Abstract
Applying a methodology similar to Feldstein and Altman (1998) to Slovenia's unemployment insurance (UI) system, the paper shows that unemployment insurance savings accounts (UISAs) are a viable alternative to a modest, but not generous, UI system. Under the modest regime, only one quarter of workers end their working life with a negative cumulative balance and 43% ever experience a negative UISA balance; in contrast, under the generous regime, 49% of workers end their working life with a negative cumulative balance and 66% ever experience a negative balance. The simulations also show that the level of redistribution under UISAs lags behind the redistribution implied by the UI system.
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Notes
See Vodopivec (2004), for an extensive evaluation of income protection as well as efficiency aspects of UI and other income support programs for the unemployed.
In particular, Orszag and Snower (2002) show that UISAs reduce unemployment by both increasing on-the-job efforts of employed workers as well as job search efforts of unemployed workers.
In her pioneering study, Kugler (1999) examines the effects of a 1990 conversion of the severance pay program into a UISA program in Colombia. She finds that the lion's share of the costs of the transfer that firms make to the accounts of individual workers (75%–87%) shows up as a reduction of wages, implying that the likely effects of the new program on the reduction of labor demand and employment are small. She also finds that, in accordance with the theoretical predictions, the conversion increased both firing and hiring by firms, in comparison with the previous system of severance pay.
Similar to OECD countries, Slovenia provides income support to the unemployed via a social insurance program consisting of a combination of UI and unemployment assistance (UA). The program covers the majority of employed persons, irrespective of industry or occupation (the most notable exceptions are the self-employed). Under unemployment insurance, the benefits are earnings-related and the duration of entitlement is contingent on the length of work experience, with predetermined maximum and minimum levels. Benefits under UA are means-tested and offered to those who exhausted their eligibility for UI as well as to selected groups of other workers who do not qualify for UI benefits. For a review of unemployment benefit systems of European transition countries in the 1990s that summarizes both efficiency and income protection impacts, see Vodopivec et al. (2005).
According to some proposals, the adaptation of the standard UI system to suit developing countries also entails the simplification of monitoring the job search behavior and labor market status of benefit recipients and conditioning the benefit receipt with work and/or training requirements (see Vodopivec, 2009).
The fact that the Slovenian UI system was, in reality, predominantly financed by the state budget, as the combined contribution rate of employers and workers in Slovenia has been a very low 0.2% since the early 1990s, does not invalidate the above approach. Namely, as the essential ‘ingredient’, the study relies on unemployment spells of benefit recipients as experienced in the Slovenian UI system and uses them to analyze alternative financing designs, namely UISA versus UI. This is a valid approach, as long as one maintains that the incidence and duration of the unemployment spells used in simulations were independent of the method of financing (I am indebted to the anonymous reviewer for pointing out this possible discrepancy).
To avoid unnecessary complications, we assume a zero-inflation economy to avoid the indexation of UISAs.
See Vodopivec (2008) for details on the procedure and for the presentation of key labor market outcomes of the simulation cohorts.
To enable comparison with the results of Feldstein and Altman (1998), here are their simulation assumptions: contribution rate of 4%, maximum duration of benefits of 26 weeks, replacement rate of 50%, minimum prior employment requirement of 1 year, and grace period of 5 years. They report various options for the interest rate applied to UISAs, including an interest rate of 5.5% that is based on the historical real rate of return, and for the maximum accumulation amount, including 50% of the individual's wage income in the previous year, with all options producing quantitatively similar results.
Note that the average value of lifetime unemployment benefits is 11.5 and 4.7 multiple of average monthly wages under the generous and modest benefit regime, respectively.
The baseline case for UI retains the same structure end eligibility conditions of benefits as under UISA (60% replacement rate, the maximum duration of benefits of 6 months, minimum prior work requirement of 6 months in the last 12 months) and computes the implied taxation rate.
The presence of moral hazard problems in the Slovenian UI system has been shown by Van Ours and Vodopivec (2006), who take advantage of the 1998 change of the UI law, which reduced potential benefit durations, and show that following the change, the probability of leaving unemployment among UI benefit recipients significantly increased.
Compare the results of Hopenhayn and Hatchondo (2002), who study the design of UISA accounts by considering the welfare effects of different parameter specifications. Their main finding is that UISA can come close to the full insurance and optimal UI cases, and that the performance of UISAs along an efficiency/budget deficit trade-off is maximized under high taxation and low replacement rates.
The choice of the time period to which data needed to generate work histories refer may also influence the results, although for over a decade the variation of Slovenia's unemployment rate has been very modest (the unemployment rate has been slowly lowering, falling from the average of 7.4% over the last 5 years of the 1990s to 6.6% over the next 5 years) and so using data from later periods would leave qualitative results unchanged.
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Acknowledgements
The author is grateful to the Statistical Office of Slovenia and to the National Employment Office of Slovenia for providing data and to Tomaž Rejec for excellent research assistance.
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Vodopivec, M. How Viable are Unemployment Insurance Savings Accounts? Simulation Results for Slovenia. Comp Econ Stud 52, 225–247 (2010). https://doi.org/10.1057/ces.2009.18
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DOI: https://doi.org/10.1057/ces.2009.18