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Unemployment crisis: A case for Unemployment Insurance

On 31st May 2019, Ministry of Statistics and Program Implementation (MoSPI) finally released the report[1] on unemployment (July 2017-June 2018). The report shows unemployment at 6.1, highest in four-decades. The unemployment crisis is looming large and  has still not been answered by the government. The report shows higher unemployment in urban areas (7.8) than in rural areas (5.3). In this unemployment crisis we look at a policy of unemployment Insurance, its meaning, use in foreign jurisdiction and whether this model can be implemented in India.
What is unemployment insurance?
Unemployment insurance (UI) is a social insurance programme intended to provide income support to workers who have lost their jobs through no fault of their own and are seeking re-employment. The purpose of UI is to reduce the hardships of unemployment by smoothening consumption and to help stabilise the economy during downturns by maintaining demand for goods and services.[2]
UI is related to the development of a country and hence we find this programme more strongly implemented in developed country wherein it is the most common public income support program and provides good protection, and covers the majority of person, irrespective of their field of employment,[3]
Need of UI in India: Protection of workers not jobs
Legislations in India are aimed at protection of jobs rather than workers. It is argued that removal of over protective legislation will boost the creation of more and better jobs and will also improve job prospect for vulnerable group. The Indian Industrial Dispute Act, 1947 (IDA) embodies a restrictive severance pay programme. The IDA requires employers with more than 100 workers to seek the authorization of the Commissioner of Labor for intended layoffs. The permanent employee can only be removed on proven misconduct or habitual absence. It requires the employer to pay compensation to laid-off workers. However the discretionary and lengthy process in the Act restricts the ability of employer to lay off worker.
A complete overhaul of this severance pay scheme is required by the government which clearly demarcates between “job protection” and “workers protection”. The latter will increase the efficiency of economy.[4] Therefore, as a part of labor reform, job protection need to be removed and worker protection need to be encouraged.
Unemployment benefits in other Jurisdictions
In United States of America unemployment insurance (UI) is a two-tier system, with two levels of government – the 53 ‘states’ (the 50 American states plus the District of Columbia, Puerto Rico, and the U.S. Virgin Islands) and the federal government. Under the US UI system, each state finances its own unemployment insurance through payroll taxes paid by employers. Important features related to the unemployment benefits, including the weekly benefit amount, the duration of benefits and most of the eligibility requirements for benefit receipt, are determined at the state level in an independent way. On an average, the benefits extend up to 50% of their monthly wages for a period of 1 year.[5]
In China the scheme covers all employees of urban enterprises and institutions. To be eligible, the person needs to have at least one year of covered employment. The benefits are determined by local governments: less than local minimum wage but more than the level of local public assistance benefit; benefit paid for up to one year with five years of coverage, up to 1.5 years with 5-10 years of coverage, up to two years with more than 10 years of coverage. The contributions need to be made from – Employee: 1 % of gross earning; employer: 2% of payroll; provincial and local government subsidies.[6]
In South Africa it covers all employees working more than 24 hours a month. To be eligible, the person must have sufficient credit before becoming unemployed. For every six completed days of employment, eligible for one additional day of benefits, up to 238 days in the prior four-year period. Benefits include 38% to 68% of average earnings in the last six months, depending on the insured´s period of Service; paid for up to eight months. Contributions include – Employee: 1% of earnings; employer: 1% of payroll.[7]
In Brazil scheme covers persons employed in the formal private sector and other categories of workers such as household workers and fishermen. To be eligible, person must have worked at least six of the last 36 months. Benefits include 80% of average earnings for average earnings up to 1,090.43 reais; 50% of average earnings plus a lump sum of 872.35 reais for average earnings of 1,090.44 reais to 1,817.56 reais; lump sum of 1,235.91 reais with average earnings greater than 1,817.56 reais. Benefit paid for three to five months, depending on the insured´s duration of coverage.  The scheme is funded by Earmarked taxes.[8]
India’s policy on unemployment benefits
  1. Employees State Insurance Corporation of India (ESICI)- The ESIC under the Employees State Insurance Act, 1948 provides medical care, maternity and work related disability benefits for employees earning less than Rs 21,000 a month.[9] The scheme is funded by contribution from employees (0.75%) and employer (3.25%). The rate of contribution was recently revised by government bringing it down from 6% to 4%. The Labour Ministry said that the move will bring about a substantial relief to workers and will bring more and more workforce into the formal sector.[10]
  2. Rajiv Gandhi Shramik Kalyan Yojana(RGSKY)- In 2005 the RGSKY was added to the ESIC programme. RGSKY is the only form of traditional unemployment insurance in the country. Under this scheme, an insured person who loses his job after contributing premium for at least three years is eligible for unemployment allowance equivalent to 50% of wages per month for a maximum period of one year. However, the ESIC in 2016 decreased the contributing period to two years and increased the benefits to two years as against one year.According to official data, in 2016-17, 508 people availed of the unemployment allowance under the RGSKY scheme, down from 1,146 in 2015-16 and 1,030 in 2014-15.
  3. Atal Bimit Vyakti Kalyan Yojana (ABVKY)- In 2018 introduced the unemployment benefit scheme for the formal sector. The scheme will be applicable to worker covered under the ESI Act. Workers who are left unemployed for whatsoever reasons will be paid money, from their own contribution towards the ESI scheme, in cash through bank account transfer.[11] As per the draft scheme, workers will be able to draw 47 5 of their contribution towards ESIC after remaining unemployed for at least three months from the date of leaving their previous jobs.[12]
Unemployment insurance model for India
Labour market in India is dominated by informal sector, making unemployment a continuous variable and capacity of Indian administration lags far behind those in developed nations. These two factors are likely to affect the design of the UI programme thus affecting efficiency properties of UI programme. Thus India needs a departure from the standard UI programme. The following recommendations can be made-
(i) Rely on self- insurance (via unemployment insurance savings accounts (UISAs) to provide unemployment benefits, thereby introducing strong financial incentives to prevent work disincentives.
(ii) avoid personalized monitoring of benefit eligibility that is likely to be ineffective and/or prone to corruption, at least in the initial phase. The question of eligibility I important since IDA already envisages retrenchment compendation and lay-off benefits and as per ILO convention wherever retrenchment compensation and lay-off benefit exist, the unemployment insurance benefit should be suspended for the duration for the period for which the insured person receives compensation equally to the loss of his earnings.[13]
(iii) Because of the high political risk and environment prone to corruption, the program would benefit from a transparent and simple payment mechanism in the form, for example, of individual accounts.
(iv) having a comprehensive social security database is a sine qua nun of running an efficient unemployment Insurance programme, the completion of Unique Identification (AADHAR) schema would be a big step towards achieving this objective.
Conclusion
RGSKY and ABVKY are working in their limited area and the benefit provided by them is not availed by substantial working force, MNREGA provides insurance to rural workers, aside from a small unemployment component in ESIC, no unemployment insurance exist for urban areas. The MoSPI report showing unemployment more in urban areas it has become imperative to bring a worker centric legislation with a comprehensive UI programme which can be funded by contribution from both workers and employer and supplemented by taxation.
The ESIC in its present form with minimum 3 years of prior contribution is not feasible for the majority of the structure the government rightly cut the contribution rate to bring a larger section of workers under its ambit. Now government also need to modify it further to provide a better unemployment benefit to workers thereby mitigating the unemployment crisis.

