ILO is a specialized agency of the United Nations

276th Session
Geneva, November 1999

Committee on Employment and Social Policy



Economic and financial crises -- ILO policy and activities

Unemployment, social protection and crises: Trends and issues



I. The social consequences of crises

II. The concept and role of social protection

III. Unemployment protection: Trends and policy issues

IV. Policy discussion

V. Concluding remarks

Appendix. References


1. Since the onset of the Asian financial crisis in 1997, the ILO has discussed the social consequences in various forums. The ILO High-Level Meeting on Social Responses to the Financial Crisis in East and South-East Asian Countries (Bangkok, 22-24 April 1998; GB.272/4) was followed by the Governing Body Symposium on the Social Impact of the Asian Financial Crisis (Geneva, 19-20 March 1999) and the Informal Tripartite Meeting at the Ministerial Level on Economic and Financial Crises -- ILO Action (Geneva, 9 June 1999), held during the International Labour Conference. One of the main conclusions of these meetings was that the severity of the social impact was aggravated by the relative neglect for the development of social protection during the decades of the Asian economic miracle.(1)  The Reporter of the Governing Body Symposium concluded that: "The highest priority should be given to the strengthening of systems of social protection. Possible measures include the introduction of unemployment insurance and the expansion of social assistance schemes to relieve extreme poverty."(2)  In view of this conclusion, the Committee on Employment and Social Policy asked the Office to prepare a paper on how social protection mechanisms against unemployment can help prevent and cope with crises.

2. This paper is based on a variety of studies and technical advisory services that the Social Security Department and some of the MDTs have carried out in the recent past. Within the context of the World Labour Report for the year 2000, the department undertook a review of unemployment benefit schemes worldwide. In addition, the MDT in Santiago de Chile surveyed the experience of Latin American countries in regard to unemployment insurance, vocational training and employment services (Conte-Grand, 1997). Some of the material used in this paper is also based on ILO technical advisory services. In recent years, the Social Security Department has reviewed social security systems, including unemployment insurance schemes, in countries such as Egypt, the Russian Federation and South Africa. In addition, at the request of the Government of Thailand it undertook, together with the multidisciplinary team in Bangkok, a detailed study on the feasibility of introducing an unemployment insurance scheme (ILO, 1998a).

3. This paper first analyses the potential impact of different types of crises (armed conflict, natural disasters, economic downturns and political transitions) on employment, earnings and social policies (social services, employment, food subsidies, social assistance and social security). The second section reviews the concept and role of social protection, while the third gives a brief overview of existing unemployment protection measures in various parts of the world and summarizes the main trends and issues. The last section provides a policy discussion on the function of unemployment protection measures -- before, during and after crises. That section also highlights the place of such measures in the overall set of ILO policy instruments, such as social dialogue, as well as employment and training policies.

I. The social consequences of crises

4. A large number of complex crises today have a direct impact on the world of work, in particular on employment (ILO, 1999a). One of the most visible recent crises has been that in Asia, which brought a sudden and substantial contraction of output and employment in the region, leading to massive job losses in the formal sector of the economy, rapidly rising unemployment and an expansion of the informal sector. One in every four jobs in the formal sector of the Indonesian economy was lost, and an additional 20 per cent of the population now lives in poverty. The Republic of Korea has seen a nearly fourfold increase in the unemployment rate, estimated in February 1999 at an unprecedented 8.8 per cent.

5. However, economic and financial crises are not the only form of crisis that can result in massive unemployment. There have been in recent years many armed conflicts, particularly in sub-Saharan Africa (Angola, Congo, Liberia and Rwanda for example) and also in Europe (Bosnia and Kosovo). In such situations there is an urgent need for food aid to prevent people from starving, followed up by support for reintegrating into society and the labour market the diverse conflict-affected groups, such as refugees and returnees, internally displaced people, demobilized combatants, the increased numbers of female heads of households, disabled persons, child soldiers, war-affected youth and orphans.

6. Several countries continue to be afflicted by natural disasters, such as recurrent drought and floods (in Africa and Asia), earthquakes and hurricanes (Turkey and Central America), which leave many communities not only without homes and sources of income, but also wipe away decades of their countries' efforts in development. The recent hurricane Mitch in Central America had a devastating effect on various countries, in particular Nicaragua and Honduras. An analysis of the consequences found that the disaster would have had a much smaller negative impact in the developed countries on account of their better social and economic infrastructure and their higher standards of living (Barahona et al., 1999).

7. Finally, there has been the traumatic crisis faced by countries making economic as well as political transitions. The transition in Central and Eastern European countries led to unprecedented unemployment, which persists in some of those countries. In addition, the peaceful transition from the apartheid regime to a democratic and inclusive one in South Africa has not as yet yielded increases in levels of employment, nor have economic conditions yet improved for the majority of the population.

8. The severity and duration of the social consequences of such crises will to a large extent depend on the social and economic institutions of the countries affected. In the case of political transitions, such institutions will have to be built or rebuilt, with the result that the transition period is likely to be long. In situations such as the financial crisis in Asia, new social institutions such as unemployment insurance will be needed in order to cope with the social consequences. In the case of armed conflicts, many economic and social institutions have been wiped out, and here too rebuilding is necessary. Finally, natural disasters usually affect only certain regions in the country, so that existing institutions can be strengthened to provide support.

