By Anand Sahasranaman, IFMR Finance Foundation
This is the first post in the Unemployment Support in India series. In this series, we will explore the unemployment support mechanisms in India today; use comparative case studies of national experiences in Eastern Europe, South East Asia, and Latin America to throw light on those aspects in India that are lacking; and explore possible ways forward for a comprehensive program of unemployment assistance.
Social Security is widely seen as a fundamental building block of a just and equitable society. While ideas of welfare, pension and charity have been with us since the times of the earliest civilizations, the modern concept of social security can arguably trace its origins to the aftermath of the industrial revolution. The profound changes in social and economic structures wrought by the industrial revolution created the environment for the development of organised systems of welfare provision spearheaded by the state.
The International Labour Organisation1 defines “social security” as comprising of nine elements: medical benefits, sickness benefits, unemployment benefits, old-age support, employment injury support, family support, maternity benefits, invalidity benefits and survivor’s benefits. As per this definition, unemployment support or benefit is a core component of a well-functioning social security system.
Unemployment benefits enable households to smooth consumption at times of job-related distress, which is especially critical for middle and low income households who may otherwise slip into poverty. Unemployment benefits could also accelerate economic recovery by boosting domestic demand for goods and services.
What does “unemployment” mean? The definition of this term is critical in determining eligibility for unemployment programs and products. Okochi (1952)2 stresses three aspects of unemployment: that it denotes a worker who has no means of production and has lost her job; that the unemployed worker retains her willingness to work; and that the worker remains unemployed if she does not find a job that is appropriate for his skills and ability. Self-employed workers therefore fall outside the purview of unemployment related social security policy and their problems of poverty or underemployment should be tackled by other industrial or educational policies3.
In general, we find that unemployment benefit programs under the social security framework consist of ‘active’ and ‘passive’ policy options to provide support to those who are without a job. ‘Passive’ policies aim to provide temporary income support for the unemployed – severance pay, unemployment insurance, and unemployment assistance. ‘Active’ policies involve support to unemployed to enable transition to new employment – work programs, career counselling and training4.
Labour law could require severance pay for the employee upon termination of work contract. Unemployment Insurance Programs involve contributions from employer, employee and in some cases, government, and provide pay-outs for a defined duration upon unemployment. Unemployment Insurance Savings Accounts (UISA) are private savings accounts that workers can draw on in case of unemployment and they generally contain no risk-pooling mechanisms. Unemployment Assistance provides for means-based benefits for those in greatest need. Finally, Work Programs are designed to select the neediest households at minimum wage in exchange for the creation of public works.
Most countries have some combination of active and passive market policies, which are largely dependent on their political philosophies and labour market structures. A country like India, where 93% of the workforce is in the informal sector5 may well need a vastly different approach to unemployment support than western economies, where the labour markets are predominantly formal. These structural characteristics are critical both to understanding the rationale for current strategies for unemployment assistance in India and gaps in the present design. Additionally, lessons from global experience in unemployment support mechanisms will provide us useful pointers to alternate approaches and frameworks, which could be appropriately adopted to the Indian context .
1 – ILO Social Security (Minimum Standards) Convention 1962
2 – Okochi, Kazuo, “Overview” Okochi (ed.), Unemployment, Kawade Shobo, 1952
3 – Kamimura, Yasuhiro, “Employment Structure and Unemployment Insurance in East Asia: Establishing Social Protection for Inclusive and Sustainable Growth
4 – Berg, Janine and Matthew Salerno, “The Origins of Unemployment Insurance: Lessons for Developing Countries” in Janine Berg and David Kucera (eds.), In Defense of Labour Market Institutions: Cultivating Justice in the Developing World, Palgrave Macmillan, 2008
5 – Based on Ajaya Kumar Naik’s paper titled “Informal Sector and Informal Workers in India”