v e l l e d o f f i n t h e U n i t e d S t a t e s and s i n c e  Canada's  programme a p p e a r s t o h a v e a l m o s t r e a c h e d a c o m p a r a b l e level,  i t c a n be p o s t u l a t e d t h a t t h e C a n a d i a n programme  has p r o b a b l y  j u s t about reached t h e peak o f i t s c o u n t e r -  c y c l i c a l e f f e c t i v e n e s s d u r i n g downswings. no m a j o r r e v i s i o n s o f t h e  This  assumes  programme.  T a b l e X shows t h e c o r r e l a t i o n c o e f f i c i e n t f o r t h e c y c l i c a l i r r e g u l a r p e r c e n t a g e s o f n a t i o n a l income and  unemployment  Insurance c o n t r i b u t i o n s f o r comparable  p e r i o d s i n t h e U n i t e d S t a t e s and Canada.  For the f i v e  - 78 -  TABLE X Comparison o f t h e c o e f f i c i e n t s o f c o r r e l a t i o n f o r t h e c y c l i c a l i r r e g u l a r p e r c e n t a g e s o f n a t i o n a l income a n d unemployment i n s u r a n c e c o n t r i b u t i o n s d u r i n g p e r i o d s o f economic e x p a n s i o n a n d c o n t r a c t i o n , Canada v s U n i t e d S t a t e s , 1949 - 1965 COUNTRY  PERIOD  VALUE O F - r  Expansions US  4th quarter 1944 - 3rd quarter 1953  .20*  Canada  1st  1950 - 2nd  1953  .48  US  3rd  1954 - 3rd  1957  .23  Canada  2nd  1954 - 2nd  1957  .29  2nd  1958 - 2nd  I960  .82  Canada  2nd  1958 - 1st  I960  .13  US  1st  H  1961 - 1st  "  1964  Canada  1st  M  1961 - 4th  "  1965  -.60  1954  .90  1954  .98 .40  US  Contractions US  3rd  "  1953 - 3rd  Canada  2nd.  *  1953 - 2nd  US  3rd  1957 - 2nd  1958  Canada  3rd  1957 - 4th  1957  2nd  I960 - 1st  1961  .99  1st  I960 - 1st  1961  .67  US Canada  M  "  * A positive value indicates a s t a b i l i z i n g negative value indicates a d e s t a b i l i z i n g  effect, a effect.  -  79  -  p e r i o d s s u b j e c t to the comparison  stabilizing  are suggested  As  no 1957  i n both c o u n t r i e s .  c o e f f i c i e n t c o u l d be d e t e r m i n e d  effects  stated earlier  f o r t h e downswing o f  i n C a n a d a b e c a u s e t h e p e r i o d was  too s h o r t .  t h e n e g a t i v e v a l u e o f t h e I96I-I965 e x p a n s i o n  Is  Since ex-  c e p t i o n a l i t w o u l d h a v e b e e n i n t e r e s t i n g t o compare i t w i t h a f i g u r e f o r a comparable p e r i o d i n the U n i t e d States.  R e j d a , however, o m i t s t h i s expansion  p a r t of h i s study. 1  The  from  this  v a l u e s o f r do n o t y i e l d a good,  i n d i c a t i o n o f t h e m a g n i t u d e o f an o f f s e t t i n g  effect,  but  effect.  do  tend to i n d i c a t e the d i r e c t i o n of the  T h i s comparison  then i n d i c a t e s a s t a b i l i z i n g e f f e c t f o r  t h e c o n t r i b u t o r y component o f b o t h A General  Statement The  as (1)  programmes.  f i n d i n g s o f t h i s s t u d y may  be  summarized  follows: C a n a d a ' s u n e m p l o y m e n t i n s u r a n c e programme h a s  f o r m e d c r e d i t a b l y as an a u t o m a t i c  stabilizer  p e r i o d s o f economic c o n t r a c t i o n .  The  1 - R e j d a , op.  cit.,  p.  204.  per-  during  b e n e f i t component  -  80  -  o f t h e scheme h a s b e e n a l m o s t t o t a l l y r e s p o n s i b l e f o r this effectiveness.  Moreover, the e f f i c a c y of the pro-  gramme d u r i n g d o w n s w i n g s h a s d o u b l e d  i n recent years  -  i n c r e a s i n g f r o m a s t a b i l i z i n g e f f e c t o f about 14$ o f t h e c h a n g e i n n a t i o n a l Income d u r i n g t h e c o n t r a c t i o n o f 1953  - 1954  t o one o f a b o u t 27$  o f t h e change i n  n a t i o n a l i n c o m e d u r i n g t h e c o n t r a c t i o n o f 196O-I96I. T h i s i m p r o v e m e n t made t h e programme a b o u t a s  effective  a s t h e U n i t e d S t a t e s ' programme d u r i n g t h e most  recent  downswing. (2)  The programme h a s b e e n r e l a t i v e l y l e s s  effective  as a s t a b i l i z e r d u r i n g p e r i o d s o f economic However, d u r i n g t h e l a s t  two e x p a n s i o n s  c o m p e n s a t o r y e f f e c t was e x p e r i e n c e d . the  e f f e c t l a y b e t w e e n 10$  a n d 17$  a  expansion. significant  The m a g n i t u d e o f  o f t h e change i n  n a t i o n a l income d u r i n g t h e e x p a n s i o n  o f 1958-1960 a n d  b e t w e e n 5$ a n d 8$ o f t h e c h a n g e i n n a t i o n a l i n c o m e d u r i n g the upswing of llels  I96I-I965.  