Wednesday, April 20, 2011

Funding unemployment insurance

I like to write a few words about funding unemployment insurance. The premium is paid by workers and are used to pay benefits to the unemployed.
Assume that the unemployment rate is 6%. If the unemployment benefit is 100% of wages, the premium rate has to be 6% of their wages. It is not advisable for the benefit to be 100% of wages, as it will create a moral hazard, i.e. some workers may voluntarily become unemployed. If the benefit is 50% of the wages, the premium rate can be reduced to 3%. 

Additional measures may be introduced, as follows:
a) The benefit is payable only for retrenchment after at least two years in the job.
b) The benefit is paid only for a certain period, say 12 or 24 months. 
c) The unemployed person must actively seek work and cannot reject a suitable job that has been offered.

With these rules, it may be possible to bring down the insurance premium to a lower level. Another factor is the share of the contribution from tax revenue. This contribution will bring down the insurance premium rate proportionately. It is possible for the insurance premium to vary according to industry. A higher rate may be charged for industries with higher unemployment rate, i.e. the rate is based on actual claim experience. 

A final point - the unemployment insurance scheme has to be compulsory by law. If it is voluntary, only those who suffer a higher risk of unemployment will buy the insurance. This will not give a sufficiently large pool to spread the risk. 
Tan Kin Lian

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