9. Most crises have a common impact displayed in an economy-wide shock that affects the employment and incomes of broad groups in society, and in particular the poor and other vulnerable labour market groups. Some of the main transmission mechanisms in this process are the following (Lustig and Walton, 1999):

(i) reduced employment, either directly through lay-off of workers or indirectly through reduced demand for the product of household enterprises;

(ii) price inflation, which can increase the cost of a poor family's consumption basket, or through its effect on economic activity and, therefore, on employment;

(iii) public spending cuts, which reduce employment as well as the quantity and quality of social services consumed by the poor;

(iv) destruction (in the value) of assets, and particularly in community- and family-based institutions and networks that may affect people's capability of putting labour to income-earning use;

(v) long-term impact on capabilities, mainly driven by falls in the school attendance rates of poor children called on to work as additional sources of income or family labour, or by the inability of the family to afford the cost of school attendance.

II. The concept and role of social protection

10. Social protection -- social security and non-statutory social benefit schemes -- has a major role to play both in the prevention of certain types of crises and in coping with their consequences.

1. The concept of social protection

11. In this paper social security is defined as the protection that society provides for its members, through a series of public measures (ILO, 2000) with the following aims:

12. Social security is defined to include social insurance (i.e. contributory schemes), social assistance (i.e. tax-financed benefits provided only to those with low incomes) and universal benefits (i.e. tax-financed benefits, provided without being income- or means-tests). Social protection is defined to include not only public social security schemes, but also private or non-statutory schemes with a similar objective, such as mutual benefit societies and occupational pension schemes. Social protection includes all sorts of non-statutory schemes, formal and informal, provided that the contributions to the schemes are not wholly determined by market forces. These schemes may feature, for example, group solidarity, or an employer subsidy, or perhaps a government subsidy.

13. In the discussion on social protection, the term "social safety net" is often used, in particular by the World Bank and IMF. The World Bank uses a very wide concept (Subbarao et al., 1997) that includes social services (health and education), all that is defined here as social protection, as well as food security measures, labour-intensive public works and credit schemes for micro-enterprises. The IMF uses a somewhat narrower concept, excluding social services and credit schemes for micro-entrepreneurs (Chu and Gupta, 1998). The advantage of a relatively broad concept is that it expresses the need for an integrated package of measures -- a concern that is shared by the ILO and further developed in later sections of this paper. However, the term "social safety net", as used by the World Bank and the IMF, is ambiguous because it traditionally refers to basic protection of last resort, and in particular to social assistance. Most social protection and unemployment benefit systems aim to provide more than merely basic, and often means-tested, benefits. This paper therefore uses the term "social protection" to convey a specific and more precise notion.

2. The role of social protection

14. The main role of social protection is to provide income security, i.e. through transfers to those without sufficient means or income and through benefits for those who have made social security contributions. In the case of unemployment protection, additional objectives are the promotion of efficient job search and the smooth adjustment of the labour market, which may reduce resistance to structural change. Income security helps make societies more stable and less prone to crises. If crises do occur, their social consequences are mitigated by the existence of social protection mechanisms.

15. In developed countries the proportion of GDP that is redistributed through the social protection system has grown rapidly over the past 50 years, and now absorbs almost 25 per cent of their GDP (including expenditure on health care). It has been successful to a great extent in alleviating the poverty which might otherwise have been associated with the risks of ill-health, old age, disability and unemployment. It has also provided much-needed protection against fast-rising unemployment after the oil crises of the mid-1970s and the early 1980s. It has also been associated with large-scale proactive public policies of training and education, which have encouraged individuals to regain employment once they have lost it.

16. For the most part these developments rest on the basis not only of economic growth but on good governance, full -- or nearly full -- employment, well-regulated labour markets, and almost complete coverage by social security programmes in terms of benefits and contributions. Nevertheless, social security schemes in these countries face a number of new challenges, such as new forms of poverty, atypical forms of employment and changed family structures.

17. The situation in developing countries and many middle-income countries is more complicated since large parts of their labour force work in the informal sector and many workers are underemployed rather than unemployed. In contrast to earlier expectations, the scale of the informal sector has grown rather than diminished. In low-income countries, typically only 10 to 15 per cent of the labour force is covered by statutory social security, while that percentage can vary from 20 to 50 per cent in most middle-income countries. The extension of social security alone cannot therefore be relied on to ensure coverage of the majority of the population.

18. In order to help provide basic social protection to all and to cope with crisis situations, some governments have introduced social assistance schemes. Others have become increasingly interested in the development of government and/or self-administered schemes for the population of the informal sector. Such schemes -- essentially micro-insurance schemes (Dror and Jacquier, 1999) -- would offer basic social protection in return for small contributions. They would not directly replace the crisis-induced income losses suffered by informal sector workers. Usually health insurance schemes, they would help to ensure that the earning capacity of informal sector workers remains unimpaired. In addition, they may protect the incomes of informal sector workers and their families in the event of death and disability. Ultimately what is sought, at best, is a rational collaboration and, ideally, integration, between formal and informal social protection mechanisms, which will enable social protection to be spread widely and generously across the population.