This experience  that of the United States'  roughly  para-  1  programme.  1 - T h i s assumes t h a t i f t h e m u l t i p l i e r m e t h o d o l o g y had b e e n a p p l i e d t o t h e U n i t e d S t a t e s ' programme t h e s t a b i l i z i n g e f f e c t w o u l d have been i n c r e a s e d b y t h e same o r d e r o f m a g n i t u d e a s was t h e C a n a d i a n programme when t h i s t e c h n i q u e was applied.  - 81 -  Limitations The a b o v e p o i n t s emerge d e s p i t e s e v e r a l t a t i o n s i n t h e methodology employed. to  summarize t h e s e  reliability  I t may be u s e f u l  l i m i t a t i o n s and t h e i r e f f e c t on t h e  of the r e s u l t s .  They a r e as f o l l o w s :  (1)  The c o n t r a c t i o n e x t e n d i n g  1957  t o t h e 2nd  q u a r t e r o f 1958  f r o m t h e 2nd  quarter of  was n o t s u b j e c t e d t o a n y  o f t h e t h r e e t e s t s employed i n t h i s study. was u n a v o i d a b l e  limi-  This  limitation  b e c a u s e n a t i o n a l income i n c r e a s e d  during  the p e r i o d d e s p i t e a general decrease i n the l e v e l o f economic a c t i v i t y . q u a r t e r 1957  The p e r i o d s u b s t i t u t e d - t h e 3rd  t o t h e 4th  q u a r t e r 1957  - g i v e s some  c a t i o n o f the•programme*s e f f e c t i v e n e s s o v e r but  b e c a u s e i t i s so s h o r t l i t t l e  on these (2)  indi-  the period,  r e l i a n c e c a n be p l a c e d  results.  B e c a u s e t h e p e r s o n a l share o f n a t i o n a l income  although  rose  n a t i o n a l income, as a whole, d e c l i n e d , t h e  m u l t i p l i e r technique  c o u l d n o t be u s e d t o t e s t t h e p r o -  gramme's e f f e c t i v e n e s s d u r i n g t h e d o w n s w i n g o f I96O-I96I. T h i s made I t i m p o s s i b l e t o c h e c k t h e r e s u l t s y i e l d e d b y the o f f s e t t i n g technique  during this  downswing.  - 82 -  (3)  Because the p e r i o d used to represent  of 1957-1958  was  so s h o r t  the c o n t r a c t i o n  the c o r r e l a t i o n technique  c o u l d n o t be a p p l i e d t o i t . T h i s t a t i o n b e c a u s e t h e two o t h e r  i s not a serious  limi-  techniques y i e l d e d con-  s i s t e n t r e s u l t s f o r the period. (4)  The a d j u s t m e n t s made t o r e f l e c t c h a n g e s i n b e n e f i t ,  r a t e s , c o n t r i b u t i o n r a t e s a n d c o v e r a g e were q u i t e It  crude.  i s f e l t , however, t h a t because the adjustments were,  a t a minimum, c o r r e c t , i n d i r e c t i o n , t h e a d j u s t e d represent (5)  A l l t h e downswings  duration. the  data.  i n v e s t i g a t e d were s h o r t i n  The s t u d y d o e s n o t y i e l d i n f o r m a t i o n  e f f i c a c y o f t h e programme a s a s t a b i l i z e r  longer (6) of  an improvement o v e r h i s t o r i c a l  a n d more s e r i o u s  data  economic  regarding during  contractions.  The s t u d y d o e s n o t a t t e m p t t o q u a n t i f y t h e e f f e c t s t h e programme o n l i q u i d i t y ,  Since  t h e programme s h o u l d  f a c t o r s , the study w i l l  expectations,  or habits.  p o s i t i v e l y a f f e c t these  tend to underestimate the pro-  gramme's e f f e c t i v e n e s s . These l i m i t a t i o n s , a d m i t t e d l y ,  reduce the  v a l i d i t y and g e n e r a l i t y o f the r e s u l t s of t h i s  study.  - 83 -  However, where the t e s t s could be a p p l i e d the r e s u l t s are remarkably c o n s i s t e n t .  This consistency lends  s u f f i c i e n t r e l i a b i l i t y to the r e s u l t s to make them useful.  I t would be s u r p r i s i n g i f the precise magnitude  of the s t a b i l i z i n g e f f e c t s i n d i c a t e d by t h i s study are correct.  