3. Unemployment Insurance System

Unemployment Insurance in Vietnam:
Design, Implementation, and Policy Issues
Giang Thanh Long and Nguyen Thi Xuan Thuy*

I. Introduction
The concept of “unemployment” appeared in Vietnam about three decades ago when theeconomy began to transform from a centrally-planned to a market economy. Since then, it has
become an important economic and social issue in Vietnam. Rural-urban migration and fiercer
urban labor market are two, among others, crucial factors determining the shape of the labormarket as well as unemployment patterns in Vietnam.
Unemployment insurance (UI), therefore, is also a new concept, which has been put in placesince late 2006 along with the first-ever Social Insurance Law, and started since 1 January 2009.
This period may not be long enough to see impacts of a policy, but some studies show that
Vietnam’s UI scheme resembles those in both developed and developing countries in terms ofcoverage, qualifying conditions, contribution responsibility, and benefit duration and amount. In
addition, the examination of Vietnam’s two-year experience with the UI scheme draws lessons not
only for Vietnam but also for other developing countries which are considering the introduction of
an UI program.
The main purposes of this paper are to describe the Vietnamese UI scheme with some
important indicators, and to analyze some challenges of the scheme under economic changes inVietnam. The paper will also propose policy suggestions in order to deal with financial
sustainability and fairness of the UI scheme.
The paper is organized as follows. In the second section, we will provide some information
about the UI scheme in Vietnam with important indicators such as coverage, qualifying conditions,and benefits. In the third section, we will analyze labor market and unemployment issues inVietnam, as well as performances of the UI scheme over the past two years. The analysis on
policy challenges will be discussed in the fourth section, while some concluding remarks arepresented in the last section.

*

Dr. Giang Thanh Long is Vice Director, Institute of Public Policy and Management at National Economics University (NEU)

in Hanoi. He is also a research fellow at the Indochina Research and Consulting (IRC) in Vietnam.
Ms. Nguyen Thi Xuan Thuy is a researcher at the Vietnam Development Forum (VDF), a joint research project between NEU
and Tokyo-based National Graduate Institute for Policy Studies (GRIPS).

77

II. The Vietnamese UI Scheme: Regulations and Performances
1.

Coverage

The UI scheme in Vietnam was introduced as a part of the Social Insurance Law promulgated in
2006, but its implementation was from 1 January 2009 under the guidelines indicated in Decree
No. 127/2008/NĐ-CP dated 12 December 2008. According to the Law and the Decree, only thosewith the following conditions are eligible for the UI scheme participation:• Employees working under contracts of indefinite term or contracts of a term of threemonths and/or over;• Cadres, public servants;• Defense workers, police workers;• Professional officers and soldiers of the Army; professional officers and noncommissioned officers, technical officers and non-commissioned officers of the police
force; persons engaged in cipher work and enjoying salaries like army or police men;
• Non-commissioned officers and soldiers of the Army, non-commissioned officers andcombatants of the police force on term services; and• Persons working overseas for a definite term who previously paid compulsory social
insurance premiums.
Employers participating in the UI scheme are those who employ ten or more employees at
the following organizations:• State bodies, state units, security services;• Politicalorganizations,social-politicalorganizations,social-political-professionalorganizations, social-professional organizations, other social organizations;• Foreign agencies and organizations, international organizations operating in Vietnamese
territory; and• Entrepreneurs, cooperatives, business individuals, cooperative groups, other organizations
and individuals hiring, employing and paying wages to employees.
2.

Qualifying Conditions
According to Article 81 of the Social Insurance Law and Article 127 of the Decree No. 127,

only the unemployed who meet the following conditions are qualified for receiving UI benefits:• The insured must have worked and contributed to the UI Fund for at least 12 months in
the 24 months prior to his/her unemployment.
• The insured must be registered with the Employment Service Center at the Provincial
Department of Labor, Invalids, and Social Affairs (DoLISA) when he/she loses his/herjob, or when his/her labor/working contract is interrupted.
• The insured has not yet found a job within 15 working days after the date of making
unemployment registration with the Employment Service Center of DoLISA.

78

3.

Contributions

Contributions from employees, employers, and government are main sources forming theunemployment insurance fund. The total contribution is 3% of the employee’s salary/wage, inwhich employees contribute 1% of their monthly salary/wage; employers contribute 1% of
payroll; and the government contributes remaining 1%. Contributions of employees andemployers are done monthly, while the government’s contribution is done yearly.
4.

Benefits

By participating in the UI scheme, the insured will receive the following benefits: (i)unemployment insurance benefit, (ii) health insurance, (iii) vocational training support, and (iv)free-of-charge job-seeking consultancy.
The monthly unemployment benefit provided to the insured is equivalent to 60% of theinsured’s average monthly salary/wage of the six consecutive months prior to unemployment.
The period of receiving the unemployment benefit is stipulated as follows:• Three months, if his/her contribution to the UI scheme has been made for 12 months toless than 36 months;• Six months, if his/her contribution to the UI scheme has been made for 36 months to lessthan 72 months;• Nine months, if his/her contribution to the UI scheme has been made for 72 months to lessthan 144 months;• Twelve months, if his/her contribution to the UI scheme has been made for 144 months
and above.
The insured will also get vocational training support for a period of no more than six
months from the date he/she receives monthly unemployment benefit. The support amount isequivalent to the level of expense for a short-term training course in accordance with the Law on
Vocational Training.
To seek a job, the insured persons will get employment consultancy and recommendation
free of charge in the duration of receiving unemployment benefits. Lastly, to protect the insured
from health risks, health insurance benefits are also provided to him/her, in which the healthinsurance premium is paid by social insurance organizations.
5.

Suspension and Termination

The insured will be suspended from receiving unemployment benefits if failing to report his/her
job-seeking situation monthly to social insurance organizations or being remanded during theperiod of receiving unemployment benefits.
The insured shall be terminated from receiving unemployment benefits when the period of
unemployment benefits ends, or if he/she:(i)finds a job,

79

(ii)

fulfills military service obligation,(iii) becomes an old-age pensioner,(iv)

has twice refused jobs recommended by the social insurance organizations withoutplausible reasons,(v)

fails to report his/her job seeking situation monthly to social insurance organization inthree consecutive months,(vi)

goes abroad for residence,(vii) serves administrative penalties at reformatories, training institutions, treatment
institutions, or is under incarceration, or(viii) dies.
In the cases of (ii) and (iii) aforementioned, the insured will get a lump-sum benefit
equivalent to the remaining amount of his/her unemployment benefit.
After the termination of receiving unemployment benefits, the previous duration ofunemployment insurance contribution will not be counted for the subsequent receipt of theunemployment insurance allowance.
6.

Current Unemployment Situation and Performances of the UI Scheme

6.1. Unemployment at a Glance
In 2010, out of 65.6 million persons aged 15 and over, 77.4% (or 50.8 million persons)participated in the labor force. The participation rates for males and females were different: 82%
and 73%, respectively. Urban and rural labor forces respectively accounted for 28% and 72%, andurban and rural labor force participation rates were significantly different: 81% and 69.5%,
respectively.
Of the labor force, 49.5 million persons were employed, while 1.3 million persons were
unemployed. In Vietnam, an unemployed person is understood as a person aged 15 and over who
fulfills all three conditions: (i) does not work, (ii) is willing to work, and (iii) has been actively
seeking job during the 7 consecutive days (one week) prior to the current date. This group also
includes persons, who are not currently working but are taking steps to start their own business or
taking a new job after the reference period, or are temporarily absent from work due to staff
reduction/dissolution/re-arrangement of the enterprise; or those, during the reference week, who
are always available for work but are not looking for a job due to temporary illness, being busy inprivate matters (care of death, marriage, care of unwell baby), bad weather, or waiting for aseasonal crop.
The results of the 2010 Labor Force Survey (GSO, 2011) show that, among the unemployed,
females accounted for 56.1% and urban persons accounted for 42.9%. Table 1 presents theunemployment situation by age groups and areas. Of 1.3 million unemployed persons, the youth(aged 15 to 29) constituted nearly two thirds of the share (66.5%), followed by the group 30-49(23.8%) and the group 50 and over (only 9.7%). The situation was the same for both urban and80rural areas when the unemployed persons are disaggregated by age group. In particular, the youth
unemployment in rural areas was severe.
Table 1: Distribution of the unemployed population by age group and area, 2010
Percentage (%)
UnemployedAge group
Female(thous. persons)
Total
Male
FemaleTotal
15 - 29
30 - 39
40 - 49
50+
Urban
15 - 29
30 - 39
40 - 49
50+
Rural
15 - 29
30 - 39
40 - 4950+

1343.6
893.8
195.4
124.3
130.0
576.8
353.4
93.8
63.4
66.2
766.7
504.4
101.6
60.9
63.8

100.0
66.5
14.5
9.3
9.7
100.0
61.3
16.3
11.0
11.5
100.0
70.5
13.3
7.9
8.3

100.0
61.7
11.7
11.0
15.6
100.0
54.8
14.6
12.9
17.8
100.0
68.0
9.1
9.2
13.6

100.0
70.3
16.8
7.9
5.1
100.0
67.5
17.9
9.2
5.5
100.0
72.1
16.0
7.1
4.8

56.1
59.3
64.6
47.8
29.4
54.2
56.4
56.3
42.7
24.6
59.8
61.1
72.3
53.1
34.4

Source: GSO (2011)
Table 2 shows the unemployment situation of different regions, disaggregated by area andsex. In general, with high concentration of labor, Red River Delta, Central Coast, and Southeast
had the highest unemployment rates. In all regions, urban areas had higher unemployment rates
than did rural areas, and females had higher rates of unemployment than did males. Especially inthe aforementioned three regions, such situations are clear.
Table 2: Distribution of the unemployed population by region, 2010
Social economic region
Whole country
Northern Midlands and Uplands
Red River Delta
North Central and South Central Coast
Central Highlands
Southeast
Mekong River Delta

Total
2.88
1.21
2.61
2.94
2.15
3.91
3.59

Residental area
Urban
Rural
4.29
2.30
3.42
0.82
3.73
2.18
5.01
2.29
3.37
1.66
4.72
2.90
4.08
3.45

By sex in urban
Male
Female
3.90
4.73
3.69
3.14
3.53
3.95
4.91
5.13
2.71
4.12
4.22
5.30
3.21
5.23

Source: GSO (2011)
Table 3, showing the unemployed population by age groups, disaggregated by area and sex,
obviously indicates that youth unemployment in Vietnam is a serious policy issue. The
unemployment rates of young people (aged 15-24) in both urban and rural areas were higher thanthose of other age groups. Female youth had higher rates than did their male counterparts.

