It’s time to expand unemployment protections

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​In earlier blogs we proposed several ideas to alleviate the economic slowdown. These ideas included delaying certain tax payments, making access to new credit easier, and expanding procurement work. Here we focus on extending unemployment insurance to all workers that have been laid off.  

Unemployment protection is a combination of measures aimed at guaranteeing a certain standard of living for workers who have lost their jobs and policies to help unemployed workers increase their job prospects. It allows resources to be accumulated in good times and released in times of economic distress – as is the case today with the coronavirus pandemic.

Not every country has unemployment insurance, however. In fact, three out of every five economies worldwide do not have an unemployment benefit scheme by law. This is particularly the case in low-income economies (figure 1), which may lack the financial resources to afford such programs. One low-income economy which offers unemployment protection is Nepal, which introduced its contribution-based Social Security program in November 2018. The program includes medical, health, accidental and other benefits, and is made available to workers in the formal sector. In Sub-Saharan Africa, three other economies – Cabo Verde, Mauritius and South Africa offer unemployment protection. All programs are new: Cabo Verde introduced it in 2016, Mauritius in 2008, and South Africa significantly expanded it in 2002.  

Even in countries with unemployment protection programs, not all workers or enterprises benefit from such measures. For the 2 billion workers (around 60 per cent of world’s employed population) who are in informal employment, reduced working hours and constrained social mobility means loss of income with no unemployment benefits. The most vulnerable face an impossible dilemma – stay at home jobless or try to earn money and create a health risk. The priority for any government now is the health of its population, so safety measures should be maintained until the health crisis is under control.  

Figure 1- Availability of unemployment protection varies widely by income and region

Availability of unemployment protection varies widely by income and region

Source: World Bank 

The economic distress caused by the pandemic requires action informed by fresh ideas on how to expand unemployment protections. Income support measures in low-income countries are most effective in the form of cash transfers to households. In places where cash transfer programs are already in place the same can be topped-up to ensure additional resources reach the poor. Low-income households could also be supported by negative personal income taxes, a measure used in North Macedonia in response to the global pandemic. Other measures that countries are implementing include extended paid sick leave and increased access to employment insurance. For example, Senegal covers in part the wages of workers in danger of being laid off and vulnerable workers such as the self-employed.

Governments have announced crisis response packages to prevent further disruption to businesses. A popular policy is loan guarantees that increase firms’ access to credit. For example, in March 2020 the UK government unveiled a scheme for £330 billion of loan guarantees—equivalent to 15% of the country’s GDP—to provide businesses with cash to pay wages and other expenses. Similar approaches have been followed elsewhere, in both advanced and emerging economies.

These programs inject much-needed liquidity in firms, but do not resolve a bigger looming issue: insolvency. The gap between lower-than-expected revenues and piling payables – including the new loans that firms have to eventually repay – has to be addressed. And this is not just the case for retailers, travel agencies, airlines or businesses in hospitality or entertainment, where demand may pick up only gradually even after the crisis. The economic crisis has exacerbated existing vulnerabilities in other industries and may slow down their recovery. As supply chains around the world are severely disrupted, trade in intermediate goods has collapsed. In these sectors too, expanded unemployment protections are needed.

Authors

Simeon Djankov

Senior Fellow, Peterson Institute for International Economics

Dorina Georgieva

Economist, Development Economics Indicators Group