But, i t would be more s u r p r i s i n g i f these  estimates are so u n r e l i a b l e as to be unusable.  CHAPTER ? SUMMARY AND CONCLUSIONS  Summary A u t o m a t i c s t a b i l i z e r s may b e d e f i n e d a s mechanisms which a u t o m a t i c a l l y reduce t h e f l o w o f funds to  i n d i v i d u a l s and c o r p o r a t i o n s d u r i n g p e r i o d s o f eco-  nomic e x p a n s i o n and which i n c r e a s e t h e f l o w d u r i n g of  economic c o n t r a c t i o n .  Theoretically, classification  o f Canada's unemployment i n s u r a n c e matic its  periods  programme a s a n a u t o -  s t a b i l i z e r c a n be j u s t i f i e d b y c o n s i d e r a t i o n o f  two f o l d a c t i o n .  F i r s t l y , because c o n t r i b u t i o n s (a  f l o w o f funds from i n d i v i d u a l s and c o r p o r a t i o n s ) a r e d e r i v e d f r o m t h e wage b i l l s h o u l d move p a r a l l e l And  secondly,  o f covered  employees,  they  t o t h e l e v e l o f economic a c t i v i t y .  because b e n e f i t s (a f l o w o f funds t o i n d i -  v i d u a l s ) a r e d e r i v e d from t h e l e v e l o f unemployment, s h o u l d move i n a d i r e c t i o n o p p o s i t e  they  to the l e v e l of  economic a c t i v i t y . Thus, by t h e v e r y nature  o f t h e programme, a  r e d u c t i o n i n t h e l e v e l o f economic a c t i v i t y s h o u l d be accompanied b y an i n c r e a s e d l e v e l o f b e n e f i t payments  - 85 -  and  a reduced l e v e l o f c o n t r i b u t i o n s .  increase  Similarly,  an  i n t h e l e v e l o f economic a c t i v i t y s h o u l d  be  accompanied by an i n c r e a s e and  by a reduction As  the  In the level of contributions  i n the l e v e l o f benefit  a result  o f such t h e o r e t i c a l  C a n a d i a n unemployment i n s u r a n c e  payments. considerations,  programme h a s come  t o be a c c e p t e d a s a n a u t o m a t i c s t a b i l i z e r .  Empirical  research  States'  which demonstrated that the United  u n e m p l o y m e n t c o m p e n s a t i o n scheme d o e s i n f a c t  operate 1  as an automatic s t a b i l i z e r s t r e n g t h e n e d t h i s  acceptance.  Such support i s , however, i n c o n c l u s i v e because t h e C a n a d i a n programme d i f f e r s f r o m t h e U n i t e d  States' pro-  2 gramme i n s e v e r a l w a y s .  Conclusive  e m p i r i c a l support based on Canadian This  study presents  verification  require  data.  empirical evidence to  s u p p o r t t h e n o t i o n t h a t Canada* s programme f u n c t i o n s a s 1 - F o r e x a m p l e , E i l b o t t , o p . c i t . a n d C l e m e n t , M.O. "The Q u a n t i t a t i v e I m p a c t o f . A u t o m a t i c S t a b i l i z e r s , " Review o f Economics and S t a t i s t i c s , X L I I ( F e b r u a r y , I960). " 2 - F o r e x a m p l e , t h e U n i t e d S t a t e s * programme i n c o r p o r a t e m e r i t r a t i n g ; t h e C a n a d i a n programme d o e s n o t . As a s e c o n d e x a m p l e , i n t h e U n i t e d S t a t e s c o n t r i b u t i o n s a r e n o t c o l l e c t e d from employees; i n Canada t h e y a r e .  - 86 -  an automatic techniques  stabilizer.  F u r t h e r , two o f t h e t h r e e  employed a l l o w e s t i m a t i o n o f t h e magnitude  of the s t a b i l i z i n g  effect.  C a n a d a ' s unemployment  insurance  performed c r e d i t a b l y as an automatic p e r i o d s o f economic c o n t r a c t i o n .  programme h a s  stabilizer  The b e n e f i t  during component  o f t h e scheme h a s b e e n a l m o s t t o t a l l y r e s p o n s i b l e f o r this  effectiveness.  Moreover, t h e e f f i c a c y o f the pro-  gramme d u r i n g d o w n s w i n g s h a s d o u b l e d i n r e c e n t y e a r s i n c r e a s i n g from a s t a b i l i z i n g  -  e f f e c t o f a b o u t 14$ o f t h e  change i n n a t i o n a l income d u r i n g t h e c o n t r a c t i o n o f 1953-1954 t o o n e o f a b o u t 27$ o f t h e c h a n g e i n n a t i o n a l i n c o m e d u r i n g t h e c o n t r a c t i o n o f I96O-I96I. The programme h a s b e e n r e l a t i v e l y as a s t a b i l i z e r  d u r i n g p e r i o d s o f economic  However, d u r i n g t h e l a s t  effective  expansion.  