SYSTEMS AND REFORMS
IN SELECTED OECD COUNTRIES
Over the years a wide variety
of unemployment compensation systems have developed in OECD countries
to cushion the financial blow of unemployment. For example, New Zealands
unemployment compensation system is a non-contributory scheme that provides
a means-tested unemployment benefit of unlimited duration. Finland, on
the other hand, provides wage replacement protection via a three-pronged
scheme that incorporates elements of both insurance and social assistance.
Canadas unemployment insurance system lies somewhere in middle of
In recent years, many OECD
countries have introduced changes to their unemployment compensation systems.
Irrespective of the variety of schemes, the direction of reform has been
similar; governments in these countries have uniformly introduced measures
to reduce their unemployment compensation costs and, in some instances,
alleviate the adverse impact of these programs on behaviour in the labour
market. The latter is a relatively new objective for most European countries
where it has been widely believed that the extensive income protection
associated with their schemes has not contributed to high and persistent
unemployment.(1) Both of
these objectives underlie Canadas proposed reforms to unemployment
insurance. Furthermore, the proposed changes are also intended to make
unemployment insurance spending more "active." Under this proposal
the government would reallocate a substantial proportion of cost savings
to employment benefits (e.g. wage subsidies, earnings supplements, training,
etc.). The impetus for this is due, in part, to the fact that Canada spends
relatively less on "active" labour market measures than many
other OECD countries. As illustrated in Chart 1, roughly 70.9% of federal
labour market expenditures in Canada were allocated to passive uses (i.e.
income support) in 1994-95. This compares unfavourably to an average of
61.7% among the other G-7 countries and the majority of countries discussed
in this paper.
The remainder of this paper
examines the basic features of unemployment compensation systems, and
recent reforms to them, in several OECD countries, including Belgium,
Canada, Finland, France, Germany, New Zealand, Sweden, the United Kingdom
and the United States.
Unlike those in many European
countries, Belgiums unemployment compensation system consists of
a single benefit system. This system replaces the earnings of qualified
individuals who lose full-time or part-time (at least 18 hours per week)
employment.(2) To be eligible
for benefits (first claim), individuals must work a certain number of
days within a given period of time. Prior to 1994, the minimum age-related
qualification requirement ranged from 78 days of work in the past 10 months
to 624 days of work in the last 36 months prior to registering as unemployed.
In 1994, the Belgian government tightened this entrance requirement for
younger workers by establishing a uniform minimum work requirement of
312 days within the last 18 months for all workers under the age of 36.
This represents a significant increase for Belgiums youngest workers
who, prior to this change, faced a minimum qualification requirement of
78 days of work if they were under 18 and 156 days of work if they were
between 18 and 25.(3)
The duration of unemployment
benefits in Belgium is somewhat unique in that it depends on a claimants
demographic characteristics and regional location. Although often touted
as being indefinite, benefits can be terminated once claimants under the
age of 50 have received benefits for a period equal to twice the average
duration of unemployment for the individuals age, sex and region.
This suspension does not apply if an individuals household income
is below a certain threshold or if an individual is 50 years of age or
more. Once benefits end, individuals must obtain full-time employment
for a continuous period of twelve months in order to requalify. Prior
to 1994, the requalification period was six consecutive months.
The degree of income support
provided under Belgiums unemployment compensation system depends
on claim duration, family status and the number of income earners in a
family. The wage replacement rate for sole income earners with dependants
is 60% of gross maximum earnings. Single income earners (with no dependants)
are entitled to a benefit rate of 60% during the first year of unemployment
and 42% thereafter. Individuals who are not the sole earners in a family
and who do not have dependants receive 55% of gross maximum earnings during
the first year of their claim, 35% for the next three months (prior to
1994 this was six months) plus three months for each year of employment
and a flat-rate payment thereafter.
In April 1995, the Belgian
government introduced new measures for preventing long-term unemployment,
a problem facing many OECD policy-makers especially in some European countries
where the incidence of long-term unemployment is more than four times
that in Canada. Under the Belgian initiative, all fully insured individuals
below the age of 45 and in their tenth month of unemployment are required
to participate in programs designed to enhance their skills. An action
plan is developed for each claimant. Those who accept and execute their
plans have their benefits extended. Sanctions, including the suspension
of benefits, are imposed on those who wilfully fail to fulfil their action
Reducing the size of the
unemployment insurance program has been a policy objective in Canada for
some time now. The potential for a major overhaul of the program surfaced
in 1994 when the federal government launched its review of social programs.
While certain aspects of the legislative proposal currently being considered
represent a new approach, the bulk of the proposed reforms would maintain
the programs primary structure. The current weeks-based approach
for determining benefit eligibility and duration would be converted to
one based on hours (assuming a standard work week of 35 hours). New entrants
and re-entrants to the labour force would see their entrance requirement
rise to 910 hours of insurable employment (26 weeks), from 20 weeks (700
hours). Minimum insurability rules would be eliminated and the first hour
of work would be covered.
