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Employment and Unemployment - Part IV

Sam Vaknin, Ph.D. - 7/20/2006

III. The Solutions

IIIa. Tweaking Unemployment Benefits

Unemployment benefits provide a strong disincentive to work and, if too generous, may become self-perpetuating. Ideally, unemployment benefits should be means tested and limited in time, should decrease gradually and should be withheld from school dropouts, those who never held a job, and, arguably, as is the case in some countries, women after childbearing. In the USA, unemployment benefits are not available to farm workers, domestic servants, the briefly employed, government workers and the self- employed.

Copious research demonstrates that, to be effective, unemployment benefits should not exceed short-term sickness benefits (as they do in Canada, Denmark, and the Netherlands). Optimally, they should be lower (as they are in Greece, Germany and Hungary). Where sickness benefits are earnings-related, unemployment benefits should be flat (as is the case in Bulgaria and Italy). In Australia and New Zealand, both sickness benefits and unemployment benefits are means tested. Unemployment benefits should not be higher than 40% of one's net average monthly wage (the "replacement rate").

Most unemployment benefits are limited in time. In Bulgaria, to 13 weeks, in Israel, Hungary, Italy and the Netherlands to 6 months and in France, Germany, Luxemburg and the United Kingdom - to 12 months. Only Belgium offered time-unlimited unemployment benefits. In most countries, once unemployment benefits end - social welfare payments commence, though they are much lower (to encourage people to find work).

In many countries in transition (e.g., in Macedonia), the unemployed are eligible to receive health and pension benefits upon registration. This - besides being an enormous drain of state finances - encourages people to register as unemployed even if they are not and distorts the true picture.

Some countries, mainly in Central Europe, attempt to provide lump sum block grants to municipalities and to allow them to determine eligibility, to run their own employment-enhancement programs, and to establish job training and child care centers. Workers made redundant can choose to either receive a lump sum or be eligible for unemployment benefits.

A third approach involves the formation of private unemployment, disability, and life, or health insurance and savings plans to supplement or even replace the benefits offered by the relevant state agencies.

An intriguing solution is the municipal "voucher communities" of unemployed workers, who trade goods and services among themselves (in the UK, in Australia, and in Canada). They use a form of "internal money" - a voucher. Thus, an unemployed electrician exchanges his services with an unemployed teacher who, in return tutors the electrician's off-spring. The unemployed are allowed to use voucher money to pay for certain public goods and services (such as health and education). Voucher money cannot be redeemed or converted to real money - so it has no inflationary or fiscal effects, though it does increase the purchasing power of the unemployed.

IIIb. Enhancing Employability

In most such schemes, the state participates in the wage costs of newly hired formerly unemployed workers - more with every year the person remains employed. Employers usually undertake to continue to employ the worker after the state subsidy is over. Another ploy is linking the size of investment incentives (including tax holidays) to the potential increase in employment deriving from an investment project. Using these methods, Israel succeeded to absorb more than 400,000 working age immigrants from Russia in the space of 5 years (1989-1994) - while reducing its unemployment rate.

IIIc. Encouraging Labour Mobility

Workers are encouraged to respond promptly and positively to employment signals, even if it means relocating. In many countries, a worker is obliged to accept any job on offer in a radius of 100 km from the worker's place of residence on pain of losing his or her unemployment benefits. Many governments (e.g., Israel, Yugoslavia, Russia, Canada, Australia) offer the relocating worker financial and logistical assistance as well as monetary and non-monetary incentives.

The EU is considering to introduce standard fixed term labour contracts. They would reduce the insupportable costs and simplify the red tape now involved in hiring and firing. The only country to buck the trend is Germany. It is looking to equate the rights of part time workers and full time ones. Similar ideas are debated in Britain. In France and most countries in Central and Eastern Europe, to dismiss a worker, the employer has to show that it has restricted hiring, applied workforce attrition, and reduced overall overtime. The EU's "social chapters" - now on of every member's law books - provides sacked employees with recourse to domestic and European courts against their employers. In other parts of the world, the two parties are subject to conciliation, mediation, or arbitration.

IIId. Reforming the Minimum Wage

Minimum wage hinders the formation of new workplaces - and yet almost all countries have it. Both the USA and the UK have just increased it. Many are considering a scaled minimum wage, age-related, means tested, and skills-dependent.

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