III. Unemployment protection: Trends and policy issues

19. The World Employment Report 1998-99 (ILO, 1998b) estimated that at the end of 1998 some 1 billion workers -- one-third of the world's labour force -- were either unemployed or underemployed. The actual number of unemployed people -- those seeking or available for work but unable to find it -- had reached about 150 million by the end of 1998. In addition, 25 to 30 per cent of the world's workers -- between 750 million and 900 million people -- were underemployed, either working substantially less than full time while wishing to work longer, or earning less than a living wage.

20. Only a small minority of the world's workers benefit from unemployment protection, and they are mainly concentrated in the industrialized countries. Unemployment insurance schemes have recently been set up in various transition countries and in middle-income developing countries such as the Republic of Korea, but in general the schemes cover only a minority of the workforce, i.e. those with employment contracts in the formal sector. These workers are usually also protected by job security measures laid down in legislation or collective agreements. But most of the workforce in the developing countries are underemployed workers in rural areas and in the urban informal sector who have virtually no protection against unemployment. Many low-income and some middle-income developing countries have put in place labour-intensive infrastructure programmes that provide employment for the underemployed.

21. The essential role of unemployment benefits is to provide income security during spells of involuntary unemployment. Unemployment benefits thereby help smooth consumption, both at the individual and macroeconomic levels, promote efficient job searching and facilitate structural change, while ensuring a better match between supply and demand in the labour market. Finally, by transferring the uncertainty of risk from the individual to the community, social insurance financing enhances the welfare of the community as a whole (ILO, 1976).

22. In principle, in so far as short-term and frictional (time lags between jobs) unemployment varies unpredictably and is small, it is amenable to insurance. Unemployment benefit schemes have generally preserved their financial viability by a variety of mechanisms, such as defining the contingency in precise terms; being explicit and often restrictive about coverage; and attaching to the provision of benefits a range of controlling and other conditions of which the duration of benefits is probably the most important. However, it is clear that in periods of crisis the expenditure of unemployment insurance schemes will exceed their revenue. This difference could be financed out of the scheme's reserves, by increased contribution rates and by government lending and/or subsidies. During the severe recession of 1998, the Republic of Korea gave a substantial extra subsidy to the unemployment insurance and social assistance schemes to compensate the unemployed for lost earnings. Some countries, such as the United States, have increased the duration of unemployment insurance benefits in the event of high unemployment.

23. A common feature of mass retrenchments in times of crisis is that they are often caused by factors beyond the control of individual workers and employers, whose livelihoods are put at risk. Downturns appear to be an inherent part of market economies, which is why unemployment insurance has been established in OECD countries. Such measures in many less industrialized countries have been considered unnecessary (during prolonged and rapid growth periods), unaffordable (except for the small minority of workers in public enterprises and the largest formal sector corporations), or even possibly counter-productive (leading to increased dependency by individuals on the State). In most of these countries, workers displaced from formal jobs were expected to be absorbed by the urban informal sector or to return to subsistence farming. This "strategy by default" has proven woefully inadequate to provide replacement livelihoods to most retrenched urban workers and those already in the informal sectors. Growing poverty in turn delays the resumption of economic growth by prolonging reduced levels of domestic consumption and savings.

1. OECD countries

24. OECD countries have also suffered unemployment crises, as illustrated by the two oil crises of the mid-1970s and the beginning of the 1980s. It is relevant to review their experience with unemployment insurance schemes here, since they can provide a benchmark for other countries. Almost all OECD countries have unemployment benefit schemes based on compulsory social insurance. When entitlement to unemployment insurance benefits runs out, the long-term unemployed are entitled to either special unemployment assistance or general social assistance benefits. Most workers also benefit from employment protection governed by labour legislation and collective agreements. The strictness of employment protection systems is measured by an OECD index covering different aspects, such as statutory notice periods, procedural inconveniences, the level of severance pay and rules governing unfair dismissal (OECD, 1994).

25. Most OECD countries in the 1990s reduced the protection provided by their unemployment benefit systems as a result of the increasing financial strains experienced by the State and the unemployment insurance systems (Schmid and Reissert, 1996). A second factor was the growing awareness of the potentially negative effects of unemployment benefits on unemployment. Partly based on various studies at the beginning of the 1990s, The OECD Jobs Study (1994) found evidence that there is a long time lag between increases in benefits or benefit durations on the one hand, and unemployment rates on the other. Two more recent ILO studies also reviewed the evidence of the effect of unemployment benefits on unemployment. Graafland (1996) concludes that "the influence of the replacement ratio and benefit duration seems to be neither large nor negligible".

