Welfare Clawback Rate Traps Able-Bodied Workers in Poverty: Study

A "help wanted" sign is seen in the window of a bakery in Ottawa, in this file photo. Chris Wattie/Reuters

If the government reduced taxes and reduced welfare benefits more gradually, more Quebecers receiving social support would join the workforce, suggests a study released Monday by the Montreal Economic Institute (MEI), a public policy think tank with offices in Montreal and Calgary.

The study said the current welfare system “encourages long-term dependency through perverse economic incentives,” and adds that it only traps “able-bodied recipients in a vicious cycle of poverty.”

Each province has various social assistance programs, most of which provide both cash payments and benefits such as dental, vision, drug, and health care coverage.

When welfare recipients work, notes the study, social assistance payments are reduced at a sharp clawback rate above a certain threshold of earnings. In some provinces, the rate is 100 percent.

“The steep taxes and benefit reductions discourage recipients of social assistance from joining the labour market,” said Jason Dean, associate researcher at MEI and the study’s author.

He suggests that if the federal and provincial governments made the reduction in welfare benefits more gradual, the idea of working would become “more attractive.”

Dean used data from 2020, and calculated an individual working full-time in Quebec earning minimum wage would gross $25,414 per year. Once that individual paid taxes, mandatory social contributions, and lost specific benefits, totalling $16,112, the net gain would be $9,302.

That works out to an hourly wage of $4.61. Basically, over 60 percent of the gains from minimum wage work are lost to taxes, contributions, and benefit reductions in Quebec, notes the study. “For this worker, the participation tax rate—the portion of one’s salary eaten up by taxes and lost benefits—would be 63.6%.”

“Unfortunately, taxes and the quick reduction of benefits in Quebec mean that there is an income level at which working hardly seems worth it,” stated Dean.

He suggests the province could reduce the clawback rate to welfare payments by half, which would encourage more people on social assistance to join the workforce.

“The more of one’s employment income one gets to keep, the more attractive it is to work,” states Dean.

Welfare

Dean estimates there are over 348,000 individuals on welfare in Canada, and of those, 100,000 are living in Quebec.

The report notes the unemployment-to-job vacancy ratio, a measure of the number of unemployed people per job opening, reached an all-time low of 1.4 in the first quarter of 2022, with all provinces experiencing a decline.

“Employers are unable to fill roughly one million vacancies, and expectations of shortages are a leading concern for the immediate future,” according to the study. It attributes the labour shortage in part to “an aging population, exacerbated by the pandemic,” which it said “wreaked havoc on global supply chains and led to sizable shifts between occupations, with many feeling jobs in accommodation and food services.”

While it acknowledges there is “no easy solution,” the study suggests that if the two largest provinces, Quebec and B.C., cut the clawback rate from 100 percent of welfare recipient earnings to 50 percent, it would incentivize part-time workers.

It also suggests increasing the payments made under the Canada Worker Benefit, a federal subsidy for low-income workers, which stops at a level of income lower than full-time earnings at the minimum wage, and allow welfare recipients to obtain post-secondary education and training without a reduction in benefits.