Weekly benefits would be
determined by averaging insurable earnings over a fixed, consecutive period
of time (including weeks without earnings) known as the "rate calculation
period." Claimants could see their benefit rate decline by as much
as 5 percentage points depending on their claim history ("intensity
rule").(5) In terms
of income redistribution, the bill would provide an income supplement
to claimants who have children and a low family income. Moreover, the
existing benefit repayment provision would be significantly strengthened
by lowering the income threshold at which benefits were repaid as well
as raising clawback rates depending on an individuals claim history.
Although claimants would continue to be allowed to earn up to 25% of weekly
benefits without experiencing a reduction in their benefits, the bill
would introduce, in addition, a lump-sum threshold of $50 per week for
those receiving weekly benefits below $200. The latter would effectively
raise the earnings exemption rate for claimants whose weekly benefits
are below the $200 threshold.
The proposed law would lower
and freeze maximum insurable earnings to the year 2000 as well as provide
a premium refund to eligible small businesses in 1997 and 1998. In addition,
the new insurance system would permit the program to generate and maintain
In conjunction with the
major provisions outlined above, the reconfiguration of the existing insurance
system would, in addition to continuing the National Employment Service,
provide guidelines for the delivery of employment benefits (currently
referred to as unemployment insurance developmental uses). Financial assistance
under employment benefits could include grants, contributions, loans and
vouchers. Eligibility for these benefits would be greatly expanded to
include those who had received regular benefits in the past three years
and those who had received maternity or parental benefits in the past
five years. Like the reform of unemployment insurance in 1990, the government
intends to redirect some program savings to employment benefits. By the
time the bill is fully implemented, the government expects an annual saving
of $1.9 billion. Of this, $800 million (42%) is expected to be reallocated
to employment benefits. Thus the proposed reform is expected to yield
a net reduction in spending of roughly $1.1 billion.
Throughout the period 1990-94,
Finlands economy was in recesssion and labour market conditions
deteriorated to an unprecedented degree. Today, the rate of joblessness
in Finland hovers around 20%, almost six times that of 1990.(6)
Expenditures on labour market initiatives throughout this period saw a
substantial increase, most of which can be attributed to higher "passive"
expenditures on Finlands comprehensive unemployment insurance system.
The explosive growth in unemployment compensation payments throughout
this period (e.g. from FIM 5,127 million in 1991 to FIM 15,500 million
in 1994), coupled with Finlands growing debt problems, has caused
policy-makers to retrench the level and extent of income support available
to unemployed workers.
Despite these reforms, Finlands
unemployment compensation system continues to be relatively generous.
All unemployed individuals engaged in job search are entitled to one of
three types of support: unemployment insurance, unemployment allowance
or labour market support. Under unemployment insurance, unemployed individuals
who are members of one of the 71 union-managed unemployment funds and
who have been employed in insurable employment for at least six months
in the last two years are entitled to benefits for a maximum period of
500 days.(7) Benefits consist
of a basic daily allowance (FIM 116) plus 42% of the difference between
a workers previous daily wage (up to a monthly wage of FIM 10,400
and 20% of any amount exceeding this) and the basic allowance. The effective
replacement rate is around 90% for those with monthly earnings around
FIM 5,000 and roughly 45% for those with monthly earnings around FIM 20,000.
Eligible individuals are required to serve a waiting period of five days
before receiving benefits. Claimants must be available and searching for
work and must also accept an offer to participate in a job creation or
Unemployed workers who have
not contributed to an unemployment fund and who have been employed for
at least six months in the last two years are eligible to receive a flat-rate
allowance for a maximum period of 500 days. Prior to the 1994 reform,
unemployment allowance eligibility was universal and its duration was
indefinite. In 1994, the same eligibility requirement for unemployment
benefits was extended to the unemployment allowance. Moreover, the maximum
duration of the allowance was set at 500 days, marking a major change
in the degree of income support provided under this arm of Finlands
unemployment compensation system. Unlike the partial earnings-related
payment provided under unemployment insurance, the unemployment allowance
is a flat rate payment equal to basic daily allowance (FIM 116). Although
these payments were means-tested prior to 1994, this is no longer the
case. Recipients are subject to the same waiting period, job search and
availability requirements as are applied to claimants under unemployment
In 1994, the government
introduced a new social assistance program called labour market support.
Although the value of this payment is identical to the basic allowance
mentioned above, it differs from the basic allowance in that it is means-tested
and is available for an unlimited period of time. Individuals living at
home with their parents receive 60% of the basic allowance. Labour market
support payments are made to new labour force entrants, those who are
not entitled to an unemployment allowance or benefit and those who are
participating in a labour market adjustment program. Except for those
who exhaust their unemployment allowance/benefit, individuals must normally
wait three months before they are entitled to labour market support payments.
