Comparative Study of (Un) employment Insurance Valerie Schmitt & Celine Felix ILO DWT Bangkok 20 December 2010

Structure of the presentation Crisis impact & justification for UI and other income support measures A few definitions Coverage gap in Asia Comparative study of UI schemes at country level –Various models –Legal and effective coverage –Contribution rates and sources of funding –Levels and duration of benefits, replacement rates –Challenges & way forward

Crisis impact at global level The recent economic and financial crisis resulted in: –Rising unemployment According to ILO estimates the global number of unemployed people has reached a maximum of 239 million at the end of 2009, which would be 59 million more than in –Loss of income or reduced income Workers worldwide have been affected by declines in income through unpaid leave, working hour shortages and other loss of income opportunities. –Increase in working poverty Working poverty – which had steadily decreased during the past decade – is now predicted to take a steep rise. The vulnerable living on US$ 2 reached 43 % of the global workforce or 1.4 billion workers.

Crisis impact in ASEAN In ASEAN countries the unemployment rates are globally lower than in the rest of the world. However the situation is diverse across countries with low unemployment rates in countries such as Thailand and Malaysia (resp. 1,5% and 3.7% in 2009) and higher unemployment rates in countries like Indonesia and the Philippines (resp. 8.0% and 7.5%) Between 2007 and 2009, the unemployment rates rose in at least six countries (Malaysia, Philippines, Singapore, Thailand, Cambodia and Viet Nam) with higher increases in Viet Nam, Cambodia and Singapore

Crisis impact: unemployment rates

Crisis impact: vulnerable employment Vulnerable employment is a major challenge among ASEAN countries The share of workers in vulnerable employment is likely to increase from 60.1 per cent in 2007 to between 62.3 per cent and 64.4 per cent in 2009, as a consequence of the crisis and lost of export-sector jobs (such as in the Garment industry in Cambodia)

Crisis impact: vulnerable employment In Indonesia in the absence of UI benefits laid off workers contributed to grow the rows of the informal economy : the number of informal economy workers increased by 2 million between August 2008 and February 2009.

Justification for UI & EI Unemployment insurance Employment services (vacancy information, job matching, vocational training, and other ALMP is one of the most effective and efficient mechanism to: & 1- to protect the unemployed and their families against poverty and deal with the economically-adverse effect of the crisis 2- to assist them to return to employment as soon as possible on the other hand (stabilizing the employment)

Need for other income support measures for vulnerable workers In the informal economy, where everybody has to work in order to survive the very concept of “unemployment” seems to be irrelevant. The main issues are underemployment and the often extremely precarious character of existing employment opportunities for those in poverty.

Need for other income support measures for vulnerable workers The long-term solution relies on : –Sustainable employment-generating policies –Adapted ALMPs including: Such measures are among the foundations of the Social Protection Floor (SPF) promoted by the ILO & UN since April 2009 A minimum income support for the un/under-employed in the form of cash transfers Certain forms of basic employment guarantees (e.g. public works) Training & retraining, support to the creation of micro-enterprises …

Structure of the presentation Crisis impact & justification for UI and other income support measures A few definitions Coverage gap in Asia Comparative study of UI schemes at country level –Various models –Legal and effective coverage –Contribution rates and sources of funding –Levels and duration of benefits, replacement rates –Challenges & way forward

A few definition: Unemployed The "unemployed" comprise all persons above a specified age who during the reference period were: a)without work, i.e. not in paid employment or self-employment; b)currently available for work, i.e. available for paid employment or self-employment during the reference period and able to work; and c)seeking work, i.e. haven taken specific steps in a specified recent period: –registration at a public or private employment exchange; –checking job opportunities at worksites, farms, factory gates, markets …; –placing or answering newspaper advertisements; –seeking assistance of friends or relatives; –looking for land, building, machinery or equipment to establish own enterprise; –arranging for financial resources; –applying for permits and licenses, etc.

A few definitions: Unemployment benefit schemes Unemployment benefit schemes provide at least partial income replacement, usually over a limited period, to those who face temporary unemployment. The objective = enable the beneficiary to maintain a certain standard of living during the transition period until a new employment is available. Amounts of cash unemployment benefits are either related to the previous earnings of the beneficiary or paid at a flat rate. Different types of schemes: –contributory UI schemes –employment-related social assistance that steps in when the unemployed are no longer eligible for UI –non-contributory, tax financed social assistance, instead of insurance

A few definitions: Entitlement to benefits Entitlement criteria usually include: –being in involuntary unemployment –searching for employment (registered in employment services, accepting job placement offers, undertaking training) and ready to start employment soon –being below normal pensionable age –having completed a certain qualifying period of contributions or employment (the most common qualifying period is 6 months of coverage)

A few definitions: Duration and amount of benefits Unemployment benefits are usually granted only for a limited period, which may depend on the number of years worked previously. –An unemployed worker who refuses an offer of a suitable job without good cause usually will have benefits temporarily or permanently suspended. –If an unemployed worker refuses a place on a retraining program or fails, without good cause, to attend an educational placement, benefits can be temporarily or permanently suspended. The amount may depend on the previous salary or may be a flat rate. –The basic rate of unemployment benefits is usually between 40 percent and 75 percent of average earnings.

