Written by Professor Frank Reid, University of Toronto
The Canadian government’s work-sharing program is a long-standing (but not well-known) special feature of the Employment Insurance system that can be a very useful tool to sustain employment as the economy recovers from lockdowns due to the COVID-19 pandemic. The work-sharing program allows employees not only to share the work, by working reduced hours, but also to share the Employment Insurance benefits that would otherwise be received by laid off employees.
Reduced levels of employment and/or reduced hours of work are likely to be widespread in Canada as the economy emerges from the lockdowns of the COVID-19 pandemic. Until a vaccine is developed and widely deployed, the so-called “new normal” is likely to require physical distancing measures and widespread use of masks to prevent another wave of infections. Employment is unlikely to return to pre-pandemic levels under the new normal because, in order to respect physical distancing measures, many businesses may have to operate at substantially reduced capacity, such as restaurants, pubs, retail outlets, entertainment, travel and tourism related companies. Some consumers may also be reluctant to resume their pre-pandemic shopping patterns due to ongoing fear of the virus.
In this post I will outline the basic principles of the federal work-sharing program and then discuss the advantages and disadvantages of the program from the perspectives of employees, management and government.
First, let me distinguish the related concepts of work-sharing and job-sharing. Work-sharing means reacting to a reduced demand for labour by reducing hours of work in order to reduce or prevent layoffs. Job-sharing means reducing hours of work in response to employee preferences for improved work-life balance. Although they both involve reduced hours of work, work-sharing is a response to reduced demand for labour and job-sharing is a response to reduced supply of labour. The terms are sometimes used interchangeably, but they are responses to two very different issues.
Basic Principles of Work-sharing
As an example, suppose that in the new normal, a firm requires only 60 per cent of its usual level of employment. To attain its required level of employment, the firm could either layoff 40 per cent of its employees or it could reduce the workweek from 5 days to 3 days and take part in the federal work-sharing program. Under the layoff alternative, 2 out of every 5 employees would be laid off and drawing Employment Insurance (EI) benefits 5 days per week. Under the special work-sharing option in the EI program, employees working only 3 days per week are eligible to draw EI benefits for the two days per week that they are not working.
Notice that the firm pays for the same amount of labour under both options: under work-sharing the firm is paying 5 employees to work 3 days per week; under the layoff alternative, the firm is paying 3 employees to work 5 days per week. In principle, the government also pays the same amount of EI benefits under both options: under the layoff alternative, 2 unemployed workers are drawing EI for 5 days per week; under work-sharing, 5 employees are collecting EI benefits for 2 days per week.
Employees also receive the same total amount of time off work (“leisure”) in the two scenarios. Under work-sharing, 5 employees enjoy 2 extra days of leisure per week; under the layoff alternative, 2 employees are off work 5 days per week. Although work-sharing only involves a redistribution of work, EI benefits, and “leisure” compared to layoffs, it has significant impacts for employees, business and government.
Design of Canadian Work-Sharing Program
Work-sharing has been a feature of the EI program since 1981 but, in response to the COVID-19 pandemic, the Canadian government introduced some temporary, special measures to facilitate application to the work-sharing program (effective for a one year beginning March 15, 2020). Some of the eligibility requirements are:
– firm must be in business for at least one year (previously two years),
-maximum expected duration of work-sharing is up to 76 weeks (previously 26 weeks),
– magnitude of the work reduction must average between 10% and 60%,
-work reduction should not be seasonal,
-employees must qualify under the usual EI criteria,
-usual (2 week) waiting period for EI benefits waived,
-in a unionized workplace, participation requires agreement of the union,
-if non-union, a substantial majority of employees must agree to participate.
Impact of Work-sharing on Employees
In the above work-sharing example, in which employees work 3 days per week, the employee receives 60% of their normal weekly earnings for the 3 days worked. If we assume, for simplicity, that EI benefits replace 50% of earnings, then work-sharing employees receive 20% of their normal weekly earnings for the two days they draw EI. In total, employees receive 60% + 20% = 80% of their normal weekly earnings plus two extra days of leisure each week.
How would we expect employees to react to a work-sharing plan that involves a 20 per cent reduction in income that is accompanied by a 40 per cent reduction in hours of work? In assessing employee reactions, it’s useful to consider two separate groups of employees: first the 60 per cent of employees (let’s call them the “senior” employees) who, in the absence of work-sharing, would continue to work full time and receive their normal weekly income (i.e. the employees who are not threatened with layoff). Second, the 40 per cent of “junior” employees who, in the absence of work-sharing, would be laid off and draw EI five days per week (equal to 50 per cent of their normal earnings).