81

Table 3: Distribution of the unemployed population by age, 2010
Age group

Total

Total
15 - 19
20 - 24
25 - 29
30 - 34
35 - 39
40 - 4445 - 49
50 - 54
55 - 59

2.88
7.62
6.68
3.44
1.81
1.22
1.01
1.18
1.66
3.34

Residental area
Urban
Rural
4.29
2.30
15.11
6.23
10.91
5.23
4.93
2.75
2.69
1.41
1.98
0.88
1.81
0.66
1.91
0.86
2.85
1.14
6.23
2.22

By sex in urban
Male
Female
3.90
4.73
15.22
14.97
9.45
12.31
3.57
6.28
2.06
3.35
1.85
2.13
1.83
1.79
2.15
1.64
3.29
2.34
6.23
-

Source: GSO (2011)
In terms of technical qualification, Table 4 provides interesting information to contrast
urban and rural areas; males and females. In general, Table 4 implies that workers withqualifications of vocational training and university and above had the lowest rates of
unemployment in terms of both area and sex. The unemployed with professional secondary orcollege qualification had the highest rates of unemployment. An interesting contrast between
urban and rural areas is that the unemployment rate of non-technical workers was 4.63% in urban
areas while only 2.19% in rural areas; but the unemployment rate for college qualification in
urban areas was 2.87% and 3.09% in rural areas. This could be explained by the fact that theurban labor market needs more qualified workers than does the rural labor market.
Table 4: Distribution of the unemployed population by technical qualification, 2010
Technical qualification
Total
Not any
Vocational training
Vocational high school
College
Undergraduate and above

Total
2.88
2.76
3.16
4.36
4.35
2.92

Residental area
Urban
Rural
4.29
2.30
4.63
2.19
3.13
3.18
4.93
3.85
4.92
3.82
2.87
3.09

By sex in urban
Male
Female
3.90
4.73
4.37
4.92
2.66
4.66
4.24
5.45
5.17
4.75
2.38
3.49

Source: GSO (2011)
6.2. Performances of the UI Scheme
As mentioned above, the UI scheme in Vietnam has been in place since 1 January 2009. Up to
December 2010, there were 7.1 million people joining the UI scheme, which accounted for merely
14% of the total labor force, and 75% of the total mandatory insured. In comparison with 2009, it
was an increase by 1.06 million persons (or 17.7%).
The total number of beneficiaries in 2010 was 156,765 persons. Figure 1 provides thenumber of beneficiaries by region and age. It is shown that, having high labor concentration, Red82

River Delta, Central Coast, Southeast, and Mekong River Delta also had the highest number of
unemployed. Moreover, persons aged 25-40 accounted for the highest proportion of unemployedin all regions. This shows a critical situation for such an important force of labor in Vietnam.
Figure 1: Number of beneficiaries by region and age, 2010
30,00025,00020,00015,00010,0005,000

0Red River Northeast Northwest
Delta
<24

Central
Coast

25-40

Central Southeast Mekong
Highlands
River Delta>40

Source: VSS (2011)
The beneficiaries, disaggregated by region and sex, show that females had more claims for
unemployment than did males in all regions (Figure 2). This is consistent with the fact thatfemales generally have higher rates of unemployment than do males.
Figure 2: Number of beneficiaries by region and sex, 2010
70,00060,00050,00040,00030,00020,00010,0000
Red River Northeast Northwest
Delta
Male

CentralCoast
FemaleSource: VSS (2011)

83

Central Southeast Mekong
Highlands
River Delta

In terms of financing, Figure 3 shows different types of expenditure.
Figure 3: Expenditures of the UI scheme, 2010
VND millions
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,0000Exp. for UI

Exp. for Vocational Training

Source: VSS (2011)
By December 2010, the UI fund collected VND4.8 trillion (about USD240 million), making
the total accumulative revenue for both 2009 and 2010 reach VND8.3 trillion (about USD420
million). In 2010, about VND557.3 billion were spent for monthly UI benefits. The number of
persons receiving lump-sum benefits, vocational support, and job-seeking consultancy were 3,007,
273 and 154,631, respectively. In the first four months of 2011, for a total of 106,358 workers
registering for unemployment status, there were 65,191 receiving UI benefits, 157 supported for
vocational training, and more than 78% of these registered workers receiving job-seeking
consultancy. With these trends, Figure 3 shows that more than 97% of the total expenditure wasfor unemployment benefits, while that for vocational training was really small.
III. Policy Challenges and Recommendations
1.

Policy Challenges

There are two main policy challenges for the UI scheme in Vietnam, in which the first challenge isfrom the design and implementation, while the second challenge is due to labor market andeconomic conditions.
1.1. Challenges due to design and implementation
First, the issuance of health insurance for the unemployed is usually slow, which in turnmakes it difficult for the unemployed to get health care services.
According to Term 1, Article 19 of Decree No. 127/2008/NĐ-CP, the unemployed will
benefit from health insurance during the time of unemployment, and he/she needs to submit

84

eligible documents within 15 days since his/her registration of unemployment. As such, theunemployed can get health insurance via provincial employment consultation centers from the16th day since his/her unemployment registration. At the same time, however, Term 2, Article 38of this Decree indicates that health insurance benefits will be provided only after 20 days since thetime that documents are submitted. Therefore, the unemployed will not be able to get any healthinsurance benefits during the time of assessment for documents, and this in turn makes it difficult
for them to get claims from social insurance organizations once they have health care services.
According to the recent surveys by Vietnam Social Security (VSS), since some unemployedpersons were not well aware about this regulation, they did not keep any receipts from health carestations in order to claim reimbursements from social insurance organizations.
Second, there are time constraints for registering unemployment status and getting UI
benefits.
According to the current regulations, the unemployed must register their unemployment
status within seven days, and submit eligible documents within 15 days in order to claim UI
benefits. Missing such deadlines, the unemployed will not be able to claim any UI benefits. In fact,with the current administrative capacity, these time frames are too constrained for the unemployed,
the employers and social insurance organizations to fulfill all relevant requirements. A recent
report by VSS (2011) shows that there are a number of reasons for delayed claims, including low
enforcement of UI regulation by enterprises, late provision of labor contract termination, delayed
payments for UI contribution, and imprecise information of social insurance for the workers.
Another common issue is that the unemployed are usually seeking jobs and miss the deadlines for
unemployment registration, and therefore they are not eligible for unemployment benefits withoutcertified documents.
Third, contributions and benefits are not closely linked, which can lead to unfairness among
UI participants. This also creates “actively” unemployed groups.
According to the Social Insurance Law in 2009, and Term 3, Article 27 of the Decree
127/2008/NĐ-CP, the maximum wage used as the base for UI contribution is 20 times theminimum wage. As such, the amount of UI benefit that an unemployed person receives in threemonths is about 25 times the amount that he/she contributed in the 12 months prior to his/her
unemployment. If the contributions include those from employers and the government and thepayments exclude those for vocational training support and job-seeking consultancy, the gap isstill five times (VSS, 2011).
Fourth, there have been “disguised” (or “fake”) unemployed persons.
Since the labor market in Vietnam is huge and changing over time, and given current
administrative capacity, different employment or unemployment statuses are not controlled well.
VSS (2011) shows that many people are receiving unemployment benefits at the same time as
they are working for different enterprises without a labor contract. As discussed above, because
the expected amount of UI benefits are much higher than UI contributions, some workers claim

85

UI benefits in a short time, and then return to work at the same place. This situation indicates a big“loophole” in the UI regulations.
Fifth, the number of unemployed persons getting vocational training is too low. This in turnmakes it difficult for them to seek jobs and may become long-term unemployed, especially in an
economic slowdown situation.
The regulations show that, during the time of unemployment, the unemployed with ademand for vocational training will be supported, and necessary training will be conducted by
vocational training centers. The unemployed will not get any cash for self-training. The maximum
monthly grant is VND300,000 per person, and the maximum time for training is six months.
Given these provisions, in 2010 nationwide, only 273 out of 156,765 beneficiaries had vocational
training. Some provinces did not even have any unemployed persons demanding vocational
training. The main cause of such a situation is that demand for low-skilled workers is high, so that
persons with vocational and other training qualifications sometimes find it difficult to get goodjobs, and they are sometimes also paid the same as those without any skills. Another importantreason is that the vocational training courses offered are poorly designed, and cannot meet thestandards of skills required by employers.
1.2. Challenges due to labor market and economic conditions
Along with the abovementioned challenges from design and implementation of the UI scheme, anumber of challenges also result from labor market and economic conditions.
First, labor market development is premature. This can be seen in the way the unemployedpersons seek jobs (Table 5). For all unemployed persons with different levels of education/training
qualifications, the main modes are “job application” and “via relatives/friends”. Such anorganization will not help the unemployed reach necessary information about the labor market,
which in turn helps them to find appropriate jobs.
Table 5: Mode of job search by qualification, 2010
Mode of job search
Setting up
business/own
account work

49.1

0.5

4.8

1.3

5.4

59.4

0.6

4.3

1.5

1.4

Vocaltional training

100.0

49.5

6.7

37.6

0.4

4.6

1.2

0.0

Vocational high school

100.0

68.9

4.3

22.7

0.2

3.5

0.4

0.1

College
Undergraduate and above

100.0
100.0

62.0
69.2

5.1
5.9

24.1
16.7

0.2
0.0

8.3
7.3

0.2
0.7

0.2
0.2

OthersVia
recruitment
advertisement

Via job searchadvertisement

5.4

27.4

Via friends/
relatives

37.9

100.0

Via public
employment
service

100.0

Not any

Total

Appliedfor job

Total

Technical qualification

1.1

Source: GSO (2011)
Second, it is difficult to manage the UI scheme because there are a number of types forlabor contracts. Informal approaches (such as no contract or verbal agreement) account for nearly8650% of the salaried and waged workers, who are expected to participate in the UI scheme. These
approaches also tend to increase significantly over time (Figure 4).
Figure 4: Distribution of wage and salaried workers
by type of contract, 2007 & 2009

Source: MoLISA (2010)
Third, the labor market is really volatile with economic fluctuations. In particular, somelabor-intensive industries, such as fishery and manufacturing, are sensitive to and negatively
influenced by economic slowdown (Table 6). As these industries have contributed significantly increating jobs for the economy, such impacts show that challenges for Vietnam in dealing witheconomic shocks (such as slowdown) are greatly difficult.

87Table 6: Impacts of economic slowdown on employment, 2009

Source: Pham et al. (2009)
Fourth, for the long-term challenges of employment/unemployment in Vietnam, it is criticalthat both the contribution of total factor productivity (TFP) to economic growth (Figure 5) and
improvement in labor productivity (Figure 6) have been low. In comparison with other regionalcountries, Vietnam has lagged behind in terms of labor productivity. Such a situation can beelucidated by the fact that in the labor market unskilled and low-skilled workers are abundant,
while high-skilled and technical workers are rare. These issues in turn will significantly impact
long-term economic growth and national competitiveness—two factors influencing job creation.

88

Figure 5: Sources of economic growth in Vietnam, 1990-2007

Source: Ohno (2008)
Figure 6: Labor productivity in Vietnam and other regional countries, 1975-2009

Source: CIEM and LKY School of Public Policy (2010)
2.

Policy Recommendations
To deal with unemployment challenges for the UI scheme, we propose the following policy

recommendations.
First, as employment and unemployment are “two sides of a coin”, we need to focus on
creating employment rather than struggling with unemployment. To do so, with an increasing
labor force, Vietnam needs to improve labor productivity and efficiency, since these factors havelong-term impacts on economic growth and national competitiveness. As manufacturing industries
will be acting as the key pillar for growth and job creation, vocational training for workers in89

these industries is an important policy action. At the same time, diversification of rural
employment via appropriate structural changes will also help create jobs for rural areas.
Second, a large number of workers are still outsiders of the UI scheme. Most of them arevulnerable persons, such as own account or family workers. Therefore, promoting voluntary
unemployment insurance should be considered an important policy action in preparing
unemployment risks for these groups.
Third, for the current UI scheme, some regulations should be revised or changed in order toadapt with situations. For instance, it is necessary to consider different points of time for
unemployment registration, submission of unemployment benefit application, and benefit delivery.
Along with these amendments, it is also necessary to improve the administrative capacity ofprovincial bureaus of labor and social insurance organizations to avoid “fake” unemployment.
Policy actions include monitoring and evaluation of labor contracts, wage and income auditing,and maintaining a list of current workers for all types of enterprises.
Last, but not least, information dissemination about the UI rights and responsibilities for all
employers and employees is equally important as other policy actions. Without transparent
regulations, it is obviously hard to have an efficient and influential UI scheme to protect workers
from various risks, including job loss.
IV. Concluding Remarks
Unemployment insurance is a risk-coping tool for the workers, and it is an important pillar
in the social protection system as a whole. To reach financial sustainability and fairness, design
and implementation are extremely crucial to cope with unemployment shocks.
The labor market in Vietnam is still premature and fragile to economic slowdown,
especially labor-intensive industries. As such, special attention for the laborers of these industries
should be in place. Demand-based vocational training and structural changes with particularinvestments in rural areas will be a key to dealing with unemployment. More importantly,
improvement of labor productivity and efficiency must be a prioritized policy agenda and action,
since these factors are critical to long-term economic growth and national competitiveness, which
in turn shape labor market and unemployment patterns. This is also the best way to protect
workers from unemployment risks.

