Federal System of Government“A public sector with both centralized and

decentralized levels of decision making in which choices made at each level concerning the provision of public services are determined largely by the demands for those services of the residents of (and perhaps others who carry on activities in) the respective jurisdictions.”

-Oates (1972)

But federal systems can differ greatly due to divisions of powers and responsibilities:

Centralization Ratio

Canada has a relatively decentralized government

Note that France and UK are not federal states

Expenditure changes

Provincial activity has grown over time

Expenditure changes

Centralization and ExpenditureNote that these centralization ratios (central

government expenditures to total government expenditures) can be misleading in two ways:

1)If the federal government heavily funds provinces with many restrictions, the centralization ratio is underestated This is significant in healthcare, but insignificant

elsewhere

2) If provinces successfully lobby the federal government, the centralization ratio is overstated

Optimal CentralizationCompared to many industrial countries, Canada

has a relatively decentralized system, and there is a continual tension between provincial and federal government over a variety of issues

Should provinces get more power? Less?What are the advantages and disadvantages of

decentralization (more power to the provinces)

Advantages of a Decentralized System

1) Tailoring government to local tastes People have differing tastes, and people with

similar tastes tend to group together Decentralized governments allow for different

levels and varieties of government services Different areas operate differently and could

benefit from different economic regulations (ie: Sunday shopping)

2) Fostering intergovernmental competition Provincial and local governments can be more

efficient through implicit competition as citizens see the results from other jurisdictions

Advantages of a Decentralized System

3) Experimentation and Innovation in regionally provided goods and servicesMany jurisdictions trying different approaches

produces data to figure out the “best” way“It is one of the happy incidents of the Federal

system that a single courageous state may, if its citizens choose, serve as a laboratory, and try moral, social and economic experiments without risk to the rest of the country.”

– Brandeis, US Supreme Court Justice

Decentralized Experimentation Examples:

1) Saskatchewan experimented with healthcare in 1962

2) Different healthcare models (Canada and abroad) may yield better organization tools

3) Quebec and British Columbia are experimenting with increased childcare subsidies

4) Different universities have different tuition, with differing results. Is U of A’s $6k best, or U of Lethbridge’s $5K best?

EI History –1975 ReformsThose who quit or were fired from misconduct

couldn’t claim for 6 weeks (up from 3)Age limit reduced to 65 years (from 70)75% dependent coverage eliminated (all 66%)

Increased benefits became linked to an 8 year moving average, instead of 4% trigger

EI History –1977 ReformsNew entrants, re-entrants to labor force and

people with repeated claims needed more weeks of employment to qualifyExemptions for repeat claimants in high-

unemployment regions

Benefits reduced to 60% of wage (from 66%)High income earners clawed back at 30% in net

income was 1.5 times maximum insurable earnings

Distributional Effects – Coverage (2005 Table)

EI covered 43.4% of unemployedGov. claims EI covers 80% of target; it is not meant to

cover some categories

Employment Insurance Conclusion

EI has Insurance and Income Redistribution characteristics (based on loss and need)

Insurance Characteristics:Only contributors are covered Higher income have higher loses therefore higher

benefits

Income Redistribution CharacteristicsLow-income benefit enhanced through Family

supplementHigh-income benefits are clawed back

Employment Insurance Conclusion

Problem of Insurance and Income RedistributionBalancing two goals may prevent doing either goal

wellPerhaps there should be 2 separate programs?But even 2 separate programs would interact

EI reforms (such as hour-based eligibility) have been improvements, but issues and tensions remain even after over 25 years

Chapter 11 Conclusion

Unemployment has increased since 1950, with fluctuations

Unemployment insurance has been essential, but often seen as increasing unemploymentEI affects unemployment through impact on

layoffs, quits, employment duration, labor force participation, industrial mix, labor mobility, education, and automatic stabilization

EI is a government program due to insurance failure due to market failure and adverse selection

Chapter 11 Conclusion

EI has many income distribution effects:Transfers to primary industries and

constructionTransfers to Quebec and Atlantic Canada

In 1996, EI eligibility changed to hour-based

Changes over time have improved EI, but the tension between insurance and income redistribution remains