Social and unemployment insurance:
a comparative analysis for Europe
Content of the module
• Unemployment insurance: a comparative analysis for
Europe.
• Introduction to job search theory.
• Job search theory and unemployment insurance.
• Optimal unemployment insurance.
• Unemployment insurance: empirical evidence on its
effect.
Public Economics and Labour Markets
• Public economics deals with government
interventions in the economy.
• Public economics tries to explain from an economic
point of view:
- Why governments should intervene in the economy
Reasons of interventions
• Among the reasons for government intervention
there are:
1) Market Failures (Externalities, Public goods
etc…).
Public Economics and Labour Markets
• Government should interve in the working of the
labour markets:
- For redistributive reasons (transferring money to
workers earning too little or nothing).
- To correct market failures that could be present in
Money to unemployed workers
• Consider now a policy consisting in giving money
to unemployed workers.
• Can this be motivated from from a public
Money to unemployed workers
• Giving money to unemployment can be motivated
for redistributive reasons but also because of market failures.
• In this latter case the reasons for market failure
comes from problems of asymmetric information and moral hazard.
Asymmetric information, moral hazard
and unemployed workers
• A government can give money to unemployed workers to help him facing an unexpected period of time when he cannot find a job.
• But, alternatively, the worker could have obtained a private insurance to cover him in case of unemployed.
• That is, the worker could go to a private insurance company, pay them an amount each months and in
exchange get back a larger amount of money if he lose a job.
• If this is the case, the market can take care of the problem of unemployment and public intervention is not needed
Asymmetric information, moral hazard
and unemployed workers
• However a private insurance against unemployment
can hardly exists because of:
• Asymmetric Information: the insurance company
does not know exactly the quality of workers and does not know the probability that he lose the job (while
workers knows this information).
• Moral Hazard: once the worker has a private
insurance against unemployment his behaviour will change. He will put effort in the job (increasing the probability of being fired) and, in particular, once he becomes unemployed he will put less effort in finding a job (given that he is paid to be out of work!).
Asymmetric information, moral hazard
and unemployed workers
• Given Asymmetric Information and Moral
Hazard the private sector cannot provide an
insurance against unemployment and therefore the public sector should intervene to create a public
insurance against unemployment or some other transfer of money to people out of work.
Topics of this module
• Unemployment insurance: a comparative analysis for
Europe.
• Introduction to job search theory.
• Job search theory and unemployment insurance.
• Optimal unemployment insurance.
• Unemployment insurance: empirical evidence on its effect
Social Insurance, Unemployment Insurance
and Social Assistance
• Social insurance: it is an insurance that workers
pay to some public institutions and that covers them in case of some events (usually illness, accidents, old age, unemployment and so on).
• Unemployment insurance: it is an insurance that
workers pay to some public institutions and that covers them in case of unemployment.
• Social assistance: it is an amount of money that the governments transfer to individuals. It is not an
insurance and these individuals did not pay anything to receive it.
Social Insurance, Unemployment
Insurance and Social Assistance
• In this module we focus on unemployment
insurance (and not much on social insurance in general).
• We will cover several aspects of unemployment
benefits: practical, theretical, empirical and comparative
Unemployment insurance
• Unemployment insurance systems consist in a
mechanism that pays amounts of money (benefits) to certain individuals when they are unemployed.
• UI systems are usually made up of an infrastructure
UI building blocks
• Eligibity requirements:
• In order to be eligible to receive benefits workers must
satisfy some eligibility requirements.
• Often they are in the forms of previous months/years
of employment and of contribution to some welfare funds.
• This, in general, prevent new entrants in the labour
market to be eligible for benefits.
• If the system did not require any previous
contribution it is not exactly structured as "insurance" but rather as "assistance"
UI building blocks
• Requirement during benefits reception
• Workers on benefits are otfen asked to mantain
some behaviour during this period. Failure to mantain such compulsory behaviour should imply the suspension or termination of the benefits.
• Typical examples can be the requirement of active
search (unemployed must prove to be actively searching for a job), of attending training courses and the obligation of not refusing job offers.
UI building blocks
• Employement servicses during reception
• Workers on benefits are usually offer some employment
services during this period. In particular they are generally offered:
• Counseling through several interviews with job counselor
that advise them how to better search for a job.
• Direct offers of jobs that appear to be suitable for the
worker.
• Training course to enhance the skills and the
employability.
