Most countries reformed their unemployment benefit systems with a view to strengthen the automatic stabilisers and support aggregated demand. Loosening the eligibility rules to increase the coverage of unemployment benefits, most notably for short-tenured displaced workers, increasing the replacement rates at the beginning of the unemployment spell and extending benefit duration were among the main measures that contributed to support income and consumption of jobless people. Countries with more generous unemployment benefits made fewer adjustments to the parameters of the system than countries with less generous benefits (Table II.4.1).
Regarding eligibility, several countries extended the coverage of unemployment benefits to workers with short-employment history, in most cases on a permanent basis. (35) Several countries took measures to reduce the impact of the crisis on future entitlements, inter alia counting the period of parental leave in the employment record (Slovakia), removing the waiting period requirement for receiving benefits (Spain until 2009 and the UK) or temporarily doubling the contribution period in the unemployment insurance fund (Sweden and the UK). To extend coverage, individuals with short spells of unemployment were allowed in Portugal, Spain and Slovakia to receive benefits without loosing the eligibility to benefits for frequently loosing a job.
Unemployment benefits were raised, in particular at the beginning of the unemployment spell in Belgium, the Netherlands, Bulgaria, Czech Republic and Poland (Graph II.4.1). Unemployment benefits were also increased in Latvia and Finland, regardless of the length of the unemployment spell. To avoid a fall of benefits following the downward wage adjustment due to the crisis, ad hoc adjustments were made in Latvia
(35) The work requirement for eligibility to unemployment
benefit was reduced in Finland (from 43 to 34 weeks during the preceding 28 months), in Portugal (from 450 to 365 days during the preceding 24 months), in France (from 6 months during the last 22 months to 4 months during the last 28 months), in Latvia (from 9 months during the previous 12 months to 12 months during the previous 18 months) and in Slovenia (from 12 months during the last 18 months to 9 months during the last 24 months from 2011 onwards).
and Finland to the reference wage used to compute the unemployment benefits. (36)
Graph II.4.1: Change in net replacement rates
(unemployment benefits only) in the first year of unemployment over the period 2007 and 2009 -10% -5% 0% 5% 10% 15% 20% 25%
EL IT BE SK SI DKUK LT LV PL NL DE AT PT FR CYMT FI IE EE ESHU LU CZ SE (1) For the explanation of net replacement rates see the comment to the Graph II.3.1. The net replacement rates may change when unemployment benefits are modified or when taxes on earnings are modified more or less than taxes on benefits.
Source: Commission services; Joint European Commission- OECD project, using OECD Tax-Benefits models.
Owing to the leveraged fiscal position, Lithuania reduced the amount of maximum benefit but increased the fixed part of UI benefits. Lump sum payments were given to the unemployed not qualifying for unemployment benefits (in Italy a one-off payment of 30% of previous income with a ceiling of 4000 € was given to displaced workers previously employed with a project contract work)
or having exhausted their benefit entitlements (in Greece, France and Spain).
The duration of the benefits was raised in Romania, Latvia and Finland – Graph II.4.2 and Graph II.4.3. (37) Conversely, the duration was
(36) In Finland, unemployment benefits are based on pre-crisis
salaries; in Latvia, the period relevant for the calculation of unemployment benefits was extended from 6 to 12 months. In addition, in Finland, the increase in the replacement rate is small as it concerns only those on the "Change Security" system. In situations of mass dismissals and company closure, this system gives the right to the employees to individual programmes or re-employment or re-education, free time for job searching and counselling while still on the job and higher levels of benefits in the transition period. (37) In 2009, the duration of unemployment benefits was
increased by 3 months for some categories of the unemployed in Latvia to 9 months for all unemployed regardless of the insurance period in Latvia (previously duration was dependent upon the social insurance record).
reduced in few countries. For example in Ireland it declined from 15 to 12 months (from 12 to 9 months) for those with at least (less than) 260 days of paid contributions. In France, duration was made proportional to the affiliation period (i.e. the period of contribution required for eligibility), which was reduced to increase the coverage of precarious workers. (38) Duration was also shortened in the Czech Republic and Poland; while to stabilise incomes of displaced workers the initial level of UI benefits was increased.
In Lithuania UI benefits were extended by 2 months in the municipalities particularly hit by recession compared to the national average. A change in the unemployment duration in the Netherlands, Sweden and Italy was not related to the crisis.
(38) As a result, UI benefits can now be granted in France only
for 4 months (previously 7 months).
Graph II.4.2: Change in the maximum unemployment insurance benefits duration over the period 2007 and 2009 -25 -20 -15 -10 -5 0 5 RO IT CZ IE SE NL In months
Source: Commission services. Joint European Commission- OECD project, using OECD Tax-Benefits models.
