[Recorded by Electronic Apparatus]

Tuesday, November 19, 1996

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[English]

The Chairman: Order. The finance committee is very pleased to have before usDr. Andrew Sharpe. I've asked him specifically to appear before us because last year he ran a two-and-a-half day conference here in Ottawa on the difference in unemployment figures between the United States and Canada, and this is very relevant to the work we're doing.

Thank you very much, Andrew Sharpe, for being with us.

Mr. Andrew Sharpe (Centre for the Study of Living Standards): I would like to thank the committee very much, in particular Jim Peterson, the chair, for inviting me to appear before you today. I'm from the Centre for the Study of Living Standards. This is an Ottawa-based independent economic research organization which was established just over a year ago. The objectives of the organization are to contribute to the understanding of the trends and determinants in the living standards in Canada and thereby to contribute to the development of better policies to improve living standards.

Our activities are directed by a group of well-known Canadian economists, includingPierre Fortin, Craig Rudell, Rick Harris, Lars Osberg, Ian Stewart, a former deputy minister of finance, and David Slater, the former chair of the Economic Council of Canada. Our projects have included studies on service sector productivity, on business-labour sectoral trading councils, and on the Canada-U.S. unemployment rate gap. That's what I'm going to be talking to you about today: the Canada-U.S. employment rate gap.

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As the chairman mentioned, in February we had a conference in Ottawa on the reasons why unemployment was higher in Canada than in the United States. This was funded by a number of government departments, particularly Human Resources Development Canada, as well as the private sector. The papers from that conference - at least about 13 of them - are forthcoming in a special issue of the journal Canadian Public Policy. I also have documentation on the conference if any of you are interested.

What I'd like to do today is present a synthesis of the results of the conference, as well as more recent research on the issue of the gap. My presentation will be divided into three major parts. First, I want to talk about the basic data on Canada-U.S. labour markets, particularly as they relate to the gap. Second, I'll talk about the various explanations of the gap. Finally, I'll have a very brief section about the policy implication of the explanations.

The first question is about why the gap is important. There are two reasons. First, the gap means we have high unemployment in Canada. We all know that unemployment is a very important variable for economic performance, and we've done extremely poorly in that regard in recent years.

The second reason is that the U.S. is really the benchmark for the Canadian economy for economic performance. We always compare ourselves against the U.S., and when we do poorly that represents a problem.

Turning to the actual numbers on how much the gap is and how it has changed over time, I have prepared a handout of very basic data on what the unemployment rate has been in Canada over the last almost 50 years in table 1, as well as some more data in table 2 on trends in various labour market variables. I'll just go over some of the salient points here. I admit it's maybe a little heavy with these numbers here, but I think it's important in understanding the gap to get a feel for the numbers.

So far in 1996, unemployment in Canada has been 4.2 percentage points higher than in the United States. In the first three quarters of the year, unemployment was 9.6% in Canada compared to 5.4% in the United States - a difference of 4.2%. In the most recent month the gap actually increased, as you know. Unemployment went up to 10% in October and actually fell to 5.2% in the U.S. So the gap right now is actually more than shown here on an average annual basis.

I have four observations to make about table 1. The first observation is there has been a major upward trend in the gap over time. From an historical perspective this gap is a recent phenomenon. If you look on the second page at the averages for the various decades, you'll see that in the 1950s unemployment was actually higher in the United States than it was in Canada. In the 1960s it was about equal in the two economies. In the 1970s it was a little bit higher in Canada by about .05%. Then in the 1980s it averaged 2% more in Canada than in the United States. Finally, in the 1990s it has averaged almost 4% higher in Canada. So there has been an upward trend over time that really accelerated in the 1980s.

The second point is that only since the early 1980s has the gap been sustained. There are examples before 1981 where there was a positive gap in Canada, but it never lasted for any length of time, even in 1978, where we had a gap of 2.2%. So the phenomenon is really a phenomenon of the 1980s, and more importantly of the 1990s.

The next point is that there's a very close link between the gap and economic performance overall, particularly economic growth. Since the 1960s, the periods when we've had lower unemployment rates in Canada than the United States were from 1963 to 1966 and from 1974 to 1976. Those were periods when the Canadian economy outperformed the American economy significantly. That led to lower unemployment in Canada than in the United States. So there's a very close link between the gap and the relative performance of the Canadian economy vis-à-vis the American economy.

Turning quickly to the second table, I'll just make a number of observations. First, you can look at two periods, really: the 1980s, when the gap went up to about 2%; and the 1990s, when the gap increased by a further 2%, to an average of around 4%. There are different causes of the gap in both those periods, and you can get some insight into them by looking at the trends in the various labour market variables that determine the unemployment rate.

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The first thing to note is that the gap emerged in the 1980s not because unemployment increased in Canada - at least in terms of a comparison of 1989 to 1981, the peak years - but because unemployment in the United States fell from around 7.5% to 5.2% between 1981 and 1989.

If you look at what actually happened in the Canadian economy in the 1980s in our labour market variables vis-à-vis the U.S., we were actually very similar to the U.S. in terms of our working-age population growth, our participation rate and our labour force. Even our output growth was basically identical to that of the U.S., but our employment growth was slower than that of the United States by about 0.3%. That lower employment growth led to basically no change in the unemployment rate, whereas in the United States the unemployment rate fell.

Turning to the 1990s, we see a completely different economic situation in Canada than what we had in the 1980s. First off, the unemployment rate has gone up in the 1990s. It went from 7.5% in 1989 to about 9.5% in, say, 1995 or 1996. In the United States, however, the unemployment rate has gone up by only a small amount.

In terms of employment growth, again our employment growth in the 1990s has been weaker than that of the United States by about 0.5%. The major reason why it has been weaker is that our output growth has been much weaker than output growth in the United States - and I'll return to that point later on because it's an important one.

Our output growth has been very weak. If you look at our output growth here, the Canadian economy has been growing at only 1.3% per year since 1989. That compares to 3.2% in the 1980s, and it also compares to a superior American performance of 1.8%.

In terms of what has happened to the Canadian labour market in the 1990s -

The Chairman: Excuse me, Andrew. By ``real output'', do you mean growth in GDP?

Mr. Sharpe: That's right, real GDP.

The Chairman: Real GDP.

Mr. Sharpe: Yes, and that is the key economic variable in many ways.

The Chairman: Okay.

Mr. Sharpe: I have two points about our labour market in the 1990s that are very important. One is the working-age population growth, which means the population aged 15 and over. It has increased by 1.6% a year, which is actually up from what it was in the 1980s, when it was 1.3% per year. Immigration is the major reason why our working-age population growth has been faster. We've been taking in 200,000 to 250,000 immigrants per year in the first half of the 1990s, which is considerably more than it was in the 1980s. That's led to faster working-age population growth. In the United States, on the other hand, their working-age population growth is about 0.5% slower than Canada's - and I'll come back to that point later on when I talk about the explanations.

A second point is that we've had really disastrous developments in our participation rate. It has fallen by about 0.7% per year since 1989, particularly among youth and particularly among older men. They've left the labour force in large part because of the poor economic climate. If they'd stayed in the labour force, our unemployment rate would be significantly higher than it currently is - and that again contrasts with the United States, where their participation rate has not fallen in the first half of the 1990s. If you look at the employment to population ratio, which is a function of employment growth and the working-age population growth, we had a much larger fall in the employment to population ratio - 1% a year - while there has been relative stability in the United States.

Mr. Grubel (Capilano - Howe Sound): If that hadn't taken place, the unemployment rate would have been even higher, right?

Mr. Sharpe: That's right, exactly.

Mrs. Brushett (Cumberland - Colchester): Why has that fallen? Did they just stop looking?

Mr. Sharpe: Why has the labour force participation rate fallen?

Mrs. Brushett: Yes.

Mr. Sharpe: Again, there's a large debate about that in the literature. I'd say there is no definitive explanation yet, but I think most evidence points to the weak labour market. When there's a weak labour market and high employment, youths stay in school longer, they go to school instead of taking jobs, or they just give up and become discouraged workers. It's particularly been youths who have seen a very large fall in their participation rate. It's the same for older individuals, particularly those 55 and above, and most particularly men. When they're laid off, they just feel there's no possibility to find another job. They therefore take early retirement or give up.

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An hon. member: Or they run for Parliament.

An hon. member: Oh, oh!

Mr. Sharpe: So it's basically the poor economic prospects that explain it. For example, every time we see the employment rate increase in a given month, the labour force increases at the same time because people jump back into the labour market. There is therefore a lot of potential for our labour force to grow, what with all these people who have left, jumping back in.

Turning to the duration of unemployment, it is very interesting to look at. Is the increase in unemployment in Canada due to the unemployed staying unemployed longer, or is it due to a larger percentage of the labour force experiencing a bout of unemployment? If you look at the numbers, you'll see that it's all in the duration.

The duration of unemployment has been increasing steadily in Canada since 1976. Right now, the average duration is about 24 weeks, but if you look over at the incidence of unemployment - by incidence, I mean the percentage of people who experience a bout of unemployment in a given year - it has actually fallen. It was lower in 1995 than it was in 1991. So what we're seeing is a concentration of unemployment among a small group of people who experience long spells of unemployment.

If you look down at the last table, you'll see that the percentage of people who have been unemployed for 12 months or longer has increased to about 14%, up from around 7% in 1991. This phenomenon of long-term unemployment is very important in Canada, and it explains the rise in unemployment. This is true to a lesser degree in the United States. There has been lesser incidence and longer duration there, but, as I mentioned earlier, they have not seen a rise in unemployment.

I have two other points here about the unemployment rate gap. First off, as you know, unemployment is only one aspect in terms of the under-utilization of labour. There are also the discouraged workers and there are also the involuntary part-time workers. These are the people who are working part-time, but who would prefer to have full-time employment. That group of individuals has in fact doubled since 1989.

The number of part-time workers who want to work full-time has gone from 400,000 to 800,000. That represents a lot of hours that are not being used in the economy. In the United States, that hasn't happened. If we calculated a measure of the utilization of labour based on hours and included the involuntary part-time workers, the gap in Canada would be six percentage points instead of four. So we are basically underestimating the difference in labour market slack that exists between Canada and the United States by just looking at the official unemployment rate.

Surprisingly, when you look at the discouraged worker data - at least at the official estimates of discouraged workers - there's no additional increase in the gap. The number of discouraged workers in Canada hasn't increased by that much for some reason - at least as measured by Statistics Canada - even though the participation rate has fallen. This is a big puzzle that no one can figure out, so I'll leave that point there.

The final point on labour market characteristics is that the gap is a very pervasive phenomenon in terms of the characteristics of the labour force. If you break down unemployment by age, by gender, by region, by industry, by occupation and by educational attainment, all groups have seen an increase in their unemployment rate vis-à-vis their comparable unemployment rate in the United States. So it's a pervasive phenomenon that has affected all sectors and all elements in the Canadian labour market.

Mr. Grubel: How about the relative size of seasonal industry? Has anybody ever looked at that?

Mr. Sharpe: In relation to the gap?

Mr. Grubel: No. Let's say seasonal employment in Canada between 1970 and 1990, as a share of all employment providers, grew from 15% to 20%. What happened in the United States? One of the great hypotheses was that we had an over-expansion of industries that were indirectly subsidized by the system, and those are the seasonal industries.

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Mr. Sharpe: Linked to UI; unemployment insurance.

Mr. Grubel: Linked to UI.

Mr. Sharpe: I'm going to talk about the role of UI. Can we come back to that later? It's a very important point, but I don't want to prejudge what I'm going to say.

Mr. Grubel: Okay.

Mr. Sharpe: I'll turn to the explanations of the gap here, and I've broken my explanations into three main explanations. The first is what I call measurement issues, differences in the way we measure unemployment. Obviously you have to start there if you want to look at the unemployment rate. The second is what I call cyclical or demand-side explanations for the gap. Third is structural or supply-side explanations for this 4% gap.

First, measurement. Most people thought this wasn't really an issue; in Canada we measured unemployment basically in the same way as we did in the United States. That was the view of the OECD and the Bureau of Labor Statistics, because they published standardized rates of unemployment for all members of the OECD. They're standardized rates. There's no difference in the national rates of unemployment, so most people thought there were no real measurement differences between Canada and the U.S.

