Generous Unemployment Insurance Systems Raise Productivity

The annual OECD Employment Outlook – the product of the Directorate for Employment. Labour and Social Affairs (DELSA) can usually be relied upon to provide a well-reasoned counter point to the extreme neo liberalism of the Economics Directorate (ECO) — and the 2007 issue is no exception.)

For a summary and details on how to access the report (full document not available on line ) see here.

Chapter 2 of this year’s report looks at the impact of labour market policies on productivity. One of the key findings is that “Reforms that reduce the generosity of unemployment benefits are likely to reduce the aggregate level of measured productivity.” (p.57)

The study finds (p.76) that there is no link between UI generosity and GDP per capita among OECD countries, suggesting that any negative impacts on employment are offset fully by positive impacts on productivity. (p.76.)

Two key reasons to expect a positive impact of UI generosity on productivity are developed with supporting evidence.

First, more generous benefit systems allow unemployed workers the time and resources to find a new job which better matches their skills and experience, resulting in a better matching of the unemployed and available job vacancies. Better matching increases overall economic efficiency. The OECD cites studies which finds that more generous Unemployment Insurance systems are associated with longer-lasting, better-paid jobs for workers once they find a new job. (p.77.) In short, forcing workers to take the first available job rather than engage in a longer job search is not good for productivity.

Second, lack of income security may dissuade workers from leaving a relatively secure but not very productive job for a new, higher productivity but more insecure job. A study undertaken by the OECD finds that countries with more generous UI systems have significantly higher levels of productivity and productivity growth in “risky” sectors where a high proportion of firms fail.

In Canada, there has been a huge focus in policy research on the supposed employment disincentives of EI generosity, and very little emphasis on the positive impacts of EI generosity on economic efficiency. This should be redressed.

2 comments

  • And how does this square with the 96 jobs report which found the opposite? Either the OECD was lying then or were lying now.

    More seriously, but also more cynically: Let me make a prediction: at the tail end of the next recession the OECD will find that high UI replacement rates act as barriers to re-entry.

    It would be nice if some of this was at least tempered with some consideration of the differential effects policy is likely to have at different points in time in the economic cycle and with some respect to the structure of the economy.

    We should be wary of the OECD even if they have commissioned some reform minded liberals at this late stage in the game.

  • A study published at IZA in Germany also argues for generous UI. Author is Konstantinos Tatsiramos. Link: ftp://repec.iza.org/RePEc/Discussionpaper/dp2280.pdf)
    “… even if receiving benefits has a direct negative effect increasing the duration of unemployment spells, there is also a positive indirect effect of benefits on subsequent employment duration. This indirect effect is pronounced in countries with relatively generous benefit systems, and for recipients who have remained unemployed for at least six months. In terms of the magnitude of the effect, recipients remain employed on average two to four months longer than non-recipients.”

Leave a Reply

Your email address will not be published.