26. According to a recent study (OECD, 1999) on employment protection, there appears to be little or no association between the strictness of employment protection legislation (EPL) and overall unemployment. However, the study does point out that regulations may have hit adversely younger and older workers but not prime age men. Another finding of the study is that fewer individuals become unemployed in those countries where employment protection is stricter, but once unemployed, they have a higher risk of remaining unemployed for a long period of time. A recent ILO paper shows that in some European countries with high employment protection legislation (such as Spain and Italy), labour court rulings on disputes arising from termination of employment contracts might be more favourable to workers since the level of unemployment insurance beneficiaries is so low -- less than 20 per cent of the total unemployed (Bertola, Boeri and Cazes, 1999). More research would be needed on the question of whether there is a basic trade-off between dismissal protection at the firm level and unemployment insurance protection at the macro level, and how changes in one system might affect the other (Auer, 1999).

27. At the policy level, there is a clear trend towards the activation of labour market policies within which unemployment benefits and social assistance will have to play their roles. This is the cornerstone of the European Employment Strategy and is expected ultimately to lead to an increase in employment rates. Reducing the share of protective labour market policies and increasing the share of active policies is at the top of the agenda. A new social contract between the unemployed and the labour market administration is envisaged: the terms of this contract are that after a defined period of receiving unemployment benefits, a regular job or an active labour market measure has to be offered. From that moment on (as a rule before six months for youth, 12 months for adults) benefits are only available in exchange for active participation in work or training. This should be seen both as a right to activation and a duty for the unemployed to participate in active labour market policy measures.

28. Simultaneously, the regulations on benefit claims and demonstrable job search activities have tightened considerably in most industrialized countries. For unemployed persons and those at risk of dismissal this may reduce the likelihood of being trapped in unemployment by the generosity of unemployment benefits (Atkinson and Micklewright, 1991; Addison and Portugal, 1998). Policy reforms aimed at strengthening the link between contributions and benefits within the unemployment insurance system are also likely to reduce the risk of an unemployment trap for those insured, but they can also reduce the scope of coverage since new labour market entrants or those who wish to return to the labour market from household activities would be excluded. However, a recent reform of Canada's unemployment protection system shows that strengthening the insurance element can be combined with the achievement of greater coverage for part-time workers.

2. Central and Eastern Europe

29. After 1989 most countries in Central and Eastern Europe (CEE) were faced with the new phenomenon of open unemployment. It was thought that the transition would succeed if those employed in obsolete enterprises could be retrained. As more and more enterprises were forced to lay off staff, many employees were encouraged to take early retirement. Just after 1989, many CEE countries successfully established employment funds that provided unemployment benefits and labour market support when unemployment was still very low. Unfortunately, rising and persistently high levels of open unemployment in countries such as Bulgaria, Hungary, Poland and Slovakia caused unforeseen strains on the unemployment benefit systems, leading to tighter eligibility rules, lower levels of replacement, shorter duration of benefits and lower beneficiary rates.

30. In most Central European countries unemployment rates have fallen, sometimes because the unavailability of jobs discouraged entry into the labour market. In a number of countries rates are presently rising, partly as a result of the Kosovo conflict. In some Eastern European countries, such as the Russian Federation, unemployment and poverty have risen dramatically in the last two crisis years. The Russian unemployment scheme reaches only a fraction of the total number of unemployed. Hidden unemployment, combined with the simple non-payment of wages to employed and actually working people, has emerged as a major social policy problem. The unemployment benefit system can only provide benefits when persons are actually registered as unemployed. As long as a major part of the workforce is kept on unpaid leave or administrative leave, or works without being paid, no insurance benefits can be paid. In effect, neither the unemployment benefit system nor the social assistance scheme can provide benefits to the "employed poor" on a regular basis. The present number of recurrent social assistance beneficiaries is unknown, but the estimate of about 15 per cent of the population who live in extreme poverty might serve as a conservative estimate for the potential size of the population group, which is in urgent need of improved social assistance benefits (ILO, 1999b).

3. Middle-income developing countries

31. Unemployment benefit systems have been set up in middle-income developing countries such as the Republic of Korea and Mexico, where the duration and level of benefit payments are generally low and coverage is limited. These countries have only recently established systems of unemployment protection, and existing regulations and arrangements are subject to rapid change. By contrast, formal sector employees -- and in particular government employees -- are usually covered by various forms of employment protection legislation in many middle-income developing countries. This is the case in Egypt, where 40 per cent of the labour force between ages 20 and 24 are unemployed and 94 per cent of total unemployment affects the 15-29 age group. Since these young unemployed have not contributed to unemployment insurance, they are not entitled to benefits. Meanwhile, they have to find work in the informal sector; those seeking a government job have to wait for an average of 13 years.

Latin America and the Caribbean

32. The traditional emphasis of labour market regulation in Latin American countries is securing employment stability by protecting workers from arbitrary dismissal (Márquez, 1995), and providing lump-sum termination benefits to help tide unemployed workers over spells of unemployment. Severance payment schemes are mainly tenure- and earnings-related, so that employers' termination costs are steeper for workers with longer employment attachment. More recently, countries such as Chile and Colombia have experimented with individual severance savings accounts, which accumulate a fund to be withdrawn by the worker in the event of employment termination. Various countries reduced employers' termination restrictions and costs in the 1990s, and some have transformed severance compensation schemes into mandatory severance saving schemes.

