Unemployment benefits Stabilising or counterproductive Vilinius Lithuania 12
Unemployment benefits – Stabilising or counterproductive? Vilinius, Lithuania 12 May – 13 May 2015 Slide | 1 Ekkehard Ernst International Labour Office, Geneva
Motivation Crisis has seen a large increase in unemployment and the jobs gap Currently, almost 200 million jobseekers worldwide Not all of them receive unemployment benefits. . . and there are less and less that do Countries face fiscal sustainability issues. . . and popular view is skewed against “give-away” benefits But: Wouldn‘t it be more effective to spend more on unemployment benefits? Slide | 2
Structure of presentation 1. What are unemployment benefits? 2. 3. Who is covered by unemployment benefits? Mechanisms of unemployment benefits Evidence of the effect of benefits on unemployment 5. Short-term vs. long-term effects Passive vs. active labour market policies Conclusion Slide | 3 4. Maintain / support aggregate demand Investment in human development / human capital Provide incentives for job search: Activation
¢ Income support in periods of joblessness form part of passive labour market policies ¢ Linked to previous employment history ¢ Loss of job related to economic conditions ¢ Time-bound ¢ Often linked to previous earnings, up to a limit ¢ Contributory vs. non-contributory (tax-financed) schemes ¢ Some schemes allow voluntary contributions ¢ Lump-sum vs. regular payments ¢ Long-term joblessness social assistance schemes Slide | 4 What are unemployment benefits?
Slide | 5 1. Who is covered by unemployment benefits?
Slide | 6 Low global coverage for unemployment
Slide | 7 Little emphasis on unemployment benefits globally
Wide international variation in legal coverage. . . Sub. Saharan Africa Slide | 8 Developed economies and EU
10 2005 2007 Middle-income economies 2008 2009 2010 2011 High-income economies 2012 2013 11, 0 5, 8 11, 2 5, 9 11, 4 6, 0 11, 7 6, 3 12, 1 6, 1 14, 2 7, 8 13, 6 7, 9 13, 7 8, 1 14, 4 9, 1 11, 1 30 34, 8 35, 2 36, 0 36, 8 38, 9 43, 9 40, 8 40, 5 40, 8 38, 1 40 Slide | 9 0 5, 2 % unemployed receiving unemployment benefits …and falling effective coverage 50 20 2014 World
Slide | 10 Many different schemes are used
Slide | 11 How much did countries spend on UB during the crisis?
Slide | 12 How much do UB cost overall?
Slide | 13 Recent experiences in UB
2. The two dimensions of unemployment benefits: Macro-economic stabilization Slide | 14 Incentives for job-seekers
Effects of unemployment benefits: Macro, meso and micro Macro level effect: ¢ ¢ ¢ Short term automatic stabilizers and medium term multiplier effects raises growth potential Effect strongest during times of financial stress Promote social cohesion & may facilitate adoption of reforms (the political economy effect). . . but: increase in fiscal spending might interfere with macroeconomic stability, Pro-cyclical rise in taxes/social contributions creates the risk of low-growth, high-unemployment equilibria (e. g. Den Haan, 2006) Slide | 15 ¢
Effects of unemployment benefits: Macro, meso and micro Meso level effect (or local economy) ¢ ¢ ¢ Investment in productive community assets Increased demand local spillovers through injection of cash into local markets Micro level (individual / household level) ¢ ¢ Consumption smoothing and poverty reduction increases welfare Sets incentives for education and raises match quality …. . But reduces job search effort Stronger rise in wages due to higher bargaining power, especially at lower skill levels Slide | 16 ¢
UB as automatic stabilisor I Slide | 17 Employment multipliers small for advanced countries
UB as automatic stabilisor II Slide | 18 Employment multipliers much larger for emerging countries
Slide | 19 Potentially adverse effects on job-search effort. . .
. . . can be addressed by activation policies Making benefits a function of unemployment duration Raising the quality of public employment services . . . Making use of private service providers Profiling jobseekers Activation effort concentrated on most difficult cases PES effectiveness measured by duration of matches not number of case off-loads Job-search monitoring . . . includes intensive counselling Slide | 20
Slide | 21 3. The evidence on unemployment benefits:
Slide | 22 Do UB lower employment rates?
Slide | 23 Do UB increase job destruction?
Slide | 24 Do UB foster job creation?
Slide | 25 UB in times of financial stress I
UB in times of financial stress II A reduction in replacement rates would lower employment significantly in times of crisis Slide | 26
Simulate an adjustment scenario to a shock Employment decreased by 0. 7% in G 20 Adjustment scenarios according to different fiscal policy rules Concern about fiscal sustainability affects UB Should UBs be expanded to strengthen income support? Should they be cut to consolidate gov. budget and restore incentives? Slide | 27 UB and fiscal consolidation: A simulation I
Slide | 28 UB and fiscal consolidation: A simulation II
Slide | 29 UB and fiscal consolidation: A simulation III
Large variations in income-support coverage of jobseekers across the world Overall, UB represents a small amount of fiscal outlays In crisis countries, some attempts have been made to cut UB. . . with a view to fiscal consolidation and restoring job-search incentives Macro-economic evidence shows that this is not likely to help, neither fiscal nor labor market goals Slide | 30 Conclusion
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