The economic crisis caused by COVID-19 has shone a spotlight on the need to reform Canada’s income-support framework. Combine this with the looming risks of automation and age-related labour shortages, and we have a strong case for creating a modern framework that promotes work and minimizes earning losses for dislocated workers. As we rebuild our economy following the crisis, Canadian policy-makers will need to grapple with this complex and critical task.

There was growing momentum for significant reforms to Canada’s income support framework prior to the COVID-19 crisis. The Employment Insurance model, which was born out of the Great Depression, has been showing its age. It now covers less than half of unemployed workers, its inflexibility does not reflect the “gig economy”, and it is ill-suited to support mid- or late-career workers affected by technology- or trade-induced dislocation.

And while these trends were already galvanizing support for various types of reforms, including the adoption of a guaranteed basic income, the COVID-19 experience has brought them into greater focus. It has accentuated the need to reconceptualize Canada’s income-support framework. That the government needed to create two new programs – the Canada Emergency Relief Benefit and the Canada Emergency Wage Subsidy – in the middle of a crisis is a sign that our current system is no longer serving the country’s needs.

As part of a rebuilding effort following the pandemic, we will see renewed impetus for modernization and reform of our income support programs. Such an agenda will necessarily be multi-faceted: it will need to consider multiple policy problems – including poverty, disability, skills development and housing and so on – involve different levels of government and, of course, support people of diverse backgrounds, skillsets and circumstances. Reforming Canada’s income support framework is, in short, both highly necessary and highly complex.

Other essays in this series (as well as previous work published by the Public Policy Forum) target related questions, including the treatment of non-standard work, income inequality, and gender equity in the labour force. This brief essay sets out the case for the adoption of wage subsidies as a pro-work income support policy that can help expand employment and earnings for dislocated workers. One might think of wage subsidies as an employment-centered social policy that is designed to “make work pay.”

The Canada Emergency Wage Subsidy (CEWS) was conceived as an extraordinary measure to keep workers attached to their firms during the COVID-19 pandemic. It covers 75 percent of employee wages for up to 24 weeks for employers who experience large drops in their revenues during the economic shutdown. The goal of the CEWS is to minimize job losses and better position firms and the economy as a whole to resume normal activities when public health restrictions are relaxed.

This temporary measure is not how wage subsidies are normally conceptualized. Wage subsidies are an active labour market policy typically designed to either reduce the labour costs of employing targeted workers (employer-side wage subsidies) or increase incentives for targeted workers to accept job offers (employee-side wage subsidies). The former aims to increase employment of targeted workers by increasing demand for their labour, and the latter aims to increase employment by increasing the supply of targeted workers. Both are characterized as policies that aim to “make work pay” and are thus sometimes described as “employment-centered social policy.”

The premise of a wage subsidy is that paid employment brings a combination of financial and non-financial benefits to individuals, households and communities, and that income-support programs should tilt in favour of work.

Most of Canada’s current income-support programming has the implicit goal of encouraging and enabling recipients to re-enter the labour market. The problem is their track record is generally underwhelming. Ontario’s social assistance programming, for instance, has experienced a doubling of average durations over the past decade, and 80 percent of those who leave the system return within a year.

Various explanations exist for the system’s mediocre performance helping people transition into employment. One factor is the role of incentives. Some income-support programs discourage paid employment because of the associated claw-back rates. Marginal effective tax rates can exceed 100 percent in some cases – especially accounting for in-kind benefits such as health care, housing and child care.

It is worth elaborating here on the role of marginal effective tax rates. Unemployed Canadians receiving public benefits start to lose those benefits as they earn employment income. Depending on a person’s individual circumstances, the loss of benefits can be significant: every two dollars earned in employment income can cost as much as one dollar in direct income support. And the costs can accumulate even more if individuals or households lose subsidized health insurance or experience a rent increase because they live in rent-geared-to-income housing.

These cumulative costs can harm the financial rewards associated with paid employment. This effect can act as negative work incentives for affected individuals and therefore undermine the goal of helping recipients transition into paid employment. The ultimate risk is that the income-support system starts to function less as a safety net that helps dislocated workers bounce back into the labour market and more as a web that traps them in a state of dependency.

Herein lies the case for wage subsidies. They are a policy intervention that actively deploys public resources to either incentivize employers to hire dislocated workers or incentivize dislocated workers to accept jobs with low market wages. The goal is to minimize the costs and maximize the financial rewards of paid employment – hence the notion of “make work pay.” Wage subsidies are regularly described as “in-work benefits” because they are a form of public benefit delivered as active employment support.

Suppose, for instance, that an oil sands worker loses their job and cannot find a new one at a similar level of pay as their previous work – or that even matches their Employment Insurance payment. An employee-side wage subsidy would provide a wage top-up to reduce the gap between the previous earnings (or at least the Employment Insurance payment) and the pay rate in a new position. It would amount to a policy intervention that “makes work pay” for the targeted recipient.