90

References
CIEM (Central Institute of Economic Management, Vietnam) and Lee Kwan Yew School of
Public Policy. 2010. Vietnam Competitiveness Report 2010 (draft).
GSO (General Statistics Office). 2010. Labor and Employment Survey 2009. Hanoi: Statistical
Publishing House.
GSO. 2011. Labor and Employment Survey 2010. Hanoi: Statistical Publishing House.
MoLISA (Ministry of Labour, Invalids and Social Affairs). 2010. Vietnam Employment Trend
2010. Hanoi: MoLISA.
Ohno, K. 2008. “Avoiding Middle-income Trap in Vietnam”, VDF Policy Notes (draft). Hanoi:
Vietnam Development Forum (VDF).
Pham, T.H., Phung, D.T., Nguyen, V.C. (2009). “Evaluating the Impacts of the Current Economic
Slowdown on Unemployment in Vietnam”, UNDP Policy Discussion Paper.
VSS (Vietnam Social Security). 2011. “Bao cao tinh hinh BHTN sau 2 nam thuc hien” (Report on
unemployment insurance after 2-year implementation), draft. Hanoi: VSS

91

What Makes Unemployment Insurance Funds Grow:
China’s Challenge to Stabilize Workers and the UI FundYukari Sawada∗

Background
Many preceding studies on China’s unemployment insurance (hereinafter UI) program havefocused on how to sustain and stabilize the UI fund, and thus tend to be cautious toward raising
the level of benefits. They were leaning toward putting much effort on preventing fraud cases andon investing the fund’s surpluses in vocational training and business start-ups. Deregulation in thefinancial market was also preferred. Lately, however, more attention is paid to the reserves in the
UI fund and its underlying problems.
What is unique about China’s case is that even under unprecedented economic growth thatmade it the second largest nation in terms of gross domestic product (GDP), the unemployment
rate is steadily rising due to the pressure from a large supply of labor (Figure 1). At the same time,
the UI fund’s balance of payment is running a surplus, accumulating huge reserves (Figure 2). We
can see from Figure 1 that the absolute numbers of beneficiaries are declining while theunemployment rate turned upward. Facing recent increases of labor disputes and social unrest,
policymakers and academics started to consider making better use of UI reserves to solve
workers’ anxiety or lift the burden from employers.
We must keep in mind that China’s official unemployment rate only shows local urban
workers registered as unemployed. It does not include two groups of job seekers in the labormarket: One is rural workers who migrated to urban areas seeking jobs and the other is new
graduates from high schools and colleges who haven’t found a job within six months after
completing schooling. According to the press release by Dr. Li Wei of the Institute of Sociology in
the Chinese Academy of Social Sciences, based on his survey conducted from May to Septemberof 2008, the estimated urban unemployment rate was 9.4%, which was almost double the official
number (ChinaNews.com). On March 22, 2010, Premier Wen Jiabao stated to the overseasdelegates attending the 2010 annual meeting of the China Development Forum that China isfacing the unemployment pressure of 200 million citizens (Ministry of Foreign Affairs, PRC).
This means that the unemployment rate is already over 10%. Why is it possible for the UI fund tohave more surpluses when the unemployed population is growing?
This paper first discusses elements that made huge reserves possible, then explores someside effects of UI reserves to the contributors, and finally suggests some ideas to cope with theside effects to promote social protection among the unemployed.
∗

Professor, Tokyo University of Foreign Studies

93

Figure 1. Urban Registered Unemployment, Unemployment Rate andBeneficiaries at the Year End(%)(10,000
persons)
1000

Urban Registered
Unemployment

6.0

Beneficiaries of UI

900
5.0

Registered
Unemployment Rate

800
700

4.0

600
3.0

500
400

2.0

300
200

1.0

100

08
20

05
20

02
20

99
19

96
19

93
19

90
19

87
19

84
19

81

0

19

19

78

0.0

Source: Guojia Tongji-ju Renkou he Jiuye Tongji-si & Laodong he Shehui Baozhang-bu Guihua
Caiwu-si (Department of Population and Employment Statistics, National Bureau of
Statistics & Department of Planning and Finance, Ministry of Labor and Social Security),ed. (2010)94

Figure 2 Balance of Payment, Number of Contributors and Beneficiaries of UI Fund
10,000 persons

100 million yuan
(or 10,000 persons)UI Contributors at Year-End (left axis)
16000

2000

Revenue (right axis)

14000
12000

Expenses (right axis)

1800

Balance at Year-End (right axis)

1600

Beneficiaries of UI Fund (right axis)

1400

10000

1200

8000

1000
800

6000

600
4000

400

2000

200

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0
1994

0

Sources: For 1994-2009, Guojia Tongji-ju Renkou he Jiuye Tongji-si & Laodong he ShehuiBaozhang-bu Guihua Caiwu-si (Department of Population and Employment Statistics,
National Bureau of Statistics & Department of Planning and Finance, Ministry of Laborand Social Security), ed. (2010). For 2010, Renli Ziyuan he Shehui Baozhang-bu(Ministry of Human Resources and Social Security) (2011)
Elements behind UI Fund Surpluses
At the end of the year 2010, UI fund reserves reached 175 billion RMB, which was morethan double the amount in 2006. This means that even during the global financial crisis of 2008
and 2009, China’s UI fund was growing faster than its GDP. Recent increases in wages and thesize of newly covered workers surpassing that of beneficiaries are the obvious explanations. A low
replacement rate has also been effective in keeping the UI fund away from debt. The UI
Ordinance of 1997 allowed provinces to determine the level of UI benefit within a range higher
than the minimum living standard but lower than the minimum wage of the locality’s urban area.
Frequently it is set at around 60% to 70% of the local minimum wage standard. It is not linked tothe unemployed individual’s earnings, limiting UI’s consumption smoothing effect, but it
decreases income disparities via redistribution.
Aside from the above explanations, one element that caused the large surplus is rather
ironical but typical of developing economies. Social insurance is usually mandatory so as to avoid
adverse choice and lessen risks. However, in developing economies, the well-established formal

95

modern sector is likely to be a front runner in adopting newly introduced types of social insurance.
As a result, the relatively stable and more well off than average employees are covered by UI
before the rest. In other words, limited coverage works favorably in keeping the UI fund’s balanceof payments in the black.
In the case of China, a notable example is institutional organizations (IOs). IOs areorganizations that engage in public services but are not part of the government. Typical examples
are schools, hospitals, museums, publishers, and TV broadcasting stations. There are numerous
institutions under this category, with a wide degree of variation, but they often receive subsidies
from the government. Employees of IOs were integrated into the UI fund by the 1999 UI
Ordinance. Given the extremely low frequency of dismissal, higher than average wages, and wide
coverage due to strong influence from local government (more than 80% of employees had joined
UI by 2008), IOs’ presence contributed greatly to UI fund surpluses. Zhang (2010) estimated thatout of the UI fund surplus accumulated at the end of 2009, 27.6% was provided by IOs, which isequivalent to 42.2 billion RMB.
However, Zhang’s study indicates that if every IO contributed UI premiums in line with
Article 6 of the 1999 UI Ordinance, which is 2% of total wages and 1% of an individual worker’s
wage, then the amount of contribution for 2009 should have been much higher than the actual one.
The total sum of annual contribution made by IOs was 5.9 billion RMB, whereas the statutory
contribution estimated was 21.8 billion RMB. Zhang (2010) concluded that incompliance wasprevalent among IOs regarding UI contributions. IOs’ reluctance to follow the ordinance is sharedby enterprises that contributed for a long time without benefits. The issue was acknowledged by
Mr. Wu Daohuai, the Head of the UI Division, Ministry of Labor and Social Welfare, in 2008, as
he announced the launch of a new study project to amend the UI Ordinance (Xiang, 2008).
There is still another group that should be covered by UI but is more often excluded fromthe scheme than not. They are migrant workers from rural areas that are employed by urban
enterprises or become self-employed in the cities. The number of migrant workers at the end of
2009 reached 145.3 million. Article 6 of the 1999 UI Ordinance exempted rural contract workers(another description for migrant workers) from paying their share of contribution, but employers
are obliged to pay a premium. Also, article 21 states they may receive a lump-sum allowance fromthe local social insurance institution, provided that they were hired for more than a year, theircontract was yet to expire, and their employers made contributions. They are eligible to receive alump-sum allowance repeatedly if they find a job in an urban area after they return home tofarming. The same article pronounces that provincial governments (which include fourmunicipalities directly under the Central Government and autonomous regions) are responsible
for setting methods and standards for the allowance.
However, as shown in Table 1, even official statistics from the Ministry of Human
Resources and Social Security indicate that the majority of migrant workers are yet to be coveredby social insurance, among which UI is the lowest.

96

Table 1

Social Insurance Coverage (2009)
Types of Social
Insurance

Urban
Workers

Old age pension
Industrial injury
Medical
Unemployment

Migrant Workers

57.0
47.9
52.7
40.9

Total*

New
Generation

11.5
24.3
18.9
7.2

7.6
21.8
12.9
4.1

Source: Renli Ziyuan he Shehui Baozhang-bu (Ministry of Human Resources and Social Security)(2010)
Furthermore, not all of those covered always received a lump sum upon their return to theirhome village. A sample survey among migrant workers in the Pearl River Delta conducted by Liu
et al. (2011) in the midst of the global financial crisis shows that many did not take a lump sum as
they left jobs, or simply did not have social insurance to withdraw to begin with (Table 2).
Table 2

Refunded Social Insurance upon Leaving Job
2009
2008
Persons
Percent
Persons
Percent
59
6.9
80
8.8
Yes
367
42.7
371
40.8
No
Did not have social
security

434

50.5

458

40.8

Total

860

100.0

909

100.0

Source: Liu Linping, et al. (2011: 79).
Notice that the survey refers not only to UI but to any form of social insurance. When theauthor conducted interviews personnel managers of foreign direct investments in the Pearl River
Delta in 2000, many answered that they usually refund old age pensions to migrant workers
annually before the Lunar New Year. The workers are nominally “dismissed” and allowed to takeold age pension money kept in their individual pension accounts. The managers said this was
welcomed by the workers, as they could spend the extra money to purchase New Year gifts fortheir families back home. However, UI was not included in the refund. Their explanation was that
migrant workers left their job every year so they could not receive UI benefits; that is, they had
not fulfilled the “more than one year” condition to be eligible. One manager added that theworkers did not mind because they were exempted from contributing UI premiums, so they did
not feel deprived of their rightful benefit.
Of course, one can see that migrant workers from rural areas have alternative means to97

