The paper discusses the role of unemployment insurance system in economic development in general and in the context of the ongoing crisis due to the forced lockdown related to COVID-19. The key elements of employment subsidy programs with reduced working hours or partial unemployment benefits, based on the experience of OECD countries get special attention.

COVID-19, economic crisis, unemployment insurance system, labour market, Russia

The resilience of the economy to various shocks depends on its institutional organization, and on the development of labour market institutions in particular. One of the most important and complex institutions of the labour market is the unemployment insurance system. Most developed countries, who have a long history of facing and overcoming economic crises of different origins, have gradually developed such institutions and adjusted them not only to support those who have lost their jobs, but also to compensate for forced leave and reduced working hours. The existence of a well-functioning system of this kind greatly facilitates the governments of these countries to cope with the economic consequences of forced lockdown related to COVID-19 by providing effective mechanisms to support the population in a period of temporary but large-scale decline in economic activity.

Russia, which has much shorter experience of overcoming economic crises, has no developed system of this kind. Moreover, the current mechanisms of adaptation to shocks in Russia lie in the field of reducing real wages and expanding informal employment. Though reducing economic efficiency through slowing down the processes of economic restructuring, the Russian way of adaptation of the labour market did work under economic shocks, reducing but not stopping economic activity. The today’s almost entire stopping of economic activity in some sectors during the COVID lockdown put Russia in completely different conditions. Some of the previous adjustment mechanisms are not available (the activity of the informal and semi-formal sectors has been stopped to an even greater extent than the corporate sector) and urgent demand for mechanisms to support people in anticipation of a sharp reduction in wages and forced leave emerged. Durable fully paid period of forced vacations is a sensitive issue for large employers, and not affordable for medium and small businesses, which all parties understand.

Measures to support the population declared by the Government already include elements which can be channeled through state employment services. However, without radical changes in the rules of registration with the employment service in order to receive benefits for loss of employment or forced leave, the support measures run the risk of being vague and not reaching small and medium, often semi-formal, business, which is millions of people. These new rules are to be applied during the lockdown and the following recession. The experience of developed countries in the organization of employment subsidy programs with reduced working time, short-time work (STW) programs, or partial unemployment benefits, is very important. It is impossible to deploy a similar system in Russia in the shortest time. However, it is possible to introduce the essential elements of such a system for the time being, in fact, to carry out public transfers through the extended powers of the employment services. The deployment of full-scale schemes of insurance against total or partial loss of employment needs to be carried out “in peacetime”, without the hope that the COVID-19 pandemic is a single case that will not reoccur in the foreseeable future. It can be said that the pandemic opens a window of opportunity for unemployment insurance schemes, without which adaptation to shocks of different nature will remain ineffective. Time will show to which extent we shall use this window of opportunity.

Below I discuss the role of unemployment insurance in economic development and the key elements of employment subsidy programs with reduced working hours or partial unemployment benefits, based on the experience of OECD countries.

The classic Diamond-Mortensen-Pissarides search theory draws attention to the fact that unemployment is an important and productive state. In the process of search for the best suitable employment by the employee (and search for the best suitable employee by the employer) the “worker – workplace” matching takes place, which then largely determines the productivity of the economy.

Underestimation of this important role of unemployment results in distortion of the adjustment processes of the economy to a variety of shocks, both structural and cyclical. For example, as shown in Boeri and Terrell (2002), among transition economies, countries with underdeveloped unemployment insurance system were slower in job cuts in the obsolete sectors and slowdown in economic restructuring.

Moreover, Asemoglu and Shimer (1999) have shown that unemployment insurance not only enables diversification of risks, but also increases output (GDP). The emergence of unemployment insurance enables eliminating the distortions in job creation caused by uninsured risk. If workers were risk-neutral, the maximum level of output in the economy could be achieved without unemployment insurance. However, if workers are not neutral, but are risk-averse, maximizing output in such an economy requires a system of unemployment insurance and payment of an unemployment benefit in case of lay-off.

The main explanation for this relationship between output and unemployment insurance is the difference in incentives for the creation of highly productive jobs. If there is no unemployment insurance scheme, workers agree to jobs with low salaries/productivity. In this case unemployment is low, but wages are also low. Low unemployment increases the risk of unfilled vacancies, resulting in a decrease in the capital/labour equilibrium, which means a lower quality of jobs. Unemployment insurance increases the incentive to continue to search for better-paid (and hence more productive) jobs. Unemployment is increasing. However, the incentives of employers to create more productive and highly paid jobs are also increasing. This leads to a higher capital/labour equilibrium. An improved structure of jobs in terms of productivity ensures an increase in total output.

Loss of work is related to loss of income. Since optimal behaviour requires income smoothing over time (adjusted for the individual discount rate), the employee is ready to spend part of his income during a favourable period and to purchase an insurance policy, payments under which occur when the unfavourable situation, namely layoff, takes place. This economic motive for improving social and individual welfare underpins the unemployment insurance schemes that exist in all developed and in many developing countries. In the vast majority of cases, such systems are public systems, sometimes with some additional insurance through industry unions.

