EUROPEAN PAPERS ON THE NEW WELFARE

APPENDIX 1

Institutional Arrangements to Protect Against Unemployment in Europe

The level of unemployment benefit

One means of assessing how social transfers can affect income over the life course is to examine replacement rates which measure the net income provided by benefits received in unemployment relative to the net wage received before the beginning of the unemployment spell.
Table A1a reports the most recent trends in net replacement rates at different earnings levels during the initial phase of unemployment. The rates have been computed from the OECD Tax-benefit model, and cover therefore only 19 out of 25 EU Member States. Although results are presented here are for single persons only, these are indicative of the generosity of the system for protecting against unemployment in the different countries. Table A1b reports some summary statistics derived from Table A1a: the ranking of the generosity of the net replacement rates in 2004 and 2001 (first and second column for each earning level); the difference in replacement rates between 2004 and 2001 (third column) and its ranking (fourth column) and a qualitative assessment of the change in the generosity over the period considered1 (fifth column).
In the majority of the countries, the generosity of unemployment benefits for low-wage earners (those with earnings of 67% of those of the average production worker) did not change much. A notable exception is Slovakia, where the net replacement rate declined by more than 11%. In Hungary, France and Portugal, the reduction was between 5% and 10%, though in the last two, the replacement rate was particularly high at the beginning of the period. The reduction in replacement rates in Slovakia and Hungary reflects a general tendency observed in many former socialist bloc countries of reducing the progressivity of the tax benefit system, an outcome of policies aimed at eliminating disincentives to work for low wage earners. In Slovakia, in particular, the decline was associated with a general tightening of eligibility conditions (see Table A2). The largest increases in replacement rates for low-wage workers were between 5% and 10% in Greece and Poland, in both being part of a general increase in the generosity of the unemployment benefits system for all workers. For average-wage earners, the variability in the differences between net replacement rates in 2004 and 2001 is less than for low-wage earners; the largest reduction occurring in Hungary, with small declines in Spain and all three Nordic countries. For high wage earners, the variation in the difference in generosity is less pronounced than for low-wage earners, and no clear tendency across all Member States is evident: In Denmark, Hungary, Spain and Sweden, there is a reduction in generosity as for medium earners, while in Greece, Ireland and Poland, high earners experienced a similar rise as lower earners.
Among the ‘Continental’ European welfare states (Germany, France, Austria, Belgium, Luxembourg), there was no substantial change in the generosity of the system (with the exception of a reduction in France for low earners and in Luxembourg for medium-high earners). Among the Scandinavian welfare states (Denmark, Sweden and Finland), there was no change in the generosity of the system for low wage earners, but a small decline in the net replacement rates for both medium and high wage earners. In the Anglo-Saxon types of welfare regime, there was no substantial change in the UK but a small increase in generosity in Ireland, where replacement rates were very low at the beginning of the period. Southern European countries show mixed tendencies: an increase in generosity in Greece, a decrease in Spain for medium-high earners and mixed effects in Portugal. Among the new Member States, there was a general reduction in generosity for low earners except for Poland.

Table A1a: Net Replacement Rates for single persons and different earnings levels: nitial phase of unemployment (2001-2004)

Source: OECD, Benefits and Wages (2004).

Table A1b: Net Replacement Rates for single persons and different earnings levels: nitial phase of unemployment (2001-2004)

Source: Authors’ calculations on the basis of OECD, Benefits and Wages (2004).

Table A2: Changes in the generosity of unemployment benefits (UB)

Source: Carone and Salömaki (2001).

Eligibility and Coverage of Unemployment Benefits Systems

Table A3 below highlights the distinctive nature of unemployment benefit systems in terms of eligibility and coverage. Unemployment insurance is voluntary in Denmark, Finland and Sweden, although it covers most employees. In other countries, insurance is compulsory but because of employment and contribution requirements coverage is far from complete. The required contribution record is mostly 6 to 12 months but it is shorter in France (only 4 months) and longer in Belgium (468 days), Portugal (540 days), Slovakia (24 months) and the UK (2 years).
The amount of benefit received depends not only on the contribution record but also on previous earnings. The benefits in some cases are flat amounts (Ireland, Poland and the UK), so these systems by design are more generous to low wage earners than to average and high wage earners. In countries where unemployment benefits are linked to past earnings, the replacement rates are lower for higher wage earners, though the benefits payable and replacement rates are quite different across these countries. Most importantly, the earnings base can be gross earnings (as in Belgium or Hungary), net earnings (as in. Austria or Germany) or some intermediate measure (in Denmark, gross less 8%, in Finland, gross but excluding additional holiday pay and social security contributions). Ceilings on benefits are also applied in all countries so that the amounts paid cannot exceed a maximum level irrespective of earnings.

Table A3: Unemployment insurance benefits for a 40-year-old single worker without children, with a 22-year employment record (2002)

Source: OECD, Benefits and wages (2004).

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