A Primer on Unemployment Insurance

Dr David Law
Insights Newsletter
10 September, 2021

Work is underway to design an unemployment insurance (UI) scheme for New Zealand. Details are limited, but a more complete policy proposal for consultation is expected later this year.

In the meantime, you may be wondering what UI is, and is not.

Programmes that offer financial support for people who are unemployed while they search for a job are common worldwide. All OECD countries, including New Zealand with Jobseeker Support, have them in one form or another. Unemployment insurance is but one way to support those in unemployment.

So what features might a typical UI system have?

UI benefits are individual specific and tied to past earnings. An individual receives a given share of what they earned when they were employed – the replacement rate. This means some people receive more than others.

For example, assuming an initial replacement rate of 80% of gross income, an individual who had been earning $60,000 per year would receive a monthly benefit of $4,000 from unemployment insurance before tax. On the other hand, someone who had been earning $120,000 per year would receive a monthly benefit of $8,000.

Support is time limited. There is a maximum duration for which UI benefits will be paid – the potential benefit duration.

There are eligibility criteria to meet. Minimum previous work experience or contributions to the UI system are common. The reason for unemployment can be a deciding factor – redundancy will certainly mean one qualifies for UI benefits but voluntary resignation may not.

While receiving benefits, people must be ready and available to work. Monitoring of job search activities is also common.

Participation in UI programmes is compulsory for most people and you should expect to pay. They are typically funded through taxes levied on both employers and employees in equal measure and are not cheap. Top ups from general taxation are also common.

And what is UI not?

Despite the name it is not insurance. At least, UI has virtually nothing to do with actuarially fair insurance. Workers and firms individual risk profiles with respect to unemployment are seldom accounted for.

The term insurance is used because benefits are conditional on an event occurring. Welfare programmes, on the other hand, usually focus more on need and are means tested in some way.

Finally, unemployment insurance is not designed as an instrument for income redistribution. Although some benefits do go to poorer households, most tend to go to middle- and higher-income households, particularly once lifetime income is considered.

The exact design of unemployment insurance programmes varies greatly across countries, but there are many similarities. There are also common pitfalls, which we’ll discuss over the coming weeks.

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