two u p s w i n g s a s i g n i f i c a n t  c o m p e n s a t o r y e f f e c t was e x p e r i e n c e d . , the  less  The m a g n i t u d e o f  e f f e c t l a y b e t w e e n 10$ a n d 17$ o f t h e c h a n g e i n  n a t i o n a l i n c o m e d u r i n g t h e e x p a n s i o n o f 1958-1960 a n d b e t w e e n 5$ a n d 8$ o f t h e change i n n a t i o n a l d u r i n g t h e u p s w i n g o f I96I-I965.  Income  -  87  -  Implications It  i sdifficult  t o draw i m p l i c a t i o n s from a  study o f such narrow scope. t o make s u c h a n a t t e m p t . for,  I t may, h o w e v e r , b e u s e f u l  The s t u d y h a s i m p l i c a t i o n s  a t l e a s t , two g o v e r n m e n t p o l i c y a r e a s 8  s t a b i l i z a t i o n p o l i c i e s a n d (2) ployment  (1)  overall  p o l i c y t o w a r d t h e unem-  i n s u r a n c e programme. I n terms o f government p o l i c y toward t h e un-  employment I n s u r a n c e programme, i t a p p e a r s t h a t more emphasis  s h o u l d b e p l a c e d o n t h e programme's r o l e a s a n  automatic s t a b i l i z e r . in  So l o n g a s t h e programme o p e r a t e s  s u c h a manner a s t o o f f s e t a s i g n i f i c a n t p o r t i o n o f  economic  movements, t h i s r o l e s h o u l d b e s e r i o u s l y c o n -  s i d e r e d whenever changes plated.  i n t h e programme a r e c o n t e m -  T h i s i s not t o say that  s t a b i l i z a t i o n s h o u l d be  made t h e p r i m e o b j e c t i v e o f t h e programme. that  the social objective w i l l  I t appears  (and should) remain i t s  p r i m e a i m . However, s t a b i l i z a t i o n , and any o t h e r s e c o n d a r y o b j e c t i v e s , s h o u l d n o t be o v e r l o o k e d b y g o v e r n ment  officials. F o r t u n a t e l y , t h e r e i s a s u b s t a n t i a l degree o f  c o n s i s t e n c y between s o c i a l and s t a b i l i z a t i o n  objectives.  Most changes  a c t so a s  stemming from s o c i a l o b j e c t i v e s  - 88-  to  i m p r o v e t h e c o u n t e r c y c l i c a l a c t i o n o f t h e programme.  F o r example, t h e government's r e c e n t statement  that i t  1 i n t e n d s t o e x p a n d t h e programme social  and s t a b i l i z a t i o n  i s d e s i r a b l e from  viewpoints.  Despite t h i s , the  government s h o u l d s t a t e e x p l i c i t l y t h e p r i o r i t y to  both  t h e v a r i o u s o b j e c t i v e s o f t h e unemployment  given  insurance  programme. The  study a l s o r a i s e s the p o s s i b i l i t y o f u s i n g  t h e u n e m p l o y m e n t i n s u r a n c e programme a s a f o r m u l a stabilizer.  flexible  T h i s would i n v o l v e changes i n b e n e f i t r a t e s  i n response  t o d a n g e r s i g n a l s g i v e n b y some e c o n o m i c  indicator.  I n p a r t i c u l a r , d u r i n g downswings b e n e f i t  r a t e s c o u l d b e i n c r e a s e d when some p r e v i o u s l y s e t l e v e l of activity  i s reached.  Although,  n o t be c l a s s i f i e d a s a u t o m a t i c be  quite  t h i s mechanism would  stabilization  i t might  effective. In  policy l i t t l e  terms o f o v e r a l l government  stabilization  u s e f u l g e n e r a l i z a t i o n i s possible without  empirical research into the countercyclical effectiveness of the other automatic economy.  stabilizers  The most i m p o r t a n t  working  on t h e Canadian  o f these a r e personal i n -  come t a x e s , c o r p o r a t e i n c o m e t a x e s a n d e x c i s e t a x e s . 1 - News i t e m i n t h e M o n t r e a l G a z e t t e , J u l y 25,  1967.  - 89 -  Adding  t h e compensatory e f f e c t s o f t h e s e mechanisms  would y i e l d a value f o r t h e o v e r a l l b u i l t - i n w i t h i n t h e economy. S t a t e s ' economy  1  Judging from  stabilization  s t u d i e s on t h e U n i t e d  the t o t a l battery probably yields a  potent s t a b i l i z i n g influence.  