33. Several countries (Argentina, Barbados, Brazil, Chile, Ecuador, Mexico, Uruguay and Venezuela) have implemented, or are introducing, unemployment insurance schemes integrated within their social insurance schemes. Unemployment insurance schemes are of more recent origin; in most cases they are complementary to severance schemes. Coverage under unemployment insurance schemes is very restrictive in most countries. It usually excludes the wage earners who are most vulnerable to spells of unemployment, such as construction, domestic, agricultural and young workers.

34. An appreciable change is the recent emphasis on developing employment services for the unemployed (Conte-Grand, 1997). In the 1990s, Argentina, Mexico, Peru, Uruguay and Barbados introduced measures aimed at devising or augmenting active labour market policies in an effort to deal with the problem of unemployment. These include strengthening labour market intermediation services and the flow of information on vacancies and skill shortages; managing training programmes for the unemployed; facilitating worker mobility from public to private sector employment and micro-enterprises; and providing job subsidies for the unemployed.

South and South-East Asia

35. As of 1998 only three economies (China, the Republic of Korea and Mongolia) had any form of unemployment benefit scheme. Where formal benefits are available, they appear to be generally modest. In the Republic of Korea just half of all employees are covered. Elsewhere, coverage extends only to a minority of formal sector employees.

36. Various other countries, such as Bangladesh, India, Indonesia, Malaysia, Pakistan and Sri Lanka have employer liability schemes to disburse severance or retrenchment payments on termination of employment. Only a (small) minority of the working population -- from larger companies in the formal sector -- is effectively covered by the schemes. The linkage of these gratuities to length of service makes them more akin to a retirement provision for long-service employees than an unemployment benefit scheme. Workers with short periods of employment receive gratuities that support them for only limited periods of unemployment.

37. The recent Asian financial crisis has made it clear that unemployment insurance schemes could play a substantial role in coping with the unacceptable levels of hardship caused by rapidly escalating unemployment. Had unemployment insurance coverage been sufficiently extensive in the countries affected by the crisis -- for example by extending it to all employees in enterprises with more than five workers -- then a majority of job losers would have been eligible for unemployment benefits. The Republic of Korea's unemployment insurance scheme has been rapidly expanded in response to the massive increase in unemployment. Moreover, a recent feasibility study carried out by the ILO for Thailand (ILO, 1998a) estimates, on the basis of an economic recovery scenario, that the required contribution rates for a scheme that pays benefits for six months at a level equal to 50 per cent of previous earnings would be 2.5 per cent of payroll in the first year of operation, but would fall steadily thereafter to 0.6 per cent by the seventh year. This rate allows for the accumulation of a reserve equivalent to one year's expenditure on benefits.

4. Low-income developing countries

38. Countries with a small formal sector, such as those in sub-Saharan Africa, usually do not have unemployment insurance schemes. Pensions are the predominant social security schemes for workers in the formal sector. The absence of a developed labour market and of active labour market policies makes it difficult to introduce traditional unemployment insurance schemes in these countries.

39. However, some underemployed workers in the low-income -- but also in the middle-income -- developing countries have been assisted by labour-intensive infrastructure programmes. Infrastructure works are undertaken mainly during the lean season when small farmers and landless (hired) workers are not engaged in agricultural operations and have no alternative sources of employment. In an urban setting they could also be undertaken during periods of recession or crises. These employment-intensive programmes can generate employment and significantly reduce poverty by applying labour-based (and cost-effective) construction techniques to mainstream investment programmes and orientating investments increasingly towards the productive and social needs of the poor and low-income groups of the population. The provision of such employment can be achieved through a reorientation of existing and planned investments, and does not therefore have to be financed through government deficit spending.

40. The scale of such programmes can vary from one country to the other. Employment created by India's monumental Jawahar Rojgar Yojuna ("income-earning") programme (JRY) had reached 1 billion work-days by 1995, covering 123 of the country's 350 underdeveloped districts. In 1992, JRY generated about 20 work-days per participant, or 62 work-days per family (Subbarao et al., 1997). Similar programmes on a smaller scale have also been operated in the urban and rural areas of Latin American countries such as Bolivia, Chile and Honduras. In eastern and southern Africa, ILO-supported employment-intensive programmes have been operating in Botswana, Kenya, the United Republic of Tanzania, and more recently in South Africa. Finally, the umbrella organization AFRICATIP groups together some 18 AGETIPEs (French acronym for "executing agency of employment-intensive public works") in French- and Portuguese-speaking countries which organize, on behalf of municipalities or government ministries, and with financial support from the World Bank, public works for implementation by small local contractors.

IV. Policy discussion

41. It goes without saying that preventing a crisis is always better than coping with its consequences. So, the first protection against unemployment is a comprehensive policy aimed at full employment, consisting of macroeconomic policies at the national and international levels; sectoral, regional and local policies; and labour market and training policies. Similarly, as stated above, a solid, broad-based social protection policy can provide a buffer against many of the negative social effects of crises. The paper has also pointed out that many middle-income developing countries do not have unemployment insurance or social assistance schemes that could provide basic social protection in times of crisis. Under what conditions could social protection schemes be maintained and new ones set up, and how would they relate to other economic and social policies, such as macroeconomic, labour market and other anti-poverty policies?