The reaction of senior employees to such a program will, of course, vary depending on their individual circumstances. But if the typical employee was initially working their desired number of days per week hours, then it seems reasonable that many senior employees may be attracted to the prospect of taking an extra day or two of leisure because the “cost” of an extra day of leisure is now only the loss of a half day’s pay rather than a full day’s pay. (In economics, this is known as a “substitution effect”.) Junior employees would clearly be even more attracted to the work-sharing option, because for them the alternative is being laid off and receiving only 50 per cent of their income in the form of EI benefits. The work-sharing program has been evaluated several times since its inception, most recently in 2016 (Employment and Social Development Canada, Evaluation of the Work-Sharing Program). Surveys of employee representatives who participated in the work-sharing program indicated a high degree of satisfaction with the program.
It should also be noted that actual EI benefits could be higher than this example, because the basic EI benefit is 55% of earnings, or it could be lower than this example for employees with earnings that exceed the EI maximum insurable earnings ($54,200 per year in 2020). In addition to these economic benefits, work-sharing also has important psychological and social benefits since it avoids the stress and negative impacts on self-esteem that are often associated with layoffs.
Impacts of Work-sharing on Employers
Comparing work-sharing to a layoff alternative, there are some factors that tend to increase labour costs, and some that tend to decrease labour costs. The time and monetary costs of administering a work-sharing program is one of the factors that may increase costs. Labour costs may also be higher under the work-sharing option due the costs of benefits that are a fixed amount per employee (such as a dental plan). Benefits that are a percentage of earnings (such as employer contributions to a private pension plan) would not increase costs because total earning are about the same under work-sharing and the layoff alternative.
One of the factors that tends to result in lower labour costs for work-sharing compared to layoffs, are cost decreases due to savings on layoff and recall costs. Under the layoff option, some of the laid off workers may find other jobs and the firm would incur costs of recruitment and training. These costs would be less under work-sharing because the firm would retain more of its employees. Another factor is that productivity is likely to be higher under work-sharing because employees can continue to do their usual jobs, whereas under layoffs employees may need to switch to less familiar jobs that were previously done by the laid off employees. This factor would be exacerbated in a unionized environment where layoffs are by seniority and more senior workers are entitled to “bump” more junior workers from their jobs. There may also be benefits to the firm in the form of improved morale if workers appreciate that the employer is adopting a progressive policy that avoids layoffs while not disadvantaging senior workers.
Overall, because of these offsetting effects, the net impact on labour costs is likely to be small, and there is some evidence that labour costs may be slightly lower under work-sharing than under the layoff alternative. A survey of managers involved in the work-sharing program undertaken as part of the ESDC 2016 evaluation of the program indicated that a substantial majority were satisfied with program.
Impacts on Government and Society as a Whole
Although, in principle, government expenditure on EI should be the same under the work-sharing and layoff alternatives, the cost of EI benefits was actually somewhat higher under work-sharing. This occurred mainly because of a couple of unusual design features of the Canadian work-sharing program that are not essential to the principle of the program. First, the usual two-week waiting period to receive EI benefits was waived, to make the program more attractive to the senior workers not threatened with layoff. Second, if layoffs occurred at end of the work-sharing program, any employees that were laid off were allowed to draw EI in the normal way (a so-called “double-dipping” provision). These provisions could easily be modified to make the cost of EI payments more equal under work-sharing and layoffs.
Another important consideration, however, is that layoffs result in an increase in the social costs of unemployment due to factors such as an increase in stress related diseases. Work-sharing avoids much of this increase in government spending due to the social costs of layoffs and, although such savings are difficult to quantify, they are not zero. It could well mean that government spending, broadly defined, is lower under work-sharing than layoffs. Finally, the most important advantage of the work-sharing alternative is the increased equity of sharing the work, employment benefits and leisure among a group of employees rather than imposing the consequences of a layoff on a small fraction of employees who lose their jobs.
Frank Reid, “Sharing Work and Employment Insurance Benefits in the COVID-19 ‘New Normal'” Canadian Law of Work Forum (July 17 2020): http://lawofwork.ca/?p=12888