However, a researcher in the United States, at Ohio State University, thought there might be something more to this issue. He actually looked at these surveys, the questionnaire for the labour force survey in Canada, the current population survey in the United States, and how we measure unemployment in the two economies. He found there actually was a difference in the treatment of passive job searchers. These are people whose only job search method is to look at newspaper ads. They don't telephone people, contact people. All they do is look at newspaper ads.

Well, if you just look at newspaper ads in Canada, you're considered unemployed. You're as much unemployed as someone who is going door to door. However, in the United States, if you're just engaging in this passive job-search method, you're not considered unemployed at all. You're considered out of the labour force, and therefore you don't count as an unemployment statistic.

This researcher wasn't able to do a very thorough analysis of this, because he didn't have the data, so at the conference we had Statistics Canada go back to the original data and rerun it with these different definitions, and we found the difference in measurement does, at least in 1993, which was the last year there were comparable data for the two economies, explain about 0.7% of the gap. In other words, if we measured the unemployment rate in Canada in the same way as they do in the United States, our unemployment rate would be about 0.7% lower. That's about 17% of the gap. So we know right off the top the gap is lower than the official numbers show, because of this measurement issue.

Mr. Grubel: Do you know anything about whether that was true also in the 1940s, 1950s, and 1960s?

Mr. Sharpe: We have data going back only until around 1976, because the new labour force survey was introduced that year. At that time it was actually less. It was only around 0.2%.

The importance of what are called ``passive job searchers'' in the total pool of unemployed has been increasing in Canada in the last fifteen years. We don't have data for earlier. I don't think it would have been as important a phenomenon earlier. First of all, there wasn't a gap in the 1940s and 1950s. So it's very hard to say what the situation was. But we do know the phenomenon is becoming more important. We have data only for 1993. It may be even more important in 1996 than it was in 1993.

Mr. Grubel: But I think important as a percentage of the total level - it may have remained constant, and it may still be the same percentage of the total level of unemployment in this country.

Mr. Sharpe: We know from 1976 to 1993 it increased in its importance. It explains 0.2% of the gap then, and now in 1993 it explains 0.7%. So the rise in the gap explains half a point.

Mr. Grubel: I apologize, but the percentage point of the gap is a percentage point. It's an absolute number.

Mr. Sharpe: Right.

Mr. Grubel: But it ought to be based on the level of unemployment. You see, 0.2% on a basis of 5% unemployment is the same as a 0.4% gap for a 10% unemployment rate.

Mr. Sharpe: Yes. Right.

Mr. Grubel: In that sense it may not have changed at all.

Mr. Sharpe: That's possible, yes.

Mr. Grubel: That's a very important thing. You can't just brush that aside.

Mr. Sharpe: No. But I'm saying we know that from 1976 to 1993, even if you use that basis, it has increased in importance.

Mr. Grubel: Let's see that.

Mr. Sharpe: I don't have -

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Mr. Grubel: In 1973, the unemployment rate was 6.2% in Canada.

Mr. Sharpe: In 1976, not 1973.

Mr. Grubel: So in 1976 it was 7.2%.

Mr. Sharpe: That's right, and it was then at 0.2%.

Mr. Grubel: That's right, and in 1993 it was 11.2% -

Mr. Sharpe: And it was 0.7%, yes.

Mr. Grubel: These are one-year numbers, so I don't think they clinch the point. If it is properly based it's certainly not as big as it appears, by going from 0.2% to 0.7%.

Mr. Sharpe: When you look at it in that sense it's less, yes.

Mr. Grubel: That is the way it should be looked at, with all due respect.

Mr. Sharpe: Okay.

The Chairman: I think we will have to use probability analysis to get to the bottom of this thing.

Mr. Sharpe: Another aspect of the measurement issue is the difference in the institutional structures of Canada and the United States. The relative importance of the incarcerated population in the United States is much greater than it is in Canada, and one can do an analysis to see the effect of this on the unemployment rate.

The number of people incarcerated in the United States increased from 250,000 in 1970 to 500,000 in 1980, and then to 1.3 million in 1993. I'm not sure of the estimate for 1996, but I'm sure it's at least 1.5 million.

It's fair to say that if those incarcerated people were on the streets, their unemployment rate would be much higher. One study surveyed people's labour force status before they were incarcerated, and the unemployment rate of this group was 43%. Obviously, they're poorly skilled people with low levels of education, and if they were in the labour market they would have significant difficulties.

So if these people were in the labour market, what would be the unemployment rate in the United States? It would be slightly higher, about 0.4% higher, than it is now. That's a simplistic calculation, a back-of-the-envelope number, to get some insight into the impact of this.

Our incarcerated population is about one-fifth the level it is in the United States, so the impact on our unemployment rate is really trivial - maybe 0.1% at the very maximum.

An hon. member: What about the trend here?

Mr. Sharpe: In Canada? It's upward as well, but it's nowhere near the U.S. in terms of the relative increase in the incarcerated population.

Based on those numbers, the unemployment rate in the United States is about 0.3% lower than it would be if this population - . So that can explain about 0.3% of the gap. That is a relatively small number, so it's a small element in the overall story.

The Chairman: Did you say 0.3% or 0.4%?

Mr. Sharpe: About 0.3%.

The Chairman: Which is -

Mr. Sharpe: It's about 7% or so. The gap is around 4.2%.

The Chairman: Okay.

Mr. Sharpe: So the bottom line on measurement is that about 1% or about 25% of the total gap would be due to these measurement differences between the two economies.

Turning to the cyclical element of the gap, how much of the gap is due to the weakness in our economy vis-à-vis the United States? One way to get a handle on the importance of cyclical unemployment, or inadequate aggregate demand on employment, is to compare the actual unemployment rate to what's called the structural unemployment rate, or what economists call the NAIRU or non-accelerating inflation rate of unemployment. I hate to use that type of jargon, but it seems to be used a lot in economic policy debates.

I'll call it the structural rate of unemployment -

Mr. Grubel: It used to be called voluntary unemployment, but the Keynesians go ballistic whenever you use that.

Mr. Sharpe: I won't get into that debate.

There is a wide range of estimates on this structural rate in Canada, but in the United States there is less of a range. Let's start with the United States.

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In the United States right now the unemployment rate is around 5.6%, or at least that's what it was in 1995-96. The estimates of the NAIRU, at about 5.5%, are basically the same. So the United States has no inadequate aggregate demand on employment. All of their unemployment is structural.

In Canada, estimates of the NAIRU range from a low of 6.5% all the way up to 9.5%. There's a wide range of estimates. It depends on your estimate, but if you take 7.5% as a starting point - and people will differ with that, but that's an average number of the estimates - that means we have a cyclical unemployment rate of about 2% in Canada, because our unemployment rate is around 9.5%. If the U.S. is at 5.5%, 2% of that is due to either measurement or structural issues and 2% to cyclical factors.

On that very simplistic analysis, which I'll back up with statistics in a minute, about half the gap is due to cyclical factors or weakness in the Canadian economy vis-à-vis the American economy.

In support of that position one could look at what's called the output gap, which is a measure of the capacity of the Canadian economy to produce goods and services relative to our capacity. According to the recent Bank of Canada semi-annual monetary report, the output gap is around 3% or 3.5%. That's a low estimate. Many people think the output gap is significantly higher - up to 10% some people believe. But even if you think it's around 3.5%, the U.S. has no output gap. In fact many people think they may be over, that they may be above capacity currently.

So there's no doubt there's a difference between Canada and the United States in terms of our capacity utilization, and I think that explains about half - some people may feel it's less, maybe a quarter - but there's no doubt that's a significant factor in the gap.

The Chairman: Measurement differences account for 17%, the incarceration rate -

Mr. Sharpe: About 7% -

The Chairman: - and structural weakness in the economy is 50%.

Mr. Sharpe: That's a ballpark estimate.

The Chairman: Okay, so that takes us up to 74%, and the output gap -

Mr. Sharpe: No, the output gap is part of the cyclical.

The Chairman: Got you. Okay.

Mr. Sharpe: The output gap is evidence of the cyclical effect.

Why do we have this output gap? It goes back to the point I made earlier about the performance of the Canadian economy. In the 1980s we had growth of 3.2%. Since then we've had growth of 1.3%. So our economic growth has fallen off nearly 2% in the 1990s vis-à-vis the 1980s. So that's been the big development, and again, we've done worse than the United States.

Again, I would refer you to a paper. I'm sure you've heard reference to Pierre Fortin's presidential address entitled ``The Great Canadian Slump'' in the November issue of the Canadian Journal of Economics. He puts forward, in a very cogent fashion, the factors behind the great Canadian slump of the first half of the 1990s.

I will turn now to supply-side factors that will explain the remaining quarter of the gap. The first supply-side factor that I talk about - and the one that receives the most attention - is unemployment insurance.

The rationale here is that Canada has a more generous unemployment insurance system than the United States does, particularly in the level of benefits, the number of weeks you need to qualify for benefits and so on. That really dates back to 1971, when there was a liberalization of the UI Act in Canada. The argument is that back in the early 1970s there was an increase in our structural rate of unemployment because of the increased generosity of social programs, particularly unemployment insurance. The argument is that if this happened, why didn't we have an unemployment rate gap with the United States in the 1970s? I mentioned earlier that it really only appeared on a sustained basis in the 1980s.

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The argument is that the effect was actually masked in the 1970s by a much stronger Canadian economy than the American economy. We outperformed the U.S. in the 1970s in terms of growth. Therefore the higher structural unemployment rate did not assert itself because it was offset by a much stronger economy. However, what happened in the 1980s was that our macroeconomic performance was not as strong as the U.S.'s. We had a more severe recession in the early 1980s. And again in the 1990s we had a much worse performance. So this structural factor came into the fore, particularly in the 1980s, and explained some of the gap.

I think there's an element of truth in that explanation. Of course you have to factor in that the UI Act was changed throughout this period and became less and less generous, although there's no doubt that in the 1980s UI was more generous than it had been pre-1971.

What's really interesting, though, is what's happening in the 1990s. Unemployment insurance has been changed significantly, as you all know, in a series of changes. Currently, according to estimates of the generosity of UI calculated by the Department of Finance, the UI system is actually back to its pre-1971 level of generosity. So it's very hard to point currently to UI as the culprit in explaining the gap when our level of generosity, although it still is more generous than the U.S.'s, has fallen a lot.

My take on that would be that UI was probably more important as an explanation of the gap in the 1980s. The structural part of the gap was larger in the 1980s. Now it's fallen off. Certainly it's still there, but it's only a quarter, or maybe not even that much. It's still a factor, but it's certainly a much less important factor than in the past, because of the reduced generosity of UI.

The Chairman: What figure do you put on that - what percentage point?

Mr. Sharpe: I would say probably about 0.5% to 1%. Take an average of 0.7% or so if you want.

The Chairman: Which is how much of the total?

Mr. Sharpe: It would be about 12% to 17% or so.

The Chairman: Say 15%?

Mr. Sharpe: It's very hard to get precise estimates of this. We had a number of papers at the conference, and there's a lot of debate in the profession on the role of UI. There's certainly no consensus. I'm just giving you my hunch of what it is, after spending a lot of time with the numbers.

Mr. Grubel: May I say something?

The Chairman: Sure.

Mr. Grubel: Or do you want to have it separate?

The Chairman: It's up to you.

Mr. Grubel: I just can't accept this, for the following reasons.

The Chairman: Herb, if this is going to be a major debate, why don't we wait until the end to get into it?

Mr. Grubel: Okay.

Mr. Sharpe: In terms of other possible structural factors of the gap, I mentioned earlier that our immigration levels have been much higher than they were in the 1980s. In the long run there's no doubt immigration does not contribute to unemployment, because immigrants adjust and get jobs and contribute to growth. However, in the short run it's possible.

Unfortunately we didn't have a paper on this at the conference, but a large number of people at the conference kept bringing this point up, so I'd like to raise it.

In the short run, immigrants to Canada often have difficulty adapting to Canada because of language differences, because their credentials aren't recognized by Canadian authorities and so on. Even though they may be highly skilled, their unemployment rate tends to be higher than the national average.

So just on a composition basis, the higher immigration in the early 1990s compared to the 1980s would put up the unemployment rate by possibly 0.1%. It's not a major factor, but especially when the Canadian economy was doing poorly and was unable to absorb these people, if they hadn't been there, the unemployment rate would have been slightly lower.

So I think we can say immigration played a minor role in increasing the gap, at least in the early 1990s.