Unemployment insurance, like any other type of insurance, has two key potential problems that need to be taken into account in the formulation of insurance rules.

The first problem is the so-called adverse selection. Employees differ in their productive abilities, motivation, and many other characteristics of importance for the labour market. These differences, together with different demand for work of various qualifications, determine differences in the probability of loss of work and the ability to quickly find a new one. In the absence of a public (i.e. compulsory for all) unemployment insurance system, the private insurance system will not arise: those with high risks of loss of work will be the first to apply for insurance, and those who consider their chances of losing their job as low will not acquire insurance. In this case, the voluntary insurance pool consists mainly of workers with a high risk of losing their jobs. In conditions of limited ability to identify individual-specific risks of job loss, insurance premiums for the operation of the private insurance system are extremely high and are not attractive to insured persons. Thus, private insurance simply won’t arise. State insurance, making the purchase of an insurance policy compulsory for all groups of employees (through payments to the social unemployment insurance system), ensures diversification of insurance system risks, since in this case both those whose risks of job loss are high and those whose risks are minimal are insured.

The second common problem for all insurance systems is the so-called moral hazard. In general, this means less safety and more risky behaviour behalf the insured than the uninsured. In the case of unemployment insurance, this results in higher (compared to the social optimum) selectivity of the insured and those receiving unemployment benefits in relation to new a job and a decrease in the intensity of job search. The demand for co-financing and the availability of deductions are well-known tools for reducing opportunistic behaviour. In the case of unemployment benefits, the examples of co-financing designed to reduce opportunistic behaviour are: establishment of a rate of substitution of salary with a benefit below one, the reduction of this indicator as the unemployment period increases, and the establishment of the deadline for payment of the benefit. The requirement of registration with the employment service and active job search, including through strict definitions of suitable (professionally and geographically) work, are mechanisms that help to separate the unemployed from those who do not have a job and do not want to work, and therefore do not seek it (economically inactive).

For employers, participation in the unemployment insurance system is not only an additional tax aimed at achieving a socially beneficial insurance system. An employer is able to reimburse part of his or her costs from public insurance funds if the rules for assigning the status of unemployed and thus the right to compensation for loss of part of the income are granted to those who are transferred to part-time work (as within the framework of reduced working hours subsidy, short-time work (STW) programmes, or partial unemployment benefits). Short-time work programmes or partial unemployment benefits are designed to preserve jobs in enterprises with temporary decline in demand for their products by stimulating cost sharing by a large number of workers and compensating loss of earnings for workers with a reduced working day/week or on short-term leave without pay (see below for details). The main task is to avoid unnecessary lay-offs where the rapid correction of the economic situation will make jobs attractive again.

Indeed, dismissal is not always the best strategy for the employer. If the drop in demand for products is seen as a temporary phenomenon, it is more reasonable for the employer to reduce production volumes and working hours, but to keep the employee recruited. This is especially important in the case of skilled labour and a large proportion of specific skills required to work in a given enterprise, as well as in the case of competition for workers in the labour market (a large share of jobs per unemployed person). In the absence of an extensive system of insurance against labour market shocks, the employer is forced to either dismiss the employee and then again incur the costs of hiring and training, or to bear (and share with the employee) the cost of reducing the working time. Recognition as unemployed and compensation of the lost part of income for those who work reduced time allows transferring the burden of costs from the individual employee and/or the employer to the insurance system. This expands the benefits of unemployment insurance.

In an economic crisis, where firms face liquidity constraints, this kind of government support improves public welfare. In addition, it allows to distribute the costs of adjustment to the shocks of the economic crisis more evenly (Hijzen and Venn 2011; Hijzen 2012).

In such a system, it is important to reduce the employer’s incentives for opportunistic behaviour (excessive use of public funds as compared to payments made). For this purpose, the dependence of the amount of the insurance premium on the intensity of the use of public funds by employees of companies is usually introduced.

STW programmes, or partial unemployment benefits, are of great interest in times of economic crises. In 2009, 25 OECD countries used such programmes, with the total number of participants reaching about 4.5 million workers. The most active partial unemployment benefit schemes were implemented in Belgium (7% of employees), Germany and Japan (4-5%). Between 1% and 2% of employees participated in Austria, the Czech Republic, France, Ireland, Italy, the Netherlands and Slovak Republic (Hijzen 2012).

The literature notes four groups of characteristics according to which STW programmes differ from country to country (Hijzen and Venn 2011): the requirements for the proportion of employees involved in the programme and the reduction of working hours; conditions of access to the programme; a set of conditions for participants; the amount of subsidy or terms of co-financing.

Denisova Irina Anatolyevna, Cand.Sci. in Economics, PhD in Economics, Professor at New Economic School, Associate Professor at Lomonosov Moscow State University. E-mail: idenisova@nes.ru