11 April 2012

World ranking in Unemployment Benefit replacement rates

In times of crisis, the ability of workers who lose their jobs to retain their purchasing power has important social and economic implications. A high replacement rate (ratio of unemployment benefits a worker receives relative to the worker’s last gross earning) ensures that the negative effects of rising unemployment on aggregate demand are mitigated. It also prevents workers from falling into poverty when they lose their jobs.

The table below shows the gross replacement rate in the first year of unemployment for as many countries as is available. The data is taken from a recent IMF working paper (see end of post for full reference). I have ranked countries from highest to lowest (restricting the sample to those countries which replacement rate is superior to 0). 

An interesting finding is that European countries did not have the monopoly of high replacement rates in 2000. This challenges the notion that high economic development is a necessary or sufficient condition for protection fo workers to be high. Indeed, workers who have unemployment insurance in non-EU countries sometimes score higher. For instance, in the top 10 one finds Ukraine, Algeria, and Taiwan, while Russia, Tunisia, Romania and Hong Kong make it into the top 20.

The Anglo Saxon countries rank poorly: UK (46th), Australia (43rd) and Ireland (39th); US (31st) i.e.: coming after Venezuala, Azerbaijan, Egypt, Belarus... The picture for Eastern European countries is more mixed with Bulgaria (16th), Romania (18th), Ukraine (9th) doing ok, whereas others do not do so well: Estonia (48th), Poland (41st), Czech Republic (42nd).

Country  Gross Replacement Rate, year 1   Ranking
Netherlands 0.7 1
Switzerland 0.687 2
Sweden 0.685 3
Portugal 0.65 4
Spain 0.635 5
Norway 0.624 6
Algeria 0.612 7
Taiwan 0.6 8
Ukraine 0.56 9
Italy 0.527 10
Denmark 0.521 11
Russia 0.505 12
Tunisia 0.5 13
Finland 0.494 14
France 0.479 15
Bulgaria 0.473 16
Canada 0.459 17
Romania 0.45 18
Hong Kong 0.41 19
Austria 0.398 20
Belgium 0.373 21
Argentina 0.354 22
Germany 0.353 23
Greece 0.346 24
Azerbaijan 0.338 25
Egypt 0.329 26
Venezuela 0.325 27
Belarus 0.313 28
Israel 0.307 29
Japan 0.289 30
United States 0.275 31
Kyrgyzstan 0.255 32
New Zealand 0.254 33
Latvia 0.253 34
India 0.25 38
Korea, South 0.25 37
Uruguay 0.25 36
Uzbekistan 0.25 35
Ireland 0.238 39
Hungary 0.235 40
Poland 0.226 41
Czech Republic 0.225 42
Australia 0.21 43
Turkey 0.206 44
Albania 0.202 45
United Kingdom 0.189 46
Brazil 0.152 47
Estonia 0.132 48
Lithuania 0.117 49
Chile 0.115 50
Georgia 0.09 51

Data taken from: Mariya Aleksynska and Martin Schindler (2011) Labor Market Regulations in Low-, Middle- and High-Income Countries: A New Panel Database. IMF Working Paper.

17 comments:

Kenneth Thomas said...

Great post. Where did you find the data for individual countries? I couldn't find it in the paper linked here (http://www.imf.org/external/pubs/ft/wp/2011/wp11154.pdf), only various averages

Tim Vlandas said...

Thanks! The underlying data of the working paper can be accessed at: http://www.frdb.org/language/ita/topic/archivio-dati/dataset/international-data/scheda/IMF-labour-institutions-database. Let me know if it doesn't work.

Anonymous said...

I would have thought Australia's would be vastly superior to the USA's. So I question the accuracy based on that.

Anonymous said...

Check out this infographic comparing EU wages vs EU unemployment rates
http://www.targetonlinemarketing.com/en/blog/196-infographics-ireland-2012-eu-unemployment-vs-eu-minimum-wage.html

Anonymous said...

Interesting. A good follow-up analysis would determine if the citizens of the countries with the greater benefits are "lazier" than Americans, since the GOP/Tea Party insists that UI benefits make people lazy. Under their argument, the citizens with the best benefits should be substantially lazier than Americans. Are they? (Somehow I doubt it)

Tim Vlandas said...

Thanks - my understanding of the current evidence is that replacement rates do not have adverse effects on "lazyness". The design of the benefits - for instance access to training of quality, search monitoring, conditional receipts of benefits or public employment services - is more important as a predictor of both unemployment duration and aggregate unemployment. The experience of Nordic EU countries is generally pointed to, since they have among the highest employment rates with fairly generous - and well-designed - labour market policies.

Eugenio Facci said...

Hi Tim, great post. I'm a journalist and I'm writing a piece that partly explores this topic. I'm trying to work around a methodology problem and maybe you can help. In some countries (e.g. Italy) you are often not eligible for unemployment benefits, you must meet some strict criteria like having been employed on a specific type of contract for at least 3 years etc...Do the data you posted show the average for all unemployed workers or only for unemployed workers that are eligible for benefits? I doubt Italy would rank highly if all unemployed workers were considered. Thank you Tim, any input much appreciated and congrats again on this helpful blog!