Continued eligibility requires individuals to be available and looking
General tax revenues are
used to cover the cost of unemployment allowances and labour market support
payments. A tripartite financing arrangement exists for unemployment insurance.
Under this arrangement, employers and the state are equally responsible
for 94.5% of program costs, while employees finance the rest. Employee
financial participation in the program is a relatively new arrangement
and was introduced in 1993 to help defray rising program costs. The actual
employee payment is calculated according to gross wage income.(9)
in France, like that found elsewhere in Europe, combines elements of insurance
and welfare. The former provides unemployment benefits to workers, subject
to previous employment, wages and contributions; while the latter provides
income support, subject to a means test, to those who have exhausted,
or who are unable to qualify for, unemployment benefits. This system is
somewhat unique in that participants (including both firms and workers)
finance and administer the insurance component of the program under government
welfare component of the program, known as the solidarity system, is financed
and administered by the state.
Rising unemployment insurance
costs, coupled with evidence that high levels of income replacement prolong
the duration of job search, prompted the French government to reduce the
level of income support available to unemployed workers. Unemployment
payments were reduced in 1992 following the introduction of a variable
replacement rate. Under this new feature, discussed below, the benefit
rate declines as the duration of a claim (i.e. the unemployment spell)
increases.(11) In 1993,
the duration of benefits was also reduced. In the same year, contribution
rates were raised following an agreement reached by the government, employers
and employees. These increases, in conjunction with lower program expenditures,
are expected to eliminate the unemployment insurance deficit (estimated
to be FF 30 billion in 1993) by the year 2003.(12)
To qualify for unemployment
benefits, workers in France must have had a minimum of six months of employment
in the last twelve months.(13)
The benefit payment period, one of the most generous in the world, depends
on a workers age and the number of months of insured employment,
as illustrated in the table below. For instance, a worker under the age
of 50 with eight months of insurable employment in the last twelve is
entitled to 15 months of benefits. Full benefits are paid for the first
five months and weekly benefits decline by 17% every four months thereafter.
A worker over the age of 50 with eight months of insurable employment
in the last twelve months is entitled to 21 months of benefits. Full benefits
are paid for the first eight months and decline by 15% every four months
thereafter. Initial benefits are equal to 57.4% of the gross reference
wage, although the actual replacement rate may be higher since benefit
payments are not allowed to fall below a minimum level during the initial
stages of a claim.(14)
Workers must wait for a certain period of time before receiving benefits,
whose duration depends on the number of holidays not yet taken.
Unemployed individuals receive
an allowance equivalent in value to unemployment benefits while they are
training. Unlike unemployment benefits, allowances are not reduced during
the training period and workers are entitled to an end-of-training allowance
(allocation de formation de fin de stage) once training is complete.
This last provision effectively extends the benefit period, since the
level of income support provided under this allowance remains unchanged
from that paid during training. The unemployment insurance system covers
73% of the cost of the training allowance and the state finances the rest
(including the cost of the end-of-training allowance).(15)
Duration of Unemployment
Months of Insurable
Duration of Benefits
(per four month period)
6 months during
the last 12 months
8 months during
the last 12 months
- under 50 years of age
- over 50 years of age
14 months during
the past 24 months
- under 25 years of age
- 25-49 years of age
- 50 years of age and over
27 months in the
last 36 months
- 50-54 years of age
- 55 years of age and over
Source: Commission of the
European Union, Employment Observatory, Basic Information Report: France,
Berlin, December 1992, p. 41.
Once workers are no longer
entitled to unemployment benefits, they may qualify for a solidarity allowance.
To be eligible for this payment, individuals must demonstrate need and
prove that they have been dependent on employment for at least five of
the last ten years since being laid off. Eligibility for this payment
is renewed every six months provided recipients continue to satisfy the
means test and demonstrate that they are looking for work.(16)
It is estimated that the
reforms outlined above saved some FF 7 billion in 1994. While the number
of individuals claiming unemployment benefits dropped by 8% in 1994, the
proportion of those claiming the solidarity allowance increased by 13.8%
in the same year.(17)
As is the case elsewhere
in Europe, unemployed individuals in Germany are entitled to two types
of earnings replacement protection: unemployment benefits and unemployment
assistance. Equal contributions from employers and employees cover the
cost of unemployment benefits, while the state finances unemployment assistance.
