Unemployment Compensation in a Worldwide Recession

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Abstract

This paper examines data on unemployment compensation programs across a sample of 150 large countries that account for 99 percent of the world’s population. It documents recipiency rates and replacement rates in the 66 countries with UC programs. It makes comparisons of the degree of earnings loss protection in countries arranged by geographic area and by income level. Overall it finds that UC replaces 11.7 percent of the earnings losses caused by unemployment.

Introduction

A major worldwide recession is underway and its depth as of June 2009 is not certain. The April 2009 International Monetary Fund (IMF) forecast of real GDP growth for countries in its World Economic Outlook data base projected negative growth in 2009 for 165 of 182 countries. Ten of the 17 countries with positive projected real GDP growth this year were from either Sub-Saharan Africa or were Pacific Island nations. The present recession is affecting all regions of the planet. 

In January 2009 the ILO published an analysis suggesting an increase in global unemployment for the year could be as large as 40 million persons, increasing from 190 million to 230 million. As 2009 continues to unfold, it is clear that an increase larger than 40 million is possible during 2009–2010.

The present paper draws upon a multi-country data base to make estimates of the replacement of unemployment-related earnings losses by cash benefit paid by unemployment compensation (UC) programs. The analysis utilizes an accounting framework developed by the authors previously to assess earnings loss replacement in individual countries, eight major global regions and worldwide.

The paper reaches three major conclusions. (1) UC replaces 0.12 of the earnings loss caused by unemployment in countries with UC programs, and, of course, less worldwide because many countries do not have UC. (2) Earnings loss replacement is highest in the countries of Western Europe and Scandinavia, in the 0.40-0.45 range, and lowest in three regions: North Africa and the Middle East, Sub-Saharan Africa and Central America and the Caribbean where it is uniformly less than 0.04. (3) Low replacement of earnings losses among the unemployed reflects the combined effects of three factors: limited prevalence of UC programs (present in just 66 of the 150 countries examined here), low recipiency rates in countries with UC, and low replacement rates among UC recipients. To increase the extent of wage loss replacement all three factors would need to be increased.

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