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For decades prior to the 1981-82 recession, the national unemployment rates of Canada and the United States had been nearly identical. Since then, a persistent 'unemployment rate gap' has emerged. Throughout most of the 1980s, Canada's unemployment rate has consistently been about 2 percentage points higher than in the United States. The gap developed in spite of very similar economic performances across the two countries: the growth rate of real per capita incomes has been virtually identical since 1976. However, now, well into the 90s, the gap has widened much more significantly. In the last five years, the United States average has actually fallen from 6.7% to 6.5%, with a current rate of 5.2%, while the Canadian rate has and still remains at 9.4%, with a current rate of 9.7%. This substantial difference in Canada's unemployment rate can be attributed mostly to the safety net which the government provides, including generous payments of unemployment insurance and other social services; but also to the high payroll taxes; and the under performing Canadian economy. There is no single reason for the persistent gap in the unemployment rates of Canada and the U.S., but rather a combination of the above factors.
'No society can be flourishing and happy, of which the far greater part of the members are poor and miserable.' (Adam Smith) This is the theory behind the creation of social services such as unemployment insurance and welfare payments in many countries. The Canadian government provides a substantial 'social safety net' for its population. At first, this seems like a fair and proper thing to do, as it is in the best interests of society as a whole. However, when this generosity is taken advantage of by undeserving recipients, problems and controversy arise. The problem of abuse of Canadian social services has become prominent in 1996. The general consensus of organizations such as the Fraser Institute and the OECD, is that Canada's generous social safety net is a disincentive to work, which leads to dependence on the government, thus resulting in increased unemployment. By comparing the social benefits provided for Canadians and Americans, the cause of this gap in the unemployment rate becomes apparent.
In general, the social benefits provided for Canadians are incredibly generous, and unregulated in comparison to those of the U.S., resulting in a dependency on them and creating a disincentive to work. Unemployment insurance is a means of protecting workers who are out of work and looking for employment. The unemployed workers receive cash payments, usually each week for a limited period of time. Unemployment insurance is financed by the combination of employer and employee contributions, of which the employer contribution (a form of payroll tax) is slightly higher. Canada currently spends 70% as much on U.I. as the United States, in spite of the fact that the total U.S. labour force is about 11 times the size of Canada's. There are two principal differences between the two U.I. systems. The first is that unemployment insurance is operated at a state level in the United States. This means that the states administer the insurance system and determine the benefits, while maintaining certain standards according to federal law. The second is that in most cases the insurance premium employers must pay is related to the extent to which their employees use the system. In other words, there is an explicit insurance, or experience rating feature built into the U.S. system. In Canada the opposite occurs, with no penalty for employers who overuse the system. Unemployment insurance is regulated by the federal government, it applies in all provinces and territories, and covers about 97% of all Canadian workers. Due to the differences between the two systems, one can understand how Canadians h...