Table II.4.1: Policy measures in EU countries, 2008Q2 – February 2010
Policy measure Generosity Policy measure Generosity Policy measure Generosity Policy measure Generosity BE 34,13 34,13 92 x + DK 27,23 27,23 110 PT 23,26 27,15 67 x + FR 15,29 16,71 103 x + x + NL 13,15 13,15 126 x + ES 13,04 18,03 70 x + x + FI 11,96 23,97 89 x +/- x + x + LU 10,18 10,18 50 SE 7,31 12,08 154 x + DE 7,13 7,13 133 EE 5,43 6,43 65 SI 5,03 5,03 25 x + AT 4,94 37,47 90 LV 4,77 4,77 52 x + x + x + IE 4,28 21,12 94 x - x - IT 3,96 3,96 -- x +/- SK 3,87 3,87 33 x + PL 3,59 3,59 14 x - x + HU 3,17 3,89 33 CY 2,99 2,99 78 LT 2,99 2,99 27 x - x + x +/- GR 2,93 4,15 55 x + x + CZ 2,85 2,85 30 x - x + MT 1,90 21,89 155 UK 0,74 8,12 100 x + BG 22 x + RO 42 x +
UI and UB generosity for a single average wage person (22 years of
contribution history) UB generosity over the unemployment spell, UB=UI+UA (a) UB coverage UI duration
Policy measures as regards UB coverage and generosity of UI benefits + lump sum payments to unemployed
Replacement rate Lump sum payments to unemployed UI generosity over the unemployment spell (a) UB coverage (b)
Source: Source: Commission services, Joint European Commission-OECD project, using OECD Tax-Benefits models; EC/OECD Questionnaire on Employment and Social Policy in the Economic downturn; '"+" indicates an increase in generosity; "-" indicates a reduction in generosity; "+/-" indicates that both measures to increase and reduce generosity were adopted; (a) UB generosity and UI generosity over the unemployment spell are calculated as presented in the Table 1, though for 2007. Countries are ranked by UI generosity over the unemployment spell. (b) UB coverage is calculated as a ratio of
unemployment benefit recipients to total number of registered unemployed persons. UB coverage may exceed 100 for some countries as part-time workers (considered as employed) may receive unemployment benefits and some persons may continue receiving unemployment benefits despite being de-registered as unemployed (in particular older persons).
European Commission
Labour Market Developments in Europe, 2011
Graph II.4.3: Change in the minimum unemployment insurance benefits duration over the period 2007 and 2009 -4 -3 -2 -1 0 1 2 3 4 5 6 LV RO IT CZ IE FR NL In months
Source: Commission services. Joint European Commission- OECD project, using OECD Tax-Benefits models.
Only few countries accompanied an increase in the generosity of benefits with stricter conditionalities to avoid the build up of either benefit dependency or incentives to early retirement. For example, readiness to work or training activities was introduced in Italy among the conditionalities for unemployment benefits, the waiting period for unemployment benefits was prolonged in Lithuania for months during which severance pay is paid, and the minimum age for receiving additional days of benefits after the exhaustion of standard benefits was increased permanently from 59 to 60 years in Finland. Only, Ireland restricted eligibility criteria for new UI benefit claimants.
replacement rates, benefit duration…), composition by instruments (unemployment insurance, unemployment assistance), and design (modulation of benefits over the unemployment spell, link of benefits to past earnings…). Those differences are related to the overall labour market and welfare policy framework and to economic, fiscal and employment conditions.
Unemployment benefits involve a trade-off between income smoothing and economic efficiency which depends, however, on the features of the unemployment benefit system and on the implementation of flanking policies. The positive stabilisation effects of unemployment benefits may imply weakened incentives in the labour market. A series of reforms can help to ease this trade off, notably by re-designing the level and time profile of unemployment benefit replacement rates in such a way to tackle the issue of unemployment traps and benefit dependence. Activation policies aimed at strengthening job search efforts for benefit recipients can also contribute to ease the above trade-off.
As stressed in the European Commission’s 2011 Annual Growth Survey, ensuring a full use of the labour potential will be a key priority looking forward. In response to the crisis, the EERP recommended emergency labour market support measures and was successful in containing excessive labour shedding and sustaining the income and consumption of the unemployed, thus helping to contain the magnitude of the recession. Looking forward, priorities are changing. Although the economic outlook is becoming increasingly differentiated across countries, and therefore priority policy actions, there are a series of common elements. First, with growth resuming, the focus of budgetary policies is increasingly shifted to stabilising public finances. Second, macro and structural policies need to be conducive to a sustainable correction of the macroeconomic imbalances and to the stabilisation of financial markets. Third, it needs to be avoided that the past recession creates permanent effects on the growth potential. To this end, ensuring a full use of the labour potential is a key priority.
better adapting to the cycle. The Annual Growth Survey calls for reforms oriented towards: (i) design of unemployment benefits that rewards the unemployed going back to work or self- employment, including effective activation policies (ii) tax and benefit systems ensuring that work pays; (iii) unemployment insurance systems that adequately adapt to economic conditions. The Joint Employment Report also stresses the need of unemployment benefit systems that provide the right incentives to work, while ensuring income support and adaptability to the business cycle. Some examples of past reforms in unemployment benefit systems in EU counties show that these can be effective in tackling incentives.