Mrs. Brushett: How much?

Mr. Sharpe: Again, the numbers are very crude, but I would say maybe up to 0.2% or 0.3%.

The Chairman: Which is what percent of the total?

Mr. Sharpe: That makes 25%.

The Chairman: That's 25% of the total?

Mr. Sharpe: No, no, in terms of the structural.

The Chairman: I'm getting lost here. Measurement differences account for -

Mr. Sharpe: For 25%. Included in measurement was the incarceration.

The Chairman: Okay, so that's 25%. Weakness in the economy is -

Mr. Sharpe: About half.

The Chairman: So that's 75%.

Mr. Sharpe: That's right, and the rest is structural, including UI and immigration.

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The Chairman: So the remaining 25% is immigration and UI.

Mr. Sharpe: That's right.

The Chairman: So a quarter of the unemployment gap between Canada and the United States is UI and immigration.

Mr. Sharpe: That's right.

Mr. Solberg (Medicine Hat): Mr. Chairman, it would be helpful if we could have all these numbers. We're all trying to write these down, and if you had them on a sheet it would be helpful.

Mr. Sharpe: I'll do that this afternoon and I'll fax it over to you.

Mr. Solberg: Thank you.

Mr. Sharpe: There are a large number of other explanations that have been put forward for the gap, which I'll just go through very quickly. At least in terms of the results of the conference, they did not find these to be important.

First is the whole question of unionization. There is a major gap in the unionization rates between Canada and the United States; our unionization rate is around 35%, the United States' is 15%. That was not this way 30 years ago. There was no gap at all. Many people said that this increased unionization in Canada vis-à-vis the United States has led to a higher unemployment rate in Canada. However, at least at the conference, the people who looked at the unionization couldn't find that to be a key variable, couldn't find any linkages between unionization and unemployment. That's a controversial topic, but I'm saying at least the papers at the conference did not identify it as a key variable.

Mr. Grubel: Theoretically or empirically?

Mr. Sharpe: Empirically.

Mr. Grubel: But theoretically it's clear.

Mr. Sharpe: Yes, you definitely could come up with a theoretical explanation for that.

Another subject was the pace of adjustment. The idea addressed is that there is more rigidity in the Canadian labour market than in the American labour market, and this means we have higher unemployment in Canada than in the United States. There were papers done by the IMF and the Bank of Canada, and perhaps surprisingly they both concluded that there were no significant differences they could find between the rigidities in the two economies.

Another one was real wages, the idea that maybe our real wage growth in Canada was higher than the U.S. and that this led to basically labour pricing itself out of the labour market and therefore lower employment growth. There might have been an element of truth in that in the 1980s, when there was higher real wage growth in Canada, but in the 1990s, in terms of the producer wage, there wasn't higher real wage growth in Canada. Again, that wasn't found to be a key factor.

Mr. Grubel: What about right-to-work rules and minimum wages?

Mr. Sharpe: The minimum wage in Canada, as you know, has been falling in recent years relative to the industrial wage; therefore, where that may have been a factor in the gap in the 1980s, the consensus was that it did not explain the increase in the gap in the 1990s.

Mr. Grubel: You have a significant correlation across American states between whether they have minimum wages and right-to-work laws and economic growth and employment rates. Why should this not extend to Canada?

Mr. Sharpe: I don't quite see your point. Do you mean the United States would have right-to-work -

Mr. Grubel: What average did you use for the United States in order to explain the gap between the minimum wage in Canada and the United States as a trend?

Mr. Sharpe: Again, there was no particular paper that looked in detail at the minimum wage. The point was that the minimum wage in Canada, compared to the industrial average, has not increased relative to what it was in the United States.

Mr. Grubel: If in the United States it fell relative to the industrial average, that then explains the gap. We're talking about the gap. So your argument is irrelevant for discussing the gap, unless it's related to what's happened to the minimum wage in the United States.

Mr. Sharpe: No, I agree with that point. I'll have to check the data on that one, but it might have been a factor. However, I don't think you can say it has been one of the key factors in the explanation.

Mr. Grubel: You don't know because you don't have the numbers.

Mr. Sharpe: No, we didn't have a paper specifically on the minimum wage. The people who looked at this found that given the trends -

Mr. Grubel: I know that in the United States huge employment growth has taken place in those areas of the country, for instance the south, where these restrictions on labour market effectiveness have not been in place. Therefore, it's quite possible that as a weighted average for the United States the minimum wage relative to the average wage has actually fallen. This could be an explanation.

Mr. Sharpe: Sure. When one looks at this question, everything that effects the labour market in each country could be a possible culprit. So you end up basically looking at literally tens of possible factors, and we certainly don't pretend that we've looked at every factor in detail. There may be truth in what you're saying.

Mr. Grubel: We're here to try to understand this, so if you wouldn't mind, I'll continue.

I see that in Europe a great deal of weight is put on all the non-wage costs of employment. I just heard yesterday from someone who talked to the Bundesbank president recently, and for every $100 that a German worker is paid, it costs the employer $180. My number was $165 and it has now risen to $180. In Canada it's only $115 or $120. I would like to know what that is relative to the United States. I understand that the United States has not legislated as many increases in payroll taxes and other legislative costs of employment.

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Mr. Sharpe: If you look at labour compensation, which includes payroll taxes, our rate of increase has not been greater than that of the United States in the 1990s. Their level payroll tax is quite high given their higher social security tax.

I'll conclude quickly here and give a summary, an overall explanation. I think Canada had a higher structural rate of unemployment than the United States in the 1970s due to our unemployment system. However, that was masked by the more favourable economic environment. Beginning with the 1981-82 recession, which was more severe in Canada, the structural gap was exposed. In the 1980s, we had an unemployment gap of around two percentage points at the end, and it was probably largely structural in nature.

Then what happened is that we had a more severe recession in the 1990s and it put the gap up to about four percentage points. Again, of the current gap, about 50% is due to the demand factors. About 25% is due to the two measurement factors I noted, and then I would say about 25% is due to structural factors. Again, possibly included in those structural factors may be the minimum wage. It also could be our UI, although that's less important than it was before, and immigration.

To conclude with what the policy implications of this explanation of the gap are -

The Chairman: It's very simple: end immigration and put everybody in jail, Andrew.

Mr. Sharpe: I guess so. Even that wouldn't -

Mr. Grubel: Is there any media here to report this? Out of the mouth of a Liberal!

The Chairman: I'm sorry you were so rudely interrupted by Mr. Grubel.

Mr. Sharpe: First off, the measurement is obviously non-policy relevant, so the fact there are differences in measurement between Canada and the U.S. in how we do the unemployment rate is not relevant to policy.

The cyclical, of course, is very relevant to policy. I'm hoping on that one that we can continue the Bank of Canada's current policy of monetary easing, and I was very pleased to see the Governor of the Bank of Canada quoted in the newspaper on the weekend saying he would like to see the unemployment rate down to 4%. I think that's a very positive development. Hopefully, with the low interest rates, that will ignite the economy and we will basically use up this output gap in the future.

On the structural side, again, we don't want as a goal to get down to the U.S. unemployment rate. That shouldn't be a goal. Our goal should be to increase the economic welfare of Canadians. If having a more generous unemployment rate system in Canada or a social safety net means we have higher unemployment in Canada, that's not necessarily a bad thing. What is important is the economic welfare of Canadians, and there's not necessarily a correlation between the unemployment rate and economic welfare. One could have a higher level of economic welfare with a higher unemployment rate if that meant Canadians had more security in terms of -

I'll stop there. I'm sorry for going over my time.

The Chairman: It wasn't your fault. Herb was interrupting you all the time.

Mr. Sharpe: Yes.

Mr. Grubel: That's right, and I would like to interrupt again.

Mr. Sharpe: I knew I would be getting a few comments.

[Translation]

The Chairman: We are going to start with Mr. Bélisle.

Mr. Bélisle (La Prairie): You presented historical data, which is very interesting. We can see the trends over the long term, and that makes it easier to understand.

However, I am a bit surprised when I see the data. If you look at the unemployment rate in Canada, it varies, of course. When unemployment is around 8 to 9%, we say, everything is fine. When it is around 10 to 12%, we say that something is wrong. Since we focus on Canadian data, let's look at the bottom of figure 2. We can see that for the period 1976-81, the unemployment rate was calculated based on the labour force rather than on the population as a whole, which means that the rate was much higher. Between 1976 and 1981, the rate was 26 to 26.6%. In 1989, when the Canadian economy was supposed to be in very good shape, the rate was 21.9%. And right now, observers tell us that the Canadian economy is recovering, even if the unemployment rate is high.

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In 1995, this rate goes up to 20.4% of the labour force.

It's rather surprising. We can therefore conclude that, over the past 20 years, since 1976, when the situation is bad, unemployment is around 25 or 26%, and when it gets better, which is the case now, it's around 20 or 21%. It means that when one person out of four is unemployed within the labour force, times are bad and when there is one out of five, everything is supposed to be fine.

We can see that the percentage change is still rather trivial as a ratio of the labour force. It's about 5%. When the rate goes up to 25%, we say that we have a problem and when it's approximately 20%, everything is supposed to be all right. I still think that it's a rather high rate. What's your opinion?

Mr. Sharpe: I can't answer you precisely, but I'll tell you a couple of things. First, when you talk about the incidence of unemployment, which means the probability that someone is going to be unemployed for some time during a given year, you have to take into account the population's age: it's mostly young people who are unemployed for some time in a given year.

The unemployment rate is much higher among young people that it is among older ones, right? The demographic structure of the population has changed over the past 20 years. The 15 to 24 age group went from 25 to 15%. Therefore, the unemployment rate among young people went down. I think that this is one of the reasons which can explain this trend, but it's not the only one.

There is also the fact that unemployment distribution in Canada concerns mostly people who are unemployed for a long period of time. The number of unemployed over a period of 12 months or more has gone up sharply. This explains why the number of people who were unemployed for some time during the year has gone down, although it was really very hard for these people to find a position. I think these two factors might explain this rather strange trend, where we see the unemployment rate go up, but at the same time, the portion of the population which is unemployed go down.

Mr. Bélisle: Shouldn't the 20 to 21% unemployment rate go down given the relatively lower number of young people and the age structure?

Mr. Sharpe: Indeed, it should.

Mr. Bélisle: Thank you.

The Chairman: Thank you very much, Mr. Bélisle.

[English]

Mr. Grubel.

Mr. Grubel: Thank you very much.

The Chairman: Would you mind if we ran a bit over our time? We've run into some problems because the chairperson was intervening too much.

Mr. Grubel: We also had a late start, so maybe we can split the difference.

You all may know that as an academic economist I was the first in Canada to attack this question. It was in 1970 and I achieved some notoriety with it. I organized an international conference where the question on this subject was posed. It's a thick book from the Fraser Institute. They gathered evidence from around the country on that subject.

Since then, I've written one other publication for the Fraser Institute on why the unemployment gap was so large in the 1980s. I could say a lot on the subject, but we have limited time. This is not an academic seminar, where the cost of people participating is zero.

But I reject this idea that over half the gap is explained by structural unemployment.

A voice: Cyclical.

Mr. Grubel: The cyclical component. You noted yourself that the range of estimates among Canadian economists is almost double. The extreme is from 5.5% to 10%, or whatever. In fact, one of my former teachers at Yale once published an article in a survey of current business - it very rarely happens outside of publishers - on how much voodoo and judgment goes into the estimate of these cyclical components. There's no doubt about it.

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When I looked at the 1988 publication of the Fraser Institute, I looked at the differences between what these demand factors are - . Our exports were a percentage of GDP - demand creating exports. It is a multiple of that in the United States. The United States has a huge deficit. It still is true. The interest rates were at the same gap they were throughout the post-war years. Investment and so on - all those factors - were very much the same. They were almost identical. I don't know about the early 1990s. I haven't updated my study on that subject, but I am quite sure that the differences in the interest rate are more than compensated for by the fact that we had huge export surpluses and the Americans had huge import surpluses. I just don't accept that.

The other thing is that where there is smoke there is fire. I hear again and again stories on how important this is.

During the hearings in the Atlantic provinces, people said the work ethic in the Atlantic provinces has dropped and does not exist any more in Canada. This was true the moment we made unemployment insurance so generous and made it possible for people in seasonal industries to accept this. It is on record. I noted it in my handwriting. Anybody who doesn't believe that can look it up.

