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Unemployment benefits – Stabilising or counterproductive?

Vilinius, Lithuania12 May – 13 May 2015

Ekkehard Ernst International Labour Office, Geneva

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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?

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Structure of presentation

1. What are unemployment benefits?

2. Who is covered by unemployment benefits?

3. Mechanisms of unemployment benefits Maintain / support aggregate demand Investment in human development / human

capital Provide incentives for job search: Activation

4. Evidence of the effect of benefits on unemployment

Short-term vs. long-term effects Passive vs. active labour market policies

5. Conclusion

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What are unemployment benefits?

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

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1. Who is covered by unemployment benefits?

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Low global coverage for unemployment

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Little emphasis on unemployment benefits globally

0

10

20

30

40

50

60

70

80

90

100

Befo

re 1

900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Post

200

5Perc

enta

ge o

f cou

ntrie

s with

stat

utor

y pro

visio

n by

br

anch

Old age

Disability

Survivors

Employment injury

Sickness and health

Maternity

Family and children

Unemployment

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Wide international variation in legal coverage...

Developed economies and EU

Sub-Saharan Africa

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…and falling effective coverage

2000 2005 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

5.2 9

.1

8.1

7.9

7.8

6.1 6.3

6.0

5.9

5.8

38

.1 40

.8

40

.5

40

.8 43

.9

38

.9

36

.8

36

.0

35

.2

34

.8

11

.1 14

.4

13

.7

13

.6

14

.2

12

.1

11

.7

11

.4

11

.2

11

.0

Middle-income economies High-income economies World

% u

ne

mp

loye

d r

ece

ivin

g

un

em

plo

yme

nt b

en

efit

s

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Many different schemes are used

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How much did countries spend on UB during the crisis?

19

31.6

2.52.1

27.8

16.9

Social protection Infrastructure spending

Active labour market policies Passive labour market policiesTax measures Other spending items

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How much do UB cost overall?

0.0 0.2

0.6 0.6 0.50.7

0.3 0.4 0.3 0.40.5 0.5

0.90.7

0.3

1.4

0.3

0.4

1.3

0.50.7

1.31.0

2.1

2.92.6

1.41.5

1.6

0.6

1.7

0

1

2

3

4

Passive LMP spending

Active measures

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Recent experiences in UB

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2. The two dimensions of unemployment benefits:

Macro-economic stabilization

Incentives for job-seekers

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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)

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Effects of unemployment benefits:Macro, meso and micro

Meso level effect (or local economy) Investment in productive community assets Increased demand and 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

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UB as automatic stabilisor I

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Em

ploy

me

nt m

ulti

plie

rs

Isre

al

Sw

itze

rland

Un

ited

Sta

tes

Ca

nada

Jap

an

Slo

ven

ia

Un

ited

Kin

gdom

Fra

nce

Aus

tral

ia

Italy

De

nma

rk

Ge

rman

y

Bel

gium

Short-term multiplier Long-term multiplier

Employment multipliers small for advanced countries

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UB as automatic stabilisor II

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Em

ploy

me

nt m

ulti

plie

rs

Arg

ent

ina

Ken

ya

Sou

th A

fric

a

Mex

ico

Bot

swa

na

Bra

zil

Sau

di A

rabi

a

Alg

eria

Tu

rkey

Egy

pt

Ch

ina

Short-term multiplier Long-term multiplier

Employment multipliers much larger for emerging countries

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Potentially adverse effects on job-search effort...

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...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

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3. The evidence onunemployment benefits:

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Do UB lower employment rates?

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Do UB increase job destruction?

9.5

-3.9

6.1

-5.7

0.8

-5.7

-1.6

-6.7

-12.9

-6.6

-15

-10

-50

510

Co

ntrib

utio

ns (

in %

)

Trainingexpenditures

Public employmentservices

Hiringincentives

Unemploymentbenefits

Direct jobcreation

Labour market spending: Contributions to job destruction (short- vs. long-term)

Short-term effecton outflows

Long-term effecton outflows

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Do UB foster job creation?

39.2

5.3

25.7

4.0

15.7

3.5

15.6

3.5

7.5

2.8

01

02

03

04

0C

ontr

ibut

ions

(in

%)

Unemploymentbenefits

Hiringincentives

Trainingexpenditures

Public employmentservices

Direct jobcreation

Labour market spending: Contributions to job creation (short- vs. long-term)

Short-term effecton outflows

Long-term effecton outflows

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UB in times of financial stress I

-50

51

01

5C

oef

ficie

nt e

stim

ate

Low Intermediate HighFinancial stress tercile

Note: Iterated estimates

Government consumption

20

30

40

50

Co

effic

ien

t est

imat

e

Low HighFinancial stress tercile

Note: Iterated estimates

Public employment

-10

00

10

02

00

30

04

00

Co

effic

ien

t est

imat

e

Low Intermediate HighFinancial stress tercile

Note: Iterated estimates

Direct job creation

-50

05

01

00

Co

effic

ien

t est

imat

e

Low Intermediate HighFinancial stress tercile

Note: Iterated estimates

Unemployment benefits

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UB in times of financial stress II

-4

-3

-2

-1

01 2 3 4

Chan

ge in

per

cent

of

GD

P

Years

Worker assets

Complete markets Incomplete markets

A reduction in replacement rates would lower employment significantly in times of crisis

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UB and fiscal consolidation: A simulation I

Simulate an adjustment scenario to a shock Employment decreased by 0.7% in G20 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?

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UB and fiscal consolidation: A simulation II

-0.8

-0.6

-0.4

-0.2

0.0

0.2

Em

ploy

men

t gr

owth

(in

% p

.a.)

2005 2010 2015 2020

Baseline scenario Early withdrawal

Additional spending for3 years (3% of GDP)

Additional tax reductionsfor 3 years (3% of GDP)

Employment recovery in G20 countries

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UB and fiscal consolidation: A simulation III

-2.0

-1.5

-1.0

-0.5

0.0

in %

of

GD

P

2005 2010 2015 2020

Baseline scenario Early withdrawal

Additional spending for3 years (3% of GDP)

Additional tax reductionsfor 3 years (3% of GDP)

Government deficit in G20 countries

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Conclusion

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