Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by governmental bodies to unemployed people. Depending on the country and the status of the person, those sums may be small, covering only basic needs, or may compensate the lost time proportionally to the previous earned salary.
Unemployment benefits are generally given only to those registering as becoming unemployed through no fault of their own, and often on conditions ensuring that they seek work.
In British English, unemployment benefits are also colloquially referred to as "the dole", or simply "benefits"; receiving benefits is informally called "being on the dole". "Dole" here is an archaic expression meaning "one's allotted portion", from the synonymous Old English word dāl.
In Australia and New Zealand, a "dole bludger" is someone on unemployment benefits who makes no effort to find work. In the United Kingdom, the equivalent word used to describe the same thing is "layabout" and in the United States, "slacker" is most commonly used to describe someone who chooses not to work for a living.
History
The first modern unemployment benefit scheme was introduced in the United Kingdom with the National Insurance Act 1911, under the Liberal Party government of H. H. Asquith. The popular measures were introduced to stave off poverty inflicted through unemployment, though they also gave the Liberal Party the added benefit of combatting the Labour Party's increasing influence among the country's working-class population. The Act gave the British working classes a contributory system of insurance against illness and unemployment. It only applied to wage earners, however, and their families and the unwaged had to rely on other sources of support, if any.The Cabinet Papers 1915–1982: National Health Insurance Act 1911. The National Archives, 2013. Retrieved 30 June 2013. Key figures in the implementation of the Act included Robert Laurie Morant and William Braithwaite.
By the time of its implementation, the benefits were criticised by Communist parties, who saw such insurance as a means to prevent workers from starting a revolution, while employers and Tories sometimes saw it as a "necessary evil".
The scheme was based on actuarial principles and was funded by fixed amounts from workers, employers, and taxpayers. It was restricted to particular industries, particularly more volatile ones like shipbuilding, and did not make provision for any dependants. After one week of unemployment, a worker was eligible to receive 7/- per week for up to 15 weeks in a year. By 1913, 2,300,000 were insured under the unemployment benefit programme.
The Unemployment Insurance Act 1920 created the dole system of payments for unemployed workers in the United Kingdom. The dole system provided 39 weeks of unemployment benefits to over 11,000,000 workers—practically the entire civilian working population except domestic service, farmworkers, railway men, and civil servants.
Unemployment benefits were introduced in Germany in 1927, and in most European countries in the period after the Second World War; with the expansion of the welfare state. Unemployment insurance in the United States originated in Wisconsin in 1932. Through the Social Security Act of 1935, the Federal government of the United States effectively encouraged the individual states to adopt unemployment insurance plans.
International Labour Organization has adopted the Employment Promotion and Protection against Unemployment Convention, 1988 for promotion of employment against unemployment and social security including unemployment benefit.
Processes Eligibility criteria for unemployment benefits typically factor in the applicant's employment history and their reason for being unemployed. Once approved, there is sometimes a waiting period before being able to receive benefits. In the US, there is no waiting period on a temporary basis currently due to the COVID-19 pandemic, but in many states there is a waiting week. In Germany and Belgium, there is no waiting week. The current waiting period in Canada is seven days. Countries implement varied potential benefit duration (PBD), which is how long an individual is eligible to receive benefits. The PBD may be a sliding scale function of the applicant's past employment history and age, or it may be a set length for all applicants. In Argentina, for example, six months of work history results in a PBD of two months, while 36 months or more of work history can result in a PBD of a full year, with an extra six months of PBD to applicants over the age of 45.
Most countries calculate the amount of unemployment benefit as a percentage of the applicant's former income. A typical replacement percentage is 50–65%. Some countries offer much higher levels of wage replacement, such as the Netherlands (75%), Luxembourg (80%), and Denmark (90%). There are often caps on the maximum benefit level, ranging from 33% of a country's average wage (Turkey) to 227% of its average wage (France). The average maximum benefit level is 77% among OECD countries. Most benefit payments are constant over the course of the PBD, though countries such as the Netherlands, Sweden, Hungary, Slovenia, Spain, and Italy have a declining benefit path, in which the wage replacement percentage decreases over time.
Most countries require those receiving unemployment benefits to search for a new job, and can require documentation of job search activities. Benefits may be cut if the applicant does not fulfill the search requirements, or turns down a job offer deemed acceptable by the unemployment benefits agency. Agencies may also provide resources, training, or education for job seekers. Some countries allow beneficiaries to accept part-time jobs without losing benefit eligibility, which can counter the disincentive of unemployment benefits to accepting jobs that do not fully replace the former wages.
