COVID-19: An opportune to introduce Unemployment Benefit Schemes?

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by Rafa Rasheed

Unemployment and Unemployment Benefit Schemes

Unemployment, as commonly defined, is a condition where a person is available to and actively seeking work. While the definition varies between jurisdictions, some definitions include an age group of persons to be counted as unemployed, or requires the person to be out of work or actively seeking work for a particular period of time. By the nature of the term, employees who are temporarily laid off and are waiting to be called back to that job may also be classified as unemployed.

Due to the reduction in investment, trade and industrial activity, cyclical unemployment becomes one of the severe problems during a global recession or an economic downturn, such as that caused by the COVID-19 pandemic. In order to stabilise and stimulate the economy and to protect workers against major income losses during such unemployment spells, advanced and emerging economies use unemployment benefit schemes as a mechanism to protect workers income after redundancy/layoff. In some parts of the globe, this is known as unemployment insurance. 

An important factor to note is that policy makers need to guard against benefits that are too generous. If benefits are too generous, these programs can raise the unemployment rate. As such the challenge for policy makers is to protect workers while curtailing undesirable side effects. This write-up explores the factors useful to consider in providing unemployment benefits, challenges that may come across and the approaches in practice in other jurisdictions.

What are the considerable advantages of Unemployment Benefit schemes?

Prior to exploring the method and practice of unemployment benefit Schemes, it will be educative and enlightening to consider the main incentives to an unemployed worker, under the unemployment benefit schemes1.

  1. For one, by replacing some lost income unemployment benefit schemes provide support to unemployed workers during recessions.
  2. Unemployment benefit schemes enable workers to maintain their standard of living while searching for appropriate jobs based on their skills.
  3. As the necessity for workers to approach loan financing would be reduced to some extent, unemployment benefit schemes would also help workers to reduce their burden for debt.
  4. By acting as a subsidiary of income, unemployment benefit support keeps low-income households out of poverty.
  5. Unemployment benefits may also assist unemployed workers with borrowing, from defaulting, consequently helping them to maintain their creditworthiness.

What should the Unemployment Benefit scheme focus on?

As indicated previously, unemployment benefit schemes need to strike a balance between the objective of sustaining workers incomes during unemployment spells and the need to ensure adequate incentives to work. 

The main elements usually considered in an unemployment benefit scheme includes the stringency of entitlement and eligibility conditions (the requirement of workers seeking to claim unemployment benefit). Benefit level (the generosity level of the benefit to provide to the workers) and Benefit duration (the maximum duration the policy makers would facilitate workers to relish on unemployment benefit)2.

Entitlement Rules and Eligibility

Not every person who is out of work is eligible for unemployment benefits. Unemployment benefits are usually intended to compensate unemployed workers, who are out of work, through no fault of their own, until they find a replacement job.

To collect unemployment benefits, the workers are required to meet the “Eligibility Requirements”. Although the rules and definitions vary across the globe3, and there is no set of fixed rules to follow, the factors that may be considered in determining whether an applicant is eligible for Benefit include:

  1. The most obvious factor is that the applicant must not be employed at the time of application. On the contrary, it is important to highlight that, in some jurisdictions, special benefits are awarded to groups who are not unemployed per say, particularly for job seekers, between a certain age limit.
  2. The applicant must be out of work through no fault of their own, such as layoff or redundancy. If an applicant is fired, unemployment benefit depends on the reasons for the termination. Where the applicant was terminated from the previous job, for serious misconduct, the person may not be eligible for unemployment benefit. Instead, if an applicant was wrongfully or unfairly dismissed from the position or forced to quit (constructive dismissal) the applicant may qualify for unemployment benefit.
  3. Unemployment must be temporary. Applicants must have some connection or link to the workforce, in the sense that applicants who have been out of the workforce for a long time or have only held very limited jobs may not be eligible for unemployment benefit.
  4. Applicants must be able, available, and actively looking for work. This also means that the applicant should be prepared and willing to accept work, should they get an offer.  What qualifies as an adequate job search depends on the applicant’s field of work and where an applicant is temporarily disabled or injured and unable to work, the applicant may not be allowed to collect Benefit for that period of time. 
  5. Some jurisdictions also require an applicant to meet predetermined weekly requirements for hours worked or compensation earned prior to filing an application for unemployment benefit.

Benefit level

Various factors are considered by countries in determining the level of unemployment benefit. Given that the unemployment benefit Scheme needs to balance the value of benefit against job loss and the incentive for job-search, an important question that needs to be addressed is: what is the optimal level of generosity of an unemployment benefit Scheme?

In answering the question, it is essential for the policy makers to consider the duration of unemployment and the duration the government can provide income security to unemployed workers, as this duration carries implications on the fiscal sustainability of the unemployment benefit Schemes.

