Pros and cons

Western Europe (64%)

Central/Eastern Europe and North America (22-28%)

APAC (7%)

Rest of world (1-5%)

Source: Social Security Programs Throughout the World, SSA, 2014, 2015

Globally,

28%of workers qualify for

unemployment benefits

Yet only

12%of these workers receive

these benefits

Highest in North America and Europe (80-90%)

APAC (17%)

Lowest in Africa (8%)

Mainly OECD and industrialised countries

Almost all OECD countries reduced level of unemployment insurance protection in 1990s due to:

Increasing financial strain

Publication of studies which showed high unemployment benefits contribute to higher unemployment rates

Source: Social Security Programs Throughout the World, SSA, 2014, 2015

39%of countries have legislated

unemployment benefits

• For workers who lose their jobs

involuntarily

• Pools funds from workers

• Pays out according to certain

conditions

• Based on a % of worker’s last drawn pay

• Payouts for a limited period of time

• Determined by premium contributions paid

before unemployment occurs

#1: Safety net for unemployed workers to maintain standard of living

#2: Keeps low income households out of poverty

#3: Allows unemployed more time to look for a job they prefer

#4: Automatically stabilises economy by ensuring unemployed have

ability to spend on goods & services

#1: Safety net for unemployed

workers to maintain standard of living

Only for payouts of at least 84% of

previous income

Worker needs to supplement with own

savings

#2: Keeps low income

households out of poverty

Only sustainable if national

reserves have deep pockets

#3: Allows unemployed

more time to look for a job

they prefer

Recipients can afford to wait to

find a job

Tradeoff of lower exit rate from

unemployment

#4: Automatically stabilises

economy by ensuring

unemployed have ability to

spend on goods & services

May not be true for all economies

Not all of UI benefits are spent,

some are saved and hence doesn’t

go into economy

Tradeoffs between spending money

on UI vs other economic stimuli

(e.g. growing business

opportunities)

#1: Employers use this to justify retrenchments

#2: Hidden costs

#3: Workers abuse system

#4: Politicians wield this as a carrot to win votes

#5: Unemployment Insurance fails in bad times

#1: Employers use this to justify

retrenchments

Employers have less reservation to retrench

workers

European countries which make it difficult for

companies to retrench haved suffered:

labour rigidity

less investments

higher unemployment

#2: Hidden costs

UI plans are usually financed by employers and

employees with government topping up deficits

Hidden costs for workers

Employers may reduce wages to pass on wage

savings to government for UI

Difficult to increase corporate tax as governments

compete to attract MNCs

Government may tax general population more to

maintain UI scheme

#3: Workers abuse system

Canada:

some workers work for the minimum period (10

weeks) to qualify for UI (32 weeks)

US:

10% ↑ in UI caused 1.5 weeks ↑ in

unemployment duration

NBER study:

↑ in UI caused 7% ↑ in unemployment duration

and 0.4% ↑ in unemployment rate

Concerns that unemployment insurance

negatively impacts work ethic of workers

Sources:

Employment Insurance: Canadians who won't work shouldn't get EI, National Post 15 May 2012

Meyer, Bruce D “ Lessons from the US Unemployment Insurance Experiments” Journal of Economic Literature 33 (March 1995)

Do Extended Unemployment Benefits Lengthen Unemployment Spells? (NBER, May 2013)

#4: Politicians wield this as a carrot to

win votes

Risk that politicians over-promise

unemployment benefits to win elections

Good times:

Benefits grow, but rarely used as workers

can find jobs

Bad times:

Governments dare not reduce

unemployment benefits due to political costs

Governments may resort to debt financing

which shifts the burden to future generations

of workers

Governments which go bankrupt and cannot

borrow will cause payouts to be affected

#5: UI fails when in bad times when it is needed

the most

South Korea:

During 1997 Asian Financial Crisis, employers were

taxed more

Yet unemployment benefits caused increase in deficits

from S$126m (2007) to S$724m (2011)

To cover more unemployed workers, each worker

received less protection

Hungary, Slovakia and OECD countries

Rising and persistently high levels of unemployment

Caused tighter eligibility rules, shorter duration of

benefits and lower beneficiary rates

Sources:

Long-term Projection of Social Expenditure in Korea by the Korea Institute for Health and Social Affairs.

South Korea’s Economy, Kinnar Majithia, Emerson Network Power