Unemployment benefits are typically funded by payroll taxes on employers and employees. This can be supplemented by the government's general tax revenue, which can occur periodically or in response to economic downturn. Contribution rates are usually between 1 and 3% of gross earnings, and are usually split between the employer and employee.
Economic rationale and issues
Macroeconomic effects To Keynesians, unemployment insurance acts as an automatic stabilizer. Unemployment benefits can result in redistribution between groups.
Private unemployment insurance Adverse selection causes private insurance agencies to set high premiums for the insurance because there is a high likelihood they will have to make payments to the policyholder. High premiums work to exclude many individuals who otherwise might purchase the insurance. "A compulsory government program avoids the adverse selection problem."
Moral hazard "At the same time, those workers who managed to obtain insurance might experience more unemployment otherwise would have been the case." The private insurance company would have to determine whether the employee is unemployed through no fault of their own, which is difficult to determine. Incorrect determinations could result in the payout of significant amounts for fraudulent claims or alternately failure to pay legitimate claims. This leads to the rationale that if government could solve either problem that government intervention would increase efficiency. The moral hazard argument against unemployment insurance is based on the idea that such insurance would increase the risk, or 'hazard,' that the insured worker would engage in activity that is undesirable, or 'immoral,' from the insurer's point of view. That is, unemployment insurance could create longer or more frequent episodes of unemployment than would otherwise occur. This could occur if workers partially cushioned against periods of unemployment are more likely to accept jobs that have a higher risk of unemployment, or spend more time searching for a new job after becoming unemployed.
Unemployment Insurance Savings Accounts can protect against unemployment effects with less of the adverse incentives.
Unemployment benefits effect on unemployment In the Great Recession, the "moral hazard" issue of whether unemployment insurance—and specifically extending benefits past the maximum 99 weeks—significantly encourages unemployment by discouraging workers from finding and taking jobs was expressed by Republican legislators. Conservative economist Robert Barro found that benefits raised the unemployment rate 2%.Robert Barro, "The Folly of Subsidizing Unemployment", The Wall Street Journal, 30 August 2010. Disagreeing with Barro's study were Berkeley economist Jesse Rothstein, who found the "vast majority" of unemployment was due to "demand shocks" not "[unemployment insurance]-induced supply reductions."Would Extending Unemployment Benefits Increase Unemployment?. Simon van Zuylen-Wood. 30 November 2011Unemployment Insurance and Job Search in the Great Recession. Jesse Rothstein 9 September 2011 A study by Rothstein of extensions of unemployment insurance to 99 weeks during the Great Recession to test the hypothesis that unemployment insurance discourages people from seeking jobs found the overall effect of UI on unemployment was to raise it by no more than one-tenth of 1%.The Blind Spot in Romney's Economic Plan Jonathan Cohn| tnr.com| 29 April 2012
A November 2011 report by the Congressional Budget Office found that even if unemployment benefits convince some unemployed to ignore job openings, these openings were quickly filled by new entrants into the labour market.Policies for Increasing Economic Growth and Employment cbo.gov 15 November 2011 A survey of studies on unemployment insurance's effect on employment by the Political Economy Research Institute found that unemployed who collected benefits did not find themselves out of work longer than those who did not have unemployment benefits; and that unemployed workers did not search for work more or reduce their wage expectations once their benefits ran out.http://www.peri.umass.edu/236/hash/10dbb94dafa96d904bcaf546ee3b02a2/publication/456/ Unemployment Benefits and Work Incentives: The U.S. Labor Market in the Great Recession (revised), Howell, David R.; Azizoglu, Bert M.; Political Economy Research Institute, 21 Mar 2011
One concern over unemployment insurance increasing unemployment is based on experience rating benefit uses which can sometimes be imperfect. That is, the cost to the employer in increased taxes is less than the benefits that would be paid to the employee upon layoff. The firm in this instance believes that it is more cost effective to lay off the employee, causing more unemployment than under perfect experience rating.
An alternative rationale for unemployment insurance is that it may allow for improving the quality of matches between workers and firms. Marimon and Zilibotti argued that although a more generous unemployment benefit system may indeed increase the unemployment rate, it may also help improve the average match quality. A similar point is made by Mazur who analyzed the welfare and inequality effects of a policy reform giving entitlement for unemployment insurance to quitters. Arash Nekoei and Andrea Weber present empirical evidence from Austria that extending unemployment benefit duration raises wages by improving reemployment firm quality. Similarly, Tatsiramos studied data from European countries and found that although unemployment insurance does increase unemployment duration, the duration of subsequent employment tends to be longer (suggesting better match quality).