Unemployment benefits are
available to unemployed individuals who have contributed to the program
and who have worked at least 360 days in the previous three years. As
in France, the duration of an individuals unemployment benefit depends
on a claimants previous employment and age, both of which are positively
related to the potential claim duration. For example, the maximum duration
of a claim for an individual under the age of 42 with 360 days of employment
in the past three years is 156 days (excluding Sundays). The longest claim
duration is 832 days (excluding Sundays); it is available to individuals
who are over the age of 54 and who have worked at least 1,920 days.(18)
Prior to 1995, older workers were permitted to receive benefits for up
to 32 months even though they were essentially retired. Now, workers who
retire early are entitled to no more than 24 months of benefits and the
amount of benefits actually paid depends on the value of a claimants
In an effort to reduce the
tax burden to pre-reunification levels, German authorities have introduced
several measures to reduce spending. As found in many other OECD countries,
reduced expenditures on social programs are an integral part of this policy
objective. In terms of unemployment compensation, the German government
reduced the replacement rate under unemployment benefits by three percentage
points in 1994. At present, single individuals receive 60% of their net
earnings (i.e. earnings after statutory deductions). This assessment is
usually based on the last 100 days of work within a six-month period immediately
preceding unemployment. Claimants with dependants are entitled to 67%
of net earnings. Unemployment benefits are taxed back at 50% if a claimants
net weekly earnings exceed DM 30 per week. If net earnings plus unemployment
benefits (after the tax back) exceed 80% of a claimants average
net earnings in the claimants previous employment, benefits are
taxed back at 100%.
is the second component of Germanys unemployment compensation system.
This program provides wage replacement protection to unemployed individuals
who no longer qualify for unemployment benefits and who, according to
a means test, are deemed to be in need of this payment. Unemployed individuals
who have worked at least 150 days in insurable employment in the past
year are also eligible to receive unemployment assistance, subject to
a means test. As a rule, unemployment assistance is available for an unlimited
period of time, although recipients must requalify annually. In 1994,
the benefit rate for unemployment assistance was also reduced by three
percentage points. Currently, all recipients, save those with dependants,
are entitled to a weekly payment equal to 53% of net wages paid in their
last employment. The wage replacement rate for recipients with children
is 57% of previous net earnings. In 1996, the government intends to make
several changes to unemployment assistance including the introduction
of an activity test,(20)
a more rigorous enforcement of the means test and new measures for determining
the level of support.(21)
Unlike those in most OECD
countries, New Zealands income security system is founded on a non-contributory
principle. Consequently, all transfers to individuals, including unemployment
benefits, are financed via general taxation. Unemployment benefits are
paid to individuals who are unemployed and capable of work, provided they
are available for work and have taken suitable steps to find it. Benefit
payments are income-tested and subject to a waiting period. The actual
weekly rate of unemployment benefit depends on a beneficiarys marital
status and the number of children in the beneficiarys care. As of
November 1994, basic net weekly benefits paid to childless single individuals
18-24, 25 years of age and over, and to childless married individuals
was NZ$ 112, 135 and 224 respectively.(22)
Single individuals with one or more than one child receive NZ$ 193 and
210 respectively, while married individuals with one or more children
receive 239 per week.(23)
Benefits are available for an unlimited period of time, subject to financial
need, job search and availability for work requirements.
In 1990, the New Zealand
government announced a package of reforms collectively called the Economic
and Social Initiative. One of the major thrusts of this package was to
encourage individuals to become more self reliant. In terms of labour
market policy, reform measures included a number of changes to New Zealands
unemployment benefits scheme. To encourage recipients to return to work
sooner, the government lowered the benefit payment, increased from 6 weeks
to 26 weeks the waiting period for those who are voluntarily unemployed
and tightened job search requirements. Beneficiaries are now required
to attend regular interviews with program officials. If beneficiaries
do not take reasonable steps to secure employment or refuse offers of
work, benefit payments cease.(24)
In addition, unemployment benefits for youth 16-17 years of age were withdrawn
and replaced by a special youth benefit for those unable to obtain parental
In concert with the reforms
outlined above, New Zealand has devoted more attention to helping unemployed
workers, particularly those who have experienced long spells of unemployment,
to acquire skills and job experience. The level of resources devoted to
direct job creation programs has increased markedly during this period.
In 1990-91, New Zealand allocated approximately 1.6% of GDP to subsidized
employment programs. In 1993-94, this proportion was 2.8% of GDP.(25)
These direct job creation initiatives are called Job Plus, Enterprise
Allowance, Taskforce Green and Community Taskforce. Job Plus provides
a six-month wage subsidy to employers who hire individuals who have been
unemployed for at least six months. As the name implies, the Enterprise
Allowance scheme offers financial assistance (up to a maximum of NZ $5,000)
to eligible unemployed individuals who have an opportunity to become self-employed.
Taskforce Green is a wage subsidy program that provides job experience
to unemployed individuals in projects which are beneficial to the community
and to the environment. Community Taskforce is a community-based job creation
program established in 1991 that provides work experience (usually three
days a week) to long-term unemployed individuals. Participation is normally
voluntary, although mandatory participation is required in some instances.