I would just like to suggest that that is a very serious - . One person came up to me and said he had a vacation home in the Atlantic provinces. He had a person looking after the family and the children all summer. He wanted that person to come back to Montreal with him to work with the family in the winter. Everything was arranged. Then she came back and said she didn't have to do this. She wasn't going to Montreal with him. She would get more money on UI. There are just so many stories.

Switzerland had a zero unemployment rate. During the post-war years, until four years ago, it put in generous unemployment insurance benefits. Ever since then it rose year by year, and Switzerland now suddenly has a 4% unemployment rate.

There is so much of that kind of evidence. Whether the guys who looked at these other things want to minimize the impact or not, I believe it is a very significant thing. Let me say that.

In the 1970s - . It takes time for the subsidies that are implicit in the unemployment insurance program to have their effect on the structure of the industry. We know that these data, which you didn't mention, are fundamental to an understanding of the problem. For every $1 of unemployment insurance payments paid by seasonal industries like forestry, construction, mining, and the recreational industries - fisheries - they receive $6 from the benefits. What that means is that you're encouraging the expansion of those industries. It takes time for this to happen.

Secondly, there is an attitudinal problem - a cultural factor. When I grew up, until the 1970s, there was a stigma attached to being unemployed - being on the dole. Now it is something that is a right.

It is for those reasons that I believe these numbers representing the role of unemployment insurance with respect to that gap are a serious underestimate. It is, I'm sure, greater than a quarter, for the reasons I've indicated.

Even if tomorrow you reduce the benefits, you reduce all of those implicit subsidies, as we have. It is difficult to bring down those numbers again because of the institutions, the over-expansion of the industries, and so on.

Monte just mentioned to me that tax more than made up for the reduction in the benefits that were made available.

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I'm very glad to know that you organized this conference and that these numbers came out. It has increased our understanding enormously, but I really would focus on the importance of the cyclical component that explains over half of the gap and the validity of this. If it's in a residual, you get only a quarter. I would come at it from the other way and try to determine what explains the cyclical gap between Canada and the United States.

My argument is that the existence of the generosity of our UI system has in fact fed back onto the measurement of the gap and has distorted the measurement of the gap. The cyclical gap has always been calculated taking strictly Keynesian indices of aggregate demand. It should put in the fact that there is an inducement to longer duration of unemployment, greater frequency of unemployment, and greater expansion of seasonal industries. That should feed back on the estimate of the gap. So it's almost tautological that it appears as big as it is.

Thank you, Mr. Chairman.

The Chairman: Do you agree, Andrew?

Mr. Sharpe: No. I agree with parts, but basically I think the cyclical component can be up to 50% - . First of all, I agree with the comments on the 1980s, and your work was on the 1980s and 1970s. I think then there was a much more important structural component to the gap. In fact it may have been all structural in 1989 when we had a gap of two percentage points.

At that time the Canadian economy was doing very well. I'm saying that, for the gap in 1996 or 1995, when all indications are that we're way below our potential vis-à-vis the U.S., I think the cyclical component can explain around half of it. The structure is certainly there. There's no denying it's there. We're just talking about its relative importance.

The Chairman: Thanks very much, Mr. Grubel.

Mr. Grubel: I have one last question. What do you think about the OECD's disagreeing with you on that?

Mr. Sharpe: The OECD has an open gap of around 3.5% for the Canadian economy, and it has the U.S. economy at around 2% over its capacity. The OECD numbers explain half of the gap, so I agree with the OECD numbers on the output gap. The OECD supports the cyclical explanation for half the gap.

Mr. Grubel: I'm talking about the job strategy.

Mr. Sharpe: I think they overplayed the role of rigidities in the 1994 job strategy. I think the most recent one they did on technological change and productivity, which was part of the OECD job study, was more of a balanced approach.

Mr. Grubel: I would just like to have this on record. There is a group of independent researchers working for the OECD in Paris, and everything they publish has to go through national filters, including Canadian filters. They have said as a generalization that the majority of the gaps between the United States, Europe, and Canada are explained not by the output gap, as Andrew would say, but by these other things that I'm emphasizing, these structural rigidities.

Secondly, the national report of the OECD on Canada just came out two or three days ago. All I saw was a summary of it in The Globe and Mail. I asked for a copy of it. It again stresses the structural thing. What do they know that you don't know, or what do you know that they don't know?

Mr. Sharpe: There are differences of opinion in the economics profession, and I'm basically drawing on a large number of papers, as well as additional research, that I'll present at our conference.

So there are legitimate differences in the economics profession on the causes of unemployment and the relative importance of these various factors. I'm not saying I have the truth; on the other hand, I don't think the OECD necessarily has the truth either. I think there's room for a debate.

Mr. Grubel: I just wanted to bring that out. David Laidler, by the way, disputed very heavily the relevance of the Fortin paper. Fortin himself said, and I quote, ``The purpose of my paper was - . I hope I stimulated discussion. I'm not sure I'm right.''

The Chairman: Susan Whelan, followed by Dianne Brushett.

Ms Whelan (Essex - Windsor): Thank you, Mr. Chairman. I just wanted to clarify something in my mind. Are the cyclical unemployment rate, the output gap, and the supply-side factors all part of the cyclical unemployment rate?

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Mr. Sharpe: No, the supply-side factors are different from the cyclical.

Ms Whelan: Okay, so the cyclical is just the output gap?

Mr. Sharpe: The cyclical is similar to the demand side, and the supply side is structural.

Ms Whelan: Okay.

According to Mr. Grubel, the one thing that's missing in this whole analysis is the issue of the difference between minimum wage rates.

Mr. Sharpe: That's right; I didn't talk about that.

That is a valid point, and it should be looked at in more detail. We didn't have a paper on that at the conference, so I'm willing to admit there may be something there. I don't think it's going to explain half the gap or anything. I would consider it a structural factor, so it would be part of the overall structural explanation of the gap.

Ms Whelan: Did you look at any papers on the introduction of the free trade agreement and the NAFTA? Did they have any effect on -

Mr. Sharpe: Some people feel our unemployment is due to free trade with the United States and NAFTA. I reject that argument. I don't think the effect of FTA and NAFTA on employment levels has been very great. Sure, there have been job losses in certain industries, but they've been offset by gains in other industries.

The net effect of FTA and NAFTA on unemployment I think is very minor, so we really did not put a lot of emphasis on trade policy as an explanation of the gap. However, I'm willing to look at research. If you feel that was a factor and it should be emphasized more, I'm willing to hear your logic and rationale on it.

Ms Whelan: The only reason I raise that question is it goes back to the point Mr. Grubel raised about the minimum wage rates, which I think are a factor in this somewhere. I'm just not sure I know where. I have nowhere near the expertise that either you or he would have, and I look forward to his report when he updates the 1990s, because I'm sure he will.

I know what happened. I live in a border community, and I know they've transferred plants to Kentucky and Mexico. I don't have a problem with the whole idea of free trade and NAFTA. I understand we live in a global economy. I just think the minimum wage rate has some effect.

I was a bit concerned about your stats - and I'm not sure; maybe I didn't understand it - when you talked briefly about output per worker. You're saying from 1981 to 1989 it was higher in Canada than it was in the U.S. and now it's the same.

Mr. Sharpe: That's right. In terms of rates of growth, yes. The rate of growth was slightly higher.

Historically productivity growth has been higher in Canada than in the United States for the last several decades, if not longer, because of what's called the catch-up.

The U.S. has a higher level of productivity per worker. They're the centre of best-practice technology, and we've been trending towards that through the importation of technology from the U.S. We've been playing catch-up in the past few decades and have had a higher growth rate in productivity as we approach their level. As we get to their level, our growth rate trends towards their growth rate.

Ms Whelan: I just have one final question on that.

I know a lot of times the plants that have moved south will keep their Canadian plants open and often return some of the work to the Canadian plants because of the quality. Is there anything in your stats on quality of employment, workers and products?

Mr. Sharpe: The quality of jobs is hard to measure. I guess one could look at the average wages.

Ms Whelan: No, not quality of jobs; quality of output.

Mr. Sharpe: Oh, okay.

Mr. Grubel: Human capital.

Mr. Sharpe: No, you're talking about product quality.

Ms Whelan: Yes, product quality.

Mr. Grubel: Well, it's the productivity of the labour that produces the high-quality product. That's what she's talking about.

Mr. Sharpe: Okay.

In terms of human capital, I don't think we have much of a problem vis-à-vis the United States overall. Our level of educational attainment is comparable to that of the United States. Possibly in terms of training we don't do as well, but overall we have a pretty highly qualified labour force.

I don't think the increased unemployment is due to a deterioration in the quality of our labour force and therefore the production of inferior products vis-à-vis the United States. Look at our export growth in the 1990s.

Ms Whelan: No, I would say it's the other way around. I'm just saying some plants have come back.

The Chairman: Ms Brushett, very briefly.

Mrs. Brushett: Yes, Mr. Chairman. Thank you.

You indicated that the supply side is about 25% of the explanation of the gap and that we have recently gone back to pre-1970s in restructuring the Employment Insurance Act.

Mr. Sharpe: In terms of generosity.

Mrs. Brushett: When can we see the output into the lessening of the gap because of these changes we've made?

Mr. Sharpe: That's a good point.

It's very hard to know. Maybe we already have. Maybe the effect of UI on the gap has fallen off and other factors have come in to offset that, so the gap still remains very high. It's very hard.

Some people think there may be long lags in the effect on labour market behaviour of unwinding the UI system and it will take a while. It's very hard to know whether we're there or we're going to come there. I guess the positive thing is that we are seeing that gap due to UI basically falling off, or we will see it in the future.

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Mrs. Brushett: This is my second point, which will be made very quickly. Have you or an economist developed a model to show the relativity of the employment rate for this gap? How does it relate to GDP? How significant is it?

Mr. Sharpe: That's a very good point. Basically, our per capita GDP vis-à-vis the United States has fallen off. We used to be at around 91% of that of the United States, and now we're down around 87%. Again, it depends on the measures and purchasing-power parities you use.

We've had a deterioration in our standard of living per capita vis-à-vis the United States. The major reason for that is because our employment-population ratio is way down. There are just not as many people working on a per capita basis as there used to be. It means we have lower employment in Canada and therefore less income and therefore a relative decline in our standard of living vis-à-vis the United States.

Mrs. Brushett: You're saying it's directly related.

Mr. Sharpe: Absolutely. It's a key determinant in our standard of living. That's one of the reasons why the Centre for the Study of Living Standards was interested in this project. Our standard of living is determined by productivity in the long run and employment in the short run.

We have to make sure we have a fully employed economy, but we're far from that. So in the short to medium term, we have to move to full employment, and then get our productivity going to improve our standard of living. This topic of the gap is very closely linked to our standard of living.

Mrs. Brushett: Thank you.

Mr. Grubel: What about the underground economy as a part of the explanation of this reduced participation rate? Has that been looked at?

Mr. Sharpe: Again, the underground economy is another really big issue. I think the best work on that has been done by Statistics Canada. It was a very thorough job. They found that it was really only around 3% of GDP. They had a very small estimate, much smaller than other estimates of that. I don't think there's a lot in the underground economy story, but I could talk about it for a while if you want.

The Chairman: I'm sorry that I didn't schedule enough time for this very important and interesting topic. Andrew, on behalf of all members, I thank you very much for having appeared before us.

Mr. Sharpe: Thank you. I've enjoyed the spirit of the debate very much.

The Chairman: Thank you very much on behalf of all members.

Our next witnesses are from the Caledon Institute on Social Policy. Ken Battle is the president. Sherri Torjman is the vice-president. They're certainly no strangers to this committee. We welcome both of you.

Mr. Pielsticker, we'll have you after, if you don't mind. Thank you very much.

Mr. Ken Battle (President, Caledon Institute on Social Policy): Thank you, Mr. Chair, for the invitation. This is probably going to be a change of pace for you - I'm not sure - from what Andrew was talking about.

We thought we would review a couple of the major social policy issues that are under way on which we've done work. One of the points we'll talk about will directly relate to pre-budget consultations. The others are somewhat longer in term and more general in nature.

We put together some notes. These are not meant to be a report to you or anything like it, but we're going to refer to some of the graphics in them.

I guess if our remarks have any theme to them - I'm trying to find a theme this morning - we could perhaps hang it on the image of whether there will be a peace dividend in the war against the deficit.

