Unemployment Insurance and Social Welfare in Cyprus Statements and Comments

Transcription

1 Unemployment Insurance and Social Welfare in Cyprus Statements and Comments Louis N. Christofides University of Cyprus and University of Guelph, Canada It is generally argued that the generosity of the German unemployment benefit and assistance systems, in combination with the reunification process and sudden exposure of the East German economy to severe adjustments, have contributed to a rise in the German unemployment rate and widespread public concern. The `Hartz reforms, implemented between January 1, 2003 and January 1, 2005, may be seen as an endogenous response to this situation. By contrast, the unemployment rate in Cyprus (henceforth, the area controlled by the Republic of Cyprus will be referred to as Cyprus, while the area occupied by the Turkish army following its 1974 invasion will be referred to as the north) is low. The seasonally adjusted Harmonised Unemployment Rate for January 2007 was 4.7% in Cyprus, 7.5% in the EU25 and 7.7% in Germany. The labour market in Cyprus has been providing employment for large numbers of Turkish Cypriots who commute from the north, EU citizens, and third-country nationals. A number of illegal workers must also be added, bringing the total of these workers to between 20-25% of the gainfully employed. In this context, the problems that led to the Hatrz reforms do not loom large in Cyprus though it must be noted that, in the event of a political solution to the Cyprus problem, the reunification of the Republic of Cyprus will present challenges similar to those experienced in Germany. 1. Policy Context, economic circumstances and institutional/legal background in Cyprus The general objectives of the social safety system in Cyprus are (a) securing a minimum standard of living for all citizens especially those who cannot participate, or participate to a limited extent, in the productive process and (b) the attainment of a more equitable distribution of income and burden of taxation. Other objectives of government social policy are the promotion of full and productive employment, the preservation of sound industrial relations, the maintenance of industrial peace, and the achievement of satisfactory health and safety conditions at work. The social safety system can be thought of as consisting of an insurance-related part, financed through contributions, and a social welfare system which generally relies on taxation. The social insurance system is quite broad and includes, inter alia, unemployment insurance. The social welfare system provides a further safety net. Health care would generally be available free of charge to all individuals that fall under the coverage of social insurance or social welfare. 1.1 The Social Insurance System The system is run by the Department of Social Insurance in the Ministry of Labour and Social Insurance. It provides the following benefits (in brackets appears the proportion of 2004 social insurance expenditures for the particular, most substantial, categories): Old age pension (60.46%), widow s pension (17.51%), unemployment benefit (7.52%), invalid s pension (5.54%), sickness benefit (4.05%), maternity allowance (2.18%), disability pension, orphan s benefit, April 2007 Peer Review Implementing the new basic allowance for job seekers 1

2 missing persons allowance, funeral grant, maternity grant, marriage grant, and benefits for industrial accidents and occupational diseases including temporary incapacity (injury and disablement benefits) and death. Some of these benefits (e.g. unemployment insurance benefits) are income related in which case they include (a) a basic part, corresponding to the basic insurable earnings determined by law and (b) an earnings-related part which depends on individual earnings above the basic insurable earnings. The beneficiaries are the contributors for the various categories of insurance. Employed persons are entitled to all the above benefits. Self-employed persons are not entitled to unemployment benefits and benefits for employment injuries. Voluntary contributors working abroad for Cypriot employers are not entitled to benefits for employment injuries. Other voluntary contributors are entitled only to marriage, maternity and funeral grants and to old age and survivor s benefits. In addition to the above cash benefits, the scheme provides free medical treatment to victims of employment accidents and occupational diseases and to invalid pensioners. The system is financed by contributions from employers, the insured persons and the state. The rate of social insurance contributions for employed persons is 16.6% and for self-employed persons 15.6% of their insurable earnings. For employed persons the contribution is shared between the employer, the employee and the state at the rate of 6.3%, 6.3% and 4%, respectively. The contribution payable by the self-employed is 11.6% and the corresponding state contribution is 4%. The rate for voluntary contributors is 13.5% of which the 10% is payable by the voluntary contributor and the 3.5% by the state. The voluntary contribution by those employed by Cypriot employers abroad is 16.6%, of which the 12.6% is payable by the voluntary contributor and 4% by the state. The contributions collected are paid into the Social Insurance Fund out of which all social insurance benefits and administrative expenses for the operation of the system are paid. The unemployment benefit is earnings-related and consists of the basic and supplementary parts: the basic benefit corresponds to 60% of the basic earnings of the previous year on which contributions have been paid. The level of basic earnings is determined by law each year and for 2007 it is CYP per week (or, multiplying by the rough exchange rate of 1.7 Euro per Cyprus pound, approximately Euro 140 per week). The basic benefit is increased by 1/3 for the first dependent and by 1/6 for each additional dependent (up to a total of three). The supplementary benefit corresponds to 50% of the earnings above the basic in the previous year on which contributions have been paid. The supplementary benefit cannot in any case exceed the basic earnings of the beneficiary which have been received in the previous year. Thus, the maximum unemployment insurance benefit (for a single person earning three times the amount of basic earnings or more) is 1.6 times the basic earnings or approximately 900 Euro per month (82.67x4x1.6x1.7). While this amount may seem high by the new German standards, earnings equal to three times the basic earnings (approximately CYP 992 or Euro 1686 per month) are unusual (as a comparison, the minimum wage for experienced workers is about CYP 400, or Euro 680 per month). The replacement rate for these high earners is only 53% (1.6/3) and it would be lower still for even higher earners. The replacement rate is more generous for individuals with several dependents. The maximum duration of the unemployment benefit is 156 days. Though most unemployed individuals find work within six months of being laid off, the social welfare system provides a further safety net for individuals whose benefit entitlement has been exhausted. Naturally, this further safety net also covers other individuals in difficult circumstances April 2007 Peer Review Implementing the new basic allowance for job seekers 2

