Most of World Lacks Unemployment Insurance

Social Protection Systems under Strain

ILO launches World Labour Report 2000

Wednesday 21 June 2000
( ILO/00/29 )

GENEVA (ILO News) - Seventy-five per cent of the 150 million people unemployed around the world lack any unemployment insurance protection, says a new report by the International Labour Office (ILO).

Even the world's richest countries in Europe and North America reduced protection provided by unemployment insurance in the 1990s, says the ILO's World Labour Report 2000: Income Security and Social Protection in a Changing World.^*

Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland provide the most generous unemployment protection systems of all ILO member countries, the report says.

The report identifies Australia, Canada, Ireland, Japan, New Zealand, the United Kingdom and the United States as belonging to "medium-level type systems". Fewer of the unemployed in these countries receive benefits and the compensation that is provided is lower than those available in the first tier of countries.

Benefit payments, which the report defines as "net wage replacement rates" range from 23% of wages in New Zealand to 58% in Canada and the United States, among these "medium-level" countries. In contrast, "top level" countries such as Finland and Spain provide 63% and 77% respectively of national average earnings in their unemployment insurance, the report says.

The report says that the United States, Canada and the United Kingdom are also rated low because "the duration of unemployment benefit payments is short, with benefits payable for less than 12 months". In addition, neither the United States nor Canada has a second layer of unemployment assistance available when the first layer runs out.

Extending social protection to all

But poor unemployment insurance coverage is not the only problem identified in the report which finds a wide range of threats to workers' security and protection worldwide. "The vast majority of the population in many developing countries, including informal sector wage earners and self-employed persons, have no social protection whatsoever", warns the Report, which insists that "the major focus must be on the extension of coverage" to these workers.

"Alarmist rhetoric notwithstanding, social protection, even in the supposedly expensive forms to be found in most advanced countries, is affordable in the long term", says ILO Director-General Juan Somavia in the report's introduction. "It is affordable because it is essential for people, but also because it is productive in the longer term. Societies which do not pay enough attention to security, especially the security of their weaker members, eventually suffer a destructive backlash."

The report notes that millions of people in the informal sector "earn very low incomes and have an extremely limited capacity to contribute to social protection schemes". They cannot afford to save much of their meagre incomes. They can look forward neither to pensions nor to health insurance benefits. They are reluctant or simply unable to seek help from social assistance schemes where these exist.

The ILO says that for low-income developing countries "it is imperative to give priority to schemes specially designed to meet the needs of informal sector workers". Government support is deemed "indispensable" in the effort and a possible starting point would be the extension of statutory social insurance schemes "toward increased - and possibly universal - coverage".

The report makes various proposals to extend social protection, which now covers less than half of the world population. The three main options toward meeting the goal include extension of existing programmes, creation of new programmes which target informal sector workers and the development of tax financed social benefit systems.

The report highlights some key trends and issues affecting social protection:

• The number of people living in extreme poverty around the world has increased by 200 million people in just the last five years, mainly in sub-Saharan Africa, Central Asia, Eastern Europe and Southeast Asia;

• 850 million people work less than they want or earn less than a living wage;

• Poverty is one of the major factors driving 250 million children into the labour force and jeopardizes their attendance in school;

• In certain developed countries, rates of divorce have increased up to 500% (Canada, United Kingdom) over a 30-year period, meaning many more children are living in single-parent households;

• In many of the same developed countries, births to unmarried women also jumped up to six times over the same 30-year period, which again puts many children into single-parent households;

• Poverty rates for households headed by a single mother are at least three times higher than for two-parent households in Australia, Canada, Germany, Luxembourg, Netherlands, Norway and the United States;

• Social security expenditure as a percentage of GDP has risen in most countries over the period 1975-92, but there have been exceptions to this trend, especially in Africa and Latin America.

"Changes in family structure have combined with other developments, notably rising unemployment and inequality, to produce a steep rise in child poverty rates between the mid-1960s and the mid-1990s", says the report.

Fertility rates are falling throughout the world, which allows more women to enter the labour market. However, largely because of falling fertility rates, the population is ageing rapidly in most parts of the world. This is having a major impact on the ratio of working age generation to retired segments of the population.

