TL;DR – If something sounds too good to be true, it probably is.
Recently, we keep hearing that Singapore’s economy is heading for gloomier times and stormier weather. According to an MAS survey, analysts have cut growth forecast for Singapore’s economy to 1.9%, down from 2.2%.
As a result of the economic slowdown and challenging business climate, layoffs climbed 205 to hit 15,580 last year, while job vacancies fell. Of those made redundant, 70% were professionals, managers, executives and technicians. For 2016, Mr Koh Juan Kiat, executive director of Singapore National Employers’ Federation (SNEF) expects redundancies to remain above 10,000.
Given such tough conditions, it is not surprising that people are worried about their jobs. Will they be retrenched? If they are retrenched, how long would it take before they find a job? If it takes too long, how will they provide for their families? These are all very valid concerns.
To address these concerns, some people have called for the implementing of unemployment insurance schemes. These people include opposition MP Sylvia Lim, as well as economists Dr Walter Theseira of SIM University and Selena Ling of OCBC. Most recently, Dr Chee Soon Juan had made unemployment insurance (which he called a retrenchment insurance scheme) a major issue in the recently concluded Bukit Batok by-election.
Each of these proposals for unemployment issues, though different in specifics, are similar in many ways. Essentially, all the proposals for unemployment insurance call for setting up a pooling, pay-as-you-go system, that is intended to protect workers from income losses in times of unexpected unemployment. The unemployed worker will be able to claim a percentage of his last drawn pay for a limited period or until he secures a new job thereby easing the pain of lost wages.
Such a system sounds very attractive, especially given the economic headwinds that Singapore is facing. But, as DPM Tharman reminded us when he spoke at PAP’s final rally speech for the Bukit Batok by-election,
Every scheme comes with costs. For instance, the SDP’s proposal for unemployment insurance will cost S$2 billion a year.
Beyond financial costs, there are also various other issues with unemployment insurance. Here are six that we think are worth pointing out.
1. Workers may abuse and game the system
Some workers may find ways to extract the maximum benefit out of an unemployment insurance scheme. They may do so by working the minimum period required to qualify for unemployment insurance, then scheme their way to be retrenched so that they can collect the unemployment insurance. Also, since they are receiving an income from the unemployment insurance, they may not feel the same urgency to find a job. As such, they may end up being unemployed for longer periods.
2. Employers may end up being more likely to retrench workers
This is especially if the unemployment insurance scheme is partially funded by the employers. If business is bad, employers may think that since they have already paid for the unemployment insurance, why continue to keep workers on payroll? Might as well let them go and let the unemployment insurance “pay” their wages and hire them back when times are better.
3. It may end up as a political tool, with future generations footing the bill
Politicians may over-promise the benefits of the unemployment insurance in good times, offering generous benefits. Then when times are bad, they may be unwilling to cut back on the benefits for fear of losing support. They thus have to resort to running budget deficits. As a result, future generations would have to pick up the tab.
4. Workers bear the majority of the cost of implementing an unemployment insurance
Even if the unemployment insurance scheme is co-funded by the employers, government, and workers, workers actually bear the majority of the cost of implement the scheme. Employers may end up paying their part of the scheme by cutting the wages of workers. Governments fund the scheme using tax collected. To fund such a scheme, the government would have to either spend less on other areas or collect more taxes. Significant amount of tax collected come from workers.
5. Unemployment insurance schemes likely to fail when they are most needed
Most unemployment insurance schemes that have been implemented in other countries are “pay-as-you-go” schemes. This means that the benefits paid to current unemployed come from payments made by those who are presently working. In times of economic difficulties, when a significantly large number of people are out of work, those who are still working may not be able to contribute enough to support the unemployment insurance scheme.
6. Part-time and freelance workers are excluded
Increasingly, more people are working part-time and as freelancers. Yes, the gig economy is happening. This increasngly growing pool of people would not be eligible for current forms of unemployment insurance.
Unemployment insurance schemes aren’t new concepts. Singapore actually had a number of these schemes going in the past. However, none of them turned out to be sustainable. If we do decide to implement unemployment insurance, we would need to design a scheme that address the above issues. Most importantly, the scheme should complement existing efforts to aid unemployed workers to get back on their feet and find a new livelihood, which is the best insurance against retrenchments.
Here, a prezi on the Tragic Tale of Unemployment Insurance.
Click here if you can’t view the prezi.