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Helping those stuck in the welfare trap could aid in addressing Canada’s labour shortage

Celia Pinto MoreiraWould you take a job for $4.61 per hr? Probably not. But that’s the choice many Quebecers receiving social assistance are offered.

With no exaggeration, they can either stay home or work full time for a whole year and earn a net gain equivalent to $4.61 per hour worked. This is due to all the taxes, contributions and various benefit reductions that eat up a large portion of the gains associated with getting a job.

Take the example of Gabrielle, a fictitious 28-year-old. She lives alone, has no kids, has a high school diploma, and is currently on welfare. She is capable of working. For the purposes of the exercise, we are in 2020, the most recent year for which the data are available.

As things stand, the benefits she receives give her an income of $13,005, to which are added programs like dental and vision care and free drug insurance. She applies to work in retail sales and gets the job. She will work full-time for the whole year and earn a gross salary of $25,414.

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Of this amount, she must deduct $1,958 – the net cost of income tax and other mandatory contributions, such as Quebec Pension Plan and the Quebec Parental Insurance Plan, which finances maternity and paternity leave, less the tax credits to which she is entitled. That leaves her with $23,456.

As she now has a job, her income level is too high to continue receiving social assistance benefits. Most notably, she loses her eligibility for free governmental drug insurance – which will now cost her an additional $582 – and her coverage for vision and dental care, which will now cost her $567 in the private sector. She’s left with $22,307.

Gabrielle’s year of work has thus earned her $9,302 more than if she had stayed home and collected welfare. Assuming she works 2,000 hours a year, that works out to a net gain of $4.61 per hour worked.

Another way of looking at Gabrielle’s situation is that for every dollar she earned working, the government took back 63.4 cents through taxes and contributions paid and benefits no longer received. It’s as if she were in a 63.4 percent tax bracket – which, in fact, is higher than any marginal income tax bracket we have.

It’s easy to see that for those in Gabrielle’s situation, going out and finding a job, only to gain $4.61 extra per hour, is relatively unattractive. And there are a lot of people like her – living alone, employable, but on welfare. In Quebec alone, there are around 100,000, and across Canada, nearly 350,000.

These people could help address our labour shortage and fill some of the 246,000 job openings in Quebec or the nearly one million vacancies across Canada. Encouraging them to join the labour force is not terribly complicated; we just need to re-examine our policies in order to reduce the disincentive to work.

One good way to get there is to claw back the social assistance benefits gradually. At the moment, a recipient of social assistance in Quebec can earn up to $200 a month, after which every additional dollar earned working leads to a full dollar of benefits lost. That’s a 100 percent tax rate: at a certain level of income, a person earns no more by working an hour more than by staying home an hour more.

On the other side of the Ottawa River, things are different. Instead of clawing back a dollar of benefits for every dollar worked, the Ontario government only claws back 50 cents. As a result, benefits are lost less quickly, which encourages work and avoids creating a situation where employment is simply not attractive.

To be fair, Quebec is not alone in doing this. The governments of British Columbia, Saskatchewan and Manitoba do the exact same thing.

To respond to the labour shortage, provincial governments should recognize the existence of this welfare trap and reduce the barriers to joining the workforce. This would help companies and our public finances but, most of all, it would help a large cohort of people to start working and improving their lot.

Célia Pinto Moreira is a Public Policy Analyst at the Montreal Economic Institute.

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