A few definitions: combination with employment services Provision of UI benefits is more efficient if combined with employment services and employability-enhancing measures: –assistance in searching for new employment, –providing those unemployed with counselling, –training or retraining. This is the Employment Insurance (EI) approach. There are also measures such as public works or other forms of employment guarantees which provide certain forms of paid employment to beneficiaries.

A few definitions: severance pay In some countries where there is no unemployment insurance, there exist legal provisions called ‘severance pay’ Employers are obliged to pay a lump sum equivalent to several months’ salary to workers who are laid off The entitlements and amounts of severance pay depend on past employment service with a given employer. –In the Philippines, for example, employers are obliged to pay one month’s salary for every year of previous employment. Limitations: –Employers – particularly those going through a difficult period of adjustment – may evade the law. –According to international standards: unemployment benefits should be periodical payments, not one-off payments. –The employer bears the total burden of firing employees; this may lead to adverse selections in hiring decisions as well as evasion.

A typology: Passive and Active Labour Market Policies Passive LMPActive LMP Provides temporary ‘income security’ for the unemployed:  Unemployment insurance that is organized by the government and funded through contributions from payroll.  Severance pay and similar termination benefits, which are funded by the employer and provided as a lump sum. ALMP provides active support to unemployed workers in making ‘transitions’ to new employment: Job search assistance through the public employment service (i.e. job centres), including job and career counselling. Training or re-training to increase employability. Promotion of self-employment through business management training, mentoring, credit access, tax breaks, etc. Wage subsidies to encourage hiring of unemployed.

Additional readings SSA&ISSA:2008. Social Security Programs Throughout the World: Asia and the Pacific, /asia/ssptw08asia.pdf ILO:2010. World Social Security Report 2010/11. Providing coverage in times of crisis and beyond do?tid=1985

Structure of the presentation Crisis impact & justification for UI and other income support measures A few definitions Coverage gap in Asia Comparative study of UI schemes at country level –Various models –Legal and effective coverage –Contribution rates and sources of funding –Levels and duration of benefits, replacement rates –Challenges & way forward

Coverage gaps in Asia Coverage can be measured by: –Are there Unemployment benefit schemes? –What is the legal coverage (as a percentage of the economically active population)? –What is the effective coverage (effective coverage is oft en substantially lower than legal coverage)?

Are there Unemployment benefit schemes? Malaysia, Philippines, Lao, Cambodia, Indonesia, Myanmar … have no unemployment scheme India, Mongolia, China, Thailand, Korea, Japan, Viet Nam have established (Un)Employment Insurance New Zealand and Australia have Unemployment Assistance

What is the legal coverage? Only 20% of economically active population is legally covered under UI contributory and non contributory schemes in Asia

What is the legal coverage? Malaysia, Philippines, Lao, Cambodia, Indonesia, Myanmar … have no unemployment scheme Mongolia, Thailand, Korea cover between one third and two thirds of Economically Active Population India, China, Bangladesh, Viet Nam cover less than one- third of the Economically Active Population

What is the effective coverage? Only 10% of unemployed effectively receive UI benefits in Asia from contributory and non contributory schemes

What is the effective coverage? In Korea between one third and two thirds of unemployed receive benefits In China, Thailand, Mongolia less than one third of unemployed receive benefits

Additional readings

Structure of the presentation Crisis impact & justification for UI and other income support measures A few definitions Coverage gap in Asia Comparative study of UI schemes at country level –Various models –Legal and effective coverage –Contribution rates and sources of funding –Levels and duration of benefits, replacement rates –Challenges & way forward

Passive Labour Market Policies: unemployment or severance pay Active Labour Market Policies: job centers, training, retraining … High Low HighLow Sri Lanka (Severance pay system) 2.4 job center/million EAP) India (Employment allowance added to the SSS but benefits are low and coverage is limited; NREGS initiative) Korea (EI model) & 6.9 job centers/ million EAP China (since 1999 all urban workers; coverage still limited because of rural economy; Job Centers at provinces, cities and districts + community) Singapore & Malaysia (no UI, but full employment strategy ; ALMPs: job search and training programs; >9 job centers /million EAP) Various models: tentative typology

Legal coverage = Percentage of the economically active population which is legally protected against loss of income in case of unemployment –Legal coverage includes persons who are covered by law but who might not be known to the system, for example because of ineffective registration. –NB: Other definition/measure = Percentage of the working age population which is legally covered Effective coverage = Ratio of the number of persons receiving unemployment benefits over the total number of unemployed (based on labour force survey data). –Effective coverage is usually lower than legal coverage in particular because of suboptimal law-enforcement. Legal and effective coverage

Source: statistical annex of ILO’s World Social Security Report 2010

In India : even though the scheme has been extended to cover all workers in formal sector, the ratio of covered persons to economically active population remains low, because of the large proportion of workers in the informal sector (92-93% of economically active population) In Korea the difference between legal and effective coverage is due to the large number of irregular workers Viet Nam has started the implementation of the UI scheme in 2009 Bahrein’s system is composed of an Unemployment benefit and an Unemployment aid for first time job seekers (over 17 years old) or insured persons who do not qualify for the unemployment benefit In Thailand although the legal coverage is relatively high (40%) only 14% of the unemployed effectively receive a benefit Legal and effective coverage