• A personal plan which describe in details the course of
action to follow in order to improve employability.
• All this activities are in general carried out by public
employment centre (even if private alternatives are sometimes offered).
UI building blocks
• Amount paid as benefits
• The actually amount paid is usually computed as a
percentage of last wage (or an average of wages
during the last few years). A ceiling to the benefits is usually also added.
• In general benefits are taxed at the normal rate
and in some cases (but not always) contains pension contribution.
UI building blocks
• Maximum duration
• Benefits usually have a maximum duration in
months/years after which benefits expires and workers stop receiving them.
• In some case duration also affect the amount
received: benefits amounts decrease through duration.
• Maximum duration usually depend on workers age
(older get longer benefits) and on how long the
A comparison of European UI system
• We compare systems on two dimensions:
• The generosity of the system (amounts and
duration)
• Active Employment Services and Search
Requirements (how the unemployed is helped in finding a job and how stringent are the search
1. PART B. THE EMPLOYMENT AND SOCIAL POLICY RESPONSE TO THE JOBS CRISIS
OECD EMPLOYMENT OUTLOOK – ISBN 978-92-64-06791-2 – © OECD 2009
76
A simple way of summarising many of the relevant institutional details is by means of
benefit replacement rates, which express net income of a beneficiary as percentages of net income in the previous job.76 Unemployment benefits are the “first line of defence” for those experiencing a job loss. Table 1.6 shows benefits replacement rates at different stages during an unemployment spell for prime-age individuals (Annex Tables 1.A8.1 and 1.A8.2 in OECD, 2009e show net replacement rates for younger and older workers). Results are averages over different earnings levels and family situations and account for taxes and for family-related benefits that are typically available. They refer to 2007 and, thus, to a period before any adjustments were made in response to the current downturn. In order to
Table 1.6. Generosity of unemployment benefits
Net replacement rates at different points during an unemployment spell, 2007a In percentage
Year 1 Year 2 Year 3 Year 4 Year 5 Five-year average
Norway 72 72 72 72 72 72 Belgium 65 63 63 63 63 63 Austria 61 58 58 58 58 59 Denmark 68 68 68 68 9 56 Ireland 50 50 50 50 50 50 Portugal 79 79 56 24 3 48 Germany 64 48 42 36 36 45 France 67 64 31 31 31 45 Finland 60 58 33 33 33 43 Australia 42 42 42 42 42 42 Spain 69 65 25 25 13 39 New Zealand 38 38 38 38 38 38 Sweden 66 63 41 8 8 37 Iceland 57 54 54 8 8 36 United Kingdom 28 28 28 28 28 28 Netherlands 71 59 3 3 3 28 Switzerland 80 40 0 0 0 24 Luxembourg 87 8 8 8 8 24 Canada 52 14 14 14 14 22 Hungary 48 13 13 13 13 20 Poland 42 16 8 8 8 16 Czech Republic 33 11 11 11 11 15 Japan 45 3 3 3 3 11 Turkey 46 0 0 0 0 9 Slovak Republic 32 3 3 3 3 9 Greece 33 5 1 1 1 8 Italy 37 0 0 0 0 7 Korea 31 0 0 0 0 6 United States 28 0 0 0 0 6 Median 52 40 25 13 9 28
a) Countries are shown in descending order of the overall generosity measure (the five-year average). Calculations consider cash incomes (excluding, for instance, employer contributions to health or pension insurance for workers and in-kind transfers for the unemployed) as well as income taxes and mandatory social security contributions paid by employees. To focus on the role of unemployment benefits, they assume that no social assistance or housing-related benefits are available as income top-ups for low-income families (covered in Figure 1.19 below). Any entitlements to severance payments are also not accounted for. Net replacement rates are evaluated for a prime-age worker (aged 40) with a “long” and uninterrupted employment record. They are averages over 12-months, four different stylised family types (single and one-earner couple, with and without children) and two earnings levels (67% and 100% of average full-time wages). Due to benefit ceilings, net replacement rates are lower for individuals with above-average earnings. See OECD (2007a) for full details. Source: OECD tax-benefit models (www.oecd.org/els/social/workincentives).