42. In times of crisis, the entire social protection system may be at risk. Social security contributions and tax revenues can drop significantly, with the result that fewer resources are available to cope with the crisis. ILO experience -- for example in Bulgaria in the aftermath of the hyperinflation of over 1,000 per cent in 1997 -- has shown that an in-depth analysis of the (macro)economic aspects of the crisis situation is indispensable to provide practical policy advice on social protection. This is even true where a crisis under consideration is not primarily economic but predominantly political, or a natural disaster or of some other nature. Understanding the economics of a crisis may often constitute 50 per cent of its solution. Within its overall socio-economic strategy the government will have to design a social protection strategy that will first have to cope with the short-term negative social consequences, and then facilitate the transition from an emergency situation to the (re-)establishment of a sustainable social protection system.

1. From emergency benefits to sustainable social protection

43. The first component of such a strategy would be to make a poverty and needs assessment of the population. Which population groups have been most affected by the crisis and are therefore most vulnerable: pensioners, the unemployed, widows, orphans, disabled persons, etc.? What is under the current circumstances the poverty line, and what is it likely to be over the next year, given trends in inflation? What are the present shortages of food, health care and education in the country, and what policies can usefully address these shortages? What is the basket of minimum necessary consumption in terms of food, health and housing, and how can it be costed in terms of prices in various parts of the country? A limited household survey could be undertaken to provide an answer to most of these questions.

44. It should not be accepted a priori as conventional wisdom that developing countries do not have the resources to improve at least their social assistance schemes. Well-planned and managed schemes will not necessarily require huge amounts of resources. The important thing is to ensure that they are properly managed and built on political consensus, which could require a considerable political investment. The present society-wide debate on the extension of social assistance in South Africa shows that it can at least be tried. Such transfer schemes could be combined with employment-intensive public works programmes; if tightly managed, innovative schemes might also attract international financing.

45. The second component would be to design the emergency social benefit system and to assess the feasibility of a social assistance system for people living under the poverty line. Such a system is likely to be mainly feasible in the middle-income developing countries. For this purpose a number of activities will have to be undertaken:

(a) to fix the benefit level for different groups and parts of the country;

(b) to assess the available resources based on the economic and budgetary situation and their probable short- to medium-term development;

(c) to estimate the financial resources needed for the payment of the emergency benefits (initially, these resources may have to be financed by international donors);

(d) to design the means test, that is to determine the conditions under which people will be entitled to benefit, taking into account their income and assets;

(e) to identify and train the institution(s), such as the existing social security administration and/or local government offices, that will have to administer the means test and pay out the benefits.

46. The third component would be to assess to what extent the current statutory social insurance system is still functioning. To what extent are pensions and other social benefits still paid out? How adequate is the financing and staffing of the system? On the basis of the assessment, various options will be developed to restore the statutory social insurance system in the post-crisis situation. Important questions to be investigated here are: (a) the extent to which workers will be able to contribute to the financing of the benefits; (b) the functioning of the existing social insurance system; and (c) the adaptation of the system to the new social protection needs in the post-crisis situation.

47. The fourth component would be to identify and support various areas and occupational groups that may have the potential to develop contributory and participatory social protection schemes, such as health insurance, mutual aid activities and childcare, as well as savings and credit schemes.

2. The role of unemployment insurance

48. The great advantage of unemployment insurance is that it provides effective income security, but it can also produce other benefits. Unemployment benefits may foster a better match between supply and demand in the labour market. It may help smooth consumption, both at the micro and at the macroeconomic level. It may also help smooth labour market adjustment to the extent that income protection reduces resistance to structural change, encourages adjustment to occur and supports efforts at regional stabilization. Unemployment insurance is superior to severance pay arrangements since its benefits are targeted at the unemployed and are dependent on collective contributions and not on the capacity or willingness to pay of individual employers whose businesses may be in financial difficulties. Unemployment insurance schemes should be adapted to the country's level of economic development and labour market characteristics.

49. The review in section III above has shown that all OECD countries and most Central and Eastern European countries have unemployment insurance schemes. The question to be discussed in this section is whether and to what extent such schemes can provide adequate and sustainable social protection against unemployment in middle-income developing countries, particularly in times of crises. As mentioned in section III, unemployment insurance provides the most appropriate protection against frictional and cyclical involuntary unemployment. In times of crisis or recession both workers' and employers' contributions tend to shrink. Without reserves, increased contribution rates or government subsidies, the levels and duration of benefits would have to be simultaneously reduced in tandem. However, as mentioned in section III, governments can and do subsidize unemployment insurance and social assistance schemes in times of crisis. In such a situation, there is generally little room for increased contribution rates, which may lead to reduced take-home pay and higher labour costs.

50. The most important issue is the coverage of the unemployment insurance scheme. In most middle-income developing countries, formal sector wage employees do not represent more than half of the labour force. They could in principle be covered by unemployment insurance, but in practice that percentage would probably be lower because of various factors that would lead to their exclusion, such as low earnings, intermittent employment and the consequent inability to build up entitlement rights. The majority of the labour force -- outside the formal sector -- could only be protected against unemployment through macroeconomic policies, such as demand-stimulating policies, and direct employment promotion measures, such as enterprise development, training and labour-intensive public works.