This differs from other income-support measures that may have an implicit goal of helping recipients transition into paid employment, but that have generally produced mixed results. Wage subsidies pursue this implicit goal by making paid employment an explicit feature of their design. Eligibility is predicated on the recipient having a job.

Wage subsidies are currently only a small portion of Canada’s income-support programming. The Canada Workers Benefit (formerly the Working Income Tax Benefit) provides employment subsidies for low-income individuals and families to help them get over the so-called “welfare wall.” It is a positive initiative with multi-partisan support. But it is a relatively small program – spending on the Canada Workers Benefit is barely 10 percent of the overall Employment Insurance program as an example.

Economic trends point to a growing need for an expansion of wage subsidies. The first trend is the unequal distribution of automation risk across sectors. As much as 40 percent of Canada’s labour market work in occupations that are at a high risk of automation. This means that a considerable number of jobs are likely to be destroyed in part or in full due to technological adoption in the coming years. Public policy will need to help the affected individuals minimize sharp income losses and secure new employment.

Another trend is that Canada’s aging population is going to result in labour supply shortages in certain parts of the economy. This will have negative effects on Canada’s overall economic output. It will be important, therefore, that public policy aims to pull as much underutilized labour supply into the economy as possible.

Wage subsidies can help to connect dislocated workers with unfilled positions. Employer-side wage subsidies can reduce the pre-market costs for an employer to hire a dislocated worker. Employee-side wage subsidies can increase the after-market pay for a dislocated worker to accept a job that may pay a lower market wage than the worker’s previous job.

Economists and policy scholars from both sides of the political spectrum have increasingly come to see a role for wage subsidies as part of the modern income-support framework. University of California labour economist David Neuwark, for instance, has proposed a temporary employer-side wage subsidy to stimulate employment in communities with high rates of poverty. U.S. conservative policy scholar Oren Cass, meanwhile, has proposed an employee-side wage subsidy that would be paid directly to workers to close the wage gap for dislocated workers who accept new, lower-paying jobs. This left-right consensus is driven in large part by compelling evidence about the broad economic and social benefits of paid employment.

The evidence generally finds that wage subsidies can strengthen labour force attachment and boost earnings for targeted workers. Consider the following studies:

  • A 2000 report by the Organization for Economic Co-operation and Development (OECD) examined the wage subsidy experience in various jurisdictions. It found that, overall, wage subsidies “had a positive impact on the number of people working” but may have a small negative impact on the number of hours worked by increasing hourly returns.
  • A 2005 report by the OECD found that in-work benefits such as wage subsidies can help to reconcile the efficiency goals of an increased labour supply with the equity objectives of supporting disadvantaged or low-skilled workers.
  • A 2018 study for the Hamilton Project in the U.S. shows that wage subsidies can raise earnings and employment among disadvantaged workers.
  • A 2019 Brookings Institution report highlights a large body of research that shows wage subsidies can have spillover effects such as:
    • reducing the use of other public assistance;
    • improving school outcomes among workers’ children;
    • lowering criminal justice system involvement among recipients and their children; and
    • reducing long-term poverty.

These are promising studies. But perhaps the most convincing and comprehensive experiment with wage subsidies took place here in Canada in the 1990s. It merits a closer, second look. The Canadian Self-Sufficiency Project ran wage subsidy experiments in British Columbia and New Brunswick between 1992 and 1995 during a period of high joblessness characterized by long-term unemployment. The program provided generous, time-limited earnings supplements for single parents who had been on social assistance for at least a year and then obtained full-time work.

The results are generally impressive. Consider the following:

  • 61 percent higher average full-time employment rate over the three-year follow-up period;
  • 28 percent higher average annual earnings over the three-year follow-up period;
  • 10 percent lower annual average welfare receipt over the three-year follow-up period;
  • 10 percent higher overall family income during the previous six months;
  • 11 percent fewer families with overall family incomes below poverty during the previous six months; and
  • research by leading Canadian economist David Card and his colleagues in 2005 even found the program started to essentially pay for itself through higher tax revenues within 30 months.

The one adverse finding from Card’s Canadian Self-Sufficiency Project research is that improvements in employment and earnings did not seem to endure following withdrawal of wage subsidies. The workers’ market wages generally did not increase enough to offset the loss of the subsidy or, in some cases, they saw their employment cease when the subsidy expired.

One explanation may be that the program’s design (including a complicated opt-in process) harmed its long-term effects. More recent analysis by labour economists Chris Riddell and W. Craig Riddell also questions whether the long-term effects of the Canadian Self-Sufficiency Project were contaminated by separate yet related policy shocks – including, for instance, parallel changes to social assistance programming and the Canada Child Tax Benefit that may have unduly affected the outcomes. As the Riddells put it in a 2016 paper: “On the basis of our investigations, we believe that the SSP [Self-Sufficiency Project] experimental estimates are unduly pessimistic about the long-term consequences of temporary financial incentives on welfare dependence. It also appears that the observed behaviour of the experimental control group over-estimates the extent to which long-term welfare recipients with dependent children leave IA [income assistance] in the absence of incentives to do so.”