Participants receive a weekly unemployment benefit supplement of NZ $15.
The fiscal position of the
Swedish government has dramatically deteriorated in recent years moving
from a surplus position of roughly 5.5% of GDP in 1989 to a deficit of
14.5% of GDP in 1993.(26)
Despite a more than four-fold increase in the unemployment rate, the level
of spending during this period became untenable, leading the Swedish government
to re-examine its spending priorities. The impetus for reforming Swedens
unemployment compensation system was also strengthened by the belief that
virtually every program in Swedens social safety net could be administered
and structured more efficiently. Little attention had been paid to the
impact of these programs, especially those of the income support variety,
on individuals behaviour in the labour market. Today, benefit dependence
and the work disincentive effects associated with these programs are being
scrutinised by Swedish policy-makers, primarily with a view to encouraging
The introduction of measures
to address the issues of affordability and efficiency have thus far been
gradual. Initial changes to unemployment insurance during the period 1991-93
involved the introduction of a five-day waiting period, a reduction in
the wage replacement rate from 90% to 80% of earnings and a decline in
the daily maximum benefit. In 1993, unemployment insurance, along with
other programs, was targeted for further expenditure reductions with the
passage of the government's plan to reduce expenditures and increase revenues.
During the period 1993 to 1998, the government intends to reduce transfers
to households by SKr 26 billion, of which almost 40% will come from the
unemployment insurance system.(27)
In April 1995, the government announced its intention to cut the benefit
rate to 75% of previous earnings, still a relatively high wage replacement
rate compared to that in many other OECD countries.
compensation system is made up of two types of assistance: unemployment
insurance and labour market assistance.(28)
Unlike most elements of Swedens social insurance system, the former
is neither compulsory nor universal. Although partly financed by the state,
unemployment insurance is administered by 40 unemployment benefit societies
representing approximately 83% of the labour force.(29)
Most members of unemployment benefit societies are unionized. To qualify
for benefits, workers must have been benefit society members for at least
12 consecutive months prior to becoming unemployed and have worked for
at least five months during this period. Benefits are paid from the sixth
day of unemployment at a level of 75% of earnings, for a maximum daily
payment of SKr 564 (SKr 2,820 per week). The duration of benefits is usually
60 weeks, but this is extended to 90 weeks for unemployed workers 55 years
of age or more. Moreover, this benefit period is often extended through
publicly supported measures that allow recipients an opportunity to requalify
for benefits. Under this arrangement, a new benefit period can be established
if an individual works at least 75 days in a period of at least four months.
"Work" in this context includes publicly supported make-work
Unemployed individuals who
are not registered with a benefit society and who have at least five months
work experience (including training) are eligible to receive a daily labour
market assistance payment of SKr 245, less than one-half of the maximum
daily payment under unemployment insurance. In 1996, the value of this
payment is expected to decline to Skr 230.(31)
Individuals 55 years of age or less are entitled to receive daily cash
payments for a maximum period of 30 weeks. For those between 55-60 years
of age, this assistance is available for 60 weeks, while those over 60
years of age are entitled to this support for up to 90 weeks.
compensation scheme is financed through social insurance contributions
paid by employers and self-employed individuals. This tax is equal to
4.32% of payroll with no upper limit. Workers must pay a small fee to
their unemployment benefit society to cover the cost of administration.
State subsidies also play a role in financing Swedens unemployment
Since the middle of the
last decade, labour market policy in the United Kingdom has become increasingly
focused on "active" measures, largely designed to combat long-term
unemployment and to strengthen incentives to work. Measures to achieve
the latter objective have sought to widen the gap between the net income
of those who work and those who do not.
Compared to most European
countries, the unemployment compensation system in the United Kingdom
is more akin to social assistance than insurance. To qualify for benefits,
individuals must have contributed an amount equal to at least fifty times
the minimum weekly earnings limit within the last two tax years. Benefits
are paid at a flat rate and are therefore unrelated to previous earnings.
As of April 1995, a single persons weekly unemployment benefit was
£46.(32) A supplement
is paid to beneficiaries who have dependants. Individuals must wait three
days before receiving benefits. The maximum duration of benefits is one
year. Unemployment benefits are financed through a progressive tax (national
insurance contributions) levied on employers and employees.(33)
Registered unemployed individuals who do not qualify for unemployment
benefits are entitled to receive a means-tested payment called income
support, the value of which depends on the individuals age and marital
In October 1996, the unemployment
benefit will be replaced by a program called the Jobseekers Allowance.