3 1.2 The Social Welfare System This is the responsibility of the Department of Social Welfare Services in the Ministry of Labour and Social Insurance. The Public Assistance and Services Law (August 1991) secures a minimum standard of living for all persons residing legally in Cyprus. It may be provided in the form of money and/or services to persons whose resources do not meet their basic and special needs as determined by law. It makes special provision for those who are more vulnerable to social exclusion (single parents, parents with four or more children, families at risk of dissolution, persons with sickness or disabilities, including those with employment injuries and occupational diseases, and some of the unemployed) and may include a rent allowance or home care, for example. Rates for public assistance are reviewed annually so that they are in line with the rising cost of living. In 2007, the rate is set at CYP 213 (or approximately 362 Euro per month). Some 18,000 cases involving approximately 28,000 individuals and CYP 75 million (or approximately 128 million Euro) are currently involved. Social protection schemes are, on the whole, financed through general taxation. Beyond the narrow social welfare system administered by the Department of Social Welfare Services in the Ministry of Labour and Social Insurance, other elements of the social safety network, administered by other units, also exist. A child benefit is granted to all families for each child without considering their income, while a supplementary amount is given when the annual income of the family is below CYP (EUR20460). Child benefits and a mother s allowance are financed out of general taxation and adjusted according to the cost-of-living index. This programme is administered by the Ministry of Finance. The Service for the Care and Rehabilitation of the Disabled was established in January 1990 with a view to filling the gap of co-ordination on disability issues and offering specialized rehabilitation and social integration services to persons with disabilities. This service promotes, through appropriate measures, the full participation of disabled persons in vocational orientation and training and facilitates their employment in the open labour market. This programme is run by the Department of Labour in the Ministry of Labour and Social Insurance. Once the 1974 refugee housing problem had been coped with, the housing programme was extended to include low and middle income groups facing serious housing problems due to the increase in the price of land and construction costs. The government attempted to improve housing conditions through measures to curb the increase in the value of land and to increase access to low-cost housing loans. It also introduced programmes aimed at offering accommodation to those in need through child care and youth centres, hostels for the aged and the invalid, and welfare community centres. This programme is run by the Ministry of the Interior. 1.3 Health Care Entitlement to publicly provided free medical care is based on individual earnings below Euro per annum, household earnings below Euro per annum (these increase by Euro 1700 for each dependent child) or on households having more than three children. Individuals with incomes between Euro and households with income between Euro (these increase by Euro 1700 for each dependent child) receive health care at reduced cost. On the basis of the criteria, 85-90% of the population has access to free or reduced-rate public health care. Individuals on unemployment insurance or social welfare would be covered April 2007 Peer Review Implementing the new basic allowance for job seekers 3

