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18 Mar 2020  (541 Views) 
Out of the box

Is it good for a country to provide unemployment benefit?
Most developed countries provide unemployment benefit for workers who lose their jobs due to factors beyond their control. It is usually caused by downsizing, bankruptcy or relocation of their employer.

The unemployment benefit can be a certain period, say 6 or 12 months, and is based on the regular income.

The cost of the benefit is usually funded by a payroll tax, e.g. 3 percent of payroll. It may also be supported from general taxation. 

The problem with unemployment benefit is the "propensity to claim". The worker and their employer may attempt to arrange the termination of employment, so that the worker can be supported by the unemployment insurance scheme. 

This propensity to claim leads to a higher cost of the scheme. This phenomena is described as "moral hazard".

What is a better way to handle it?

I prefer the the state provides a loan to the worker for loss of income due to unemployment. This loan should be related to the actual loss of income - just like unemployment insurance, but have to be repaid in the future. It will carry a low rate of interest, e.g. the rate of inflation. 

The requirement to repay the borrowing will reduce the moral hazard to a large extent, but not totally. Some workers may find that they do not need to borrow the full amount that is allowed, as they have savings to draw down, reduce their expenses or find alternative work. 

Some of the loans cannot be repaid and have to be written off. Some may be written off to avoid hardship to the borrowers and their families. The amount that needs to be written off will be a modest proportion of the borrowings given out. It will cost less than an outright benefit.

I prefer a borrowing scheme than an unemployment benefit.  It will cost less and allow workers to earn a higher income.

Tan Kin Lian

Vote - do you agree that it is better to introduce a borrowing scheme, rather than an outright benefit?


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