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Rationale for unemployment insurance

In the economy that is open to global and local competition, some businesses will fail and their workers will be retrenched. Even if the business does not fail, it may have to downsize and retrench some of its workers.


It will take the worker 6 to 18 months to find a new job that is suitable for their experience and skills. Sometimes, the worker may have to accept a job that pays a lower wage.


By now, many people who understand the trauma that the retrenched worker has to face. They may have faced it themselves, or have seen friends or co-workers gone through the difficult period. The pain of unemployment is real.


Many countries have introduced unemployment insurance to help the retrenched workers to ride over a period of adjustment. The unemployment benefit does not compensate for the full amount of the income that is lost, but does pay a certain percentage of the regular wage to help the unemployed worker for a period of one to two years.


The unemployment insurance system have a way to manage the potential abuse by workers who are too lazy to find work and want to enjoy the benefit. While they are not able to stop all the abuses, they do go some way to reduce the impact. Most workers also prefer to find work, so the unemployment benefit really goes to help people who are genuinely in need.


Assume that the unemployment people represents 5% of the workforce. If they receive a benefit of 60% of their regular wages, the cost of this benefit is 3% of the wages of the working people.


Are you willing to contribute 3% of your wages, so that if you should be retrenched, you will receive a benefit of 60% of your regular wages over 12 to 18 months? If you are not retrenched, the payment goes to somebody who is retrenched.


Suppose your company has to downsize and 5% of your co-workers will lose their job. Do you want a situation where everyone will try to protect their job, including back stabbing their co-workers to protect themselves, or do you prefer that those who keep the jobs should contribute 3% of their wages to provide the relief to the co-workers who have to leave?


This is the rationale for unemployment insurance. It reduces the uncertainty and allows the displaced workers to find a new job, without having to suffer a large financial loss.


Tan Kin Lian