However, t h e e f f e c t i s  p r o b a b l y n o t s o l a r g e a s t o make d i s c r e t i o n a r y  policies  unnecessary. Suggestions  f o r Further  Research  Further research into touched  upon i n t h i s  some o f t h e t o p i c s  study might prove u s e f u l .  Some  suggestions are as f o l l o w s ; (1)  An attempt  s h o u l d be made t o q u a n t i f y t h e c o u n t e r -  c y c l i c a l e f f e c t o f any e x p e c t a t i o n a l and monetary adjustments (2)  c a u s e d b y t h e unemployment i n s u r a n c e  programme,  The e f f e c t o f t h e t i m e l a g b e t w e e n c h a n g e s i n e c o -  nomic a c t i v i t y and t h e onset o f t h e compensatory o f t h e unemployment I n s u r a n c e  programme  effect  s h o u l d be i n -  vestigated, (3)  E s t i m a t e s o f t h e e f f e c t o f h y p o t h e t i c a l changes i n  t h e programme o n c o u n t e r c y c l i c a l e f f i c a c y  s h o u l d be made,  and  1 - F o r example, E i l b o t t , op. c i t .  and Clement, op. c i t .  -  (4)  parallel  90  -  s t u d i e s aimed a t q u a n t i f y i n g the e f f e c -  t i v e n e s s o f Income a n d e x c i s e bilizers  s h o u l d be  undertaken.  t a x e s as a u t o m a t i c  sta-  -  91  -  BIBLIOGRAPHY A. ARTICLES Brown, E. Cary. "The S t a t i c Theory of Automatic F i s c a l S t a b i l i z a t i o n , " Journal of P o l i t i c a l Economy, L X I I I (October, 1 9 5 5 ) , PP. 427-440. Brown, Ray. "Unemployment Insurance and the N a t i o n a l Employment S e r v i c e , " The Labour Gazette, L (September, 1 9 5 0 ) . C a i r n s , James P. "Unemployment Insurance i n Canada.. .. The Problem o f . C o n f l i c t i n g P r i n c i p l e s , " . C a n a d i a n Journal of Economics and P o l i t i c a l Science, XVIII (May, 1962), pp. 262-268. Clement, M..0 . . "The, Concept of Automatic S t a b i l i z e r s , " Southern Economic J o u r n a l . XXV (January, 1959)»  pp. 303-314.  Clement, M.O. "The Q u a n t i t a t i v e Impact.of Automatic ' S t a b i l i z e r s , " Review of Economics and S t a t i s t i c s , XLII (February, I960), pp. 56-61. E i l b o t t , Peter. "The E f f e c t i v e n e s s of Automatic S t a b i l i z e r s , " American Economic Review. LVI (January, 1966), pp. 450-465. Hay, K e i t h A.J. " E a r l y Twentieth Century B u s i n e s s C y c l e s i n Canada," Canadian Journal of Economics and P o l i t i c a l Science. XXXII (August. 1966). PP.  354-365.  K e l s e r , Norman F. "The Development of the Concept of Automatic S t a b i l i z e r s , " Journal of Finance. XI (December, 1 9 5 6 ) , pp. 422-441. Lerner, A.P. "Functional Finance and the Federal Debt," S o c i a l Research. X (February, 1 9 4 3 ) . Lewis, W i l f r e d J r . "Automatic F i s c a l S t a b i l i z e r s i n the 1 9 5 7 - 1 9 5 8 Business Contraction: A Comment," Review of Economics and S t a t i s t i c s , XLII (November, I 9 6 0 ) , pp. 4 3 8 - 4 4 2 . Montreal Gazette. J u l y  25,  I967.  - 92 -  Musgrave, Richard A. and M i l l e r , Merton H. " B u i l t - i n F l e x i b i l i t y , " American Economic Review, XXXVIII (March, 1948), pp. 122-128. Pearse, P.H. "Automatic S t a b i l i z a t i o n and the B r i t i s h Taxes on Income," Review of Economic Studies. XXIX (February, 1962), pp. 124-144. 1  Rejda, George E. "Unemployment Insurance as an.Automatic S t a b i l i z e r , " Journal of Risk and Insurance, XXXIII (June, 1966), pp. 195-208. Wagner, Harvey M. "A.Reappraisal o f Experience Rating," Southern Economic J o u r n a l . XXV ( A p r i l , 1959),  pp. 459-469.  B. BOOKS Croxton, F r e d e r i c k E. and Cowden, Dudley J . A p p l i e d General S t a t i s t i c s . Second E d i t i o n . Englewood C l i f f s : P r e n t i c e H a l l , 1955. Hansen, A l v l n H. F u l l Recovery o r Stagnation. W.W. Norton Company, 1938.  