This new payment will consolidate the existing unemploy-ment benefit and
income support. All individuals receiving this support will be required
to enter into a jobseekers agreement outlining a strategy to become
re-employed, thus incorporating an activity test as a condition of entitlement.(34)
Individuals who can satisfy the minimum contributory requirements (much
like those governing access to unemployment benefits) will be entitled
to an allowance for a maximum period of six months. Those who are not
eligible for this allowance will be entitled to a means-tested payment,
the value of which will depend on an individuals family circumstances.
Probably the most innovative aspect of this allowance is a bonus scheme
which will reward those who work while receiving allowances. One element
of this scheme will allow single individuals, married individuals and
single parents to earn £5, £10 and £15 of weekly earnings respectively,
without having their allowance reduced. An amount equal to one-half of
all weekly earnings earned in excess of these thresholds will accumulate
toward a maximum tax free payment of £1,000, to be paid once an individual
is employed and no longer receiving an allowance (i.e. once the individual
is working more than 24 hours per week).(35)
The government expects to save £270 million under the Jobseekers Allowance
in its first full year of operation.
While federal law in the
United States seeks to ensure uniformity in unemployment insurance, individual
states actually control the design of key program parameters and program
administration. In addition to state-operated programs, unemployment compensation
in the United States includes federal-state extended benefits. Under this
measure, 13 additional weeks of benefits may be provided if the unemployment
rate in a given state exceeds a particular level.(36)
Although eligibility requirements
vary from state to state, all individuals are required to have a minimum
level of earnings or weeks of employment during a particular reference
period in order to qualify for benefits. Some 10 states require a minimum
number of weeks of employment, ranging from 18 to 40 weeks (20 weeks is
most common). The state of Washington has a minimum hourly qualification
requirement of 680 hours.(37)
Like Canada, the duration of regular benefits is related to a claimants
employment record while access to extended benefits depends on the unemployment
rate in the state where the claimant resides. The maximum duration of
regular benefits is 26 weeks in all states save Massachusetts and Washington,
where it is 30 weeks. As noted above, benefits may also be extended during
periods of relatively high unemployment. The wage replacement rate varies
across the United States. Typically, individuals receive between 50-60%
of average wages. The level of maximum weekly benefits ranges from a low
of $US 133 in Puerto Rico to a high of $US 504 (including a supplement
for dependants) in Massachusetts. Thirteen states, (Alaska, Connecticut,
Washington (D.C.), Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan,
New Jersey, Ohio, Pennsylvania and Rhode Island), provide additional benefits
to claimants with dependants. Most states require claimants to wait one
week before benefits are paid.
Probably the most unique
feature of unemployment compensation in the United States is program financing.
Employers are the sole contributors to unemployment insurance in all but
four states (Alaska, New Jersey, Pennsylvania and West Virginia). Tax
rates vary from employer to employer even in the same state and are based,
in part, on the cost of benefits attributed to their layoff decisions.
Although experience-rating is incomplete,(38)
the United States is the only country in the world that uses this approach
to calculate employer contributions.
In the past decade, the
federal government has introduced a number of measures whereby incentives
were created for individual states to reduce the costs of their respective
unemployment compensation programs. During this period, the federal government
changed the regulations governing state unemployment insurance trust funds,
the most significant of which was the elimination of federal interest-free
loans to these funds. Moreover, states with indebted funds were required
to adopt certain measures to ensure solvency. In response to these and
other measures, the vast majority of states adopted tighter eligibility
requirements, lower maximum benefit periods and stricter disentitlement
provisions throughout this period.(39)
It is thought that these reforms have contributed, in part, to the downward
trend in the proportion of unemployed individuals receiving unemployment
benefits. Throughout the period 1991 to 1993, for example, the ratio of
unemployment insurance claimants to the total number of unemployed dropped
from approximately 40% to just over 30%.(40)
In operation since 1958,
the emergency unemployment compensation program was allowed by Congress
to expire in February 1994. The purpose of this program had been to lengthen
unemployment benefit periods on an ad hoc basis, usually in response to
a recession. As this program was financed exclusively by the federal government,
many states tended to use its support as a substitute for the cost-shared
federal-state extended benefits program.(41)
Another significant change
to many state unemployment compensation programs was the introduction
of activity-tested benefits. In 1994, 18 states (Alabama, California,
Connecticut, Delaware, Florida, Hawaii, Iowa, Kentucky, Minnesota, Mississippi,
New Hampshire, New York, North Carolina, Ohio, Oklahoma, Rhode Island,
Vermont and West Virginia) adopted measures that required individuals
assessed as potential benefit exhaustees to participate in re-employment
activities as a condition of benefit entitlement. In the same year, five
states added self-employment assistance to their unemployment compensation
programs. Under this measure, individuals in California, Connecticut,
Maine, New York and Rhode Island will continue to be entitled to unemployment
benefits while attempting to establish their own businesses.(42)
In recent years, many OECD
countries have implemented reforms to their unemployment compensation
systems. The underlying reasons for these reforms generally fall into
two categories. The first is fiscal in nature, as many OECD countries
burdened with unsustainable growth in expenditures look for ways to reduce
spending. Virtually, every country discussed in this paper has taken,
or is in the process of taking, steps to make it more difficult to qualify
for unemployment benefits/allowances, to reduce the level of payments
and/or shorten to the duration of support. For example, in 1994 Belgium
tightened its qualification requirements for workers under the age of
36. Single individuals 17 years of age or less are no longer entitled
to unemployment benefits in New Zealand. Canada is currently contemplating
a substantial increase in its qualification requirement for new entrants
and re-entrants. Moreover, the move to an hours-based entrance requirement
would see any worker whose average work week was less than 35 hours facing
a relatively higher entrance requirement. In 1992, France introduced a
variable benefit rate: as the duration of a claim increases, the level
of benefits falls. In 1994, the benefit rate dropped by three percentage
points under Germanys unemployment benefits and unemployment assistance
programs. Between 1991 and 1993, the benefit rate under Swedens
unemployment insurance program dropped substantially from 90% to 75%.