Certainly no matter where one stands on the changes that have been made not only over the last few years, but going back to the mid-1980s really for the beginning of the changes to social policy. There's disagreement on the nature and the merit of the changes, but I don't think there's much doubt that the overall thrust of the changes has been to reduce expenditures on major social programs over what they would have been without the changes.

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We want to talk about a couple of the larger ones and make an argument with regard to a fundamental change to the architecture of Canada's social security system. We think it is relevant to the question of employment, to the future of the social union and to the future of the federation, and that is the notion of a national child benefit, which I'd like to talk about briefly.

On the first page of our handout you'll see a graph entitled ``Total Social Spending in Canada''.

Do people have that? Can you see that?

The Chairman: Just go ahead. We'll be getting copies.

Mr. Battle: That is the sum total of all levels of government - federal, provincial and even municipal - on expenditures on social programs. This is work that we've just recently updated. One sees a very sharp increase, but for those of us who have worked with these in the past, the remarkable thing is that over the last couple of fiscal years - this only goes to the 1994-95 fiscal year, which is the most recent comprehensive data - we have seen a plateauing of total social spending.

You might ask why it kept going up during the years when cuts were being made, and the short answer is that the forces that drive social spending, up until the last few years, have overwhelmed attempts to restrain social spending. By that I mean the economic and social forces that put enormous pressure on the social security system - changes in the labour market, unemployment, divorce, the deinstitutionalization of persons with disabilities and the aging of the population. These are all deep-rooted long-term forces in our society and economy that exert enormous pressure on social programs.

But over the last couple of years we do see a plateauing, and if you turn the page, we show it in terms of GDP as an indicator. You can see that measured as a percentage of GDP over the last couple of fiscal years shown there, there's actually been a decline in overall social spending.

This is a historic change. For as long as we can go back and measure social spending - I started with 1945-46, which is when we were building our modern social security system - expenditures have gone up. They've gone up because of increases in the population and the addition of large social programs that served large chunks of the population, but over the last ten years, as we've been restraining social expenditures, it's been the social and economic forces that have really predominated.

However, governments have finally managed to curb mounting social spending. I'll remind you that public pension spending has continued to go up, so what accounts for this levelling off and even decline are mainly reductions to unemployment insurance and some smaller reductions to federal child benefits and federal social transfers to the provinces. The point we're making is that no matter how you look at them, there's no question that social programs have been reined in quite substantially over the last couple of years.

One of the largest changes that has been made - we would say it's the biggest change since we built the modern welfare state - has been the Canada health and social transfer, a program that is no stranger to this committee.

On page 3 is a graph that I think we presented to you when we last saw you, but you listened to us and the picture is somewhat brighter than it might have been. That graph shows the total federal cash transfers to the provinces for welfare, social services, health and post-secondary education since 1980. We've shown it in constant dollars. I'm emphasizing the cash portion. We'll look at the tax points in a few minutes.

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When the CHST was brought in, one of the big complaints about it - the real fear - was that if the partial indexation formula were maintained, it would decline and disappear, which we've shown on the graph. However, an $11 billion cash floor was placed under the CHST for five years - that is shown in the top part of the graph - which stabilizes it. We think this is an incredibly important amendment that was made to the CHST.

On page 4 you'll see that there's no question the CHST arrived with a pretty big cut. There are different ways of measuring it, and depending on how you tote it up, it's anywhere from $6 billion to $8 billion over several fiscal years. So there's been a large reduction in spending, even though it has finally been stabilized.

If you look on page 5, we do add in the tax points for those who contend that tax points are still part of federal expenditures. There's disagreement over that, of course. I've shown the whole thing there. We see the decline with the CHST, but the $11 billion floor and the expected revenue yield from the tax points means it will increase a little bit toward 2002-03.

On page 6, however, it shows that there's been a striking shift in the proportion of federal entitlement coming from cash and from tax points over the years. With the CHST we'll see a progressive decline in the share of federal transfers to the provinces in the form of cash, and the reason for emphasizing that is the cash is the only part that gives us a lever to enforce what few national standards we have in social programs.

I'll switch over to Sherri, who will briefly reprise some of the implications of the legislative change that come with the CHST. We regard this as so profound that it's certainly worth bringing to your attention again.

Ms Sherri Torjman (Vice-President, Caledon Institute on Social Policy): I think you have heard us make this argument before, but we had two major concerns with respect to the CHST. One was the loss of funds, which Ken has reviewed, and the other was the loss of the legislative base of the Canada Assistance Plan. We predicted that would have a profound impact upon social services and welfare throughout the country, and I think we're seeing that prediction taking effect.

We're trying to track some of the changes that are taking place, but what we're hearing from local communities is that there has been a serious impact, especially at the social service level. We're referring to things like child welfare, child care, transition homes for people who have been victims of family violence, attendant services for people who are trying to live at home rather than in institutions, and home-maker services for seniors. That whole range of services had been shared with the federal government under the Canada Assistance Plan, but the legislative base that allowed sharing to go into those services no longer exists.

There have been cuts in those services, and provinces have been responding by imposing or raising user fees for those very services. This means that people who can afford to pay will be able to pay for those services on their own, and those who can't will not have access to them, will have to go without in some way.

It's particularly critical in terms of the aging of the population and what we know about demographics. It's a very short-sighted policy, and we're very concerned about the fact that base has been withdrawn entirely. There have also been serious changes to welfare, as you know. We now see workfare in the province of Ontario, something that would not have been allowed had the Canada Assistance Plan remained in place.

We've seen many changes to welfare systems with respect to narrowing the kinds of people who are now eligible for social assistance, because there is no longer a legislative guarantee of an income security safety net in the country. It's just gone, and we're seeing the impact. We're hearing from people and talking with them all the time. We're trying to track those changes.

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I don't think it's worth spending our time mourning the death of CAP, and we're not here to do that, but there are some directions we would like to move in to at least compensate for some of the problems that we see created.

The Chairman: You have reminded me that I have not come to bury Caesar.

Ms Torjman: Yes, exactly. And there are some areas where we feel we should be moving in order to address some of the concerns we're seeing in local communities.

I'd like to turn it over to Ken right now, because one of the major areas of work we have been focused on recently is the national child benefit.

Mr. Battle: Just a bit of background on what this thing is about. I apologize for having to be pretty tentative here, but the negotiations are under way on this and I've been part of them. I just want to give you a general idea of where things are. The future of the child benefit is very much in the hands of Minister Martin right now, and we'll see what happens.

What is this thing that social policy wonks keep talking about? What is a national child benefit? I'll start more recently, because there's an important political dimension to this. The idea of reforming child benefits is not new. In modern times you can take it back to 1988 and the report on the reform of the Ontario welfare system, but if you look at the history of social policy, it actually goes back to the 1930s and 1940s, when people were talking about family allowances.

But the political push that has brought this idea to the light of day has come from the provinces, and it's a perhaps interesting and positive offshoot of the CHST - not everything is bad - in that the provinces moved quite quickly when the CHST came in to try to show that they can act in concert in trying to reform social security, and I mean social security beyond their own borders. If there's anything we've learned over the years it's that Canada, because of the nature of its confederal system, has a profoundly entangled social security system. We can try to look at some disentanglement, but I think the two levels of government will always be unbelievably entangled in social security because of the nature of the problems we're trying to address.

The Ministerial Council on Social Policy Reform and Renewal, which is a committee the provinces put together, put out a report in December 1995, I think - everybody but Quebec signed it - calling on the federal government to work with the provinces in creating a national child benefit, among other initiatives. That call from the provinces has been recognized by the Prime Minister and the Ministers of Finance and Human Resources Development in speeches, and work is now going on at an officials level to see what this might entail.

Before I get to the child benefit, however, I want to emphasize what I think is an important achievement of social security that is too often ignored, particularly in the media and therefore in the general public perception of social programs. We do a lot of criticizing of social programs these days, and I think quite rightly so. Even if there weren't a debt-deficit problem, I think social programs should be made more effective. There's no question that the changes in our economy and society absolutely demand major changes to social programs to make them effective and relevant.

One of the really interesting achievements of social security programs has been to offset growing inequalities out in the marketplace, due mainly to changes in the labour market and the high rates of unemployment that we have in Canada.

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I'm sure this is familiar to you so I won't go into it, but on page 9 it shows the distribution of income amongst families, using three different definitions of incomes. The first definition of income is market income. That simply means income from wages, salaries, self-employment, private pensions, earnings on investments, and other private sources. It shows how income is apportioned amongst five income levels of families, and the picture is very similar for single people as well.

You can see that families in the lowest income group got 2% of market income as opposed to 44% for families in the highest income group. But when we factor in the effect of income security programs delivered by all levels of government, the distribution of income changes quite dramatically. It may not look like much on the graph, but it really is quite a significant change. Low-income families' share of income increases three-fold, up to 6%, and high-income families' income comes down a bit. Then when we factor in the redistributive effects of the income tax system, federal and provincial income taxes, the share goes up a little bit more for low-income families.

To try to put it into some kind of perspective and to make a point, please turn to page 10. When we look at the infamous gap between high- and low-income Canadians over time, the bars on the top show the share of income from the top group divided by the share of income in the bottom group; it's a very simple index.

You can see that over the years high-income families have had anywhere from 14 to 22 times the share of market income that families in the bottom income group have had. That has gone up substantially with recessions and is very high right now, which gives credence to the impression that there is a widening of market income inequality. But when you look at the impact of income security programs and, to a lesser extent, income taxes, there's a profound change. The gap between high and low income is much, much narrower than it is for market income. Significantly, it has not increased at all despite growth and market income inequality.

Government income transfer programs have managed so far, up until 1994, to offset fully growing market income inequality. I say so far because there have been substantial reductions in social assistance payments in Ontario, which has a third of the welfare caseload of Canada, and ongoing reductions in unemployment insurance. Those are two of the largest income transfer programs, so it may begin to show up. So far, government programs have been remarkably successful in Canada in both narrowing inequalities and preventing them from getting worse.

What does that have to do with a child benefit? The point I'm trying to make here, following along with what Sherri was saying, is that we're not trying to sell a child benefit or other income programs as a panacea. It's not the solution to child poverty, it's not the solution to inequality, but it is certainly part of the solution. It's a very important part of the solution. We have a political opportunity here, because of the interests of the provincial governments and their remarkable consensus, to make some important progress on a child benefit that is part of the income security system.

What is the problem here? Why are we talking about this at all? Well, we have a child benefit system in Canada that is quite unfair and quite irrational. It's irrational from a labour market policy point of view, as well as from a narrower social policy point of view.

If you look at page 11, you will see an example of child benefits to two kinds of poor families. One is a working poor family and the other is a welfare poor family. The families in our example have two kids. The data for Ontario are a couple of years old, but the story they're telling would be repeated throughout Canada. Basically what happens is families on welfare get substantially more income security benefits for their kids than do working poor families. The reason is that not only do they get federal child benefit, but they also get social assistance benefits payable on behalf of their kids. You therefore get quite a substantial gap in income support for low-income families. Now it varies across the country because we have widely varying welfare systems, but the gap extends throughout Canada.

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Why is that a problem? It's a problem from an equity point of view. We don't think it's fair that children in one type of low-income family are getting substantially more support from government than children in another type of low-income family. It also creates part of what we have called the welfare wall. It's a disincentive for parents on welfare to move off welfare into the labour market.

The disincentive lies in the fact that they will lose a substantial amount of the income they get on behalf of their kids, because when they go into the labour force they no longer get the benefits from social assistance for their kids. Not only that, but they're facing employment-related expenses, they're not getting the in-kind benefits they get on welfare, and they're paying income taxes, CPP contributions, and UI premiums.

Mr. Grubel: About the working poor family, if you were to put an addition to that bar, what would be the income from work, on average, when they get $2,753?

Mr. Battle: This would be a family whose income from work would be about $20,000. For family earnings of anywhere between $10,000 and $20,000, they would get the maximum federal amount.

Mr. Grubel: So what would be the total income for a welfare family versus a working poor family?

Mr. Battle: I don't have the numbers here, I'm sorry.

Mr. Grubel: You see what I'm driving at. This difference, as a percentage of the total income, is really trivial if their income is $15,000 or $20,000 a year. If the working poor lose somewhere between maybe $700 or $500 by going on welfare, that to me seems a very trivial disincentive to getting into work.