The key takeaway from the Canadian Self-Sufficiency Project is this: that the evidence points in favour of wage subsidies as a useful policy tool for expanding the employment and earnings of dislocated workers over the short and long term. The positive labour market effects can even mostly offset the fiscal costs. And that does not even account for the non-financial benefits for individuals, households, and communities.

The conceptual case for wage subsidies is strong. Remember that the goal is to help dislocated workers either obtain employment or minimize earnings loss based on the underlying premise that paid work provides important financial and non-financial benefits. Public policy should therefore actively tilt in favour of paid employment.

The practical design of a wage subsidy though is complex. Policy-makers must keep various considerations in mind, including eligibility, generosity, conditionality, duration, phaseout and mechanisms for delivery. As an OECD study put it: “However elegant and desirable MWP [Make Work Pay] policies may look in outline, their effectiveness depends crucially on their detailed administration.”

Here are some considerations for designing and implementing a wage subsidy policy. This list is by no means exhaustive:

Various policy instruments could be used to implement a wage subsidy. They could be delivered in the following ways:

The delivery mechanism will depend on what the policy’s objective is (the payroll tax deduction may be used to expand hiring and the latter two policy instruments may be used to expand take-home pay, for instance) and will determine which level of government is best suited to implement the program. The federal government is responsible for joint administration of income taxes and payroll deductions and may be better suited for the first two options. The provinces and territories operate various direct transfer programs and may be well-placed to deliver something like a direct wage top-up to low-income workers.

The size of the subsidy must be determined with several factors in in mind. The overarching goal for employee-side wage subsidies should be to create a sizeable difference between welfare income and employment income in order to induce recipients to accept a job offer. But policy-makers should also consider factors such as local economic conditions, how long an unemployed worker has been out of the labour force, and a person’s actual wage rate relative to their previous earnings or Employment Insurance benefit.

Eligibility may target unemployed workers based on worker’s duration out of the labour force, their income or where they live. Wage subsidies may have broad eligibility or may target disadvantaged populations. The Canadian Self-Sufficiency Project, for instance, targeted long-term recipients of social assistance.

Wage subsidies may be available as a short-term hiring inducement or remain in place to sustain employment over the medium and even long term. The evidence from the Canadian Self-Sufficiency Project though is that wage subsidies may not produce long-term benefits if they are withdrawn too early. A common consideration in the research literature is the expected wage progression for recipients, so that subsidies can be withdrawn and replaced as a worker’s market wage increases.

Phase-out rates matter a great deal in shaping employer-employee behaviour. These have a major effect on the incentives for retention and ongoing work. A common option put forward by Cass, for instance, is to peg the wage subsidy as a share of the gap between the market pay rate and a targeted rate, and then gradually phase out the subsidy as the market wage increases.

The evidence shows that in-work benefits such as wage subsidies are most effective when combined with other policy interventions. Increasing the labour participation of single parents, for instance, may require a combination of wage subsidies and child-care supports.

These policy design and implementation considerations involve considerable complexities. They should not be minimized. One of the greatest challenges, as Cass has observed, “lies in uncharted territory.” Canada does not have significant experience in designing and implementing broad-based wage subsidies relative to other jurisdictions. One estimate is that wage subsidies comprise less than 10 percent of spending on active labour measures in Canada. Even the Canadian Self-Sufficiency Project was limited to 5,729 single parents in British Columbia and New Brunswick.

But this lack of experience should not deter policy-makers from pursuing wage subsidies as part of a broader set of reforms to Canada’s income-support framework. Quite the opposite. Projections about the risks of automation and future labour shortages make a strong case for enacting such a pro-work policy. Policy-makers must think carefully about policy design and implementation along the lines outlined in this paper. There may be a case to launch regional and local pilot projects as part of a renewed Self-Sufficiency Project so that we may experiment with various design and implementation options.

Canadian governments have not relied much on wage subsidies as part of their income-support programming or overall labour market policies. The bias has been in favour of transfer payments to affected individuals or subsidized skills training. The COVID-19 experience may be a catalyst for policy change in this regard.

Not only has the crisis made it abundantly clear that Canadian policy-makers must modernize our income-support framework, the experience with Canada Emergency Wage Subsidy may also normalize the role for public policy to support hiring and wages for dislocated workers.

The evidence suggests that this would be a positive development. The adoption of wage subsidies could help dislocated workers to obtain employment and minimize their earnings losses. There are various policy design and implementation features that must be seriously considered, but the conceptual and empirical case for a pro-work programme is generally strong. Canadian policy-makers should thus move in this direction as part of an effort to rebuild the income-support framework following the crisis.

Private Sector Partners: Manulife & Shopify

Consulting Partner: Deloitte

Federal Government Partner: Government of Canada

Provincial Government Partners:

British Columbia, Saskatchewan, Ontario & Quebec

Research Partners: National Research Council Canada & Future Skills Centre

Foundation Partners: Metcalf Foundation 

PPF would like to acknowledge that the views and opinions expressed in this article are those of the author(s) and do not necessarily reflect those of the project’s partners.