Most concrete options for reforms ahead fall under a few headings, but the associated trade-offs depend crucially on the specific policy context of countries and their economic and employment situation.
• Unemployment insurance schemes need to be adapted to the economic cycle. A key choice is whether to move towards systems that adapt automatically the eligibility to benefits and their generosity on the basis of variables reflecting the cyclical evolution of the labour market or to keep those adaptations discretionary. The advantages in terms of timeliness, predictability and protection from vested interests from an automatic adaptation are likely to arise mostly for those countries where such systems can be implemented in a credible and sustainable manner, in particular where there is no risk of clash with budgetary targets and where the financing, structure, and design of the unemployment insurance is expected to stay relatively stable.
• The design of unemployment benefit systems needs to address the risk of unemployment traps and benefit dependence. Reforms of this type are relevant notably for countries with poor design of unemployment benefit schemes, a serious problem of long-term unemployment, insufficient infrastructure to ensure effective activation policies over the medium term, and overarching budgetary consolidation needs.
European Commission
Labour Market Developments in Europe, 2011
• Reform action to tackle unemployment traps
needs to focus on net replacement rates. Priority should be given to the work categories at higher risk. Depending on the design of replacement rates, unemployment traps are often very high for low wage earners and in some cases when benefits are strongly linked to past income they can be high also for high wage earners.
• Reforms aimed at tackling benefit dependence
should address the duration and the time profile of benefits over the unemployment spell. In some countries the duration of unemployment insurance is overly long; in others the issue mostly pertains to the duration of unemployment assistance. Replacement rates for unemployment insurance with long duration do not fall sufficiently in some countries. In other countries, with relatively short duration of unemployment insurance, an issue of benefit dependence may arise if net benefits do not fall sufficiently when the unemployed move from unemployment insurance to unemployment assistance.
• Effective activation policies need to flank unemployment benefit systems. Only in relatively few countries legislation concerning activation policies aimed at ensuring job search efforts by the unemployed is absent or nearly absent. In most cases, increased effectiveness of activation policies necessitates improved infrastructure and implementation, including adequate staffing in Public Employment Services, profiling of benefit recipients and tailor-made job search conditionality, regular monitoring of job search, credible and proportionate sanctions for lack of job search activity or compulsory training or other ALMPs.
Other additional specific reform options include:
• Strengthening ALMPs. In countries with a quantitatively relevant and entrenched unemployment problem, governments may consider using public funds to finance policies aimed at increasing the employability of long- term unemployed and subsidising employment. Training for the re-skilling and up-skilling of the unemployed, employment subsidies and
direct job creation may contribute in this respect, subject to a regular cost-benefit assessment. This type of financing can partly be achieved by means of savings in unemployment benefits obtained by strengthening incentives during the recovery. Such strategies seem adequate for counties with a large pool of long-term unemployed, sufficient fiscal space, and insufficiently developed ALMPs.
• Reforming the funding principle of unemployment insurance schemes with a view to increasing their portability and versatility. Individualised unemployment accounts financed by employees and/or employer contributions have the potential to increase the job-to-job portability of unemployment insurance schemes and to make these schemes more fungible, since they can be used to finance not only consumption during unemployment but also training or retirement income. These options appear relevant for countries with strong need of adjustment and sectoral relocation and for countries that are still in the phase of developing their own unemployment benefit system.
• Ensuring an adequate support for the newly unemployed after the expiration of short-time working schemes currently in place. In some countries, the labour market support during the crisis came also in terms of increased use of STWs. These schemes allowed to subsidise employment while reducing hours, and to obtain a relatively contained increase in unemployment rates. They provide a temporary cushion, and their discontinuation is necessary to prevent subsidising unviable jobs and delaying labour reallocation (Arpaia et al., 2010). Most STWs are currently being discontinued as a result of recovering economic activity. In some cases, however, the termination of these schemes will result in increased job destruction. Therefore, in some countries inflows into unemployment may still be relatively high for some time and the adjustment in the generosity of eligibility rules and benefits for unemployment insurance schemes could be delayed or raised if necessary and compatible with fiscal space.