The Case for Unemployment Insurance: How to Design UI Schemes in MENA

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Randolf Boone
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1 The Case for Unemployment Insurance: How to Design UI Schemes in MENA András Bodor Economist The World Bank WB-ILO MENA LM Policy Course, 2010 October 25-29

2 Outline I. Income Protection Systems for the Unemployed II. The State of Unemployment Benefit Programs in MENA III. Unemployment Insurance Design in the MENA Labor Market Context

3 I. INCOME PROTECTION SYSTEMS FOR THE UNEMPLOYED

4 Types of Income Protection Programs for the Unemployed Public Works Workfare Severance Pay (End of Service Indemnity) Unemployment Assistance Unemployment Insurance (UI) Unemployment Insurance with Risk-Pooling Unemployment Insurance Savings Accounts (UISA) Unemployment Insurance Savings Accounts with Risk- Pooling Unemployment Insurance Savings Accounts with Borrowing

5 Type of Insurance Mechanism: Risk-Pooling or Self-Insurance (Compulsory Saving) Risk-Pooling The lucky employed pay the benefits of unlucky the unemployed. Works well under good compliance behavior and strong enforcement capacity. Redistribution through the insurance mechanism creates incentives to play the system (moral hazard). Hard to implement in countries with large informal sector and weak institutional capacity. Self-Insurance (Compulsory Savings) Employee and employer contributions are recorded on individual accounts; this saving is the source of benefits in case of unemployment. No redistribution; moral hazard is reduced. Unemployment insurance account balances constitute restricted individual wealth.

6 Continuum of Risk-Pooling and Mandatory Savings Combinations Traditional European Style UI schemes Brookings proposal for USA USIA Chile USIA Egypt UISA-cumborrowing leveraging pension wealth: Jordan Pure UISA Risk-pooling Mandatory savings

7 UISA Balance Accumulation: When Mandatory Saving Is Sufficient

8 UISA Balance Accumulation: When There is a Need for an Augmenting Mechanism

9 UISA Balance Accumulation: The Case to Avoid

10 UISA with Risk-Pooling (Chile, Egypt) Employee contributions Employer contributions Contribution pool savings Individual accounts implicit tax Solidarity fund Risk-pooling is the only mechanism to allocate the solidarity fund? How about targeted (PMT) co-payments to those with limited savings capacity? Matching UISA (MUISA)

11 UISA with Borrowing: Leveraging the Pension Wealth (Jordan) Employee Pension Fund (could be funded or PAYG with or without individual accounts) Employer Unemployment Insurance Individual Accounts Contributions assessed on wages Pension and unemployment insurance benefits Guarantee to allow borrowing against pension wealth Consolidation at retirement

12 THE STATE OF UNEMPLOYMENT BENEFIT PROGRAMS IN MENA

13 Share of Unemployment with Unemployment Benefits (2008) Note: weighted by labor force; source: ILO (2009)

14 Source: Angel-Urdinola and Kuddo (2010)

15 III. UNEMPLOYMENT INSURANCE DESIGN IN THE MENA LABOR MARKET CONTEXT

16 The Case for Unemployment Insurance Nature of Production and the Employment Relationship in the Medium-Income Level Countries Private Sector-Led Development and Employment Creation Path Separations are naturally more frequent By-product of the market s resource reallocation function: a source of productivity increase if low quality employee-employer matches are replaced by higher value employee-employer matches There is a Need to Facilitate Job Search and Support the Transition Period between Jobs ( Consumption Smoothing ) Employers Need to Share the Social Costs of Unemployment UI Could (At Least Partially) Replace Protection in the Form of Severance Pay Improving Labor Market Dynamics While Maintaining Worker Protection

17 UI Design Considerations in (Non- GCC) MENA MENA Labor Market Context: High degree of informality Weak enforcement capacities / low quality governance / questionable voluntary compliance Unobservable / hardly observable true employment status Moral hazard could easily undermine UI solely relying on risk-pooling UI Enforcement Needs to Rely on the Incentives the UI Design Itself Induces: Some Form of UISA!!!

18 Digression: Financing Mechanism Behind UISA UISA emerged in Latin-America where funded pension reforms established the financial infrastructure for funded UISAs However, UISAs do not need to be funded, PAYG financing is a true option!

19 DB vs. DC and Funding vs. PAYG in Pension Design Defined Benefit (DB) Pension Schemes Defined Contribution (DC) Pension Schemes Pay-As-You-Go Financing Prefunding US Social Security, most European mandatory first pension pillars Many employer provided pension programs in the US NDCs: Sweden, Poland, Latvia, Italy, Egypt (from 2012) FDCs: Chile, many European second pension pillars, many occupational pension schemes

20 Risk-Pooling vs. Compulsory Saving and PAYG vs. Funding in UI Design Risk-Pooling Mandatory Savings Pay-As-You-Go Financing Funding traditional European UI schemes Notional Unemployment Insurance Savings Accounts (NUISA) UISAs in Latin- America

21 Summary - Primary Messages UI is an Essential Part of the Institutions of a Well-Functioning Market Economy where job creation is concentrated in the private sector and worker protection is established in an incentive compatible manner with job creation and labor market dynamics The current MENA Labor Market Context Suggests the Application of Some Form of the UISA Design

Savings for Unemployment in Good or Bad Times: Options for Developing Countries

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized SP DISCUSSION PAPER NO. 0417 Savings for Unemployment in Good or Bad Times: Options for