Tim Vlandas said...

Thanks for your comment, Eugenio. There are at least four relevant dimensions to consider when assessing unemployment benefit schemes. First is the replacement rate: how much of your previous working income can you derive from benefits. Second, the coverage rate: how many people are covered by the insurance scheme. As you rightly point out, this is crucially determined by the eligibility conditions (e.g.: number of years of prior contributions for eligibility to occur). Third, what conditions are attached to continuing receipts of the benefits (e.g.: 'actively' searching for a job, undertaking some training, or taking part in some work scheme - 'workfare'). Last but not least, the duration of the benefits: how long will you receive the unemployment benefits.

Thus, replacement rates by definition do not take dimension (2) and (3) into account. It could be that unemployment benefits are generous but restricted to some segment of the population (and this is often the case in developing countries). However, as is apparent from the discussion above, one needs to decide what period is considered to assess the replacement rate. It could be for instance, that in the first year the replacement rate is high (e.g.: 80%) but falls to 0 in the second year. Considering the first two years would give you an average of 40%. And you get the same number for a case with 40% in year 1 and 2, even though this represents a different situation. Thus, it's always better to consider the replacement rates in different years separately, when data is available (which is the case for OECD countries, more difficult for non-OECD countries). Another thing to be aware of when discussing replacement rates is for what previous income. It is often the case for instance that the replacement rate is different for different income groups. Thus, in most system, there will be a degree of progressivity, i.e.: the top 10% would not get a replacement rate which is as high as a worker earning say 60% of the median wage.

Hope this helps,

Look forward to reading your article!

Big Bill said...

So in some senses the world is well on the way to actually having a basic or citizen's income already. Interesting stuff.

Daffers17 said...

Has anyone done a similar study into how welfare benefits for the long- and short-term sick or disabled? I'd like to see this.

Tim Vlandas said...

James Allan and Lyle Scruggs have done research on both unemployment and sickness insurance levels. Have a look at their 2004 paper which is freely accessible at:
http://www.sp.uconn.edu/~scruggs/ajpspaper.pdf

Anonymous said...

Do these figures take into account possible additional UK benefits, such as housing benefit, Council tax benefit, increase or eligibilty for WFTC or CTC for a couple/couple with children, in comparison with other countries?

Tim Vlandas said...

No, the figures do not take into account means tested benefits, which generates an important source of downward bias when comparing these figures with countries with less generous means tested benefits. This is more problematic to gauge the overall generosity of the benefit system for low income workers.

That being said, the figures still tell you something for those unemployed workers that may not be eligible for means tested benefits, which could even be the case for people who do not have money but leave with a spouse that still has a job or has important savings. Thus, to gauge the evolution of a welfare system over time it's important to look at all policies in depth and how they combine to generate certain entitlements. For more on the UK, there is some good research by Peter Taylor-Gooby, Jochen Clasen, Daniel Clegg, Paul Pierson, Esping Andersen and others!

Jason Norin said...

The rate of unemployment presented should be very accurate at all times. We cannot strike the culprit if the target is blurry. Having a protection like income insurance is good enough bu striking the main enemy is something that should be dealt with seriously.

Dennis Blades said...

I would be interested to see the highest paid MP's.

Jack J said...

Okay I've been mulling over the figures presented what the 'gross replacement rate' actually is and represents.

The author has stated "A high replacement rate (ratio of unemployment benefits a worker receives relative to the worker’s last gross earning) ensures that the negative effects of rising unemployment on aggregate demand are mitigated."

If I am understanding the definition correctly it is the difference between unemployment benefits and average earnings in a ratio format, correct? Assuming the data is accurate the analysis that can be drawn from this data-set is that for example the difference between UK unemployment benefits and average earnings are greater than in Romania. What this does not show is that Romanian benefits are more generous as is being claimed in the article below; http://www.dorseteye.com/north/articles/uk-unemployment-benefit-less-generous-than-romania-albania-and-the-us

The fact that there is greater divide between unemployment benefits and earnings does not confirm one nation is more generous than another. It could be argued that earnings are simply a lot higher in the UK and people are better off or to put it another way, people in Romania are not so well off. I know the author here is not to blame, but I would welcome his thoughts on this issue.

I think this is a very interesting piece with scope for greater detail and discussion but I wonder what other benefits are being neglected from the study. UK housing benefit can often make up a larger proportion of a claimants benefit entitlement and yet this does not feature. I don't know how generous other nations are in regards to housing. Likewise the UK offers Attendance Allowance, Carer's Allowance, Child Benefit, Child Tax Credit, Disability Living Allowance and Income Support. How as a collective would the UK rank when compared to other nations pooling their respective benefits?

ukulelehaven said...

Questioning anything's accuracy based on a wild assumption is hardly scientific enquiry, is it?