Contribution rates & sources of funding Source: statistical annex of ILO’s World Social Security Report 2010

Contributions can be shared by employers, employees and the government or only by employees and employers. –In Thailand, Bahrain and Vietnam, contributions are shared between 3 parties: employers, employees and the government. –In China, Korea and Mongolia, contributions are shared between employers and employees. Contribution rate is shared equally between employers and employees in Mongolia, Vietnam and Thailand, while contribution rate for employers are higher in Korea and Japan. The Chinese unemployment insurance is financed mainly by employers and employees with the contribution rate of 2% and 1% respectively. However, the provincial regulatory fund and local governments provide subsidies to unemployment funds as required. Contribution rates & sources of funding

Levels and duration of benefits Source: Comparative Analysis of Employment Injury Insurance (EII) and Employment Insurance (EI) in Asia and the Pacific region

Benefit level is usually determined as a percentage of previous earnings –Benefit level in Thailand can be divided into 2 levels: 50% and 30% of insured previous earnings depending on reason of being unemployed. –Mongolian scheme has more sophisticated way of calculating the benefit. Benefit depends on the insured’s contribution history. The longer contribution period is, the higher the benefit level will be. –Bahrein has two types of benefits: in percentage of previous earnings for the Unemployment benefit, and flat rate amount for the Unemployment aid –In China the unemployment benefit level is set by the local governments at a level higher than the local public assistance benefit but lower than the local minimum wage. Levels and duration of benefits Most countries provide the benefits for only limited period (between 2 months and 2 years). This period is related to insured’s previous contribution period. –The longer the contribution history, the longer the possibility to enjoy the benefits.

There are number of benchmarks that can be used to compare replacement rates across countries –Unemployment benefit level / average income –Unemployment benefit level / minimum wage… Large gaps can be seen across countries in the level of generosity of benefits. –A few countries provide UI benefits with significant replacement rates (with benefit level > minimum wage) –In many countries the amount of UI benefits is just half minimum wage or even less. Replacement rates

Source: Comparative Analysis of Employment Injury Insurance (EII) and Employment Insurance (EI) in Asia and the Pacific region

Challenges and way forward: From Severance Pay to UI In countries where there is no UI scheme Severance pay system obliges employers to pay a lump sum equivalent to several months of salary to workers who are laid off It is the case in the Philippines and in Indonesia Challenges: –Lack of enforcement –No risk pooling: the employer bears the total cost –Adverse selection in hiring employees –Growth of informal sector and “outsourcing” Current discussions for the introduction of UI in these countries

Challenges and way forward: Income security for informal economy In a large part of the world where extreme poverty is high, everybody has to work in order to survive Most IE and agriculture workers are working poor with precarious, low paid employment opportunities (decent work deficit) Adapted ALMPs including a minimum income support + certain forms of basic employment guarantees (e.g. public works) + training should be explored

National Rural Empl. Guarantee Scheme in India –Legal guarantee for 100 days of employment per year to adult members of any rural household willing to do public work at the minimum wage of Rs. 100 per day (3 US $) –Minimum income security –First step towards Inclusion in Labour Market –Development of “social” infrastructures (roads, health care, dams …) Challenges and way forward: Income security for informal economy

Social protection floor (services and transfers) Employment services (training, job placement, creation of micro-enterprise) “One stop shops” –They would progressively move towards sustainable employment (decent jobs) with also higher capacity to pay taxes and social contributions “One stop shop” approach: –Develop one stop shops where IE / vulnerable groups would have access to social services (health, child care, scholarships…) –In addition to social services they would receive a minimum income under certain conditions: Undertaking training & actively seeking jobs Work beneficial for the community …

Sustainable income & Higher level of social protection Unemployed Underemployed Working poor Social protection floor (services and transfers) Employment services (training, job placement, creation of micro-enterprise) Sustainable employment “One stop shops” Increased consumption (AVT) Paying taxes Paying social contributions Redistribution & funding of social services We have to demonstrate it is a win- win scenario – through a cost-benefit analysis Argument for policy makers Extension of social security Social justice Challenges and way forward: Income security for informal economy

Functions: Social protection services Employ- ment services Adminis- trative procedures 1. Enrolment Registration Identification of social needs & Vulnerability assessment Social protection services and transfers:  child care,  health cards,  scholarships … 2. Job placement Skills assessment Are requirements (seeking jobs, training) met?  Channeling job opportunities: PWPs, self-employment  Channeling business opportunities & access to markets  Training services Minimum income guaranteed through  employment guaranteed schemes  public procurement Labour market inclusion / social protection / decent work-+ 3. Support creation of productive & decent employment Minimum income continued although progressively reduced … Partially subsidized social security schemes  Support to enterprise creation e.g. through micro-credit and specialized training OSH Skills assessment Automatic registration in adapted SS schemes Inside the One Stop Shop

THANK YOU! Discussion… Thank you!