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Saturday, April 14, 2012

U.S. has 18th best unemployment benefits in OECD; also trails 13 non-OECD countries

Tim Vlandas at EU Welfare States flags some important recent International Monetary Fund data on the generosity of a number of countries' unemployment benefits. The metric used is the gross replacement rate (GRR) the ratio of unemployment benefits to a worker's previous wages. The United States gives, on average, a miserly 27.5% of previous wages in unemployment benefits, behind 17 OECD members, though ahead of 11 others (no data was given for OECD members Iceland, Luxembourg, Mexico, Slovak Republic, and Slovenia). Not only that, the U.S. falls behind 13 non-OECD members, including Algeria, Taiwan, and Ukraine, all of which have at least double the replacement rate of the U.S.

Why is this important? As Vlandas points out,
A high replacement rate...ensures that the negative effects of rising unemployment on aggregate demand are mitigated. It also prevents workers from falling into poverty when they lose their jobs.
 Furthermore, the generosity of unemployment insurance interacts with the state of other employment protections. As regular readers of this blog will recall, the United States has the absolute worst employment protections in the OECD, by a large margin compared to most other members. As commenter Norm Breyfogle rightly noted in response to that post, if your protection from both individual and mass firings are weak, you really need good unemployment insurance. As the data here show, however, U.S. workers are not well-protected with unemployment insurance.

I won't reproduce Vlandas' entire table, but I will highlight the leaders and some other significant countries.

Country          GRR          Overall rank          OECD rank

Netherlands     70%                  1                         1
Switzerland      68.7%               2                         2
Sweden           68.5%               3                         3
Portugal           65%                 4                          4
Spain               63.5%              5                          5
Norway            62.4%              6                          6
Algeria             61.2%              7                         N/A
Taiwan             60%                 8                         N/A
Ukraine            56%                 9                         N/A

All the above countries give at least twice as much as the United States' 27.5%

Canada            45.9%             17                         11
Germany          35.3%             23                         14
Japan               28.9%             30                         17
United States    27.5%             31                        18
United Kingdom 18.9%             46                        27

To compare it in another way, according to an IMF working paper (Figure 1, p. 21), the average GRR for high-income countries in 2005 was about 38%, compared to the United States' 27.5%. U.S. workers get relatively low unemployment benefits compared to other industrialized countries.

Moreover, as I showed in February, the length of unemployment is at its longest since record-keeping started in 1947. The following FRED graph gives both the mean and median length of unemployment, both of which hit double their previous record in the current jobs recession.

FRED Graph

Thus, in a country where employment protections are weaker than in any comparable nation, and which  is still just below postwar records for length of unemployment, we face the additional problem of low unemployment benefits, a factor which exerts an additional drag on growth.