Ahead of the annual Budget Debate, LINDA LIM explains a concept that is familiar to other developed countries though rarely used by Singapore policymakers even when considering similar approaches.

UNEMPLOYMENT INSURANCE

Unemployment insurance is the name given to transfer payments that governments make to working individuals who lose their jobs due to no fault of their own, such as company layoffs or shutdowns in a recession. All developed countries (except Singapore) have such social programmes. They are funded by tax revenues that may include levies on employers and pay-ins by employees when working. 

The aim is to limit the hardship suffered by unemployed individuals and their families from drops in income, consumption and welfare due to involuntary job loss.  As an automatic “entitlement” for eligible workers, unemployment insurance also saves on costs and delays from bureaucratic discretion, and serves as an automatic “stabiliser”, helping to maintain aggregate demand. It can thus reduce the severity of a recession, when large numbers of workers are retrenched. It also gives workers and their families some financial certainty as they transition to new employment.

Unemployment insurance is opposed by those who believe that it disincentivises work by discouraging laid-off workers from promptly seeking re-employment.  But this risk can easily be mitigated by proper programme design.  Unemployment payments are usually less than what a particular individual could earn in employment, and are available only for a limited time period (say, three or six months), over which the sums paid may fall (so you get less in the sixth month than the first). The extra time that these payments allow some recipients to find another job may reduce the risk of job mismatches that increase the costs to employers associated with high turnover, thus helping the labour market to function more smoothly.

Programmes typically require that workers show proof of actively looking for work while they are receiving payments. Other conditions and benefits may be attached, such as enrollment in skills training, and assistance with job search and placement.

– By Linda Lim, Professor Emerita, Stephen M. Ross School of Business, University of Michigan