Mr. Battle: I don't think it's a trivial disincentive. I take your point. There's no hard and fast definition of working poor, so obviously we could be talking about a family with an income of $10,000 in earnings.

Mr. Grubel: You said even $20,000.

Mr. Battle: It's between $10,000 and $20,000. I'm showing the maximum child benefit, and given the way the working income supplement works, which I've stacked on there, it's in that income range. It can be a family with pretty low total income.

The problem is that the disincentive, I think, lies in part in perception. A family who goes into the labour market knows that it is leaving a source of stable income. I know it's odd to call welfare a source of stable income.

Mr. Grubel: No, I agree with you.

Mr. Battle: Given the insecurity of the labour force right now, a family takes a risk in going into it, so we do think this is a disincentive.

Mr. Grubel: I agree with your general point; nevertheless, I think it's unfair to misrepresent the data in the sense that you say it's a very strong disincentive. The disincentive is, as far as I can see, going from $6,000 a year, living totally on welfare - provincial and federal - to $15,000, including only $2,500 of federal child support. There is a disincentive, but it's not as you're making it out to be with this figure.

Thank you very much. That's really all I wanted to mention.

Mr. Battle: Moving right along, what would an integrated child benefit mean? What would a national child benefit mean? A number of provinces have been making some changes in their own child benefit systems to try to move towards a child benefit system. The objective would be that we would try to provide equivalent levels of support to working poor families and welfare poor families. In other words, we're trying to level the playing field, if you will, in the amount of support that low-income families get for their children in order not to make that sort of invidious distinction between working poor and welfare poor families.

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There are different ways that one can do this kind of thing. One can do a highly theoretical clean-sheet approach, whereby you take all the money the federal government spends on kids through the child tax benefit and working income supplement and all the money the provinces spend on children through social assistance and, in some cases, additional programs, put it into a pot, create a brand-new program, and have the federal government or the provinces deliver it. That's a theoretical, big-bang approach. We in fact modelled an approach like that just to get an idea as to how much it would cost and what it might look like.

Another approach, though, which I think is more realistic - it's in line with some of the work we're doing with the provinces - is to try to recognize the fact that the provinces are coming to this thing from very different starting points, in terms of both how far they've moved towards a new child benefit and their fiscal capacity. Several provinces actually have moved very quickly towards this kind of a system through their own programs.

British Columbia, as of this year, has replaced its social assistance spending on children as part of its overall welfare reform with what they're calling the B.C. family benefit. It is an income-tested program, not dissimilar to the federal child tax benefit - it looks very similar - which is going to low-income families in British Columbia. So whether they're on welfare, whether they're working poor, or whether they have a combination of the income - because when we talk about working poor and welfare poor we're sometimes making an artificial distinction. A lot of families are getting income from different sources. B.C. has taken this step towards a new kind of child benefit with its own spending.

The interesting thing about the B.C. benefit, which, as I said, is just coming into play now, is it is being delivered by Revenue Canada. It was designed by and is paid for by British Columbia, with some technical help from HRD in designing it. It will be delivered by Revenue Canada as part of the child tax benefit delivery structure. So when we look at the fact that we have a child tax benefit, we have a working income supplement, and we have the B.C. benefit on top of it, de facto we have a national child benefit experiment, if you want to call it that, which is now running in British Columbia, where we do have an income-tested system of child benefits for families with kids.

Alberta has announced a somewhat different approach, but it's moving in the same kind of general direction. Alberta is going to be bringing in an earnings-related benefit for low-income families, working poor families, so it's not dissimilar to the federal working income supplement, although it's designed somewhat differently.

Saskatchewan has on the books an entirely new child benefit system, which is actually a combination of the Saskatchewan and British Columbia approaches. Saskatchewan's ready to go.

Quebec has just announced a major reorientation of its entire family policy, part of which is going to be the creation of an integrated benefit. They use the word intégré in French, which is also very much along this line.

Ontario, two years ago, had a program all ready to go. It pulled back from the precipice because it couldn't afford it, but it had designed a program as well.

The point I'm trying to make here is that a lot of the initiative is coming from the provinces, which I think is very interesting.

The question is what we can do to try to create a national child benefit system, because the majority of provinces still do not have that. They would like to move in that direction. It's in their self-interest to do so, because it will enable them to reform their welfare system overall.

What can the federal government do? The federal government has to play a part as well. One option that I mentioned earlier was let's sit down, I'll design a program on my computer, the federal government pays for everything, it's really clean, it's really simple, let's do that. I don't think that's going to happen for all kinds of reasons. It's not just a matter of money. It has to do with provinces wanting to do somewhat different things with their own programs.

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The kind of approach I think is a realistic or a more workable one is what I call a collaborative federalism approach. I think this is extremely important beyond the realm of social policy, and what I'm trying to sell is more than just a social policy initiative.

What this would mean is that the federal government would strengthen its foundation of income support through some redesign of the federal system. There are different ways in which we could do that, but the point would be to increase the level of income support through the federal government at least to an extent that would allow provinces to redirect some or all of the money they're now spending on kids through the social assistance system to earnings-related programs. It could be child care. We could have a broad definition of what we're including as kids here. It could be wage supplements. It could be an income-tested provincial benefit like British Columbia's or Quebec's.

The point is the provinces would be able to have a fair amount of asymmetry. We would have a national child benefit system with a core federal portion providing national standards but at the same time allow provinces to tailor their portion of benefits as they see fit. That's got to do with the differences in income distribution and the differences in the orientation of provinces. It would be a very interesting new kind of a social program.

It's a national approach. It's not a federal approach. It's not a provincial approach. It's not even just federal-provincial. The objective to me is to try to create a national system with buy-in from both levels of government.

Now this is a new kind of a creature. I'm not talking about a Canada Pension Plan, which is much more limited. This is a much messier kind of federalism, it's a much messier kind of social program, but I think it's messier in the sense that it's not nice and neat and there will be a lot more variability. I think it's the kind of approach that is going to fit the federalism of the 1990s and into the next century.

The fascinating thing here, the reason I think we really do have an unusual opportunity here, is that I can't think of a time, at least since the 1960s, when there was so much consensus about the desirability of this kind of a change for both social policy and employment policy reasons, even amongst governments with very different ideological and programmatic persuasions and mandates. So there is a chance here.

There's always a bottom line to all of this, so what's the bottom line? The bottom line is that I think for this kind of thing to move forward politically, it's going to require the federal government to commit some extra money to it. It's going to require the federal government to enhance the foundation of the child benefit, and there are different ways this can be done. I don't think we can do it overnight. I think it would be a fool's quest to say we'd like $2 billion in the next budget and we can do it. It would do it, but we're not going to do that.

I think we are looking at more modest amounts of money, probably phased in over a number of years, as we have phased in changes to child benefits in the past. It may have to be phased in very slowly. It's an objective that we're working towards, but I think it's a very promising kind of an approach to social policy, which has some resonance and some hope for the federation as well and for the social union. I'm sorry to go on so long about this, but this one is near and dear to my heart.

I think we've gone on too long here, but could we make just one more point and then end?

The Chairman: Sure.

Mr. Battle: We were going to talk about Canada Pension Plan reform.

The Chairman: We won't be dealing with that issue. It's in our pre-budget discussions.

Mr. Battle: Yes, it's not on your table.

The Chairman: It's incredibly important to us, and I've been skimming through your recommendations there.

Mr. Battle: Perhaps we could end with a very different approach. I'd like Sherri to share with you a little a whole line of work we're getting into, which is different and has implications for employment creation.

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Ms Torjman: In addition to analysing several key social programs, we're also looking for some new approaches to social policy. Ken has described the child benefit as one new approach to collaborative federalism. We're also looking at a broader framework, which we're calling sustainable social policy. Within that we're looking at community development and building community capacity. It's something we started very recently, but we've had contacts with a wide range of organizations throughout the country to try to work with them on the issue of building community capacity. Clearly employment and unemployment are a major concern.

We recently hosted a national round table, at which we had people from throughout the country coming to talk with us about some of the obstacles, some of the difficulties they have had in trying to build their local economics, and some of the forms of assistance they would require, both financial and technical in order to be able to do this.

There is a lot of activity taking place throughout the country, as you know, in this area. We wouldn't in any way pretend that this is new or something that hasn't been tried. There have been some very successful federal programs, as we understand, in trying to build community capacity, particularly in northern and rural areas of the country. We've been told, for example, that the community futures program has been quite successful in several parts of the country, primarily because it helps provide the secure infrastructure that allows communities to create various kinds of employment and carry out local economic development.

We've also heard that in urban areas there are some serious problems with respect to supporting local economic capacity. One of the difficulties - and I know you've heard this in the past - is access to capital. But it's not the only problem. It's also access to the technical capacity to set up jobs and businesses; this technical capacity is not in communities right now. We've been in touch with a number of organizations that have been trying to set up loan funds, for example, and they tell us not only about the difficulties individuals have gaining access to capital, especially if they're considered people who are not bankable under the traditional definitions of the banks, but also about the difficulty that some of the intermediaries such as the community loan funds have with their own stability, in order to carry out some of the work they're doing.

There's a lot of information in this area from people who are actively working in the field. I won't go into it any more, other than to say that we're in touch with them, we're trying to bring their concerns to the public domain. I think it would be worth your while to speak to a few people who are actually involved in some of these urban economic development initiatives, because some of the people with whom we've spoken have not had that opportunity to put some of their issues on the table.

The Chairman: I would welcome talking to you, Sherri, about how we get in touch with some of these people very quickly.

Ms Torjman: We would be more than willing to give you a list of names of people. They have some very critical issues to raise. Thank you.

The Chairman: Thank you.

Mr. Bélisle, please.

[Translation]

Mr. Bélisle: No questions.

[English]

The Chairman: Mr. Solberg, please.

Mr. Solberg: Thank you, Mr. Chairman. I just have a brief question about Mr. Battle's remarks about the provinces taking initiative and developing these benefit programs for children.

Since the phenomenon of the federal government being less involved or not involved at all is relatively new, it is quite possible that over the next few years quite a network will be developed by the provinces to support children.

Have you taken this into account? What would be your objection? Why would you argue that it won't happen anyway and may not prove to be even better than what has happened with the federal government in the past?

Mr. Battle: I think one of the problems is directly as a result of the losses under CHST, in that some of the poorer provinces are having difficulty holding the line on welfare, let alone making any enhancements. The tough thing in this kind of model, where the underlying objective is to provide equivalent levels of income support to all low-income families, is cost. You're trying to pull within the network working poor families, and that virtually doubles your cost or more, depending on how you design your program. So there's a cost problem in the sense that I think some provinces, such as Nova Scotia and Newfoundland, would find it very, very difficult right now to make any kind of move in that direction. That's one issue.

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I think there is a fair amount of cross-fertilization going on. Ideas are getting moved around at the provincial level.

I don't have any huge problem with the notion of provinces delivering programs, but there are some delivery issues that do call for a mixture of federal and provincial - . The federal child benefit, because it's delivered through the tax system, is a fairly unresponsive instrument. It's useful in some ways, but it doesn't respond well to changes in employment in the way that provincial programs could if they had a more regular reconciliation of a family's earnings. That's why we're thinking of a two-layer system.

One advantage of the federal government staying in the business, to me, is that it does provide a core foundation for a child benefit system, which ensures that we would have a basic guaranteed level of support within Canada. You couldn't do that with a provincial-only system.

Mr. Solberg: You made the point, and I think you're absolutely right, that it is in the provinces' best interest to design a program that will work for their own people so that over the long run these people will not only survive but also prosper. Ultimately this would be good for the whole population of the province. It's really in their best interests to design a program that works extremely well. Given that, I don't quite understand why there has to be such a big federal presence.

Mr. Battle: I think there has to be a federal presence to maintain national standards, and the best national standard in Canada is an income security program. We would have enormous differences among provinces if there were no federal involvement in income security programs for kids, I think.

As a long-term objective, you might be right. One could have a program delivered by either level of government, but in any sort of realistic term I think the federal role is crucial.

The Chairman: Thanks, Mr. Solberg.

I was really impressed with what you said about the welfare wall created by the differences in income and support levels that are offered by the state. It's obvious we're not going to have an integrated child benefit without a lot more work being done on the social union with the provinces, work that has already been undertaken by you in collaboration with Minister Pettigrew, who's working with his counterparts in the provinces right now, as I understand it. I don't know when we're going to see the results of that. Do you have any idea?