51. For the correct functioning of unemployment insurance schemes, it is important to fix benefit levels and duration taking into account (minimum) wages and social assistance benefits (where they exist). Another issue to be considered here is whether and to what extent the proper functioning of unemployment schemes also requires a sophisticated benefit administration that is linked to employment services. In the developed countries entitlement to unemployment benefits is usually dependent on the unemployed worker being available for work yet not working while receiving benefit. Is it realistic in middle-income countries to expect that the unemployed beneficiary will do no work when for many workers in such countries the established pattern of employment is a formal sector job with supplementary income generating activity in the informal sector? Where workers leave a formal sector job, then in principle they should be entitled to benefit. An alternative approach would be unemployment assistance rather than insurance.

52. A final issue to be discussed here is whether an unemployment insurance scheme could be introduced in the midst of a crisis. According to Lee (1998), it might be possible to adopt a two-stage strategy for wage earners in middle-income countries. The first stage would involve running a deficit that future contributions during the recovery would absorb. The deficit could be kept low if initial benefits were confined to a minimal flat-rate payment applicable to all claimants. When economic conditions improve, the system can then shift to the next stage where the level of benefits could progressively be raised and become more closely linked to past earnings and contributions. At the end of the transitional phase (i.e. when the initial deficit has been eliminated), the system could shift to normal insurance-based operations. Many Central and Eastern European countries did introduce unemployment insurance schemes at the beginning of their transition, when open unemployment was still low. However, it is unlikely that such a policy could be adopted in middle-income countries -- immediately and at full scale -- in times of rapidly rising unemployment. It would take at least one year to establish a new system, given the time needed for planning such a scheme, consultations with the social partners and the discussion and adoption of legislation and its implementation. The real problem is therefore to ensure that an unemployment insurance scheme is in place before the next crisis.

3. Employment and training policies

53. Unemployment insurance has a role to play in providing basic social protection in times of crisis, but it needs to be complemented by social support mechanisms for the unemployed and underemployed who do not have protected employment contracts. For these groups there is a limited choice of additional protection mechanisms (Márquez, 1999), such as: (a) a cash subsidy for poor families (discussed in section IV.1); (b) labour-intensive public works or, more generally, employment-generation programmes; and (c) training programmes that reduce open unemployment and transfer some resources to the unemployed and underemployed. It is important to evaluate carefully the cost-effectiveness of such mechanisms, which can change according to national and local resources, circumstances and opportunities.

54. Infrastructure rehabilitation and extension play a central role in most post-crisis situations, and in particular after armed conflicts (ILO, 1998c). Productive and social infrastructure, such as roads, dams, wells, irrigations systems, drainage and sewerage, as well as schools and clinics, tends to suffer in crisis situations, while remaining critical to the social, economic and political recovery and cohesion of the country. Infrastructure works have great potential to create employment, both directly and indirectly. There are various institutional systems for the management and implementation of infrastructure works. "Best practice" will vary with local institutional capacities. Programmes should aim to create effective partnerships between state and private sector bodies and to include local communities.

55. One of the salient features of employment-intensive programmes (EIPs) is that they "self-select" the working poor who participate in the programmes, avoiding the costly and cumbersome administrative arrangements that characterize the targeting mechanisms for social assistance benefits. Since EIPs pay low wages (the current agricultural wage in the region for similar work, or minimum wages if these are set realistically), only low-skilled workers from low-income families are attracted to work for the schemes. Other advantages are that workers can be paid in food, which is often provided by international donors in crisis situations, and that EIPs contribute to the creation of productive and social assets, such as roads and schools. Again, the important thing here is planning for crisis situations, which means that EIPs should be ready for implementation, both at the national and local levels. When a crisis situation strikes, governments, both at the local and national levels, can then target the available employment funds in the most cost-effective way possible.

56. Crisis situations often interrupt skills development for many wage-earning and self-employment activities. It disrupts the social and other mechanisms through which people develop social skills. Furthermore, the skills required may change as a result of the destruction of economic structure and disruptions of family life. There will be a need for a wide variety of training provisions, including life skills, that will prepare people for employment. They may target particular vulnerable groups, such as demobilized combatants, disabled persons and women. They may also consist in general training in business skills, which can quickly contribute to employment growth. Such training should be for both the formal and the informal sectors (ILO, 1998c).

57. A recent evaluation of training programmes in Latin America (Márquez, 1999) suggests that in crisis situations they are effective in providing job search skills to young new entrants to the labour force, but that they are mostly failures when used to deal with experienced workers displaced from declining sectors. Partly, this arises from the programme design where financial considerations dictate the need to have very short courses not suited to skills upgrading. If emergency training programmes are helpful in easing the insertion of young workers in the labour market, they should be followed up by more systematic training programmes to upgrade skills and improve productivity.

4. Extending social protection and social dialogue

58. The Asian financial crisis has highlighted the relative neglect of labour rights and social protection in the pre-crisis period of high growth. An essential element for correcting this deficiency is the widest possible involvement of those concerned, through their representative organizations, in the definition and implementation of measures to overcome the crisis and minimize its social effects (Lee, 1998). Also in the aftermath of armed conflicts, social dialogue can play a significant role in preventing further eruption of conflict as well as tackling the effects of the crisis by helping to promote reconciliation and to build consensus around economic and other objectives, for example among parties often on opposing sides of the conflict.