New York:  Hart, A.G. Money, Debt and Economic A c t i v i t y . Second E d i t i o n . New York: P r e n t i c e H a l l , 1954. Keynes, J.M. . The.General Theory of Employment. I n t e r e s t and Money. New York: Harcourt and Bruce Company, 1936• L e s t e r , Richard A. The Economics of Unemployment Compensation. P r i n c e t o n : I n d u s t r i a l R e l a t i o n s S e c t i o n , 1962. C. GOVERNMENT PUBLICATIONS Dominion Bureau o f S t a t i s t i c s . Annual Report on B e n e f i t Years E s t a b l i s h e d and Terminated Under the Unemployment Insurance Act. Ottawa: Queen's P r i n t e r , issues from 1950 to 1965. Dominion Bureau of S t a t i s t i c s . National Accounts,, I n come and Expenditures, by Quarters 1947-1961. Ottawa: Queen's P r i n t e r , 1962.  - 93 -  Dominion Bureau of S t a t i s t i c s . National Accounts. Income and Expenditures, Fourth Quarter and P r e l i m i n a r y Annual, 1963. Ottawa; Queen's P r i n t e r , 1964. Dominion Bureau of S t a t i s t i c s . National Accounts. I n come and Expenditures, Fourth Quarter and P r e l i m i n a r y Annual, 196^. Ottawa, Queen's P r i n t e r , 1966. Dominion Bureau of S t a t i s t i c s . S t a t i s t i c a l Report on the Operation of the Unemployment Insurance,Act, J u l y , I960. Ottawa: Queen's P r i n t e r , I960. Report of the Committee of Inquiry i n t o the Unemployment Insurance Act~ Ottawa: Queen's P r i n t e r , 1962. Unemployment Insurance Commission. .Third.Annual Report f o r -the F i s c a l Year Ending March 31. 1944. Ottawa: Queen's P r i n t e r , 1945. D.  UNPUBLISHED MATERIAL  Graham, Charles R. "Unemployment Insurance i n Canada." Unpublished Master's t h e s i s , M c G i l l U n i v e r s i t y , Montreal, 1942. Schweitzer, P a u l R. "Unemployment Insurance i n Canada: 1941-1958." Unpublished Master's t h e s i s , M c G i l l U n i v e r s i t y , Montreal, i960.  - 94 -  APPENDIX I  A n n u a l unemployment i n s u r a n c e b e n e f i t s a s a p e r c e n t a g e o f d i s p o s a l income and p e r s o n a l e x p e n d i t u r e s on goods and s e r v i c e s ,  1950 - I965.  Year .  1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 i960 1961 1962 1963 1964 1965  B e n e f i t s as a $ of disposable income  0.8$ 0.5$ 0.7$ 0.9$ 1.4$ 1.3$ 1.0$ 1.4$ 2.2$ 1.7$ 1.9$ 1.9$ 1.4$ 1.3$ 1.1$ 0.9$  B e n e f i t s as a p e r centage of expendit u r e s on goods and ., s e r v i c e s  0.8$ 0.6$ 0.8$ 1.0$ 1.5$ 1.3$ 1.1$ 1.5$ 2.3$ 1.8$ 2.0$ 2.0$ 1.6$ 1.4$ 1.2$ 1.0$  - 95 -  APPENDIX I I Net n a t i o n a l income a t f a c t o r c o s t , by q u a r t e r s , seas o n a l l y a d j u s t e d , a n n u a l r a t e s , 1950-1965 ( $ m i l l i o n s ) Year  First Quarter  Second Quarter  Third Quarter  Fourth Quarter  1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 i960 1961 1962 1963 1964 1965  13436 15788  13524 I6856  18448  18408  14760 16824 18596 19180 19144  14924 16884 19164 19212 19388 21388 23988 23988 25584 27036 27592 29132 31468 33824 36480 40292  Sources:  a)  N a t i o n a l A c c o u n t s , Income a n d E x p e n d i t u r e s , by Q u a r t e r s 1 9 4 7 - 1 9 6 1 .  b)  N a t i o n a l A c c o u n t s , Income a n d E x p e n d i t u r e s , F o u r t h Quarter and P r e l i m i n a r y Annual  19396 18816 19820 22340 23896 24436 25976 27420 26980 30092 31972 34356 37440  19388 18780 20692 22992 23900 24868 26348 27160 27980  30412 32612 35104 38092  21048  23344 24260 25156 26568 27560 28908 30640 33068 35808 39452  12*2.  c)  N a t i o n a l A c c o u n t s , Income a n d E x p e n d i t u r e s , F o u r t h Quarter and P r e l i m i n a r y Annual  - 96 -  APPENDIX I I I Sample c a l c u l a t i o n : O f f s e t t i n g T e c h n i q u e The o f f s e t t i n g method, w o r k s f r o m t h e f o r m u l a , that f o r benefits s  »  -AB  AN1  X  100  and f o r c o n t r i b u t i o n s  AN1 where s e q u a l s t h e p e r c e n t a g e  stabilizing  effect,  e q u a l s t h e change i n t h e l e v e l o f b e n e f i t s ,  AB  AC e q u a l s  t h e change i n t h e l e v e l o f c o n t r i b u t i o n s , a n d A N 1 e q u a l s t h e change i n t h e l e v e l o f n a t i o n a l income. The u s e o f - A B s i m p l y s e r v e s t o a s s u r e  that  a p o s i t i v e value f o r s w i l l always i n d i c a t e a s t a b i l i z i n g effect. The r o l e o f b e n e f i t s d u r i n g t h e o f 1953-1954 w i l l  serve t o i l l u s t r a t e  contraction  the method.  