Unemployment insurance, a form of social insurance designed to compensate certain categories of workers for unemployment that is involuntary and short-term.
Unemployment insurance programs were created primarily to provide financial assistance to laid-off workers during a period deemed long enough to enable them to find another job or be rehired at their original job. In most countries, workers who have been permanently disabled or who have been unemployed for a long period of time are not covered by unemployment insurance but are usually covered by other social security scheme.34 Weekly/monthly unemployment benefits35 are paid to eligible workers as a matter of right, according to benefit schedules or formulas stipulated in the law. Benefit eligibility and amounts are related to previous contributions by or on behalf of the worker.
31 An example is training schemes where periods of training in a specialised institution alternate with periods of work in the enterprise.
32 To be interpreted as assurance of a return to work with the same employer.
33 http://www.ilo.org/public/english/bureau/stat/download/articles/2007-1.pdf (10.03.2012)
34 http://www.britannica.com/EBchecked/topic/614393/unemployment-insurance (14 March, 2012)
35 Some countries – for example Hungary – they call the unemployed persons for job-seekers.
In addition to the primary purpose of providing employees with a measure of economic security through wage-loss compensation, unemployment insurance helps to cushion economic slumps by supplying consumer purchasing power. It can therefore serve as an important ―automatic economic stabilizer‖. Also, unemployment insurance may preserve work skills and training by reducing pressures on the unemployed/job-seeker to accept lower-level jobs, and it may provide additional incentive, through differentiated employer taxes, for managements to regularize their employment.
As for methods, most national systems of unemployment insurance are compulsory, in the sense that coverage is required by law and the taxing power is used for financing benefits. However, there is an emerging demand for private (voluntary and/or supplementary) unemployment insurance (see later). In the Scandinavian countries the program consists of funds voluntarily organized and administered by trade unions and subsidized by the state from tax monies.36
From the historical point of view, unemployment has been the last major economic risk of workers to be covered by social insurance. Programs on a national scale began with state subsidies to voluntary schemes in France (in 1905), Norway (in 1906), and Denmark (in 1907). The first national law establishing a compulsory program on a country-wide basis was enacted by Great Britain in 1911. The second was enacted by Italy in 1919. Germany adopted a compulsory program in 1927, Japan in 1947, and Canada in 1955.37
There are some disagreement concerning objectives, mechanisms, and effects helps to explain the delayed development of unemployment insurance programs. Sharp differences of opinion have arisen on a number of issues.
1. Both individual and total unemployment are unpredictable, yet they are subject to various influences and controls.
2. Government monetary, fiscal, and foreign-trade policies affect the volume of unemployment.
3. It is also claimed that workers and managements are, in some measure, responsible for joblessness.
4. Unemployment benefits may have an impact on wage levels and on worker incentives and mobility.
5. Tests of availability for work and of willingness to accept a suitable job present practical difficulties.
For such reasons, at least in the early stage, the unemployment insurance has not seemed to be a risk suitable for private underwriting, and no insurance company has sought such business.
36 http://www.encyclopedia.com/topic/Unemployment_insurance.aspx (14. 03. 2011)
37 http://www.tsj.gov.ve/informacion/miscelaneas/congresoeuropeo/03%20Tercera%20ponencia/300%20 J%C3%93ZSEF%20HAJD%C3%9A.pdf (11.01.2013.)
The different aspects of unemployment insurance (coverage, benefit level and duration, eligibility, disqualifications, financing, and level of policy determination) are interrelated parts of a coordinated scheme. Flat rate benefits go with flat rate contributions; liberal benefits stimulate restricted eligibility and severe disqualifications.
Views on any aspect of the program are affected by one’s conception of the purposes of unemployment insurance and one’s philosophy of economics and of government.38 There are at least six interconnecting basic policy issues to bear in mind when the unemployment insurance is discussed:
1) Insurance versus need.
Whether the unemployment program should be strictly one of compensation for wage loss from short-term joblessness or should make allowance for need factors (family size, cost of living, difficulty of re-employment, training needs, etc.) is a basic philosophical issue in unemployment insurance. Generally, under the state laws, unemployment benefit amounts vary directly with the individual’s previous earnings.
2) Adequacy of benefits.
No consensus exists with respect to the criteria for adequacy of a) benefit level or b) duration.
a) One suggested test is that benefit level should be sufficiently large to enable workers to meet all non-deferrable expenses for necessities (variously defined) throughout the period of their unemployment.
b) The duration of benefits raises the question of the types of unemployment that the insurance program is designed to meet. Of course, pressures build up for special extension of benefits in periods of heavy unemployment, in the absence of a satisfactory program of unemployment relief and proper arrangements for worker retraining and relocation.
3) Financing. In almost all countries, unemployment insurance is financed by equal employer and employee contributions, with either a contribution by the state or some state subvention for administrative costs.
4) Coverage, eligibility, disqualifications. Unemployment insurance is faced with several difficult problems of administration and definition. In addition to their technical aspects, such problems involve questions of social insurance philosophy. A strict insurance viewpoint may result in more restricted coverage and tighter eligibility requirements than in stress on need for benefit protection.
Particularly where the tax is levied completely on the employer, small businesses with two or three employees and non-profit institutions of all sorts may resist inclusion in coverage. In addition, administrative difficulties may preclude inclusion of migratory
38 http://www.encyclopedia.com/topic/Unemployment_insurance.aspx (11.01.2013)
farm workers and other casual labour. Nevertheless, coverage has tended to expand gradually.
5) Waiting period and/or deduction. An unemployed worker who is discharged for misconduct, or who voluntarily quits, even for good personal or economic reasons, or who refuses a job offer considered suitable will have his/her benefits postponed, reduced, or canceled. The nature of the penalty and the restriction of good cause for leaving to employer responsibility have reduced benefit eligibility.
6) Decentralized versus national systems.Most countries have a single, national system with nationwide pooling of reserves. In Scandinavia, the Netherlands, and Switzerland there are separate regional, industrial, or occupational funds.39