support their livelihood. They can always return to their farmland and start in agriculture again. In
fact, land and family are the ultimate social insurance for workers from rural areas. For example,
according to the Migrant Workers Statistics Observation by the National Bureau of Statistics,
when the global financial crisis was triggered by the bankruptcy of Lehman Brothers in 2008, 70
million migrant workers out of 140.4 million returned to their home village by the end of the
Lunar New Year.
However, these traditional safety nets are silently losing their effect. The one-child policy
shrunk household size. Industrialization and urbanization in rural areas are spreading, so there isless and less cultivated land as time goes on. The Migrant Workers Statistics Observation foundthat after the New Year break, only 20% stayed in their home village while 80% went out to thecities again. Among those 80% (56 million workers), 45 million found jobs after the break,leaving 11 million seeking jobs in cities (Guojia, 2009).
Emergence of the New Generation of Migrant Workers
It should be noted that migrant workers are not the same group as those we witnessed in the
1980s and 1990s. The younger generation born after 1980 has gradually become the majority
among the group. They are called “the new generation”. Based on the nationwide questionnaire
survey on the new generation of migrant workers carried out by the National Bureau of Statistics
in 2010, there are 84.9 million of them, which is 58.4% of total migrant workers. They are
different from their parents in their strong tendency to leave their farmland and the village.
Among 40-49-year-old villagers, 67.2% of the workforce stayed in agriculture, 24.1% engaged in
non-agriculture business within the village, and only 11.7% became migrant workers. For the agegroup of 30-39 years, the majority still stayed in agriculture (51.3%), less joined the
non-agriculture sector in the village (20.8%), and working outside of the village was the second
most important employment opportunity (27.4%). The numbers also show that 70-85% of thetotal workforce stayed or returned home eventually.
However, for the age group in their 20s, working outside the village has become the number
one choice. Only 37.6% remained farmers, 13.2% took a non-agricultural path but remained in thevillages, and migrant workers have reached 49.3%. The ratio of migrant workers is even higher
among the younger generation in their teens, surpassing half the workforce (50.2%) of the agegroup, so this tendency will likely continue in the near future (Cai, 2011:3-4).
Another difference from their parents is that the new generation of migrant workers haveacquired a higher level of education: 9% finished vocational middle schools and 6.4% graduatedfrom college or university. As a result, many of them lack the knowledge and skill necessary forfarming. Sixty percent of the new generation migrant workers do not have elementary agricultural
knowledge, and 24% have no experience of farming whatsoever. They spent almost 10 months ofthe year outside the village and 90% of the new generation did not spend a single day on
agriculture (Cai, 2011:7). They are more aware of their rights and are ready to protest if those98

rights are violated.
This also means that when they are unemployed they will have difficulty supporting theirliving through agriculture. Even when they return to their home village, the majority leave again
to find jobs outside. According to the National Bureau of Statistics survey of 2010, the newgeneration presented a stronger preference to stay in cities (45.1%) than to return to their homevillages (33.4%). Among young female workers, those wishing to stay in cities reached a majority(52.9%) and only 22.7% plan to go back (Table 3).
Table 3 Future Plan of Migrant Workers Born after 1980
MarriedSingleMale
FemaleMale
Female
8.1
5.3
5.6
7.6
12.5
37.0
31.7
32.0
38.8
40.4
22.2
27.9
29.4
21.3
15.6
11.2
15.1
13.7
11.3
7.1
21.5
20.1
19.1
21.0
24.5

Future Plan

Total

Never to return to villages
Stay in cities as long as possible, return to village if necessary
Return to home village after saving enough money
Definitely return to home village
Don't know

Source: Cai (2011: 15).
Based upon these findings, we can assume future migrant workers will be in need ofunemployment protection more than their parents. Yet, only a handful have joined the UI program.
The national survey mentioned above indicates that only 4.1% of the new generation of migrant
workers is covered by UI (Table 1). This is considerably lower than that of migrant workers as awhole. The UI participation ratio for all migrant workers was 11.0% in 2008, the lowest among
other statuary social insurances (Cai, 2011: 7, 213).
Local Governments Reducing the UI Contribution Rate
In the face of huge surpluses of the UI fund, some local governments started to consider
reducing the contribution rate to extend coverage and to encourage the reluctant formal sectors tocontinue paying the premium. Article 6 of the 1999 UI Ordinance issued by the Central
Government (State Council), however, clearly states that an employer must contribute a premium
equivalent to 2% of the total wage, while an employee contributes 1% of his or her wage. Under
the current system, migrant workers are not obliged to pay contributions for UI. The contributions
are solely made by employers.
However, the 1999 UI Ordinance was more decentralized in principle compared to previous
UI regulations. As mentioned earlier in this paper, Article 18 allowed local governments todetermine the level of benefits if within a given range. It was a realistic way to handle vast income
disparities between regions. By the same token, Article 9 affirmed that provincial governments
may appropriately adjust the contribution rate of the locality based upon the magnitude ofunemployed workers and the volume of its UI fund. It also obliged local governments to report
the adjustment and obtain permission beforehand. In a way, because of a lack of detailed
enforcement regulations, the UI Ordinance functioned as a guideline, and local governments had

99strong influence over the actual details of execution.
For example, in Shenzhen, a city in Guangdong Province, the UI contribution rate has been
merely 0.4% of total wage. Based on article 9 of the 1997 Shenzhen Special Economic Zone UI
Ordinance, an employer is to pay a monthly contribution equivalent to 1% of the previous year’s
average wage in Shenzhen Municipality multiplied by the number of employees, then multiplied
again by a fixed ratio. The fixed ratio is determined by taking into account the local employment
structure, GDP, consumer price index, minimum wage, and the UI fund’s balance of payments,
and it is announced to the public annually. Thus, employers located in Shenzhen were able to saveon production costs and are motivated to participate in the UI program.
Shenzhen had its own reason to adopt such an extreme adjustment. Thirty years ago,
Shenzhen was just a small village. Located adjacent to Hong Kong China, it was consideredgeographically too vulnerable to foreign military attack during the Cold War. Consequently, state
investments were scarce, leaving it free of workers made redundant by state-owned enterprises(SOEs). With a less negative legacy from the planned economy and its advantage of receiving
overseas investment via Hong Kong China, Shenzhen became a major exporter and one of the
major destinations for migrant workers. In fact, local residents, i.e. those who hold Shenzhen
registration, are in the minority. The number of non-local residents is about six times the numberof local residents. According to the 1999 UI Ordinance, they are also to be covered by the UI
program as long as they are employed by local urban IOs and enterprises.
In reality, they are only half covered. Upon their dismissal, non-locals have no way toreceive UI benefits because Shenzhen’s 1997 UI Ordinance only allows locals to register as
unemployed. Article 16 of the 1999 UI Ordinance issued by the State Council demands employees
to register unemployment at local UI offices in order to receive UI benefits. On the other hand,their employers are told that UI contributions are mandatory. Since many of the non-local
residents are migrants from rural areas, they themselves are exempted from paying the premium,but their employers must contribute their share. In short, urban enterprises that hire temporary
residents are making contributions without receiving direct benefits.
The Shenzhen Municipal Social Insurance Bureau, in response to an open letter question bya journalist in December 2009, explained that when the 1997 UI Ordinance was enforced in
Shenzhen, the Central Government’s policy principle was to protect local residents in general.
Considering the population structure of Shenzhen where the majority are non-locals, themunicipal government decided to collect 40% of the standard premium from employers. This
special bargain was meant to be a de facto way to exclude non-local residents from the UI
coverage, thus making them ineligible as UI beneficiaries. At the time of the open letter response,
there were approximately 2 million local residents and 8.7 million permanent residents, i.e. morethan 12 million under the municipality’s control, which meant that non-locals were included whenpaying UI premiums but were excluded from receiving benefits (Yangcheng Wanbao, Dec. 4,2009).

100

Needless to say, in reality, the ratio of temporary residents among employees is quite
different depending on the employer. The feeling of unrewarding UI contributions is making themreluctant to comply with the UI Ordinance. With the rapidly rising minimum wage standard
recently, this sense of unfairness is increasing. In the case of Bao’an District in Shenzhen, it wasreported in February of 2009 that 170,000 employees were covered by UI, but only 400 people
received monthly UI benefits. Taking into account that the district’s local registered population is300,000 and that migrant workers residing there have already reached 5 million, coverage is very
limited (Yangcheng Wanbao, Oct. 15, 2009).
Dongguan, another city in the Pearl River Delta that absorbed a large number of migrant
workers, adjusted the employers’ contribution rate in July 2007, cutting it from 1.5% to 0.5%
(Yangcheng Wanbao, Jan. 24, 2007). As shown in Tables 4 and 5, Guangdong enjoyed a low
unemployment rate and the largest UI fund surplus among the provinces in 2009. This was theperiod when the province was severely hit by the global financial crisis due to their high export
dependency and dismissed a massive number of migrant workers. The effect of Guangdong’s
loose monitoring of eligibility and reduced contribution rates might be seen from comparing thenumbers to Shanghai, where the legacy of large SOEs and stricter control over migrant workers,
might appear. Liaoning, the well-known base for old SOEs, and export-oriented Jiangsu andZhejiang are also highlighted for comparison.

101

Table 4
Urban Registered Unemployment & Unemployment Rate at the Year-End by Region
Unemployment(10,000 persons, %)Unemployment Rate

Region
2005

2006

2007

2008

2009

2005

2006

2007

2008

2009

Beijing

10.6

10.4

10.6

10.3

8.2

2.1

2.0

1.8

1.8

1.4

Tianjin

11.7

11.7

15.0

13.0

15.0

3.7

3.6

3.6

3.6

3.6

Hebei

27.8

28.7

29.3

32.2

34.5

3.9

3.8

3.8

4.0

3.9

Shanxi

14.3

15.6

16.1

17.5

21.6

3.0

3.2

3.2

3.3

3.9

Inner Mongolia

17.7

18.0

18.5

19.9

20.1

4.3

4.1

4.0

4.1

4.0

Liaoning

60.4

54.1

44.5

41.7

41.6

5.6

5.1

4.3

3.9

3.9

Jilin

27.6

26.3

23.9

24.3

23.4

4.2

4.2

3.9

4.0

4.0

Heilongjiang

31.3

31.2

31.5

32.1

31.4

4.4

4.4

4.3

4.2

4.3

Shanghai

27.5

27.8

26.7

26.6

27.9

4.4

4.2

4.2

4.3

Jiangsu

41.6

40.4

39.3

41.1

40.7

3.6

3.4

3.2

3.3

3.2

Zhejiang

29.0

29.1

28.6

30.7

30.7

3.7

3.5

3.3

3.5

3.3

Anhui

27.8

28.2

28.0

29.3

30.1

4.4

4.3

4.1

3.9

3.9

Fujian

14.9

15.1

14.9

15.0

15.2

4.0

3.9

3.9

3.9

3.9

Jiangxi

22.8

25.3

24.3

26.0

27.3

3.5

3.6

3.4

3.4

3.4

Shandong

42.9

43.7

43.5

60.7

45.1

3.3

3.3

3.2

3.7

3.4

Henan

33.0

35.4

33.1

36.5

38.5

3.5

3.5

3.4

3.4

3.5

Hubei

52.6

52.6

54.1

55.1

55.3

4.3

4.2

4.2

4.2

4.2

Hunan

41.9

43.3

44.4

47.0

47.8

4.3

4.3

4.3

4.2

4.1

Guangdong

34.5

36.2

36.2

38.1

39.5

2.6

2.6

2.5

2.6

2.6

Guangxi

18.5

20.0

18.5

18.8

19.1

4.2

4.2

3.8

3.8

3.7

Hainan

5.1

5.2

5.4

5.6

5.3

3.6

3.6

3.5

3.7

3.5

Chongqing

16.9

15.4

14.1

13.0

13.4

4.1

4.0

4.0

4.0

4.0

Sichuan

34.3

36.1

34.8

37.9

36.3

4.6

4.5

4.2

4.6

4.3

Guizhou

12.1

12.1

12.1

12.5

12.3

4.2

4.1

4.0

4.0

3.8

Yunnan

13.0

13.8

14.0

14.8

15.4

4.2

4.3

4.2

4.2

4.3

Shaanxi

21.5

21.5

21.0

20.8

21.5

4.2

4.0

4.0

3.9

3.9

Gansu

9.3

9.7

9.5

9.4

10.3

3.3

3.6

3.3

3.2

3.3

Qinghai

3.6

3.7

3.7

3.9

4.1

3.9

3.9

3.8

3.8

3.8

Ningxia

4.4

4.2

4.4

4.8

4.8

4.5

4.3

4.3

4.4

4.4

Xinjiang

11.1

11.6

11.7

11.8

11.9

3.9

3.9

3.9

3.7

3.8

2.0

Tibet

3.8

Source: Guojia Tongji-ju Renkou he Jiuye Tongji-si & Laodong he Shehui Baozhang-bu Guihua
Caiwu-si (Department of Population and Employment Statistics, National Bureau of
Statistics & Department of Planning and Finance, Ministry of Labor and Social Security),ed. (2010)102