Alleviating the potential
adverse effects of income support on labour market behaviour is the other
driving force behind many of the reforms outlined in this paper. In addition
to lower levels of income support and tougher qualification requirements,
several countries have begun to make their unemployment compensation schemes
more active so as to help unemployed workers re-establish a link with
work. Some such countries have introduced an activity test as a condition
of benefit entitlement. In April 1995, the Belgian government introduced
mandatory participation in a re-employment strategy for all fully insured
claimants under the age of 45 who are in the tenth month of their claim.
New Zealand and some states in the United States have also introduced
varying degrees of activity-tested benefits. Although penalties can be
imposed on claimants referred to training or other active unemployment
insurance uses, Canadas proposed reforms do not enhance existing
activity-tests; rather, the government plans to augment the level of unemployment
insurance funds devoted to active uses.
of the European Commission. Basic Information Report: Belgium.
Commission of the European Communities, Berlin, December 1992.
of the European Commission. Basic Information Report: France.
Commission of the European Communities, Berlin, December 1992.
of the European Commission. Basic Information Report: Germany.
Commission of the European Communities, Berlin, April 1995.
of the European Commission. Basic Information Report: United Kingdom.
Commission of the European Communities, Berlin, August 1995.
Gross, Dominique. "Unemployment
and UI Schemes in Europe." In Unemployment Insurance: How to
Make It Work. C.D. Howe Institute, Toronto, 1994. p. 160-93.
Hurley, M. C. and Kevin
B. Kerr. Bill C-12: An Act Respecting Employment Insurance in Canada.
Library of Parliament, LS-237E, 8 March 1996.
McMurrer D. and A. Chasanov.
"Trends in Unemployment Insurance Benefits." Monthly Labour
Review. U.S. Department of Labour, September 1995, p. 30-39.
OECD. OECD Economic
Surveys, New Zealand, 1992-93. Paris, 1993.
OECD. OECD Economic
Surveys, Sweden, 1993-94. Paris, 1994.
OECD. OECD Economic
Surveys, France 1993-94. Paris, 1994
OECD. OECD Economic
Surveys, France, 1994-95. Paris, 1995.
OECD. OECD Economic
Surveys, Finland, 1994-95. Paris, 1995.
OECD. OECD Economic
Surveys, Germany, 1994-95. Paris, 1995.
OECD. OECD Economic
Surveys, Sweden, 1994-95. Paris, 1995.
OECD. OECD Economic
Surveys, United Kingdom, 1994-95. Paris, 1995.
OECD. Employment Outlook.
Paris, July 1995.
Reissert, Bernd. "National
Unemployment-Support Schemes in the EC." Policies. Employ-ment
Observatory of the European Commission. Berlin, No. 43, Autumn 1993,
Sweden. Ministry of Finance.
Social Security in Sweden: How to Reform the System. Stockholm,
Swedish Institute. Fact
Sheets on Sweden: Swedish Labour Market Policy. December 1995.
Vuorinen, Pentti. "Finland:
From the Crisis of the Century to a Slow Recovery with Active Labour
Market Policy." Policies. Employment Observatory of the
European Commission, Berlin, No. 51, Autumn 1995, p. 26-39.
Dominique M. Gross, "Unemployment and UI Schemes in Europe,"
in Unemployment Insurance: How to Make It Work, C.D. Howe Institute,
1994, p. 160.
Subject to a means test, all individuals are entitled to receive a minimum
subsistence payment, although this payment is not directly part of Belgiums
unemployment compensation system.
Commission of the European Union, Employment Observatory, Policies,
Berlin, No. 46, Summer 1994, p. 12; and Commission of the European Union,
Employment Observatory, Basic Information Report: Belgium, Berlin,
December 1992, p. 57.