Mr. Battle: I really don't, Mr. Chairman. The design work is going on in a very concrete way, but this is now at the political level, too.

The Chairman: Barring consent of the provinces in overcoming or knocking down that welfare wall, wouldn't our best instrument as a federal government acting unilaterally be to use the working income supplement?

Mr. Battle: The problem with the working income supplement - . I know this sounds like a contradiction in terms, and you're making a very valid point. There are strengths and weaknesses to the working income supplement as opposed to the overall child tax benefit. The difficulty with the working income supplement is that it's really not all that it's claimed to be. It certainly makes sense in that you look at the differential and you say an obvious thing is to give more money to the working poor. The working income supplement is an earnings-related program, not an income-related one. It's based on earnings - well, it is based on both, but it phases in with earnings and phases out with income. It does provide right now a $500-per-family maximum benefit, which is being increased over the next two years to $1,000 per family.

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The difficulty with the working income supplement, as a child benefit that tries to deal with the issue of work incentive, is that it's a pretty blunt instrument as a work incentive. It's blunt in the sense that it's very unresponsive. Since it's delivered through the child tax benefit machinery, a family can go, depending on when their earnings change, anywhere from six months to eighteen months before receiving an adjustment in the benefit. That means the ``bonus'' you get from a working income supplement can be quite distanced from your time in the labour force. An argument can be made, especially if it's a low-income family, that if they need welfare into the workforce, if they're lucky enough to get a job, it's a very tough period for them. That's when they really would need to partially make up the income they're losing from welfare, but they're not going to get the money from the feds for a good long time.

I know the response is to say to tell Revenue Canada to smarten up, but Revenue Canada will tell us that it's not that easy. I don't think it's beyond the realm of possibility eventually, but right now it's not easy.

The second thing is that families do see the working income supplement as a reward for work, in the sense that it's folded into the child tax benefit and is received quite a bit after the fact. In Ottawa we talk about it as a working income supplement and we talk about the child tax benefit, but I think out in the streets families don't see the kind of distinction we do.

Obviously, one advantage of the working income supplement is that it's cheaper to enhance the working income supplement than it is to raise the child tax benefit. The child tax benefit is $5 billion or so, the working income supplement is $350 million -

The Chairman: It's $400 million.

Mr. Battle: - or $400 million, so there's a big differential.

I have one final point, and this is again the problem of creating a system, taking into account provincial movement. If one were to put money into the child - let's just say we didn't have a working income supplement at all; we just had the child tax benefit, which is a very simple, smooth program. If we raise that level, what we're doing in effect is displacing some of the provincial spending on families for kids. We're filling in part of that provincial money. That would allow provinces to redirect some of the spending into earnings-related programs. The provinces are in a better position to design and deliver and tailor to their needs earnings-related programs than the federal government is. That's one of the arguments we've been looking at. Again, it's a question of what division of labour would make sense here.

The Chairman: Should we proceed unilaterally, or do we wait until we get provincial agreement?

Mr. Battle: Well, I think we'd better proceed unilaterally in the sense that there's a -

The Chairman: How do we do that? By enhancing the child tax benefit?

Mr. Battle: Enhance the child tax benefit and hold the provinces to their commitment to maintain the child spending envelope and redirect within the envelope. The days of cost-sharing, the days of legislative - those are over.

I think there has to be a more general political agreement between levels of government. I know that may sound like a weak argument, but I think it's the kind of world we're in.

I think federal action is imperative to move this process along.

The Chairman: Thank you.

Are there any other questions? Mrs. Brushett.

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Mrs. Brushett: Thank you, Mr. Chairman.

In terms of Community Futures, RDAs - regional development agencies - and those types of things, I personally spend a lot of time soliciting and hearing input from those agencies that do function in semi-rural areas.

I did have policy meeting just last week, and it was on the Young Offenders Act. After three hours - people are always bashing the Young Offenders Act, it's a big problem - what came out of it was the Children's Services Act at the provincial level. Social workers from my constituency in the province of Nova Scotia were present at that meeting. They indicated to me that the act in particular - and about twenty years ago in Nova Scotia we began putting teenage girls with children into apartments - more children meant more money. This was the way to go with unwed mothers having babies. The social worker said that she has a girl, an unwed mother, who is under 30 with seven children.

My question to the institute: do you give recommendations on change in social policy? We're seeing that these children are not only not nutritiously fed but are also often abused and have many problems. We're really not helping the child. We're not helping the mother, because she gets into a trap that she will never get out of.

A few years back Massachusetts, for example, gave so much money for one child, but if you had two children, they cut you back. You didn't even get as much as for one child. Do you give to provinces these kinds of recommendations on changes to social policy, rather than looking for new models with more money to increase social spending?

Ms Torjman: Some of the work we have published has focused on the needs of children andthe associated services and changes to services. For example, we have a paper published byDr. Paul Steinhauer, talking about high-risk children and the kinds of services that should be in place to assist those children. Much of our work has been in the area of services. We think the response to child poverty has to be a combination of both income and services. As Ken was saying, it's not simply one or the other. There are many layers.

We came today to talk about one dimension, because this is something on the table right now and being discussed at the federal-provincial level. It's certainly not the only solution, and there are many other effective approaches. If you like, I could send you some of the literature we have on some of the other areas.

Mrs. Brushett: Within your mandate, do you come back to the provinces and say that perhaps we should come back to some older models? That girl isn't getting an education. She's not getting to work because of the wall of welfare. We're putting people in that trap. We're costing our taxpayers money. It's not productive, and the child is struggling in poverty. That breaks my heart.

Ms Torjman: Absolutely.

Mrs. Brushett: We're not solving the problem, and yet two more billion dollars might solve it we're told. Is that realistic?

Ms Torjman: We're trying to ensure that parents have enough money to feed and clothe their children. There's a whole set of related issues in terms of support for families, such as self-esteem. It's one of the reasons we're concerned about the withdrawal of the Canada Assistance Plan. That was the legislative base that allowed a lot of the supports in communities to be developed. It's not the only answer. We're doing a substantial amount of work right now in building community capacity for other kinds of more natural supports and family supports. I have some material here with me that I can leave with you on that issue.

We're looking at the concept of community capital from the perspective of finances, human resources, and other kinds of assets that are not traditionally seen as assets. We look at communities generally with respect to problems and how we can address the problem. We very rarely see the kinds of positive strengths there are, which can be harnessed to support families and kids.

The difficulty, though, from our perspective is that you can't communitize solutions to everything. We want to be very careful about pointing out that although you can look to the community for a whole range of assets that you've never actually taken into account before, there still has to be a strong stable base of child welfare services and supports to families who have kids at risk. That's essential, and that's where some of the work of Paul Steinhauer fits into this broader picture.

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Mr. Battle: To add to your point, going back to the child benefit, one of the major objectives of this kind of approach is to try to start breaking the welfare system down. I don't think the welfare system can be fixed up. It has to be destroyed.

Mrs. Brushett: My social workers tell me a 12-year-old child in the province of Nova Scotia can knock on the door at Children's Aid and give a whole host of reasons he can't live at home. He is then put into another home, given spending money and so on and so forth.

Quite often it isn't even investigated as to whether this child has lied, and the parents come complaining, saying, ``I have a proper home, but our curfew is 10 o'clock at night and our child doesn't want to live within the curfew. And you are using my tax dollars to do this.''

It's become a major issue in my riding and throughout Nova Scotia, and I think in every province of Canada. Why? Why don't we change some of the -

The Chairman: Dianne, you shouldn't have thrown your kids out of the house. Just have them come home.

Some hon. members: Oh, oh!

Ms Torjman: You're raising a lot of very important issues with respect to quality of services and the ability of services to respond to some of the problems.

Mrs. Brushett: It's only because of these loose social service policies that we got into this rapid escalation of social service expenditures.

Ms Torjman: Well, I'm not sure that's actually at the heart of the problem. I think it's a lot more complex than that. It's probably poverty-driven and labour market-driven in terms of family stresses. What are the stresses on families?

Certainly services are trying to keep pace with that. I'm not saying they're perfect, but they are trying to deal with very complex problems that they've never seen before.

The Chairman: Thanks, Ms Brushett.

Mr. Battle and Ms Torjman of the Caledon Institute, you two people in particular have had a profound impact on our committee in the past. It was in large part your testimony that led this committee to recommend the cash floor to the CHST, which the minister did implement. That is why this is our third effort to have you before us in this round of discussions; that is why we persisted.

I think it's obvious to all of us why this has been such an important addition to our knowledge. Thank you very much for the excellent work you've done.

Ms Torjman: Thank you for your invitation.

Mr. Battle: Thank you for your comments. We'll take them into account.

The Chairman: I'd like to get some more information. You volunteered some information that we might get on community services and stuff, and I've asked our researcher to have a chat with you before you leave, if you could.

Ms Torjman: Terrific. Thank you.

Mr. Grubel: Can I also make a request? Can you flesh out a little bit more the argument on why the national standards would be necessarily higher if they were set in Ottawa? I can conceive of the fact that the success of the model in British Columbia is so great, giving higher benefits than we used to give from Ottawa, that all of the provinces might want to adopt it.

All we get from you is the assurance that you personally believe we need national standards. To me that's not good enough. I want to know why you reject the notion that we might not in fact do better for Canadians by having the provinces experiment flexibly, work with it and have it imitated. I'm sure lots of pressure will develop in Ontario if it turns out British Columbia is doing the right thing, and it's much more effective if it's on the Ontario level.

Ms Torjman: They're working with a strong federal base. That's the important part. They're not working on their own. They're working with a strong federal base on which they can then build and be flexible.

That's exactly the point Ken was making. This is an opportunity to see incredible flexibility throughout the country. He talked about asymmetrical federalism, and that is precisely what we have in mind, but you're working from a strong federal base. A program that's federally provided has inherent national standards because it's the same throughout the country and it's portable.

Mr. Grubel: I understand, but you keep saying this is necessary, and I'm suggesting it's not obvious to me that in fact the country would not be better off with the government being totally out of it.

Ms Torjman: Try doing it -

Mr. Grubel: You can point, correctly, to the fact that in the short run, here we were going along in a certain system, with Ottawa sending money to the provinces, and suddenly that money's not there any more. So they say we have to have a discussion over this, and the first thing they do is reduce benefits to apply pressure on the feds to bring it back. But if the people of British Columbia and Ontario genuinely want those kinds of taxes, they know they're going to get it by taxing themselves without 10%, 15% or 20% of it getting stuck in Ottawa.

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So I think we might end up with a better, more flexible and possibly higher level of standards if the feds got out of the social welfare program altogether. Mr. Battle made several remarks to that extent. I would like it if you could write me a couple of pages on what is your argument for why, in the longer run, there is a presence needed in Ottawa for social welfare programs.

The Chairman: Thank you.

The next witness is from The Learning Partnership, Charlie Pielsticker.

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Mr. Charles Pielsticker (Past Chair, The Learning Partnership): I very much enjoyed the invitation to come here and to meet with you and the honourable members.

In listening to the dialogue, I think where The Learning Partnership would fit in is really talking about futures. What we're talking about in terms of The Learning Partnership is a partnership between business and education in the greater Toronto area. I'll give you some background on that, how it fits into the future, and how I think it fits into the economics in Canada today and tomorrow.

With rapid change being the only constant in all aspects of our lives today, what are we looking at, and what are we doing as far as our students are concerned? What relationship do we in business have with education on a city-wide basis, on a national basis, or on an international basis?

Back in 1992 I happened to see an article in Fortune magazine that was talking about the activity of the senior executives within the Fortune 500 companies. At that time, I was astonished that 84% of the senior executives were actively involved in primary and secondary school educational reform in the United States. What was even more surprising to me was that in primary schools the activity had increased from 27% in 1990 to 65% in 1992. I turned around, looked at it, and I asked why is this happening? Secondly, I asked myself where I would go in Toronto if I had any interest, who would I see, and what would I do?

I think the answer as to why there is this activity in primary and secondary schools is that a great deal of information has shown that if you're going to make a difference in the students, you're going to make it, first of all, up to age 3; secondly, up to grade 6; and then later on it's a working relationship.

You will see companies today such as IBM and Hewlett-Packard that have made a major shift in their donation budgets from post-secondary to primary schools. If you're going to make a difference of fundamental change on a long-term basis, it's going to be through working with primary and secondary schools.