Table 5
Statistics of Unemployment Insurance by Region (2009)
RegionUIContributors
at Year-End

Beneficiaries
of UI Fund

Beijing(10,000 persons)675.7

Tianjin
Hebei
Shanxi
Inner Mongolia
Liaoning
Jilin
Heilongjiang
Shanghai
Jiangsu
Zhejiang
Anhui
FujianJiangxi
Shandong
Henan
Hubei
Hunan
Guangdong
Guangxi
HainanChongqing
Sichuan
Guizhou
YunnanTibet
Shaanxi
Gansu
Qinghai
Ningxia
Xinjiang

239.2
484.4
293.3
229.7
625.3
241.4
471.3
523.5
1079.1
784.5
377.8
348.1
275.5
899.5
690.2
440.3
392.0
1470.7
237.0
97.5
215.9
463.5
144.6
198.7
8.8
331.0
164.1
36.0
44.9
231.8

Revenue ＆ Expenses (100 million yuan)
Revenue

Expenses

Balance atYear-End

1.8

27.9

17.8

81.7

3.1
10.4
6.1
2.5
13.4
14.3
9.3
14.6
19.7
5.5
10.5
3.6
3.4
23.0
16.7
7.0
8.3
12.8
7.6
2.8
4.7
10.0
1.1
3.5

18.9
24.9
11.9
9.7
35.5
12.0
14.5
61.8
58.5
43.8
14.4
11.3
7.0
41.5
17.8
14.6
13.7
31.0
10.5
3.8
10.7
25.4
6.6
8.0
1.1
15.2
8.4
2.5
2.4
15.0

15.6
24.2
6.2
5.2
21.6
8.4
8.2
54.7
36.3
17.6
11.5
4.3
2.8
22.2
12.3
8.9
7.3
18.1
5.3
2.0
4.8
13.7
5.8
5.4
0.5
7.4
6.1
1.5
1.2
10.1

41.5
50.6
38.1
21.8
39.0
27.1
57.0
76.4
141.2
127.8
21.4
46.2
22.4
131.5
39.0
39.4
30.4
186.2
38.9
12.3
23.4
47.5
30.5
34.7
4.1
37.9
15.4
7.7
7.1
45.4

9.3
3.7
1.0
1.1
4.9

Source: Guojia Tongji-ju Renkou he Jiuye Tongji-si & Laodong he Shehui Baozhang-bu Guihua
Caiwu-si (Department of Population and Employment Statistics, National Bureau of
Statistics & Department of Planning and Finance, Ministry of Labor and Social Security),ed. (2010)
In the wake of the global financial crisis following the Lehman Brothers bankruptcy in 2008,
other local governments temporarily began to reduce the UI contribution rate to lighten the burden
for employers. In Qingdao, the municipal government reduced the contribution rate of employers
from 2% to 1% (Bandao Dushi Bao, May 16, 2009), whereas in Changsha it was reduced only by
0.5%, leaving the contribution rate at a level of 1.5% for employers in July 2010 (Changsha
Laodong he Shehui Baozhangju, Jan. 10, 2010). In Rizhao, Shangdong Province, both employers’
and employees’ contributions were cut by half in October 2011, reducing the whole contribution

103

rate from 3% by 1.5% (Rizhao-shi Renli Ziyuan he Shehui Baozhang-ju, Oct. 10, 2011).
In the Pearl River Delta, Foshan Municipality’s Shunde District, the ratio was reduced to
0.5% for both employers and employees (Foshan-shi Shunde-qu Shehui Baoxian Jijin Guanliju,
Aug. 30, 2010), and Zhongshan Municipality’s UI contribution rate of 1% was reduced to 0.8% in
July 2009 (Zhongshan Ribao, Jul. 21, 2009). But the boldest move was made by Guangzhou
Municipality, where the UI contribution rate of 3% was lowered to only one-tenth the original, i.e.
0.3% from January 1, 2009. It was planned to expire at year-end, but in March, it was extended
until the end of 2010 (Guangzhou Ribao, Mar. 10, 2010).
On the contrary, in Shaanxi Province where SOEs used to be concentrated and which has alower UI fund surplus compared to coastal provinces like Shangdong, Guangdong, Zhejiang, or
Jiangsu, as Table 5 indicates, the contribution rate was higher by 0.5% compared to prior to thefinancial crisis. After the crisis, the Shaanxi Provincial Human Resources and Social Welfare
Bureau announced the reduction of the employers’ contribution rate to 2% but kept theemployees’ rate the same at 1%, so the total UI control result is 3%, or 10 times that ofGuangzhou (Shaanxi Ribao, May 24, 2009).
Recent Developments
The Social Insurance Law was passed in October 2010 and was enforced from July 2011. It
stated that all workers whose employer and who themselves contributed UI premiums for one year
or more are eligible for UI payments provided that they are dismissed involuntarily and are
already registered as unemployed while maintaining the will to take jobs. In order to receive UI
benefits, the unemployed person must present a document issued by the former employer as proofof his/her dismissal to the public employment service institutions to complete unemployment
registration (Article 50). If one refuses to take jobs or vocational training offered by departments
or institutions that are appointed by the local government without proper reason, he/she will
become ineligible to receive UI benefits (Article 51).
In accordance with the above law’s passage, provinces and municipalities started to adjust
their UI payment scheme for migrant workers. A frequently seen scheme is to pay properly the
lump-sum UI benefits to dismissed peasant migrant workers. In the case of Anhui Province, anadditional 10% of the lump-sum amount is offered to the applicants, but at the same time, they
will be disqualified from receiving any further UI in any form. In Shenzhen, the municipality’s
People’s Congress started to deliberate on a draft amendment of its UI Ordinance on December 22,
2011. It is finally to cover all non-Shenzhen registered citizens and provide lump-sum UI benefits
to non-locals if they so desire.
Contribution deductions depending on the employer’s lay-off frequency was also suggested
in the newly revealed Shenzhen Special Economic Zone UI Ordinance revised draft. Taking
reference from Article 8 of the Industrial Insurance Ordinance, the “Floating Contribution
System” was designed to determine a contribution adjustment for employers based on the104

previous year’s achievements such as the amount of benefits the employees received, rate ofdismissal, lay-offs, and job placements. An employer may enjoy a maximum 40% deduction ofcontributions depending on the stability one offered to the workers. This is also expected toencourage IOs to participate and continue to pay premiums.
On the other hand, if an employer failed to pay statutory premiums, arrears interest of
0.05% is added daily after the deadline. When the local labor and social welfare office find an
employer not participating, it will give a certain moratorium period, but if the employer stillrefuses to join, a fine of two to four times the missing amount of premium will be levied upon theemployer (Guangzhou Ribao, Dec. 23, 2011).
Shenzhen also suggested a new adjustment to keep the UI premium level low. Since
Shenzhen’s wage level is one of the highest in the nation, by paying premiums for every migrant
worker, contributions from enterprises are estimated to increase 7.5 times if the current national
and provincial standard of 2% based on total wage is applied. In order to reduce the employers’
burden, the Shenzhen UI Ordinance revised draft of December 22, 2011, proposes the minimum
wage standard as a base for contribution instead of the previous year’s average wage.
Conclusion
When a developing economy introduces a UI program, it often struggles with constraints
that are different from the ones seen in developed economies. According to Milan Vodopivec’s
study published in 2009, typical difficulties developing economies face are: (1) a large informal
sector, (2) weak administrative capacity, (3) large political risk, and (4) an environment prone tocorruption. In order to minimize employment disincentives, as well as assuring affordability andmaintaining the balance of payments to sustain the UI program, Vodopivec (2009) suggest, alongwith other recommendations, (1) simplified monitoring of eligibility requirements, since it is bothineffective and likely to lead to corruption, (2) modest benefits in terms of both the replacement
rate as well as potential duration of benefits (Vodopivec, 2009:2, 40), and, in case of Chna, (3)reducing UI contribution rates to extend coverage to all formal workers (Vodopivec and Tong,
2008:26).
All the listed difficulties fit China except for weak administrative capacity. Guidelines
provided by the Central Government had strong influence over local governments although thelocal governments were able to adjust them. As a result, most of Vodopivec and Tong’s
suggestions have been adopted, not always intentionally, but nonetheless persistently. As can beseen from Shenzhen’s case, simplified monitoring of eligibility requirements, modest benefits,
and reduction of UI contribution rates have been put into practice today. But whether the newSocial Insurance Law will be effectively adjusted is another matter. One of the important elementsin the course of adjustment was the public’s voice. Shenzhen’s huge UI surplus was heavily
criticized by both employers and employees through the mass media. People asked “Why let ourmoney sleep when many suffer from the economic downturn?” This might bring new pressure to105increase benefits in future, but so far the local government’s priority seems to be set on extending
coverage.
It is still too early to say that strong administrative capacity may compensate other shortfalls.
On the contrary, what is more important is to balance the demand for more benefits with the levelof contribution. If the benefits are kept too meager to maintain a low level of premium, it might
not be effective to support workers livelihood and to solve their anxiety over job loss, but too
generous a benefit may bankrupt the fund. One recommendation is to utilize migrant worker
non-governmental organizations (NGOs). They consult workers to protect their labor rights andprovide services to secure their livelihood. In Beijing, the municipality and district governments
started to purchase their service to reach the grassroots.

106References
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Cai Fang (2011), Zhongguo Renkou yu Laodong Wenti Baogao; “Shier Wu” Shiqi
Tiaozhan; Renkou, Jiuyue he Shouru Fenpei (Reports on China’s Population and Labor:
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Guojia Tongji-ju Renkou he Jiuye Tongji-si & Laodong he Shehui Baozhang-bu Guihua
Caiwu-si (Department of Population and Employment Statistics, National Bureau of
Statistics & Department of Planning and Finance, Ministry of Labor and Social Security),ed. (2010), Zhongguo Laodong Tongji Nianjian 2010 (China Labor Statistical Yearbook
2010), Beijing: China Statistics Press.

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Guojia Tongji-ju (National Bureau of Statistics of China) (2009), “2008 Nianmo Quanguo
Nongmingong zongliang wei 22542 Wanren (At the year-end of 2008, Total Number of
Peasant Migrant Workers Nation-wide is 225.42 Million)”, Press Release, March 25.
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Liu Linping, Sun Zhongwei,Cai Fengguo, Hu Shuangxi, Chen Xiaojuan, Zhang Chunni,
Yong Xin, Dang Xi, Liu Jie, Wang Zhaojun, and Chen L. (2011), Laodong Quanyi:
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Qu Ning and Chen Lixia (2008), “Woguo Shiye Baoxian de Xianzhuang Fenxi ji Fazhan
Jianyi. (China’s Unemployment Insurance: Analysis of Current States and Suggestions forDevelopment)”, Keji Chuanye Yuehan (Monthly Journal of Science Technology Founding)2008(1): 118-119, 133, January.

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Vodopivec, Milan (2009), “Introducing Unemployment Insurance to Developing Countries”,
SP Discussion Paper No.0907. May, The World Bank.

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Xiang Rong (2008), “Woguo You 2400 Wan Ren Huoyi yu Shiye Baoxian Zhidu (China has
24 million people gaining benefit from UI Program)”, Laodong Baozhang Shijie (World ofLabor Security), 1, p. 3.

9.

Zhang Bingwen (2010), “Zhongguo Shiye Baoxian Jijin Zengzhang Yuanyin Fenxi ji qi
Zhengce Xuanze: Cong Zhongwai Bijiao de Jiaodu Xianlun Touzi Tishi Gaige (Analysis on
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107

News and Press Releases
1.