The  l e v e l o f n a t i o n a l i n c o m e f o r t h e 2 n d q u a r t e r 1953 ( p e a k ) was $19,388 m i l l i o n . it  F o r t h e 2 n d q u a r t e r 1954 ( t r o u g h )  was $18,780 m i l l i o n .  was, t h e r e f o r e ,  The change o v e r t h e downswing  -$608 m i l l i o n .  However, s i n c e  i n c o m e d a t a was e x p r e s s e d a s s e a s o n a l l y  national  adjusted quarterly  - 97 -  totals  a t annual  r a t e s , i t was n e c e s s a r y  to divide  m i l l i o n b y k t o compute t h e a c t u a l c h a n g e .  Thus t h e  t r u e change i n n a t i o n a l income from peak t o t r o u g h -$152  was  million. The l e v e l o f unemployment i n s u r a n c e  for  -$608  t h e 2nd  the second  q u a r t e r 1953  ( p e a k ) was $35  q u a r t e r 195^  benefits  million.  ( t r o u g h ) i t was $56  For  million.  The c h a n g e i n b e n e f i t p a y m e n t s o v e r t h e d o w n s w i n g was, therefore,  $21  million.  S i n c e t h e d a t a f o r unemployment  b e n e f i t s was i n t e r m s o f q u a r t e r l y t o t a l s was  no  adjustment  necessary. Now  _  and s  =  AB  =  - $21  AN1  =  - $152  -21  -152  That i s ,  100  million  •  13.82$  13.82$ o f t h e d e c l i n e i n n a t i o n a l i n c o m e was  o f f s e t by an i n c r e a s e payments.  x  million  i n unemployment i n s u r a n c e  benefit  - 98 -  APPENDIX I V  Derivation of Equation B H o l d i n g a l l economic v a r i a b l e s c o n s t a n t t h e l e v e l o f unemployment expression  except  insurance contributions, the  f o r a c h a n g e i n i n c o m e b e t w e e n two  periods  may b e r e p r e s e n t e d a s f o l l o w s : (1)  AY = A l + cqAY - o f r ^ - r Y | ) + i p A Y - K r - . Y j - r Y ) 2  w h e r e AY «  - Y ,  2  2  o r t h e c h a n g e i n i n c o m e ; A l = l-j_ - l  2  o r t h e change i n i n v e s t m e n t ; c = t h e m a r g i n a l to i n v e s t out o f r e t a i n e d  corporate earnings;  2  »  propensity q = AX o r AY  the  personal  s h a r e o f t h e c h a n g e i n i n c o m e ; p = AZ o r t h e AY  c o r p o r a t e s h a r e o f a c h a n g e i n i n c o m e a n d r-^ a n d r the  ratios of contributions  Note t h a t  terms u s i n g  t o i n c o m e i n t h e two  2  are  periods.  b o t h c and i a r e n e c e s s a r y because  c o n t r i b u t i o n s a r e s h a r e d by employees and employers. The i n c o m e e l a s t i c i t y (C)  (E^) o f t h e  i s t h e r a t i o o f t h e p e r c e n t a g e change i n c o n t r i b u t i o n s  t o t h e p e r c e n t a g e change i n income. as  contributions  This  may be  expressed  follows: ACYE  c  -  AYC S o l v i n g f o r AC  (2)  1  1  gives E. AYC  - 99 -  Now 4  So s u b s t i t u t i n g AY  -  0  (3)  r  lV  r  2 2  ( 1 ) gives  into  = A l + cqAY - c E A Y C c  + i p 4 Y - E^YC^.  (5)  l  Y  definition C  So s u b s t i t u t i n g AY Solving  ]L  l  Y  Now b y  <">  Y  l  _  =  r  (6)  into  (6)  c  (5)  yields  = A l + cqAY - c E A Y r c  (7) f o r  AY  c  + ipAY - l E ^ A Y r ^  (7)  gives AI  AY  (8)  = I - cq + c E r c  c  - i p +• i E r c  As a c o n v e n i e n t measure o f c o u n t e r c y c l i c a l  c  effectiveness  one may u s e t h e e x p r e s s i o n A Where AY r e f e r s under d i s c u s s i o n  c  (9)  I - AY  m  t o a change i n income f o r t h e system and  AY  employment c o n t r i b u t i o n s no c o u n t e r c y c l i c a l  refers  t o a system where un-  do n o t e x i s t .  There i s then  e f f e c t a n d E- e q u a l s z e r o .  AY , t h e n , " a  -  is  100  -  the r a t i o of the d e c l i n e (or increase)  the  i n income i n  system under c o n s i d e r a t i o n t o the d e c l i n e ( o r i n -  c r e a s e ) i n i n c o m e I f t h e s y s t e m h a d no c o n t r i b u t o r y s y s t e m acting countercyclically. the  i s then the f r a c t i o n of  change i n income p r e v e n t e d by t h e e x i s t e n c e o f un-  employment c o n t r i b u t i o n s . Substituting zero  for  AY_  (8) i n t o (9) w i t h E  equal  to  yields  cl  A  c  -  I -  I - cq - i p I - cq  (10)  + cE r c  c  - ip +  i E  c c r  cE„r + IE r C C CO I - cq + c E r c  and s u b s t i t u t i n g q =  A  C  =  AX a n d p • = AY  c E  c  - i p +• i E r c  AZ AY 0 C r  +  i E  C C r  I - cAX - i A Z + c E r _ AY AY r  u  This  i s equation  B.  c  0  (B) + iE_r_ 0  c  - 101  -  APPENDIX V  Sample c a l c u l a t i o n : M u l t i p l i e r M o d e l The r o l e o f " b e n e f i t s d u r i n g o f 1953-1954 w i l l Involved  serve to i l l u s t r a t e  i n t h e employment o f t h i s  the  the c a l c u l a t i o n s  method.  