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Unemployment Insurance

By Shreya More

Edited by Anjini Chandra, Senior Editor, The Indian Economist

Unemployment insurance is social welfare disbursement made by the state or other authorized bodies to unemployed people. Depending on the status of the person, and the different countries, those sums may be small, or may compensate the lost time proportionally to the previous earned salary. Such benefits are extended in many countries including the U.S.A, U.K, Canada, Greece, China, Japan, Spain, Italy, and Mexico.

Unemployment benefits breed unemployment
Critics of unemployment insurance argue that it reduces on-the-job effort and the incentive to look for a new job. According to economist Robert Barro, these benefits raised unemployment rate by 2% in the U.S.A. These benefits also add to the state deficit because the unemployed do not pay taxes, and instead live off the money extended by the government. During the recessionary period in the U.S, the debt taken to extend these benefits will take about a decade to be paid off.

However, a study commissioned by the Labor Department under the Bush administration, in the U.S, showed that for every dollar spent on unemployment benefits, two dollars are pumped back into the economy. These benefits prevent the economy from losing its feet, keeps people away from the poverty line and boosts the economy. Job loss results in a significant decline in income and compensation for workers. Therefore, the aggregate demand drop increases. However, unemployed workers who are receiving insurance tend to spend their benefits, rather than save them. This reduces the impact of recession and economically, stabilizes the economy.

Now, talking about unemployment benefits in India, more than half of our unemployed population comes from the unorganized sector. Under the Indian Labor Law, the pensions and insurance provided to Indian labor include old-age pension, provident fund, health and maternity benefits. As a social security scheme for the unemployed, the National Rural Employment Guarantee Act 2005 (NREGA) is the only existing example. The Act provides for at least a hundred days of wage employment to one adult member of a rural household, who is willing to do unskilled manual labor. However, the act is not without controversies as it creates a paucity of a skilled workforce. The nation is in a dire need of skilled and certified labor, especially for the booming infrastructure. This act has not helped in skill development. Instead, workers’ skills have become dormant, and there is no scope for specialization.

Our government runs huge fiscal deficits. Moreover, when individuals look for jobs during their unemployed period, there have to be enough jobs available. Unemployment insurance will only benefit people if job creation is augmented. Also, in a country replete with corruption and tales of black money, a new scheme for disbursing money should not be started, unless it reaches out to the deserving. The best social security approach in our country would be – working individuals should be incentivized to lock their money away, and use them only during contingencies. In this way, all scopes of corruption can be wiped out!



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Shreya More is a student of Economics at Shri Ram College of Commerce, Delhi University. She is an avid movie buff and loves reading. A foodie, she loves exploring new places to eat. She prefers lazing around to partying on weekends. A great listener, she will always stand by people whom she calls friends! 

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