REFERENCE

[1] Anand Patel, Cat finally out of the bag: Unemployment at 45-year high, government defends data, India Today , 31st May 2019 https://www.indiatoday.in/business/story/india-unemployment-rate-6-1-per-cent-45-year-high-nsso-report-1539580-2019-05-31 accessed 18th June 2019
[2] Woodbury, Stephen A. 2014. “Unemployment Insurance.” Upjohn Institute Working Paper 14-208. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/wp14-208
[3] Vodopivec, Milan.  Labor Introducing Unemployment Insurance to Developing Countries. Institute for the Study of Labor (IZA), IZA Policy Papers. https://www.researchgate.net/publication/46442528_of_LaborIntroducing_Unemployment_Insurance_to_Developing_Countries
[4] Priya Ranjan, Why India needs Unemployment Insurance, Ideas for India, published on 11th March 2015 https://www.ideasforindia.in/topics/social-identity/why-india-needs-unemployment-insurance.html accessed 19th June 2019
[5] U.S Department of Labor, Unemployment insurance https://www.dol.gov/general/topic/unemployment-insurance accessed 21st June, 2019
[6]John Carter, Michel Bedard & Celine Peyron Bista, Comparative review of unemployment and employment insurance experiences in Asia and worldwide, International Labour Organization, Thailand, 2013 https://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/documents/publication/wcms_229985.pdf accessed 20th June 2019
[7] Priya Ranjan, Why India needs Unemployment Insurance, Ideas for India, published on 11th March 2015 https://www.ideasforindia.in/topics/social-identity/why-india-needs-unemployment-insurance.html accessed 19th June 2019
[8] Jenin Berg, Brazil Unemploymeny Insurance, ILO notes on the crisis https://www.ilo.org/wcmsp5/groups/public/—americas/—ro-lima/documents/article/wcms_limd3_5_en.pdf accessed 21st June, 2019
[9] This figure was revised by government in December 2016 from Rs 15000 to Rs 21000 in order to bring larger workers population under the scheme.
[10] Somesh Jha, Govt reduces rate of contribution towards ESI scheme, employers to benefit, Business Standard, 13th June 2019
https://economictimes.indiatimes.com/news/economy/policy/government-reduces-esi-contribution-rate-to-4pc-industry-to-save-rs-5000-crore-annually/articleshow/69776145.cms accessed 18th June 2019
[11]Somesh Jha, ESIC approves unemployment benefit scheme for formal sector, Business Standard,20th September 2018
 https://www.business-standard.com/article/economy-policy/esic-approves-unemployment-benefit-scheme-for-formal-sector-workers-118091901371_1.html accessed 21st June 2019
[12] ibid
[13] Kulkarni, P. (1966). Unemployment Insurance Scheme for Industrial Workers. Indian Journal of Industrial Relations, 1(4), 482-487.http://www.jstor.org/stable/27760621 accessed 20th June 2019

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ABOUT THE AUTHOR(S)

 

Himanshi Raghuvanshi is an undergraduate law student  at Dr Ram Manohar Lohiya National Law University.

 

 

 

 

 

 

 

 

 

Shashank Pandey is an undergraduate student at Dr Ram Manohar Lohiya National Law University. 

 

 

 

 

 

 

In Content Picture Credit : Office Newz

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