4 free of charge. Free health care is extended to Turkish Cypriots regardless of whether they live in the occupied north or in the south. 2. Assessment of potential transferability of Hartz IV to Cyprus An aspect of the German system which is not at all relevant to Cyprus is the complexity arising from federal and Länder relations: In a small country like Cyprus, all services reside centrally in Ministries such as the Ministry of Labour and Social Insurance, the Ministry of Finance, and the Ministry of the Interior. As already noted, the unemployment benefit in Cyprus is based on replacing income lost, starting (for a single person) with a replacement rate of 60% and dropping to 53% for a high earner. Though not an absolute amount, as under Hartz, the replacement rate is not excessive by international standards and it can only be enjoyed for six months. Thus, a major thrust of the Hartz reforms of reducing the length of eligibility and the generosity of unemployment benefits is not an issue at the moment. Measures to improve the flexibility of the German labour market were surely most welcome. While legal impediments to temporary, part-time, and contract work are not present in Cyprus, nevertheless these forms of employment are rare. Employers would support them as they might facilitate tapping labour supply pools involving women and older workers. However, unions are opposed to flexible forms of employment, fearing that they would be synonymous with bad jobs and exploitation. An ESF co-sponsored scheme to encourage flexible forms of employment for women is currently under trial but it is too soon to extract any messages from its implementation. The increasing emphasis in the German system and those of other member states on activation is a development that could become important for Cyprus in the near future. Though data was not readily available, there is a sense that caseloads are increasing over time. One reason may be that the social stigma that (in a small and homogenous society) rendered abuse of the welfare system unlikely may no longer function with quite the same force given increasing mobility, inmigration and anonymity. Thus, the Cypriot system, which has very few carrots and sticks in place to encourage individuals to get off welfare, may no longer be adequate. There has, however, been very little mention of this point, except by one of the employers federations (OEB). An approach that is also alien to Cyprus but one that is worth considering is the notion of quasi markets present in the Hartz reforms. The voucher system for placement and training services, the notion that public employment services (District Labour Offices in Cyprus) can outsource services, the lump sums paid to private placement services that find a job for an unemployed individual or social welfare recipient are all excellent tools that would enhance the efficiency of these services. It must be conceded, however, that this privatisation is not likely to be adopted by the current governing coalition in Cyprus April 2007 Peer Review Implementing the new basic allowance for job seekers 4

5 3. Issues relevant to Hartz IV that are being debated Cyprus As noted in the introduction, the labour market in Cyprus is so tight that concerns about unemployment insurance and social welfare are hardly ever raised. A few issues that touch upon the discussions that occurred in the context of Hartz have received an airing, though often in a somewhat different context. Personal advising is an idea that is currently being introduced under another ESF co-sponsored scheme to modernise the District Labour Offices in Cyprus. The programme is well under way. Protocols for assessing the needs of the unemployed but also the expectations of employers with vacancies are being developed with the help of professional advisers. Existing personnel is being trained and more officers have been hired. However, these efforts are new and as yet incomplete; their likely impact cannot be determined as of the moment. In the host-country document (p. 16) it is noted that, given that there is no minimum wage in Germany, there is a danger that the complementary benefit may develop into a hidden and uncontrollable employer s subsidy. Hartz has set UB2 at Euro 345 per month for a single adult a level which is feared to be low by German standards, presumably with the view to avoiding a welfare trap. The implication is that low wages might become pervasive and that they can only be avoided through a minimum wage. In Cyprus, there is a minimum wage that applies to the nonunionised sector (sales staff, clerical worker, auxiliary health care staff, and auxiliary staff in nursery schools, crèches and schools) and which, as noted, is approximately Euro 680 per month. The government has a policy of raising this level to 50% of the national median wage by Since there is no supplementary benefit, the concern raised for Germany does not apply in Cyprus. Nor have possible interactions between the level of the minimum wage rate, the level of unemployment benefits, and unemployment insurance usage been discussed. Rather, the debate in Cyprus has centred on the impact that the minimum wage may have on the specific areas it relates to and, through demonstration effects, on the labour market at large. Concerns about competitiveness have been raised by employers federations and the danger of adverse employment effects has been pointed out. The Human Resources Development Authority (HRDA) has been the major player in the area of personnel training generally, including programmes for new entrants into the labour market and for the unemployed. These programmes are varied and quite sophisticated. Until recently, there has not been a strong tradition of assessing the effectiveness of such programmes in Cyprus. One effort is about to begin. It is interesting, however, to observe that the Hartz reforms do not presume that the arrangements that have been put into place will, necessarily, be effective. Indeed, several alternatives are allowed for, some specifically with scientific assessment in mind. A number of studies of the effectiveness of the Hartz reforms have been conducted or are under way and a useful summary can be found in Jacobi and Kluve (2006). This welcome emphasis on assessment is at a very early stage in Cyprus and more could surely be done in that direction April 2007 Peer Review Implementing the new basic allowance for job seekers 5

6 References Jacobi Lena and Jochen Kluve (2006) Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany. Institute for the Study of Labor, IZA DP No. 2100, April. The unemployment insurance system for Cyprus is described at: ent The social welfare system in Cyprus is described at: April 2007 Peer Review Implementing the new basic allowance for job seekers 6