Changsha Laodong he Shehui Baozhangju (Changsha Municipal Labor and Social Welfare
Bureau) (2010), “Guanyu Tiaozheng Shiye Baoxian Jiaofei Feilű de Tongzhi (Notice on
Adjusting UI Contribution rate)”, January 10.
http://www.csldbz.gov.cn/xxgk/xxgktzgg/201008/t20100805_14864.html, access date,
September 14, 2011.

2.

Chen Xiaopeng (2009), “Shenzhen Shiyexian Mingnian You Wang Huiji Wailaigong(Shenzhen’s UI Benefit May Reach Migrant Workers Next Year)”, Yangcheng Wanbao(Yangcheng Evening Paper), December 4.
http://www.ycwb.com/ePaper/ycwbdfb/html/2009-12/04/content_673236.htm, access date,November 20, 2011.

3.

Chen Xiaopeng and Wang Zhiyu (2009), “Shenzhen ‘Shiyexian’ Haishi Bubi Wailaigong(Shenzhen’s ‘UI’ Still Doesn’t Protect Migrant Workers)”, Yangcheng Wanbao (Yangcheng
Evening Paper), October 15.
http://www.ycwb.com/ePaper/ycwb/html/2009-10/15/content_620353.htm, access date,November 20, 2011.

4.

Chen Zhuoda and Yang Qinshe (2011), “Shenhu, Fei-Shenhu yanglao Baoxian Jiaofei Jishu
Xiaxian Tongyi (Minimum Base for Old Age Pension Premium is Unified)”, Guangzhou
Ribao, December 23.
http://www.csldbz.gov.cn/xxgk/xxgktzgg/201008/t20100805_14864.html, access date,
September 12, 2011.

5.

Foshan-shi Shunde-qu Shehui Baoxian Jijin Guanliju (Foshan Municipality, Shunde DistrictSocial Insurance Fund Management Bureau) (2010), “Guanyu Yanchang Jiangdi
Gongshang Baoxian he Shiye Baoxian Jiaofei Feiű Zhixing Qixian de Tongzhi (Notice on
Extending Duration of Reduced Industrial Injury Insurance and UI Contribution”, August
30. http://www.gdsdsi.com/upload/resource/templates/common_content.jsp?contentId=724,
access date, August 31, 2011.

6.

“Guanyu Jieduanxing Jiangdi Gongshang Baoxian ji Shiye Baoxian Jiaofei Feiű de Tongzhi(Notice on the Reduced Industrial Injury Insurance and UI Contribution)” (2009),
Zhongshan Ribao (ZhongShan Daily), July 21.
http://www.zsnews.cn/epaper/zsrb/ShowIndex.asp?paperdate=20090721&part=7&article=3,
access date, November 23, 2011.

7.

“Jiangdi ‘Sanxian’ Jiaofeilű Shiye Baoxianjin Zhifu Fanwei Kuoda (Lower “Three Social
Insurance”, Expand UI Payment Sphere)” (2009), Bandao Dushi Bao (Peninsula City
News), May 16..
http://news.bandao.cn/news_html/200905/20090516/news_20090516_828076_3.shtml,
access date, November 22, 2011.

8.

Jiang Yuefei (2010), “Shiye Baoxian Jieduanxing Yanqi (UI’s Transitional Extension)”,108

Guangzhou Ribao (Guangzhou Daily), March 10.
http://gzdaily.dayoo.com/html/2010-03/10/content_891868.htm, access date, August 6,
2011.
9.

Renli Ziyuan he Shehui Baozhang-bu (Ministry of Human Resources and Social Security)(2011), “2010 Niandu Renli Ziyuan he Shehui Baozhang Shiye Fazhan Tongji Gongbao(2010 Human Resources and Social Security Development Statistical Bulletin)”, July 20.
http://www.mohrss.gov.cn/page.do?pa=402880202405002801240882b84702d7&guid=e60c
0ef72ddd4e8eb968ac5f11900f59&og=8a81f0842d0d556d012d111392900038, access date,November 20, 2011.

10.

Renli Ziyuan he Shehui Baozhang-bu (Ministry of Human Resources and Social Security)(2010), “2009 Niandu Renli Ziyuan he Shehui Baozhang Shiye Fazhan Tongji Gongbao(2009 Human Resources and Social Security Development Statistical Bulletin)”, May 21.
http://www.mohrss.gov.cn/page.do?pa=402880202405002801240882b84702d7&guid=e38dd4445ee74f8b9981704a7af675d0&og=8a81f0842d0d556d012d111392900038, access date,November 20, 2011.

11.

Rizhao-shi Renli Ziyuan he Shehui Baozhang-ju (Rizhao Human Resources and Social
Security Bureau) (2011), “Woshi 9-12 Yuefen Jieduanxing Jiangdi Shiye Baoxian Jiaofei
Feiű”, October 10. http://www.rzrsrc.com/rz12333/zwfb/gggs/gonggao/2493.html, accessdate, January 10, 2012.

12.

“Shekeyuan Diaocha: Chengzhen Jingji Huodong Renkou Shiyelv Dagai wei 9.4%
(Academy of Social Science Survey: Urban Labor Market Participants’ Unemployment
Rate is around 9.4 Percent)” (2008), Zhongguo Xinwen Wang (China News. Com),
December 15.
http://www.chinanews.com/cj/gncj/news/2008/12-15/1487994.shtml, access date,
December 14, 2011.

13.

“Shiye Mingong Ke Lingqu Shiyejin (Unemployed Migrant Workers Can Receive UI
Benefit)” (2010), Hefei Wanbao (Hefei Evening News), November 23.

14.

Wen Gongfeng (2007) “Shiye Baoxian Danwe Jiaofe Feiű Xiatiao (UI Employers’
Contribution rate Reduced)”, Yangcheng Wanbao (Yangcheng Evening Paper), January 24.
http://www.ycwb.com/ycwb/2007-01/24/content_1362059.htm, access date, November 14,
2011.

15.

“Wen Jiabao Meets with Overseas Delegates Attending the Annual Meeting of China
Development Forum”, Latest News, Ministry of Foreign Affairs of the People’s Republic ofChina, March 23, 2010. http://www.fmprc.gov.cn/eng/zxxx/t674988.htm, access date,
September 30, 2011.

16.

“Wo Sheng Jiangdi Shiye Baoxian Jiaofei Feiű (Shaanxi Province Reducing UIContribution rate)” (2009), Shaanxi Ribao (Shaanxi Daily), May 24.
http://www.shaanxi.gov.cn/0/1/9/39/66939.htm, access date, November 22, 2011.

109

Structural Changes in the Labor Market and Employment Insurancein Japan1
Naoki Mitani∗

1. Introduction
Japanese employment insurance (EI) has played important roles to maintain the resilienceof the society during the downturn of the economy after the financial crisis in 2008-20092 aspartly documented in the 2010 Report and after the Great East Japan Earthquake in 2011. Asidefrom the short-run fluctuations, structural changes have been taking place in the Japanese labormarket over decades. The labor force is rapidly aging and decreasing gradually, with an increasing
share of female workers. Employment is growing in the service sector, while it is declining in
manufacturing and construction. The unemployment rate has become persistently high since the1990s. The most significant changes in recent years are (1) increase in non-standard employment
and (2) increase in long-term unemployment.
The ratio of recipients of unemployment insurance and social assistance to the working age
population is fairly low (1.2%) in Japan, compared with the Organisation for Economic
Cooperation and Development (OECD) average (nearly 7%)3. It may reflect the low coverage of
EI and the low ratio of unemployment benefit (UB) recipients to unemployment (International
Labour Organization [ILO] definition) as well as the fact that there is no unemployment assistancesystem. Thus, it is a challenge for EI to adapt to the structural changes in the labor market,
especially the growing non-standard employment.
Efforts have been made to adapt EI to these issues. Recently, the coverage of EI has been
extended to cover more non-standard workers. Jobseeker assistance has just been introduced toassist non-insured workers with training, training allowance and employment support.
How has EI adapted to the structural changes in the labor market? And what are the futureissues for EI?
The structure of the paper is as follows. The next section reviews major structural changes
in the labor market. Section 3 shows the characteristics of the Japanese EI, compared with otherOECD countries. Section 4 describes the institutional aspects of the current EI. Section 5 shows
the proportion of UB beneficiaries among the unemployed and the coverage of non-standard
employment in EI. Section 6 gives an overview of the historical developments in the adaptation of1

This paper was prepared for the PECC Social Resilience Project 2011.
Professor, Kobe University.
2
Mitani (2010).
3
Duell et al. (2010).
∗

111

EI to the growing number of non-standard employees. Section 7 summarizes EI reforms
recommended by researchers and officers. The final section is the conclusion.
2. Structural Changes in the Labor Market
Japan has been experiencing structural changes in the labor market over decades, especiallyafter the burst of the bubble economy in 1991. There are long-term structural changes in the
supply side of the labor market. First, the labor force population is rapidly aging and it has begun
to decrease since 1998, mainly due to the demographic changes stemming from the falling fertility
rate and increase of longevity. Second, the share of the female workers in the labor force has
increased. The labor force participation rate of female workers has been rising rapidly since themid-1970s.
On the demand side of the labor market, the employment structure has greatly changed,
largely due to the globalization of the economy and technological changes such as informationand communication technologies (ICT).
First, employment has been decreasing in the manufacturing sector and construction sector
since the 1990s, while employment in services is increasing rapidly (Chart 1).

(ten thousands)

Chart 1 Employment by Industry(both sexes)

2000

Agriculture andf orestry
Construction

1800
1600

Manuf acturing

1400
1200

Transport andcommunication

1000
800

Wholesale and retailtrade, eating anddrinking places

600
400

Financing andinsurance, real estate

2000Services

Note: There is a disruption between 2001 and 2002, due to a change in theindustrial classification.
Source: Statistics Bureau, Labour Force Survey

Government

Second, employment by occupation has also changed. The proportions of professional andtechnical workers, clerical and related workers and service workers have increased, while that ofagricultural, forestry and fishery workers has sharply fallen. The proportion of production workers
and laborers increased to about 30% in 1970 and remained unchanged thereafter. But it began todecrease gradually in the early 1990s.

112Third, the proportion of non-standard workers has increased (Chart 2)4. Typically, one outof three employees is non-standard. This is one of the most salient features in recent structuralchanges in the Japanese labor market. Non-standard workers consist of part-time workers,
dispatched workers and contract workers, etc. Most of them are female workers and temporary
workers.

Chart 2 The Proportion of Non-Standard
Employees (Both Sexes)
100%
90%
80%

12.8

12.5

12

6.9

9.1

12.6

15

16.9

13.5
Temporary nonstandard employees
22

70%
60%
Regular nonstandard employees

50%
40%

80.3

78.3

75.4

68

30%

64.5

20%

Standard employees

10%
0%
1987

1992

1997

2002

2007

Source: Statistics Bureau, Employment Status Survey

The following factors are in the background of the growing share of non-standard workers.
First, the share of service sectors, where daily busy times are concentrated, is growing. It is
economically rational to employ part-time workers only for those busy times.
Second, international competition has become severe because of the globalization of theeconomy. Faced with severe competition, employers tend to reduce labor costs by hiring
non-standard workers whose wages are relatively cheap.
Third, the polarization of the labor market is progressing because of ICT. The developments
in ICT increase the demand for highly skilled workers who have creativity and high management
abilities, while reducing that for middle-skilled jobs which are substituted by ICT. On the other
hand, they tend to increase the demand for workers who are low-skilled but in charge of the tasks
which a machine cannot conduct, such as tasks that involve human interaction and automobiles
safely, etc. Most of the workers of the latter category are non-standard workers.

4

In Chart 2, “regular” means the length of employment contract is more than one year, while “temporary” means it is lessthan one year.

