Income support systems for the unemployed : issues and options

The report reviews the performance of various income support systems for the unemployed, and provides guidelines for developing and transition economies. It finds that: a) Unemployment insurance enables a high degree of consumption smoothing, performs well under various types of shocks, and acts as an automatic stabilizer. But it also creates reemployment disincentives, and wage pressure which increase the equilibrium unemployment rate, contributing to persistent unemployment. b) Unemployment assistance, while enabling more effective targeting, may not bring savings in comparison to unemployment insurance, and may well prove fiscally unsustainable. c) Unemployment insurance savings accounts, internalize the costs of unemployment benefits, and thus avoid the moral hazard inherent in traditional unemployment insurance, given the weak monitoring capacity of developing countries, an important advantage. d) Public works program is effective in reaching the poor, can attract informal sector workers, and provides flexible, fast responses to shocks. Despite its high non-wage costs, and possible stigmatization of participants, it is found suitable for developing countries, particularly as a complementary program. e) Severance pay offers few advantages - it adversely affects efficiency, produces high litigation costs, and offers limited risk-pooling.