Commission of the European Union, Employment Observatory, Policies,
Berlin, No. 51, Autumn 1995, p. 21-2.
Although no specific proposals have been adopted so far, the Minister
of Human Resources Development has announced that the government intends
to modify its legislative proposal, especially with respect to the "rate
calculation period" and the "intensity rule."
Policies (No. 51, Autumn 1995), p. 29.
This limitation does not apply to those over the age of 55, who receive
benefits until they reach the age of 60.
OECD, OECD Economic Surveys, Finland, 1994-95, Paris, 1995, p.
Ibid., p. 61.
Gross (1994), p.169.
Although this concept is captured in the proposal to reform Canadas
UI system, its application is intended to curb repeat use of unemployment
insurance (unemployment frequency) rather than reduce the duration of
OECD, OECD Economic Surveys, France, 1993-94, Paris, 1994, p. 132.
It should be noted that a reduced benefit is payable to workers who have
worked four months in the last eight months.
OECD, OECD Economic Surveys, France, 1994-95, Paris, 1995, p. 67.
Commission of the European Union, Employment Observatory, Basic Information
Report: France, Berlin, December 1992, p. 42.
Ibid., p. 42.
OECD .... France (1995), p. 67.
Commission of the European Union, Employment Observatory, Basic Information
Report: Germany, Berlin, April 1995, p. 22.
OECD, OECD Economic Surveys, Germany, 1994-95, Paris, 1995, p.
In concert with the requirement that recipients of unemployment assistance
be referred to work, the government intends to introduce measures such
as wage supplements, additional counselling and work placements to facilitate
this new regulation.
Policies (No. 51, Autumn 1995), p. 20-1.
Single individuals 16-17 years of age are no longer eligible for unemployment
benefits. Instead, they are entitled to receive a training allowance.
Statistics New Zealand, New Zealand Official Yearbook 95, 98th
Edition, 1995, p. 168.
OECD, OECD Economic Surveys: New Zealand, 1992-93, Paris, 1993,
p. 57 and 125.
OECD, Employment Outlook, Paris, July 1995, p. 226.
OECD, OECD Economic Surveys, Sweden, 1993-94, Paris, 1994, p.19.
In addition to these wage replacement schemes, individuals who are unable
to support themselves are entitled to social assistance. These payments
are means tested and are not intended to replace income lost as a result
of unemployment. While the rate of benefit varies somewhat across municipalities,
the monthly norm is currently SEK 3,451 for single individuals and SEK
5,712 for couples. Families with children receive higher payments.
OECD, OECD Economic Surveys, Sweden, 1994-95, Paris, 1995, p. 59.
Sweden, Ministry of Finance, Social Security in Sweden: How to Reform
the System, Stockholm, 1995, p. 11
Swedish Institute, Fact Sheets on Sweden: Swedish Labour Market Policy,
Commission of the European Union, Employment Observatory, Basic Information
Report: United Kingdom, Berlin, August 1995, p. 82.
In 1996, employers hiring individuals who have been unemployed for more
than two years will not be required to pay these contributions. In addition,
as of April 1995, contributions made on behalf of workers earning less
than £205 per week were reduced, thus creating an incentive to use more
part-time employment. For example, the contribution for an employee earning
£240 per week is £24.48 per week. If this job is split into two jobs each
paying £120 per week, the total contribution would fall to £12 per week.
If the employer converts this full-time job into three part-time jobs
each paying £80 per week, then the total weekly contribution would fall
to £7.20 (see OECD, OECD Economic Surveys: United Kingdom, Paris,
Although recipients of unemployment compensation payments are currently
required to look for work, there are no penalties for refusing to participate
in other labour market activities such as training.
United Kingdom, Department of Social Security, Press Release 95/080, 28
The states (as well as Washington D.C., the Commonwealth of Puerto Rico
and the Virgin Islands) have been free to develop unemployment insurance
programs best suited to their needs. Consequently, no two state unemployment
insurance laws or programs are exactly alike. A third type of assistance
(called emergency benefits), much like extended benefits but financed
exclusively by the federal government, was also available prior to 1994.
U.S. Department of Labour, Employment and Training Administration, "Significant
Provisions of State Unemployment Insurance Laws," July 1995
No state permits a zero tax rate; all states have a cap on tax rates;
and not all benefits are included in determining a firms experience
including, for example, benefits paid to workers employed for short periods
D. McMurrer and A. Chasanov, "Trends in Unemployment Insurance Benefits,"
Monthly Labour Review, U.S. Department of Labour, September 1995,
Ibid., p. 34
Ibid. p. 31.
Diana Runner, "Changes in Unemployment Insurance Legislation in 1994,"
Monthly Labour Review, January 1995, p. 60.