113

Fourth, the labor supply for non-standard jobs is also increasing. In particular, marriedfemale workers tend to work in part-time jobs to supplement the household budget in the face ofthe husband’s diminishing earnings due to the long-term stagnation of the economy.
Chart 3 shows the long-term trend in unemployment rate in Japan from the beginning of the 1950s
onwards. The unemployment rate decreased from over 2% in the early 1950s to a level of 1% in
the 1960s and rose again to over 2% in a gentle U-shape. The number of the unemployedremained below 1 million in the 1960s and until the mid-1970s. After the First Oil Price Shock in
1974, it began to increase gradually and in the 1980s moved around 1.5 million. In this period, theunemployment rate was not so sensitive to business cycles and remained below 3% even during
the recessions. Thus, the Japanese labor market in this period is characterized by a “low and stable
unemployment rate”. Nonetheless, after the bubble burst in the early 1990s the unemployment
rate rose sharply from 2.1% in 1991 to 5.3% in 2002. The number of the unemployed increased
from 1.36 million in 1991 to 3.59 million in 2002. The unemployment rate began to fall in 2003
but only to 3.9% in 2007 and jumped up again to 5.1% in 2009 after the Lehman Shock in 2008.
Thus, in this period, the Japanese labor market is characterized by a “persistently highunemployment rate”. Since the unemployment rate has not declined so much during the upturns of
the business cycles, it is argued that the persistence of the high unemployment rate may be due tosome structural factors in the labor market.

Chart 3 Unemployment rate (left scale) andnumber of unemployed (right scale)

(%)
6

600
5.3

5.1

5

500

4

400

359

3

300
2.1

2

200
136

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

1963

1961

1959

0

1957

0

1955

100

1953

1

Source: Statistics Bureau, Labour Force Survey

Chart 4 shows the incidence of long-term unemployment (one year or over). It was between
15% and 20% in the 1980s, but after the bubble burst, it rose rapidly to 33.8% in 2003 andcontinued to be high. After the financial crisis, it dropped temporarily but rose again to 37.3% in
2010. The long-term unemployment rate increased sharply, especially among low-educatedworkers and older workers. The increase in the long-term unemployment rate between 1994 and114

2004 is mainly accounted for by the increase in long-term unemployment among youths andhigh-school graduates. The incidence of long-term unemployment is higher among those who losttheir jobs because of bankruptcy or dismissal.5

Chart 4 Long-term unemployment
Proportion of long-term unemployment (lef t scale)Long-term unemployment rate (right scale)
Unemployment rate (right scale)

(%)
40

(%)
6

35

5

30
4

25
20

3

15

2

10
1

5
0

0
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Source: Statistics Bureau, Labour Force Survey

The persistent rise of the unemployment rate during the 1990s has provoked concern about
the quantitative and qualitative evaluation of structural factors behind this trend. Mitani (2011)
investigated, mainly by reviewing the literature, the factors behind the transition from the low andstable unemployment rate in Japan in and before the 1980s to the persistently high unemployment
rate in and after the 1990s. The role of a specific mismatch or structural factor is limited, as shownby various mismatch indicators. Rather, the response of the unemployment rate to business cycles
has become larger and long-lasting. The possible factors behind this change include (1) deflation
and rigidity of nominal wages, (2) decline in the discouraged worker effect, (3) increase in
non-regular employment and (4) long-term scars of youth unemployment.
Especially, the effect of the above “(3) increase in non-regular employment” on the overall
unemployment rate is apparent (Chart 5).

5

Shinozaki (2004).

115

Chart 5. Unemployment Rateby Employment Status(%)

All employees

6

Regular workers

Non-regular workers

5
4
3
2
1

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0

Only the number of the unemployed whose unemployment duration is lessthan one year is used.
Source: Statistics Bureau, Labour Force Survey

3. Characteristics of Employment Insurance in JapanThe ratio of the recipients of unemployment insurance and social assistance to the working
age population is about 1.2% in Japan. This is far lower than in other OECD countries, where thisratio is around 7%. This is partly accounted for by the relatively low unemployment rate in Japan,
compared with other OECD countries. However, the proportion of unemployment insurance (UI)
benefit recipients to unemployment as indicated by the Labour Force Survey (LFS) is also
relatively low and tends to decline gradually in the long run. These phenomena may reflect thefact that the EI system is not adapted to the recent structural changes in the labor market.
Compared with other OECD countries, the features of the institutional aspects of theJapanese EI scheme are as follows6.
(1) The qualification conditions to be insured include the lower limit of the expected duration of
employment in addition to scheduled weekly hours worked and age, etc. In any economy, not all
employees are necessarily insured, but only those satisfying certain conditions are qualified to be
insured. The qualification conditions are different across countries. In Japan and Germany, weekly
hours worked are used. In Japan, the scheduled weekly hours worked must be 20 hours or over tobe insured, while in Germany it must be 15 hours or over. In the United States, the criterion is thenumber of annual weeks worked. In addition, the amount of the total wage bill is also added to the6This part is based on Higuchi (2010), who made an international comparison of six OECD countries: Japan, the UnitedStates, the United Kingdom, Germany, France and Sweden.

116criterion for the eligibility of the contributions by the employers. In Japan, the qualification
conditions to be insured also include the lower limit of the expected duration of employment. It is
31 days after April, 2010. As regards the age, the upper age limit for being insured is 65 years old
in Japan, the United Kingdom (male workers), Germany and Sweden. The lower age limit is also
set in the United Kingdom and Sweden.
(2) Regarding the qualification conditions in Japan to receive UB, the payment is stopped when
the beneficiary is re-employed, even if the hours worked are short and the wages are low. In othercountries, payment is made for the partially unemployed. For example, in Germany, although thebenefit is reduced if net earnings exceed EUR165 per month, the beneficiaries do not lose total
benefits unless they work more than 15 hours per week. According to a recent report of the
OECD7, among the 16 OECD countries, there are only two countries (Japan and Italy) where
there are no benefits for those partially unemployed.
(3) An employment promotion allowance is paid as an incentive for early re-employment when
the beneficiary is employed before the expiration of the duration of UB in Japan.
(4) The replacement ratio is lower for beneficiaries whose former wages were higher in Japan,
while elsewhere it is the same regardless of former wages. In Japan, the replacement ratio isconstant for the whole period of payment, while in some countries it decreases as the duration of
UB becomes longer.
(5) The replacement ratio in Japan is not so low, as the gross wages before tax reduction are used
to calculate daily wages and UB is exempted from tax.
(6) There is no unemployment assistance scheme, which assures income for the unemployed after
the expiration of the UB duration or those unemployed not qualified for UB, such as certain
non-standard employees, even though the payment is lower.
(7) The proportion of UB beneficiaries among the unemployed (in the ILO definition) is lower inJapan compared with other countries. According to the ILO (2009), Germany (87%), France(82%), the United Kingdom (60%) and the United States (43%) have much higher proportions
than Japan (23%). It should be also noted that the proportion is decreasing gradually (Table 1).
Among these features, (1), (2) and (6) might be related to the low proportion of UB
beneficiaries among the unemployed and the low ratio of the recipients of unemployment
insurance and social assistance to the working age population. Thus, it is needed to adapt EI
7OECD (2007).

117

scheme to the structural changes in the labor market as it has been adapted so far since theintroduction of UI/EI scheme. Before discussing the recent developments of the adaptation of EI
to structural changes, we would like to show the current institutional aspects of EI briefly.
Table 1 Proportion of EI recipients to LFS unemployment and population
Ratio of EI persons Net UB
Labour Force
Population
Average
Fiscal insured
Ratio of UB recipients to duration
beneficiaries Survey (LFS)
15-64
year to total employees
unemployment
LFS
Population of completed
in the economy
unemployment
15-64
benefit spells
Thousands, annual average%%months
1980
62.9
683
1100
78740
62.1
0.9
5.8
1985
63.7
647
520
82350
42.6
0.8
5.5
1990
64.9
496
1310
86080
37.9
0.6
5.7
1995
63.7
857
2030
86980
42.2
1.0
6.1
2000
62.6
1069
3110
86570
34.4
1.2
6.1
2001
62.6
1129
3280
86250
34.4
1.3
5.7
2002
63.1
1064
3500
85770
30.4
1.2
5.5
2003
63.6
853
3360
85380
25.4
1.0
5.1
2004
64.6
697
3020
85140
23.1
0.8
4.7
2005
65.4
643
2840
84610
22.6
0.8
4.4
2006
66.0
598
2630
83960
22.7
0.7
4.4
2007
67.2
582
2480
83130
23.5
0.7
4.3
2008
68.5
622
2530
82440
24.6
0.8
4.2
2009
69.0
870
3180
81640
27.4
1.1
5.5
Source: Duell (2010)

4. Institutional Aspects of the Current Employment Insurance
The current EI scheme consists of granting benefits for unemployment and twoservices—services for stabilization of employment and services for developing human resources(Chart 6). Services for stabilization of employment are mainly those granting employment
adjustment subsidies. Services for developing human resources consist of subsidies for training by
employers and management of public training facilities, etc.
The qualifying conditions to be insured are as follows:z

The number of hours scheduled per week must be 20 hours or more.

z

The duration of employment must be more than 31 days.

z

The employee must be younger than age 65.

zVoluntary coverage applies for employees in agricultural, forestry, and fishery establishmentswith less than five standard employees.

z

Exclusion: Seasonal workers whose duration of employment is 4 months or less.

z

Special systems apply for daily workers, seamen and civil servants.

118

Chart 6 Outline of the Employment Insurance Scheme
Job Applicants’ Benefits

Unemployment Benefits
Source of funds:
Equal contributions of both
employees and employers
6/1000 of salaries andbonuses for each
as well as the National
Treasury

Two Services
Source of funds : contributionsof only employers

Job Promotion Benefits

Study and Training Benefits

Employment
Continuation
Benefits for the
Elderly

Employment Continuation
Benefits

Child Care Leave
Benefits

Services for Stabilization of
Employment (Employment
Adjustment Subsidies)

Nursing Care
Leave Benefits

3.5/1000 of payroll
Services for Developing
Human Resources
Source: The budget of the fiscal year 2010

The job applicant benefits consist of the following:(i)

Basic allowance;(ii)

Skill acquisition allowance;(iii)

Lodging allowance; and(iv)

Injury and disease allowance.
The qualifying conditions for the unemployment benefit (basic allowance) are as follows:zMust have at least 12 months of insurance during the last 24 months before unemployment(at least 6 months of insurance during the last 12 months for specific qualified recipients andthe qualified recipients who are separated for specific reasons, see the next paragraph for thedefinitions).

z

Must be registered with the Public Employment Security Office and be capable of, andwilling to, work.

z

Unemployment must not be due to voluntary leaving, serious misconduct, refusal of asuitable job offer, or non-attendance at vocational training (otherwise, the benefit may belimited to 1 to 3 months).
The duration of benefits varies with age, tenure and reasons of separation, etc. (Table 2).

The specific qualified recipients are those who are obliged to be separated through bankruptcy or
dismissal (excluding dismissal due to significant cause imputable to the employee), etc. Qualified
recipients who are separated for specific reasons are those who are separated because their fixed
term labor contracts are not renewed or because of other compelling grounds. The latter categoryof conditions to receive benefits for a longer duration was added in the law amended in 2009.