The report outlines various measures designed to improve income security for women:

• practical measures (maternity benefits, child care facilities, parental leave) that help men and women combine paid employment and child rearing and that support the access of women to paid work;

• the extension of compulsory social security to all employees including the categories in which women are heavily represented (e.g. domestic and part-time workers);

• the recognition of unpaid child rearing work through the award of credits under contributory systems or through the provision of universal benefits.

The lack of unemployment insurance protection

Developed countries - In the top 14 countries listed previously, unemployment protection consists of various layers of benefits. The first and most important one consists of unemployment insurance benefits paid during the initial period following the loss of a job, with average net replacement rates of more than 60% of national average earnings. This rate is significantly higher than in those countries belonging to the next category.

Most countries with a high-level system have a second layer of unemployment benefits, usually called unemployment assistance. This layer covers workers who have exhausted their entitlements to unemployment insurance and provides them with a grace period before they come within the purview of less generous social assistance schemes.

Almost all OECD (Organization of Economic Cooperation and Development) countries in the 1990s reduced the protection provided by their unemployment benefit systems. Eligibility rules have been tightened and the duration of benefits and replacement rates have been reduced in nearly all European countries.

In a trend sometimes known as "workfare", many Western countries have made benefits conditional on participation in training, the acceptance of jobs deemed suitable by the unemployment benefits administration or on demonstrably intensive job-search activities. Efforts have also been intensified, through active labour market policies, to get the unemployed back to work.

The report suggests that the provision of unemployment benefits should be closely coordinated with labour market policies. It also pleads for extending the coverage of unemployment benefits, which would provide income security to larger groups of unemployed and have a positive effect on labour market flexibility.

Developing countries - Workers who are fortunate enough to be covered by unemployment benefits are mainly concentrated in industrialized countries, the report says. But for those who work in the rural or urban informal sectors in developing countries - including 750 to 900 million underemployed workers - hardly any unemployment protection exists at all.

The ILO says that these groups of workers should be assisted through employment in labour-intensive infrastructure programmes - "feeder roads, land reclamation, minor dams, wells and irrigation systems, drainage and sewerage, schools and health centres". Employment provided under such programmes "can be organized so that workers can obtain an employment guarantee for a number of days per year", argues the ILO report.

The scale of such programmes "can be compelling", says the report. In India, employment provided under the Jawahar Rojgar Yojuna (income-earning) programme "had reached 1 billion work-days by 1995, covering 123 of the country's 350 under-developed districts". Similar programmes operate in Bangladesh, Ghana and Madagascar and, on a smaller scale, in Bolivia, Chile and Honduras.

ILO-supported employment-intensive programmes currently exist in Botswana, Kenya, the United Republic of Tanzania and South Africa. Others, in French and Portuguese speaking African countries, receive financial support from the World Bank.

Central and Eastern Europe - For most countries in Central and Eastern Europe, unemployment as such was virtually unknown prior to the collapse of State-controlled economies in 1989. In the early years of the transition period when unemployment was still low, many countries in the region established "funds that provided unemployment benefits and labour market support". But rising unemployment soon put these systems under strain in Bulgaria, Hungary, Poland and Slovakia "leading to tighter eligibility rules, lower levels of replacement, shorter duration of benefits and lower beneficiary rates". This, says the report, "has led to the growing impoverishment of those who are without work".

Throughout the region, "not more than half of the unemployed receive either unemployment benefits or social assistance", the report says. Between 1991 and 1995, according to a study cited in the report, "the unemployment beneficiary rate dropped from around 80% to less than 40% in Hungary, from 75 to 55% in Poland, and from 82 to 27% in Slovakia".

In the face of continuing economic difficulties, the early retirement and disability schemes once favoured in the region "are not the answer" stresses the report, adding that "both instruments cost more than unemployment benefit schemes in the long run and deflect employees from productive work".

Employment protection legislation in Central and Eastern European countries remains generally strong "mainly because of their socialist past". But, says the report, "the situation is changing, in some countries quite markedly. Laws are being modified to relax the procedures for hiring and firing". Enforcement of protective legislation "is often lax in the quickly growing private sector where unions are weak and many workers do not know their rights".

Latin America and the Caribbean - Most countries in Latin America "rely on termination compensation schemes", paying lump-sum benefits only, "to help tide unemployed workers over spells of unemployment". Unemployment insurance plans, in most cases complementary to severance programmes, have been introduced in recent years but entitlement to them remains "very restrictive" says the report. The most vulnerable wage earners - construction, domestic, agricultural and young workers - are usually excluded. "In Mexico, the scheme is limited to workers between 60 and 64 years of age", the report says.