The next step would be to decide the best way to finance the unemployment benefit Schemes. Across countries, financing of the Benefit and administration costs of unemployment benefit Schemes can be seen to be borne collectively by workers, employers, and governments through work-related contributions or taxes. This can be categorised into Contributory unemployment benefit Schemes (similar to the system in USA and Canada) and Non-contributory, tax financed unemployment benefit Schemes (similar to the system in Australia and New Zealand)

Programs implemented in some emerging economies require workers to accumulate savings which determine the unemployment benefit level to be received by that worker in case of job loss. Any contribution amount unutilised by the worker inclines to be generally credited in the form of pension entitlements upon retirement. While this might not be the best approach to apply in a critical and time restricted circumstances, it is worth exploring where an unemployment benefit Scheme is to be maintained in the long run.

Most countries also present upper and lower bounds to benefit levels, where the upper bounds avoid unnecessarily generous disbursements to individuals and lower bounds are meant to provide a way to allow the workers to maintain adequate living standards.

International Labor Organization’s Convention on Employment Promotion and Protection against Unemployment4, guides member countries on the levels of benefit unemployed workers are eligible to receive, during a period of unemployment.  The Convention instructs member countries to provide the benefit to unemployed workers in the form of periodical payments, which may be calculated as provided for below:

  • If Benefits are based on the contributions or on previous earnings, it is to be fixed at not less than fifty percent of previous earnings (a maximum amount can be fixed based on the average wage of such workers or other determination);
  • If Benefits are not based on contributions or previous earnings, it is to be fixed at not less than fifty percent of the statutory minimum wage or at a level which provides the minimum essential for basic living expenses, whichever is the highest;

Although the Maldives has not ratified this convention, it would be a helpful guideline to follow these rules established by the International Labor Organization, in determining appropriate benefit levels.

Benefit duration

The third aspect worth considering is the maximum duration of unemployment benefit. The aforementioned, International Labor Organization’s Convention on Employment Promotion and Protection against Unemployment advocates to provide the unemployment benefit for a duration of at least 6 months in each spell of unemployment or 9 months over a period of more than 24 months. Members are also advised to elect to extend Benefit during periods of deeper economic downturns.

Although an unemployed worker may meet the eligibility requirement, unemployment benefit may be withheld in circumstances such as,  where the unemployed worker deliberately contributed to his or her own dismissal, left the job voluntarily without just cause, has obtained Benefit fraudulently and has failed without just cause to accept a job replacement.

Further, as the principal purpose for the awarding of unemployment benefit is for compensating unemployed workers for the loss of earnings suffered, where the unemployed worker receives incentives directly from their employer through severance pay, the unemployment benefit may also be suspended for a period corresponding to that during which pay compensates for the loss of earnings suffered.

COVID-19 and Unemployment Benefit

As COVID-19 forces numerous businesses to close and temporarily/permanently layoff workers, unemployed workers are increasingly worried about how they are going to bear the expenses. We can expect to see a surge in jobless claims with the increase in the number of companies announcing layoffs or redundancies as they try to survive the economic storm caused by the pandemic. 

Introduction of an unemployment benefit Scheme would help the struggling, workers unemployed due to COVID-19 to sustain their living standards. Where such a scheme is introduced, it would be reasonable to expect that individuals temporarily laid off in this situation due to COVID-19 could qualify for benefits. However, it would be for the policy makers to determine the extent of the benefit and whether it would cover voluntary resignation, or the circumstances where the employee cannot attend to work due to various reasons relating to the outbreak of COVID-19.

Key points

The decision of whether to introduce an unemployment benefit Scheme, therefore, needs to be carefully examined. For certain, policies need to strike a balance between the favorable objectives of unemployment benefit programs and their adverse effects.

The successful performance of unemployment benefit Schemes in developed economies relates to various factors and conditions that are predictably lacking in emerging economies5. While providing an excellent opportunity to strengthen the protection of unemployed workers and economic efficiency, introduction of unemployment benefit scheme poses major challenges to the Government.

In the end, policy makers are left with multiple questions that need to be answered. Does the country need to introduce an unemployment benefit Scheme? Which factors influence whether unemployment benefit Scheme operates successfully? How can the design and method of the unemployment benefit Scheme be adjusted with respect to coverage and monitoring? What should be the eligibility rules, the generosity of benefit and the duration of incentive?


1 Guy Standing, ‘Unemployment and Income Security’ (2000) Geneva International Labour Organization <http://ilo.org/public/english/protection/ses/download/docs/unemploy.pdf> accessed 7 April 20208
2 Antonia Asenjo and Clemente Pignatti, ‘Unemployment insurance schemes around the world: Evidence and policy options’ (2019) Research Department Working Paper No. 49 <https://www.ilo.org/wcmsp5/groups/public/—dgreports/-inst/documents/publication/wcms_723778.pdf> accessed 7 April 2020
3 OECD, OECD Employment Outlook 2018, OECD Publishing 2008, Paris, Chapter 5
4 Employment Promotion and Protection against Unemployment Convention1988, C168
5 David Robalino,‘Providing unemployment benefits in Developing Countries’ (World Bank, 6 May 2013) <https://blogs.worldbank.org/jobs/providing-unemployment-benefits-developing-countries> accessed 7 April 2020