With that as a background, we began putting together a partnership, because there wasn't anything to begin with. We had our first meeting in June 1992. One of the very articulate people at that meeting was the Hon. Art Eggleton, Minister for International Trade. He was one of the key people in helping to get this partnership going back in 1992.

At that time we had a meeting between the 10 directors of education in Toronto and 24 business people. At that time you could see that in Toronto we had a budget of around $2.5 billion a year - I think that's a tremendous amount of money - yet there wasn't one person in education who knew anybody in business, and there wasn't any one person who was head of any business who knew the names of the directors of education. We had Bob Peterson, who's chairman of Imperial Oil; we had the president of Prudential; we had the chairman of a number of companies; and we had the vice-presidents of a couple of banks. Those were the types of people we had at our first meeting. It was like boys and girls. The boys were over on one side of the room and the girls were over on the other side. As you were just saying, there had been walls separating people in business and people in education. Nobody had bothered to pick up the telephone.

Since that time there's been a tremendous amount of activity. The Learning Partnership today comprises the 16 boards of education in the greater Toronto area. That places it as the second largest catchment area for students in North America. New York City is number one, the greater Toronto area is number two in size, Los Angeles is number three, and Chicago is number four.

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During 1992, to get our foundation for this partnership which is all from the business side; it's all volunteers. We met with people in New Brunswick, Montreal, Ottawa and Vancouver, and we met with people in Chicago, New York, and Louisville, Kentucky, because we wanted to see the best partnerships that existed in all the different communities throughout North America. If we were going to undertake this program, we wanted to see what other people were doing. We wanted to learn from their successes and also from areas that they would want to avoid in the future.

We came back and started with a partnership. We now have 16 boards of education. We have a board of 43 people. On it we have the directors of education of each of the 16 boards in the greater Toronto area. We have 16 business people, and that would include the president of the Bank of Montreal, the president of Noranda, the vice-chairman of KPMG, and a number of other people, all actively involved in this endeavour, all actively involved in their volunteer tasks.

The coming together, though, was not an easy thing. There was no lack of cynics on either side of the border; there was no lack of cynics in business or in education. Getting that out on the table from the very beginning was a very healthy and invigorating transition, because the budget now in the greater Toronto area is over $5.5 billion a year, and we have a very active and collaborative relationship.

We said that if we are going to develop the type of educational system we wanted to have, we might as well focus on developing the number one educational system in North America. Why aim for number two?

We went to the directors and asked them what they recommended we focus on in order to achieve that. They replied that it should be science and technology, literacy retention, readiness, and we've just added arts and music.

I'll run through the type of support we have for the different areas.

In the area of science and technology, Peter Branda is co-chair of that committee. Peter is president of Hewlett-Packard and he's also on the board. I'll talk to you in a moment about a program I have just alluded to in the notes I handed out, the hands-on IT.

The co-chair of the retention committee is the president of Noranda Mines; he is also on our board and is also co-chair of that committee.

The co-chair of the literacy committee is executive vice-president of the Bank of Nova Scotia. The co-chair of the readiness committee is now executive vice-president of Weston Foods.

So the commitment of these types of people as volunteers I think shows the type of commitment we're looking to on a broad basis.

There are 950,000 students, 50,000 teachers, and 1,500 schools in the greater Toronto area. I think that makes up about 40% of Ontario's students and about 17% of Canada's students.

The two programs I will talk about here just for a moment are the hands-on IT program and the learning partners program. The hands-on IT really began with a discussion with my daughter one day when I was asking her about the training of teachers, in terms of the use of technology. There wasn't any training of teachers in any of the teachers' colleges across the country or elsewhere in North America.

We then quickly set up a committee. It involved two people from each of the boards of education in Toronto, as well as representatives from IBM, Hewlett-Packard, Bell, Northern Telecom, Microsoft, Royal Bank and others.

What has now come into place is what I'd say is a true partnership - a partnership between government, business, and education. As far as we know, this is a program that has not been done anywhere else in North America. It is intended to be replicated across the country and across North America. The detail is there for that.

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If we have 16 boards of education in the greater Toronto area, there are two important things; these would be important in Nova Scotia and everywhere else. One is access and the other one is equity. I've learned a lot from my educational friends in the last few years. If we're going to have that and if we're going to train teachers, the most important part is going to be kindergarten to grade 8. If we expect the students to know what is going on, it's the teachers we have to train first, and they had not been trained.

In each of the 16 boards the schools had to compete. These are kindergarten to grade 8 schools. The principal and all the teachers had to sign on for a three-year commitment. The teachers will each get a laptop computer. They now have it; it is up and running. They each get 10 days of training and they each get a business mentor. That means they get one-on-one access to someone to work with them on a day-by-day basis. They can be connected by the Internet in most cases.

The teachers and the schools who have come to this know they're going to be measured on an international basis, and the enthusiasm they have about this program has been absolutely incredible. As I said, it's a $9.5 million program. To date we've raised over $8.25 million and the balance I think will be coming forward over the next nine months.

The impact that will have on an area is that you will have schools in board 1 working with schools in board 16 and students all working together in a way they have never done to date. I think that interrelationship of all the schools is important. Of the 16 schools that are currently participating, I think about 70% are inner-city schools. If we're going to make a difference in the overall relationship in education and if we want to provide access and equity, that is one way this will happen. It is hoped that this will then cocoon throughout the rest of the system.

The other program I'll refer to is the Learning Partners. This is a program we identified in Kansas City. They think they have a very inclusive society in Kansas City. The pilot program for this one has now been going on for five months. It will probably be adopted in the spring of this year. We hope to have 250,000 volunteers involved in that program.

We now have 125 companies involved in that, companies working with their employees as parents and also working with their retirees. These are all volunteers, and if we end up with that number of volunteers in the school system, that will be one person for every four students, whether that be in kindergarten, in grade 13, in a food program, or in science and technology, with somebody who wants to be a rocket scientist.

That type of involvement, which is now the pilot work, is going forward between the various businesses. It's been endorsed by the presidents of the various organizations and back down through the human resources departments into the manager levels in working with the school systems to make that happen.

Those are two programs that I would call signature programs. Those are two of the first and largest, not only in Canada but in North America. I think the feeling of the people involved in both of these as well as in the Learning Partners is that these two programs will probably fundamentally change the way education is both learned and taught in North America.

To do that we also need relationships. In relationships, one of the programs you would see as a product of the Learning Partners is the Take Our Kids to Work Day, which started three years ago in Metro Toronto. Last year it was in Ontario, and this past year it has been in all provinces and in the territories. Next year it will be a full national program. It's also been adopted in Chile and in Trinidad this past year, and it's not impossible that in three years it will be across the United States and possibly in Europe as well.

I did receive a copy of designations signed by the Prime Minister as various students came to the Privy Council on that day this year. I just received that yesterday and was very pleased to see it.

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The Chairman: I don't think we'd ever dare to bring them to the finance committee.

Some hon. members: Oh, oh!

Mr. Pielsticker: They have been in all kinds of banks and in all kinds of small and large businesses. Over 20,000 businesses participated this last year.

Think of the relationship that is now taking place between students, teachers, all kinds of organizations and governments. You now have a relationship that was never there before. Barriers are just floating away in a relationship and a dialogue that is going to be very healthy for a very competitive country, if we're going to have that.

Another program that will follow on the same line, which will be instituted this May, is Principal for a Day. We have 1,500 schools in Toronto. I doubt that very many business people or workplace people have been in a school for a long time or know how it operates or what is going on, and I think there are probably very few principals who know what goes on in a business or in a government. That relationship will start, and we would hope that program also will be across Canada within the next three years, and possibly across North America at the same time.

Those are just some examples. Volunteers have been involved in this. It's been a very dynamic area. It's looking at the competitiveness of Canada in the future and the training on a relative basis, not only within Canada, but across North America and the rest of the world.

Thank you very much.

The Chairman: Thanks very much.

Mr. Grubel.

Mr. Grubel: I would like to congratulate Mr. Pielsticker for the initiatives he has taken. It sounds absolutely fantastic and it shows what the private sector can do without federal government money and without national standards.

I am just so impressed, and I congratulate you. I'm very glad you came and let us have this. I will find out what's going on in British Columbia.

Mr. Pielsticker: Thank you very much.

The Chairman: Mr. Solberg.

Mr. Solberg: Thank you, Mr. Chairman.

I want to offer my congratulations as well. It's a wonderful program. Herb stole a lot of what I wanted to say, but I did want to ask something. Have you received enquiries from other Canadian communities, and if so, what's happening?

Mr. Pielsticker: Yes, we have. Anything we're doing is available to anybody across the country, and it's available for replication.

In terms of dialogue, there is a monthly phone call with representatives from across the country from The Learning Partnership and other people. I can't tell you who in B.C. or Alberta, but I can tell you there is a dialogue taking place informally.

Mr. Solberg: I have one final question. I notice one of the areas you've added to help children with is art and music.

Mr. Pielsticker: Right.

Mr. Solberg: That was interesting to me, because people might argue that the only reason business is involved in this is to bring up workers and people who are skilled in technology, but obviously you've added art and music for some reason. Do you want to explain it?

Mr. Pielsticker: All of the areas that have been chosen have been at the request of the educational sector. In other words, it's their area; it's their game. We respond and work together with them.

In terms of arts and music, because of the cutback in educational spending, they say this is a big drop that we're going to have. What we have initiated right now is to say all right, if that is a big cutback, what can we do to involve the business community as well as the total community?

If you were to look at Toronto, you would see there's a lot in live theatre. It is probably Hollywood North at the same time. So I have initiated phone calls to certain people in business and said why can't we celebrate an international competition here, maybe three years from now? I'm talking about a competition of excellence and all kinds of inner-city competitions to be able to go forward. That would involve Hollywood North, live theatre, music and all the arts, with competitions in every sector, moving up to a big symposium.

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Mr. Solberg: That's just excellent. It's really important that we produce well-rounded citizens, not just workers. I congratulate you on what you're doing. I think it's great.

Mr. Pielsticker: Thank you very much.

The Chairman: Thank you.

Mr. Pielsticker, can you point to any ways in which this has actually changed the thinking of either the business community or the educators? You've said the purpose was to create an educational system that is more responsive to the competitive needs of the world.

Mr. Pielsticker: I look at it in terms of two examples, Mr. Chair.

One would be the Take Our Kids to Work Day. The directors of the various boards of education and the presidents or chairmen of various companies had no relationship, no dialogue, no correspondence together. The first Take Our Kids to Work Day brought those people together at our board. They now know each other by first name; they now act and work together; they've been in each other's boardrooms and the dialogue is fluid.

The other one would be the hands-on information technology project. That program is the first of its kind in North America. The time and money from government, from business and from education are all working together. What you have is a total community now looking at its future together, based upon the success of its children in its classrooms. So in effect you have a community working together, saying its future is 950,000 students in the classrooms.

The Chairman: Would you like to say that you formed this Learning Partnership in 1992 because you were inspired to do so by the then federal Liberal government?

Some hon. members: Oh, oh!

The Chairman: I must confess I've known Mr. Pielsticker for a number of years. I am so impressed that the efforts of one volunteer can make such a difference. I just wish more Canadians - .

I simply wanted Mr. Pielsticker here today because, first of all, it's important that we know about it, and also I hope we can publicize his efforts so more and more people can have access to the concept that they too can make an incredible difference in the lives of all Canadians.

Thank you very much, Mr. Pielsticker.

Mr. Pielsticker: Thank you, Mr. Chair.

The one last thing I'd like to do is a little bit off topic, but I hope you will bear with me just for a moment.

The Chairman: As long as it's not off colour.

Mr. Pielsticker: It is not off colour, Mr. Chair.

As the chair knows, I have two sons who live and work in Moscow. You have all read about many activities that are taking place in Moscow; it's a very challenging place to be. My sons are entrepreneurs. They both started up their own businesses there and they're both still there working and very active.

One of my sons had his first business stolen from him at gunpoint. Five people came into his office and stole his business from him and scared the living daylights out of him. Our chair here was very helpful to a Canadian who was there, who was scared out of his wits and who came back here for two months.

He is now back there doing very well as an entrepreneur, and it's a lot of thanks to you.

The Chairman: Charlie, thank you very much for that endorsement. If you'd like to talk about who you'd like to support in the next election, I'd be delighted.

Some hon. members: Oh, oh!

The Chairman: We're adjourned until 3:30 this afternoon.

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