Benefit replacement rates in the region range from 40 to 80% of earnings. Argentina and Chile pay "benefits which decline in steps, according to the length of the unemployment spell" with benefits extended from as little as four months to a maximum of one year.

In recent years, increasing emphasis has been placed on developing employment services for the unemployed by improving the flow of information on vacancies and skill shortages, facilitating worker mobility, managing training programmes and providing job subsidies for the unemployed. Countries which have introduced such active labour market policies in the 1990s include Argentina, Barbados, Brazil, Mexico, Peru and Uruguay.

Asia - As of 1998, only four Asian economies - China, Mongolia, the Republic of Korea and Hong Kong, China - "had any form of unemployment benefit scheme", says the ILO report. Benefit rates are generally modest. Coverage is comprehensive in Hong Kong only. In the Republic of Korea, "half of all employees are covered" while "elsewhere, coverage extends only to a minority of formal sector employees".

In Bangladesh, India and Pakistan, employer liability legislation require severance or retrenchment payments on termination of employment, but "only a small minority of the working population, i.e., from larger companies in the formal sector, are effectively covered".

In the Republic of Korea, unemployment insurance programmes, which had originally been established only in 1995, were rapidly expanded in 1998 in response to the massive increase in unemployment resulting from the Asian financial crisis. This expansion "was part of a quid pro quo conceded by government and employers' organizations in order to obtain the agreement of workers' organizations to legislative changes designed to facilitate lay-offs in specified circumstances", the report says. Unemployment benefits are fixed at 50% of the worker's earnings during the month prior to dismissal, but never less than 70% of the minimum wage. How long they last depends on age at dismissal and length of the period ensured.

"The recent financial crisis has made it clear that unemployment insurance schemes could play a substantial role in coping with the unacceptable levels of hardship caused by rapidly escalating unemployment", the report says.

Health care

Mortality rates are higher for the poor than for the rich at all ages, but that differential is particularly high during infancy and childhood. "From 0 to 4 years mortality in the 20% poorest countries of the world is nine times higher than for the rich, and for those aged 5 to 14 it is ten times higher", says the report.

The availability of adequate preventive and curative care is vital to ensure that workers are fit enough to earn a decent living. And it is the function of the health care financing system to ensure that the large and unpredictable costs of health care do not fall directly on the budgets of individual households. Many workers, particularly those who are outside regular wage employment, do not have any satisfactory health care coverage.

In low-income countries of Sub-Saharan Africa and South Asia, micro-insurance schemes for health care are being developed to bring the advantages of risk-pooling to people who are otherwise unprotected. The development of these schemes is highly dependent at the present time on support from governments, NGOs and international organizations, such as WHO and the ILO. They contribute, through popular participation in their setting up and in their management, to the social and political inclusion of the excluded.

However, small-scale financing systems are not likely to be the only answer to the key problem of adequate access to health care. Most industrialized countries have introduced social health insurance (or national health services), which initially only covered formal sector workers, but were then extended to lower paid workers, farmers and self-employed people. Most developing countries are still in the first phase of social health insurance coverage.

As the formalization of the labour force is a long process and may in fact never be completed, many governments in developing countries will have to use a variety of health financing mechanisms to achieve their policy goals. "What mix they use - public, private, cooperative or grass-roots - is of secondary importance so long as the mix as a whole can really achieve universal (health care) coverage", says the report.

Old Age and Survivors' Pensions

The report says that many developing countries only recently began to develop pension systems, and some nations still have not instituted any scheme to protect retired workers.

In many parts of sub-Saharan Africa and parts of Latin America and Asia, coverage is lower than 10% of the labour force. The report adds that old age still spells insecurity for certain groups of the population in the industrialized countries.

People who have worked in the informal sector, predominantly women, are likely to have very low incomes in old age and become dependent on public assistance.

"It is therefore clear that, in spite of their impressive achievements, pension systems still have much unfinished business", the report says. "At the same time, they need to adapt to increasing life expectancy and to changes in labour markets and gender roles."

It concludes that "contributory social security schemes remain the instrument best suited as the main source of retirement income for workers in the vast majority of countries". However, it says the main priorities need to be increasing pension insurance coverage and improving governance.

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