Unemployment benefits
Table 1: UI Schemes Characteristics
Generosity Ranking among OECD SA Requiring previous employment Amount of benefits
Max. Duration Notes
Austria 9th/29 Y
UI Yes 55-60% of PW 20-30 weeks Older individuals get extended duration
UA No but requires UI 92% of UI unlimited Starts after UI is exhausted
Czech Rep. 23rd/29 Y
UI Yes 50% of PW
(45% after 4th month)
6 months Extended duration for older workers
UA No 60% of PW Depends on
program
Only for workers in a training program Hungary 20th/29 N UI Yes Initially 60% of AW, then 60% of MW 9 months
UA No but requires UI 40% of MW 3 months Extended duration for older workers
Ireland 20th/29 Y
UI Yes 186 € per week 15 months Amount change depending on family composition
Unemployment benefits
Italy 27th/29 N
UI Yes 50% of PW
(40% during last month)
7 months Older individuals get extended duration Netherland 16th/29 Y UI Yes 75% of PW (70% after 3rd month) 6-38 months depending on past contributions
A lower insurance exist for those not meeting contributions required
Spain 11th/29 N
UI No, but require contributions 70% PW (60% after 6th month) 12-24 months depending on past contributions
Has lower and higher limit that depends on family
composition
UA No, but requires UI 80% of base income (IPREM)
6 months extendible up to
18
Base Income (IPREM) is set by government and was 500€
in 2007
Sweden 13th /29 Y S.A requires job search
UI Yes 80% of PW for
200 days and then 70%
300 days Voluntary
UA Yes 360 SEK 300 days It is not applied after UI is exhausted
UK 15th/29 N
UI Yes 59.15£ 6 months Lower amounts for workers below 25 years
UA No 59.15 less actual
income
unlimited Amounts change depending on family composition
Measuring Active Employment Services
and Search Requirements
• We evaluate several aspects:
1) Placemente efforts at initial registration
2) If and when an individual action plans is devised
3) Frequency of search of reports on search activity
4) Whether a proof of search is revised
5) Whether counseling is given also at later stages of unemployment spells.
• Point 1 and 2 makes up the "initial" activity of the system.
• Point 2,3,4 and 5 makes up the "continuing" effect of the system.
• We will give a scor of 0, 0.5 or 1 to each of this aspects to each system and obtain a score for the "initial", "continuing" and "overal" activity.
Table 2: Active Employment Services and Search Requirements Placement efforts at initial registration Individual Action Plan (IAP) Frequency of report on search activity Proof of search required Further interviews during unemployment Score: Initial/ Continuing/ Overall Austria EC checks for readiness of
work and may offer a vacancy. Workers’ application is compulsory
It is agreed at registration
Once a week No At least every 3
months, their actual frequency depends
on the IAP
2/2.5/3.5
Czech Rep. EC checks for readiness of work and may offer a
vacancy. Workers’ application is compulsory It is agreed within 6 months and is not compulsory Every 2 weeks No Every 2 weeks 1/2/3
France EC checks for readiness of work and may offer a
vacancy. Workers’ application is compulsory It is agreed within 1 week Every month but only after the 4th
Yes Every month but only after the 4th
2/4/5
Germany EC checks for readiness of work and may offer a
vacancy. Workers’ application is compulsory It is agreed within 10 days No reporting required No Usually every 2 months 2/1.5/2.5
Hungary EC checks for readiness of work but usually do not
offer a vacancy It is agreed shortly after registration Once a month. Often included in IAP
Every 3 months, but depends on the IAP
1/3/3
Ireland EC checks for readiness of work but usually do not
offer a vacancy It is agreed after three months Usually once a month No Every 3 months 0/2/2
Italy Though EC is not required to check for suitable vacancies, actual effort
varies according to EC It is agreed at registration No reporting required No None is compulsory,
but they may be included in the IAP.
1.5/1/1.5
Netherlands Law does not require EC to check for suitable
vacancies nor is application compulsory. No IAP is carried out Once a month
Yes At least once a
month, their actual frequency depends
on the IAP
0/3/3
Spain EC checks for readiness of work but usually do not
offer a vacancy
It is agreed at 6 or 12 months
Every 3 months
No Usually every two
months
0/1/1
Sweden EC checks for readiness of work but usually do not
offer a vacancy
It is agreed within 1 month
Every 6 weeks
Yes Every 4-8 weeks 0.5/2.5/2.5
UK EC checks for readiness of
work and may offer a vacancy. Workers’ application is compulsory It is agreed within 2 weeks Every 2 weeks