59. This paper has emphasized the role of unemployment benefits in preventing and mitigating the negative social consequences of crises. However, in many developing countries people are not covered by any basic social protection at all, which makes those countries even more vulnerable to crises. In low-income developing countries more than 80 per cent of the labour force is not covered by any statutory social protection, whereas this percentage ranges from 20 to 50 per cent in middle-income developing countries. The (often underemployed) workers outside the formal sector constitute a large and increasing part of the labour force in most developing countries. Many of them are not able or willing to contribute a significant percentage of their incomes to finance statutory social insurance benefits that do not meet their priority needs (van Ginneken, 1999). Therefore, informal sector workers themselves need to (and have) set up health and other social insurance schemes that better meet their needs and contributory capacity. Such schemes would ensure that their income-earning capacity remains intact and that workers and their families are protected against the worst forms of income loss, such as through death and disability.

60. There is therefore an urgent need for comprehensive social protection policies that will make the country more crisis-resistant and that take account of its particular circumstances and opportunities. Such a comprehensive policy would support mutual insurance schemes financed by informal sector workers themselves; it would promote cost-effective social assistance measures for households living in poverty; and it would reform the statutory social insurance schemes and gradually extend their coverage to larger parts of the labour force.

61. This process would make it necessary to broaden the social protection partnership and to galvanize the various partners for the design and implementation of a comprehensive social protection policy. Central governments, workers and employers constitute the core partners, but this partnership must be broadened to promote social protection for low-income workers in self-employment and the informal sector. There is a need for improved linkages between both central and local governments, and between different ministries (social security, labour, health, finance, etc.). An important role will have to be played by local government, by associations that directly represent informal sector workers (such as cooperatives, mutual benefit societies and communities) and by intermediary organizations that work on behalf of low-income (wage) workers.

V. Concluding remarks

62. This paper has emphasized that unemployment benefits -- together with other factors -- can play a significant role in preventing and mitigating the negative social consequences of crises. Relatively few middle-income developing countries have unemployment insurance schemes, and many of them would benefit from such schemes to make their countries more crisis-resistant. Unemployment insurance schemes should be in place in order to cope with some of the negative social consequences of the next crisis. In addition, there is a need to rethink the operation of such schemes in middle-income countries where formal sector workers, when unemployed, often take up work in the informal sector. Unemployment insurance schemes are generally not applicable to the low-income countries where many workers are underemployed and where the large majority of the labour force works in the informal sector. Employment and training policies and programmes are needed to help these workers in crisis situations.

63. This paper has also highlighted the importance of comprehensive employment and social protection policies. Directly after the crisis, it is necessary to assess to what extent the existing social security institutions have the capacity to continue their operations, how this capacity can be improved, and whether new benefits will have to be introduced. It may also be necessary to increase social assistance benefits to groups that have suffered most from the crisis.

64. Recent ILO research has shown that more than half of the world labour force does not benefit from any social protection coverage. This percentage is usually higher than 90 per cent in most low-income countries, and often more than 50 per cent in middle-income countries. This situation is aggravated by the process of informalization of the economy in these countries, which is also increasingly observed in the developed countries. As a result, policies and programmes will have to be established to provide at least basic social protection to the population without any coverage whatsoever. It is also an urgent priority to elaborate a comprehensive social protection policy supported by a process of social dialogue that ensures the widest possible involvement of all the social actors concerned. Finally, there is growing awareness that the prevention and management of crises require greater international cooperation (Kaul, Grunberg and Stern, 1999). In this light, it might be envisaged to finance (parts of) basic social protection from international sources.

65. The programme and budget proposals for the next biennium reflect these concerns. Within the context of the InFocus Programme on Socio-economic Security, there will be a detailed assessment of reforms in unemployment benefit systems so as to determine best practice schemes for different degrees of economic and labour markets. A number of feasibility studies will also be undertaken in countries with emerging market economies to determine the scope, structure and administrative implications for the introduction or improvement of unemployment benefit schemes. This work will provide the basis for a general analysis of the issues to be taken into account by policy-makers, and can then be used as a basis for technical advisory services.

66. In addition, the InFocus Programme on Crisis Response and Reconstruction builds on earlier work in a number of crisis situations and aims at the development of a coherent and comprehensive capacity to respond in a timely and effective manner to different crises by facilitating the socio-economic reintegration of those most directly affected by crises. The programme also aims to ensure increased awareness at the national and international levels of the importance of employment and related social concerns in crisis situations and a greater role for ILO constituents in efforts to overcome the effects of crises. The main emphasis of the programme is on employment-related development interventions, such as the promotion of employment-intensive reconstruction and rehabilitation works, skills and entrepreneurship training, small enterprise development, local economic development and the promotion of social dialogue and social protection.

Geneva, 22 October 1999.



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1. For example, GB.274/4/4, para. 3.

2. ibid., para. 5(c).

Updated by VC. Approved by NdW. Last update: 26 January 2000.