OTTAWA - Business groups are welcoming the Harper government's partial retreat on a planned employment-insurance premium hike, but critics say the Conservatives should have done a full withdrawal.

Finance Minister Jim Flaherty announced Thursday that premiums will rise by five cents for each $100 of insurable earnings on Jan. 1. The original plan was for a 15-cent jump.

He also said the government will limit future increases to a maximum of 10 cents for each $100 of insurable earnings.

The move — which limits the 2011 premium rate to a maximum of $1.78 per $100 of insurable earnings — follows warnings from business groups that the initially proposed hike would have cost thousands of jobs and hurt the already weak economic recovery.

Flaherty said the decision will save employers and employees $1.2 billion next year over what they would have paid under the original increase.

"This will support job creation by leaving more money in the hands of businesses and their employees ... in a time of fragile economic growth.

"Together, these new limits strike an optimal balance between supporting economic recovery and ensuring that the EI program breaks even over time."

However, Liberal finance critic Scott Brison said the Conservatives didn't go far enough and should have frozen rates.

"Any payroll tax increase at a time when unemployment remains stubbornly high will kill much needed Canadian jobs," he said.

Sid Ryan, president of the Ontario Federation of Labour, also questioned why the Tories didn't go further: "It's quite astonishing, I think, that we are facing any form of an increase."

The Canadian Federation of Independent Business had estimated the projected maximum hikes could cost as many as 170,000 jobs by making hiring more expensive.

"Certainly this is a step in the right direction and one that we had to fight for," said Satinder Chera, a federation vice-president.

"When we've surveyed small-business owners, they've often said that payroll taxes are really one of the biggest impediments to growing their business, to hiring employees. In a sense, they're a job-killer."

Diane Brisebois, head of the Retail Council of Canada, said the announcement is a fair accommodation.

"Though not the freeze we were looking for, this is a reasonable increase that will help minimize the impact on our members and an economy that is still struggling to regain its footing following the recession," she said.

Flaherty is also launching cross-country consultations on how EI rate-setting "can be further improved to ensure more stable, predictable rates going forward."

While the Canada Employment Insurance Financing Board will continue to ensure EI revenues only cover program costs, Flaherty said it's "obvious that the unprecedented effects of the global financial crisis have taken their toll on the current rate-setting mechanism."

"The cumulative deficit built up over the last two years would require high, steady increases in EI premiums over a number of years to repay the deficit in the program's finances," he said.

"That is something that is simply not appropriate at a time when we are trying to support economic growth and recovery."

The head of the Canadian Labour Congress said he supports the change but warned it won't solve the shortcomings of the EI system.

"We're happy that the government has recognized that they should take most of the impact of the deficit in the EI fund ... from general revenues, rather than increase the premium," Ken Georgetti said from Victoria.

"But we're still hopeful that the government is going to look at the number of people falling off the EI system and extend those benefits to those people as well."

The CLC has met with Finance officials and urged them to extend the period when unemployed Canadians are eligible to receive EI payments, he said.

While Canada's economy has recouped the more than 400,000 jobs lost during the recession, the unemployment rate remains at 8.1 per cent — about two points higher than in 2008.

Statistics Canada says there are about 370,000 more Canadians officially unemployed now than was the case two years ago.

Restaurateurs said Thursday's measures improve a bad situation, but they said their payroll tax bill will still increase by $100 million next year.

"In an industry like ours that invests in people, not machinery, payroll taxes are a huge issue," said Garth Whyte, head of the Canadian Restaurant and Foodservices Association.

"Today, we’ve been told the EI hurricane threat has been downgraded from Level 5 to Level 2."