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

Abstract

During recent years unemployment insurance has come to be recognized as an automatic stabilizer in the economy. This implies that unemployment insurance programmes operate so as to automatically dampen both economic expansions and contractions. In Canada, however, little empirical research aimed at determining the magnitude of this dampening effect has been undertaken. In an attempt to fill this void, this study makes an empirical assessment of the effectiveness of Canada's unemployment insurance programme as an automatic stabilizer. To do this the period 1950-1965 was broken down into its component periods of economic expansion and contraction. This period was chosen to reflect modern postwar economic conditions. The component periods consisted of three downswings and four upswings. Three techniques were then employed to determine the countercyclical role of the programme during each of the seven periods. Firstly, the change in national income during each period was compared to the changes in unemployment insurance benefits and contributions during the same periods. From this was obtained a measure of the portion of any change in national income offset by compensatory changes in benefits and/or contributions. Secondly, using the same periods, a simple multiplier model was employed to determine what portion of any potential change in national income was prevented by the unemployment insurance programme. For both of these techniques both historical data and data adjusted to remove the effect of changes in the programme were used. And thirdly, a correlation analysis was employed to determine whether benefits and contributions were directly or inversely associated with the level of economic activity. The results of this study indicate that Canada's unemployment insurance programme has performed creditably as an automatic stabilizer during periods of economic contraction. The benefit component of the scheme has been almost totally responsible for this effectiveness. Moreover, the efficacy of the programme during downswings has doubled in recent years - increasing from a compensatory effect of about 14% of the change in national income during the contraction of 1953-1954 to one of about 27% of the change in national income during the contraction of 196O-I961. The programme has been relatively less effective as an automatic stabilizer during periods of economic expansion. However, during the last two upswings a significant compensatory effect was experienced. The magnitude of this effect lay between 10% and 17% of the change in national income during the expansion of 1958-1960 and between 5% and 8% of the change in national Income during the upswing of 1961-1965.

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