Unemployment Insurance Schemes Internationally

Dr David Law
Insights Newsletter
6 August, 2021

In late May, Budget 2021 revealed that work was underway to develop an unemployment insurance scheme. This would see benefits tied to past employment and wages in some way. Details, however, are limited.

It is not immediately clear there is a problem that unemployment insurance would solve.

New Zealand has low levels of unemployment, only a small share of which is long-term. We have high labour market participation rates compared to other OECD countries. Our welfare system is well targeted by international standards.

For New Zealand, unemployment insurance is an answer to a problem that may not exist.

That aside, a look at the characteristics of unemployment insurance schemes worldwide provides context for whatever proposal is eventually served up.

The International Labour Organisation (ILO) recently compared unemployment insurance schemes in over thirty countries. The ILO looked at eligibility criteria, income replacement rates, maximum benefit duration and, of course, cost.

Over half of the countries in their sample required a minimum of twelve months of employment to be eligible. However, the requirement ranged from as high as three years of employment to as little as four months.

Average initial unemployment insurance benefits range from 30% to around 90% of previous income. The average for advanced economies was 61% and the level of benefits typically fall with unemployment duration.

The maximum duration individual recipients can claim unemployment insurance benefits was, on average, a little less than seven months in advanced economies.

All these features affect the cost of unemployment insurance, which differs widely between countries. The range is from as low as 1% of wages, to as high as 8%. The average for advanced economies is 2.6%.

Last year the Ministry of Business Innovation and Employment (MBIE) provided some initial estimates of what various unemployment insurance schemes might cost in New Zealand. Some of those estimates were for a scheme that would replace 80% of lost wages for a maximum of 12 months – very generous by international standards.

MBIE put the annual cost at a mere $0.8 to $1.3 billion with flows into unemployment of 3.3% of the workforce, which is similar to the number of new Jobseeker recipients each year. That is a cost of well below 1% of wages.

Even with higher unemployment flows of 5%, costs are only estimated to be a modest $1.3 to $2.0 billion. As a share of wages that’s only around half the international average.

If eventually we are sold one of the most generous schemes internationally, that supposedly costs relatively little, I for one, will be highly sceptical.

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