The inactivity trap: Would you leave welfare for $4.61/hr?

Would you take a job for $4.61 an hour? Probably not. But that’s the choice many Quebecers receiving social assistance are offered. They can either stay home or they can work full-time, for a whole year, and earn a net gain equivalent to $4.61 per hour worked. This is due to the taxes, contributions and benefit reductions that eat up a large portion of the gains associated with getting a job.

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

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

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

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

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

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

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

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

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

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

To be fair, Quebec is not alone in imposing high “taxback” rates. The governments of British Columbia, Saskatchewan and Manitoba do the exact same thing. To respond to the labour shortage, Quebec and these other provinces should recognize the existence of this welfare trap and reduce it and other barriers to joining the workforce. This would help companies and our public finances but, most of all, it would help a large cohort of people to start working and improving their lot.

Célia Pinto Moreira est analyste en politiques publiques à l’IEDM et la coauteure de « Pénurie de main-d’œuvre: Aider un bassin de travailleurs potentiels pris au piège à améliorer leur sort ». Elle signe ce texte à titre personnel.