As s t a t e d i n t h e t e x t o f t h i s -cE r B  B  AY  B  =  study,  - c AX - cE„rt>  1 where A  contraction  B  B  t h e p e r c e n t a g e o f a p o t e n t i a l change i n n a t i o n a l income p r e v e n t e d by a change i n benefits,  c  =  the marginal propensity disposable  r  B  =  t o consume o u t o f  income,  t h e r a t i o o f b e n e f i t s t o n a t i o n a l income a t the beginning of the p e r i o d ,  E and  B  AX AY  •  t h e income e l a s t i c i t y o f b e n e f i t s ,  =  the personal  s h a r e o f a change i n n a t i o n a l  income. Now,  E  R  =  AB B 1  x  Nl, AN1  - 102 -  where  AB  t h e change i n "benefit  level,  the l e v e l o f benefits a t the beginning of. the  period  AN1  «  t h e change i n n a t i o n a l  income,  Nl-j_  =  t h e l e v e l o f n a t i o n a l income a t t h e b e g i n n i n g of the period.  The l e v e l o f n a t i o n a l i n c o m e f o r t h e 2nd q u a r t e r 1953  ( p e a k ) was $19,388 m i l l i o n .  F o r t h e 2nd q u a r t e r  1954 ( t r o u g h ) i t was $ 1 8 , 7 8 0 m i l l i o n . t h e d o w n s w i n g was t h e r e f o r e ,  The change  -$608 m i l l i o n .  o f unemployment i n s u r a n c e b e n e f i t s  over  The l e v e l  f o r t h e 2nd q u a r t e r  1953 ( p e a k ) was $35 m i l l i o n .  F o r t h e 2nd q u a r t e r 1954  ( t r o u g h ) i t was $56 m i l l i o n .  The c h a n g e o v e r t h e down-  s w i n g was, t h e r e f o r e ,  E-o  =  B  r  B  "  B  $21 m i l l i o n .  21 35  X  19,388 ~-o0&"  l  A s s t a t e d a b o v e B-_ was $35 m i l l i o n However, because n a t i o n a l quarterly  -19.1328  t o t a l s a t annual  a n d N l ^ $19,388  million.  i n c o m e d a t a was e x p r e s s e d i n r a t e s , i t was n e c e s s a r y t o  - 103 -  divide  $19,388 m i l l i o n  o f n a t i o n a l Income. $484? m i l l i o n .  4  by  The  t o compute t h e a c t u a l v a l u e  a c t u a l v a l u e was,  therefore,  N o t e t h a t t h i s a d j u s t m e n t was  not  nece-  s s a r y i n d e t e r m i n i n g Eg b e c a u s e a r a t i o o f n a t i o n a l i n come v a l u e s was Then  r«  employed.  35 4#?  =  B  Any into  two  share.  .0072  c h a n g e i n n a t i o n a l i n c o m e c a n be d i v i d e d  components - the c o r p o r a t e share and The  determined  p e r s o n a l share o f any by  1  =  For the (see above).  The  ( p e a k ) was  -  $-16  p o r a t e p r o f i t s f o r t h e 2nd  f i g u r e was  $60  then  be  hZ f r o m AY  period,  AY was  -$608  and  1,  million quarter  the i n v e n t o r y v a l u a t i o n  million.  The  q u a r t e r 1954  l e v e l of (trough)  corwas  the i n v e n t o r y v a l u a t i o n adjustment  million.  Using these to represent  c o r p o r a t e share o f n a t i o n a l income, the change I n share over  personal  l e v e l o f c o r p o r a t e p r o f i t s t h e 2nd  $2736 m i l l i o n  and  the  AZ AY  1953 - 1954  a d j u s t m e n t f i g u r e was  $2252 m i l l i o n  c h a n g e may  s u b t r a c t i n g the corporate share  AX AY  1953  =  t h e p e r i o d was  -$408  million.  the this  - 104 -  .'.  AZ  AY  and.  •  D  AY  .6710  I-.67IO = .3290 .8  1 - C.8X .3290) - (.8 X -19.1328 X .0072) o r as a p e r c e n t a g e =  Assuming -  c =  =  -.8 X -19.1328 X .0072  « .1301  A-D  -408  "=6*08"  AX = Assuming  A-r,  -  -.9  c =>  13.01$  .9  X -19.1328 X .0072  1 - (.9 x .3290) - (.9 x -19.1328 x .0072) = .1497 o r a s a p e r c e n t a g e = 14.97$ That i s , depending on t h e v a l u e assigned, t o  c the s t a b i l i z i n g  e f f e c t f a l l s b e t w e e n 13.01  and 14.97$.  

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0102366/manifest

Comment

Related Items