Sunday, May 04, 2014

The rationale for unemployment insurance

In the economy that is open to global and local competition, some businesses will fail and their workers will be retrenched. Even if the business does not fail, it may have to downsize and retrench some of its workers.

It will take the worker 6 to 18 months to find a new job that is suitable for their experience and skills. Sometimes, the worker may have to accept a job that pays a lower wage.

By now, many people who understand the trauma that the retrenched worker has to face. They may have faced it themselves, or have seen friends or co-workers gone through the difficult period. The pain of unemployment is real.

Many countries have introduced unemployment insurance to help the retrenched workers to ride over a period of adjustment. The unemployment benefit does not compensate for the full amount of the income that is lost, but does pay a certain percentage of the regular wage to help the unemployed worker for a period of one to two years.

The unemployment insurance system have a way to manage the potential abuse by workers who are too lazy to find work and want to enjoy the benefit. While they are not able to stop all the abuses, they do go some way to reduce the impact. Most workers also prefer to find work, so the unemployment benefit really goes to help people who are genuinely in need.

Assume that the unemployment people represents 5% of the workforce. If they receive a benefit of 60% of their regular wages, the cost of this benefit is 3% of the wages of the working people.

Are you willing to contribute 3% of your wages, so that if you should be retrenched, you will receive a benefit of 60% of your regular wages over 12 to 18 months? If you are not retrenched, the payment goes to somebody who is retrenched.

Suppose your company has to downsize and 5% of your co-workers will lose their job. Do you want a situation where everyone will try to protect their job, including back stabbing their co-workers to protect themselves, or do you prefer that those who keep the jobs should contribute 3% of their wages to provide the relief to the co-workers who have to leave?

This is the rationale for unemployment insurance. It reduces the uncertainty and allows the displaced workers to find a new job, without having to suffer a large financial loss.

Tan Kin Lian

Speech by Tan Kin Lian on Wages and Employment, 3 May 2014

1.      In olden days, most people work in the countryside. They grow crops and rear animals, and are able to produce enough to raise a family. Life was simple but was free from stress.
2.      Today, most people live in the city. They need a job to earn a wage to pay the bills - the mortgage for their home, utilities, food, clothes, school fees, transport fares, medical bills.
3.      They need the wages to be adequate. If the wages are too low, they have to work long hours or to work on two jobs. They will not have sufficient time for rest and leisure and will be harmful for their health.
4.      While Singapore has one of the highest per capital income in the world, many of our workers do not earn enough to meet the high cost of living. The cost of living is high because of the wide disparity between the high and low income earners. The high income earners are able to pay high prices for properties, cars and other goods and services, jacking up the prices beyond the reach of the low income earners.
Minimum Wage
5.      To improve lives for people at the lower income levels, we need to introduce a minimum wage. This minimum wage should be set at a level that is adequate for a person, working a full day, to earn enough to raise a family at a modest standard of living.
6.      The minimum wage should apply to all jobs and will give dignify to the manual and service jobs. It will encourage our local workers to accept these jobs and reduce the reliance on foreign workers.
7.      There is a fear that the minimum wage will result in higher prices to be paid by consumers. The increase in consumer prices will be modest, as the low wage earners take up only a small part of the total cost, and is likely to be partly offset by a lower share taken up by rental and profits.
9.      I have visited Jakarta regularly over the past five years. Five years ago, the minimum wage was about $120 a month but the cost of cost of living was also quite low.
10.    The minimum wage has since been increased to $250 a month, which is doubled over five years. The last increase of 40% was approved by the newly elected Governor of Jakarta Joko Widodo two years ago. He argued that the minimum wage has to be adequate to meet the cost of living in Jakarta. While several members of the business community complained about the increase, a few several business owners said that the increase was fair and necessary.
11.    The following year, the labor unions asked for a further increase of 40%, but the Governor turned it down. He had demonstrated leadership and courage to do the right thing when it was necessary, without being pressured to repeat the increase.
12.    I believe that setting a minimum wage at an adequate level is one important step that must be taken in Singapore. We are only of the few countries in the world that still do not have a minimum wage.
Adequate jobs
13.    It is equally important that there should be enough jobs for the people and that the people should feel assured that, if they are capable, adaptable and willing to work, they will be able to get a job that can pay an adequate level of income. On their part, the workers have to be willing to adapt to changes caused by global market forces.
14.    To achieve this goal, we need a vibrant economy and also, control over immigration of foreign workers to ensure that the local workers are not displaced. The large scale entry of foreign workers into Singapore during the past years has been harmful and not be repeated.
Unemployment insurance
15.    In a competitive and free economy, some people will be retrenched due to business failures. To overcome the negative impact to the retrenched workers, we need to introduce unemployment insurance to provide short term relief. The benefit can be set at a modest level and for a short duration of 12 to 18 months, and can be managed to avoid abuse.
16.    There is a fairly widespread belief, which is largely misplaced, that unemployment insurance will make people lazy and encourage them to abuse the system. While some people may abuse the system, the majority will prefer to work, if they are able to. In any case, most countries have been able to introduce fairly effective measures to manage the abuse, while giving help to those who are genuinely in need of it.
17.    Most well developed countries have a system of unemployment insurance. It is time for Singapore to study this system and have an open mind to examine its merits.

National Service
18.    National service has now become a heavy burden on male citizens when they have to compete for jobs. First, their entry into the work force is delayed by two to three years, of which two years are in full time national service and up to one year is caused by waiting to be called up and to fit into the university schedule. After completing full time service, the reservists have to be called up at regular intervals for reservists and remedial training, causing disruption to their work. Some employers find the disruption to be a disadvantage in employing male citizens with these obligations.
19.    While national defense continue to be an important priority, there is no need to impose such a heavy burden on our male citizens. We can rely more or fully on a professional army or at least, reduce the full time and reservist obligation by half. The experience of many countries showed that it is possible to train a soldier in one year, not two. There is also possible to reduce the period of reservist called up to five years, instead of the current ten to twelve years. This change will reduce the disruption to the careers of our male citizens and allow them to compete in the employment market with a reduced disadvantage.
Funding the cost
20.    There is a fear that unemployment benefits will increase the cost to the government and will need to be funded by higher taxes or GST. This fear is exaggerated. There is more than adequate surplus in the government budget to provide to provide this benefit without increasing the tax burden on the working people.
21     The introduction of a minimum wage will impact the small businesses which are now struggling with high operating cost. The government can provide some assistance to these small businesses, for example, by paying the employer's CPF contribution for these companies.
22.    If the introduction of unemployment insurance is too big a step for Singapore, an alternative is to allow the unemployed to withdraw a monthly sum from his CPF account to meet his cost of living
23.    The role of a government is to provide a better life for the people in the country. They have to set the right policy and strategy in running the country, to achieve this goal. The top priority must be to ensure that the people have a job that provides an adequate wage to meet the cost of living and to raise a family. It is time for Singapore to review the need for a minimum wage and unemployment insurance.
Tan Kin Lian

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