Slide | 1 Unemployment benefits – Stabilising or counterproductive? Vilinius, Lithuania 12 May – 13 May 2015 Ekkehard Ernst International Labour Office, Geneva

Slide | 2 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 | 3 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

Slide | 4 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

Slide | 5 1. Who is covered by unemployment benefits?

Slide | 6 Low global coverage for unemployment

Slide | 7 Little emphasis on unemployment benefits globally

Slide | 8 Wide international variation in legal coverage... Developed economies and EU Sub- Saharan Africa

Slide | 9 …and falling effective coverage

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

Slide | The two dimensions of unemployment benefits: Macro-economic stabilization Incentives for job-seekers

Slide | 15 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 | 16 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

Slide | 17 UB as automatic stabilisor I Employment multipliers small for advanced countries

Slide | 18 UB as automatic stabilisor II Employment multipliers much larger for emerging countries

Slide | 19 Potentially adverse effects on job-search effort...

Slide | 20...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 | 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

Slide | 26 UB in times of financial stress II A reduction in replacement rates would lower employment significantly in times of crisis

Slide | 27 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?

Slide | 28 UB and fiscal consolidation: A simulation II

Slide | 29 UB and fiscal consolidation: A simulation III

Slide | 30 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