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Unemployment Support: An Introduction

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Abstract

By Anand Sahasranaman, IFMR Finance Foundation

This is the first post in the Unemployment Support in India series. In this series, we will explore the unemployment support mechanisms in India today; use comparative case studies of national experiences in Eastern Europe, South East Asia, and Latin America to throw light on those aspects in India that are lacking; and explore possible ways forward for a comprehensive program of unemployment assistance.

Social Security is widely seen as a fundamental building block of a just and equitable society. While ideas of welfare, pension and charity have been with us since the times of the earliest civilizations, the modern concept of social security can arguably trace its origins to the aftermath of the industrial revolution. The profound changes in social and economic structures wrought by the industrial revolution created the environment for the development of organised systems of welfare provision spearheaded by the state.

The International Labour Organisation1 defines “social security” as comprising of nine elements: medical benefits, sickness benefits, unemployment benefits, old-age support, employment injury support, family support, maternity benefits, invalidity benefits and survivor’s benefits. As per this definition, unemployment support or benefit is a core component of a well-functioning social security system.

Unemployment benefits enable households to smooth consumption at times of job-related distress, which is especially critical for middle and low income households who may otherwise slip into poverty. Unemployment benefits could also accelerate economic recovery by boosting domestic demand for goods and services.

What does “unemployment” mean? The definition of this term is critical in determining eligibility for unemployment programs and products. Okochi (1952)2 stresses three aspects of unemployment: that it denotes a worker who has no means of production and has lost her job; that the unemployed worker retains her willingness to work; and that the worker remains unemployed if she does not find a job that is appropriate for his skills and ability. Self-employed workers therefore fall outside the purview of unemployment related social security policy and their problems of poverty or underemployment should be tackled by other industrial or educational policies3.

In general, we find that unemployment benefit programs under the social security framework consist of ‘active’ and ‘passive’ policy options to provide support to those who are without a job. ‘Passive’ policies aim to provide temporary income support for the unemployed – severance pay, unemployment insurance, and unemployment assistance. ‘Active’ policies involve support to unemployed to enable transition to new employment – work programs, career counselling and training4.

Labour law could require severance pay for the employee upon termination of work contract. Unemployment Insurance Programs involve contributions from employer, employee and in some cases, government, and provide pay-outs for a defined duration upon unemployment. Unemployment Insurance Savings Accounts (UISA) are private savings accounts that workers can draw on in case of unemployment and they generally contain no risk-pooling mechanisms. Unemployment Assistance provides for means-based benefits for those in greatest need. Finally, Work Programs are designed to select the neediest households at minimum wage in exchange for the creation of public works.

Most countries have some combination of active and passive market policies, which are largely dependent on their political philosophies and labour market structures. A country like India, where 93% of the workforce is in the informal sector5 may well need a vastly different approach to unemployment support than western economies, where the labour markets are predominantly formal. These structural characteristics are critical both to understanding the rationale for current strategies for unemployment assistance in India and gaps in the present design. Additionally, lessons from global experience in unemployment support mechanisms will provide us useful pointers to alternate approaches and frameworks, which could be appropriately adopted to the Indian context .

– ILO Social Security (Minimum Standards) Convention 1962
– Okochi, Kazuo, “Overview” Okochi (ed.), Unemployment, Kawade Shobo, 1952
– Kamimura, Yasuhiro, “Employment Structure and Unemployment Insurance in East Asia: Establishing Social Protection for Inclusive and Sustainable Growth
– Berg, Janine and Matthew Salerno, “The Origins of Unemployment Insurance: Lessons for Developing Countries” in Janine Berg and David Kucera (eds.), In Defense of Labour Market Institutions: Cultivating Justice in the Developing World, Palgrave Macmillan, 2008
– Based on Ajaya Kumar Naik’s paper titled “Informal Sector and Informal Workers in India”

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3 Responses

  1. Discussing unemployment benefits in the Indian economy might be premature. 93% in the unorganized sector many of whom do multiple part time jobs, the govt running huge fiscal deficits linked to several welfare schemes as well and bordering on broke (in the case of state governments). Looking a thrift cum insurance products is one way, but places the onus back on the earnings potential of the individual. Thrift groups effectively are also the social net for unemployment (read that as non-earning periods).

  2. This is a very interesting blog series.

    Some things I wondered about when I read this:

    1. Does India have a ‘social security’ fiscal over hang – (or not,
    possibly from doing too little)? May be interesting to review in the context of
    all the discussion about managing the fiscal deficit to avoid a rating
    downgrade

    2. Would an approach like what Singapore has – where people are
    forced to lock away money for their contingencies and retirement and only touch
    some of it for children’s education or health emergencies – work for a section
    of the middle income employed population where the savings rate is
    traditionally higher than western economies? Would this free up resources to
    tackle the issues of unemployment support for the majority low income
    households who have much more uncertain livelihoods?

    3. How is the workforce incentivised to find a job – in the US for
    e.g. there is a time after which the unemployment benefit
    runs out, there is a process of making sure the unemployed are actively looking
    for a job etc.

    Look forward to further posts!

  3. Thanks Pras and Bama for your comments.

    Our objective as part of this series is to analytically assess the Indian approach to unemployment support. As this post hints and future posts will elaborate, there are many different mechanisms adopted by countries across the world to provide unemployment support. While some of this is in the form of means-based cash benefits and unemployment insurance, for countries with a large informal population, work programs – the NREGA in the Indian context – tend to be used widely. We will study the Indian experience in a lot of detail as part of this series.

    The nature of interventions appropriate for India going forward will be determined by the nature of our labour force, as well as fiscal constraints. In this context, as Bama mentions, we need to think through and design insurance mechanisms that incorporate self contributions to the extent possible for both formal and informal workers. The design of these mechanisms must address the moral hazard problem, and again we have pointers from other national experiences that may be useful in this regard.

    We hope that as this series progresses and we study the experiences of other countries and shine a torch on India’s own experience, we will be able to meaningfully address these and other questions on a framework for unemployment support in India.

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