119

Table 2 Duration of benefits (basic allowances)(days)
Duration of benefits for(3) separated(2) separated(1) separated workers having specified recipient workers not falling
workers having
qualification or specific reason (unemployment due under category (1) difficulty finding a
to bankruptcy, dismissal etc.)
job (difficult to re(ordinary
employ )unemployment )Age(yearsold)Age(years old)
Insured period
All ages
Under 30 30-34
35-44
45-59
60-64
Under 45 45-64(years)Less than 1
90
90
90
90
90
150
150
1-4
90
90
90
180
150
90
300
360
5-9
120
180
180
240
180
90
300
360
10-19
180
210
240
270
210
120
300
360
20 or over
240
270
330
240
150
300
360
−

The introduction of a separate benefit entitlement schedule for cases of “ordinary
unemployment” in 2001 particularly affected benefit entitlements for older workers with longcontribution records. Following the principle that longer benefit durations are payable only topeople “without a time margin to prepare for unemployment”, neither termination of employment
at the end of a temporary contract nor termination upon retirement counted as “dismissal” before
2009. However, since 2009 the former has come to count as “dismissal” to ease the hardships of
those unemployed who were non-standard workers, as mentioned above.
The daily amount of the basic allowance is an amount obtained by multiplying the daily
amount of wages (DAW) by a rate ranging from about 50% to 80% (the rate is higher, the lower
the wages). The DAW is obtained by dividing by 180 the total amount of monthly wages(excluding bonus, etc.) paid during the last six months before the separation from employment.
For those aged under 60, the ratio of benefit to earnings (BR) is calculated using thefollowing formula (in 2007)8:z

If 2 080 <= DAW < 4 100: BR = 0.8*DAW;z

If 4 100 <= DAW < 11 870: BR = 0.8 – 0.3 *(DAW–4 100)/(11 870 – 4 100);z

If 11 870 <= DAW < Maximum Amount: BR = 0.5*DAW; andz

If DAW < 2 080, the daily amount is fixed at 2 080*0.8, and if DAW >= Maximum
Amount, it is fixed at Maximum Amount*0.5. The Maximum Amount is JPY 12 790 for
those aged less than 30, JPY 14 200 for ages 30-44 and JPY 15 620 for ages 45-59. In thelast case, the maximum benefit amount is JPY 7 810 per day, paid seven days per week.

For recipients aged 60 or over but under 65, the same formula (BR = 0.8*DAW) applies for DAW
up to JPY 4 100, but for higher earnings:z

BR declines more steeply, reaching 0.45 when the DAW is 10 640 (rather than 0.5 when
the DAW is 11 870); andz

The Maximum Amount is 15 130, so that the maximum benefit ceiling is 15 130*0.45 =6 808.5, slightly below the maximum benefit amount for workers aged 45-59.

8Duell et al. (2010).

120

The maximum benefit for 45-59-year-old workers corresponds to about 61% of the average
wage and is paid to people who have a DAW level of 121% of the average wage or more.
5. Proportion of UB Beneficiaries among the Unemployed and Coverage of Non-Standard
Employment in EI
As mentioned above, the proportion of UB beneficiaries among the unemployed (as definedby ILO) is lower in Japan than in other OECD countries such as Germany, France, the UnitedStates, etc. In addition, it has decreased in the long run from 62.1% in 1980 to 27.4% in 2009,
though it has risen somewhat from the bottom of 22.6% in 2005 (Table 1).
The reasons behind the relative low proportion of UB beneficiaries among the unemployedin Japan may be largely accounted for by the following two factors. First, the coverage of EI isrelatively low, as some non-standard workers are not covered. Second, with no unemployment
assistance, the long-term unemployed may have exhausted their UB entitlements.
The coverage of non-standard employees is much lower than standard employees. In 2007,
according to MHLW, the General Survey on the Diversification of Employment Status, theproportion of the non-standard employees insured in EI was 60%, while that of standard
employees was 99.2%. Male non-standard workers were less covered (56.0%) than female
non-standard workers (62.4%).
6. Historical Developments in the Adaptation of EI to the Growing Number of Non-Standard
Employees
Historically, EI has been successively amended to cover the growing number of
non-standard workers (Table 3). Special schemes have been prepared for seasonal workers anddaily workers in EI from the start of EI in 1975 to avoid possible moral hazards due to short-term
employment. The Employment Insurance Law of 1974 (Art. 6, and 38) set out specific benefit
entitlement rules for day laborers and “Specially Insured Persons in Short-term Employment”, but
did not allow exemption from contributions on grounds only of the short-term nature of theemployment. The law stated that “undertakings in which a worker or workers are employed shallbe covered undertakings” but it did not apply to “persons who are employed in a seasonalundertaking scheduled for a period not exceeding four months”. However, the contribution
coverage of short-term employment under the system for “Specially Insured Persons in Short-term
Employment” is low. After 6 months of contributions, whereas regularly insured persons wereentitled to 90 days of benefit paid monthly, “Specially Insured Persons in Short-term
Employment” were entitled to 50 days of benefit paid as a lump sum (see Art. 13, 22, 40, etc. of
the EI Law of 1974); in the 2000s, the lump sum amount was reduced to 30 days of benefit andlater increased to 40 days. Many contributors to this system are seasonal construction workers9.
9Duell et al. (2010).

121

In 1989, EI was amended to cover part-time workers whose scheduled working hours per
week were half of the statutory maximum working hours (22 hours, which was reduced to 20
hours in 1994) or over. Conditions for the UB for part-time workers were different from those forfull-time workers because of the relatively high turnover rates of the former at the start. In 2003,
these conditions for UB were equalized for full-time workers and part-time workers.
Table 3 Historical developments in Employment Insurance
1975 Employment Insurance replaces Unemployment Insurance. Benefit duration is madedependent on age instead of contribution record.
1984 Benefit duration is made dependent on both age and contribution record.
1995 Benefit duration for people in their sixties is extended by 30-60 days.
1989 The coverage of EI was extended to par-time workers, whose working hours were
22 hours or over. The threshold of working hours was reduced to 20 hours or over in 1994.
2001 The minimum income threshold for enrolment as a part-time insured worker is removed.
The previous age by contribution record schedule determining benefit duration is replacedby separate schedules for “ordinary unemployed” and for “unemployed as a result ofbankruptcy, dismissal, etc.”. In the case of “ordinary” unemployment, benefit duration is
reduced, particularly for older long-term insured workers. In the case of unemployment“as a result of bankruptcy/dismissal”, benefit duration is increased for persons aged 45-59,
but reduced (below the duration for ages 45-59) for persons aged 60-64.
The earnings ceiling (maximum earnings eligible for the benefit replacement rate of 0.6)
becomes age-dependent, ranging from JPY 14 590 per day for workers aged less than 30,
to JPY 19 450 for workers aged 60-64.
2003 For workers with 5 or more years of contributions, the maximum benefit duration is
reduced by 30 days in cases of “ordinary unemployed” and increased by 30 days in casesof “bankruptcy, dismissal, etc.”. The earnings ceiling for ages 60-64 is reduced below theceiling for ages 45-59. The gross replacement rate now declines from 0.8 to 0.5 asearnings increase (previously it declined from 0.8 to 0.6) for workers aged less than 60(from 0.8 to 0.45 for workers aged 60 or more). As a result, the maximum benefit amountis reduced by about 25%. UB was fully equalized between full-time and par-time workers.
2009 Fixed-term employees whose employers are “expected to hire them for six months ormore” are allowed to contribute to the system (previously restricted to those “expected toremain employed for one year or more”).
2010 The applicable scope of employment insurance contributions is extended to include people
who are expected to be employed for 31 days or more.
2011 Job-Seekers Support Program started in October.
Source: Duell (2010) and Hamaguchi(2010)

Prior to the 2001 reform, the conditions for being obliged to contribute to the regular
employment insurance system were:
1) Annual income of JPY 900,000 or more;
2) Work 20 or more hours per week regularly; and
3) Expect employment to continue one year or more.
In 2001, the first condition (the income minimum) was abolished. By June 2001 the numberof part-timers enrolled in the insurance system was one third higher than a year earlier—althoughaggregate statistics (Table 1) suggest this change had only a minor longer-term impact. The third
condition was modified in 2009 to cover employment expected to last for 6 months or more, and122

in 2010 to cover employment expected to last for 31 days or more.
The “Second Safety Net”
Certain measures announced in response to the recent financial crisis are grouped together
under the heading of a “second safety net”. These are:z

Emergency loans and housing allowances, announced in April 2009, for those who havelost jobs and homes. These provide assistance in finding a home, housing allowances for
up to six months and loans to cover daily living expenses (not more than JPY0.2 million
per month) for up to one year. However, this measure responded to dramatic press stories
that many laid-off workers were also being evicted from company housing.

z

Training and daily life allowances, i.e. subsistence allowances (in the form of a
non-repayable loan) payable to participants in labor market training who lack entitlement
to EI.
In October 2010, the Job Seekers’ Support Program started, perpetuating the above

Emergency Training Assistance Service introduced in 2009. This program aims to assist thoseunemployed who are not eligible for UB (such as those who are not insured, those who cannot
receive UB because the insured period is not long enough to meet the criterion, those who
exhausted their entitlement of UB, new graduates who have no employment experience, and those
self-employed whose business closed down) by providing the following services:(1) Free professional training (Job-Seekers Support Training)(2) Professional Training Participation Allowance (10,000 yen per month), if certain
conditions including means test are met(3) Strong employment support by the Public Employment Service (PES).
The program accompanies rigorous monitoring by PES to avoid moral hazard or fraud. This
program is a new attempt to fill the gap between EI and public assistance due to the absence of
unemployment assistance in Japan.
7. Recommendations
As mentioned above, the coverage of EI has been consecutively extended to cover more
non-standard employees. Prior to 2001, annual income of the worker had to be over a certain
amount to be insured in EI. This condition was abolished in 2001. To be insured, the scheduledworking hours had to be over three fourths of the working hours of ordinary workers or over and22 hours or over until 1988. This threshold was shortened to “22 hours or over” in 1989 and to“20 hours or over” in 1994. Moreover, to be insured, the expected length of employment had to be
more than one year prior to 2009. The threshold was shortened to “half a year or more” in 2009,123and then “31 days or more” in 2010. Further reforms such as shortening of the threshold ofscheduled working hours to be insured are recommended.10
Although it is expected that these reforms of EI contributed to cover more non-standard
employees, the extended coverage might accompany the risk of frequent repeated unemployment
or moral hazard, which may induce the necessity to raise premiums. Thus, several policy
recommendations are proposed.
First, consideration must be given to applying a higher premium for fixed-term employees
or introducing an experience-rated premium as practiced in the United States. Because benefit
entitlements do not usually increase in proportion to years of contributions, temporary workers
with employment spells that are just long enough to qualify for a benefit tend to be the greatest net
beneficiaries from an unemployment insurance system, while high-tenure workers are net
contributors. Since the reform in 2009, three months of benefit are paid after six months ofcontributions, which is a fairly generous ratio of benefit duration to contribution duration incomparative terms. EI needs to cover situations of repeat involuntary unemployment, and yet
minimize the subsidization of rotation between short-term jobs and benefit claims by people who
could have taken a more permanent job. A higher premium for the employers of non-regular
workers may also contribute to mitigate the dualism of the Japanese labor market by moderating
the growing number of non-standard employees.
Second, to avoid any moral hazard, efforts should be made to frequently monitor job search
activities of UB beneficiaries or to make participation in training programs a condition for thepayment of UB.
Third, it is recommended to require, as many other OECD countries do, the payment of EI
contributions on earnings from part-time work. EI covers only contracts with 20 or more standard
hours per week, which, given that real hours can vary independently of standard hours, can lead toselective enrolment.11
The condition of the entitlement to basic allowance is now to have six months ofcontribution during the one year before the separation. The duration of benefits is determined by
the reason of separation, age and length of contribution, as shown in Table 2, with consideration
given to the difficulties of re-employment and in order to avoid easy job-hopping. With regard to
the entitlement to basic allowance and the duration of benefits, some recommendations areproposed.
First, regarding the conditions of benefit entitlement, it is proposed to extend the duration ofpenalty from one month to two months in the case of refusal of job offers by PES to prevent moral
hazard.
Second, some contend that the duration of benefits should be lengthened with theintroduction of a gradually decreasing benefit system. Because there is no unemployment
1011

Duell et al. (2010).
Duell et al. (2010).

124

assistance in Japan, the benefit is suddenly suspended after the expiration of the duration of
benefit (Table 4). Nonetheless, it must be taken into consideration that, on the other hand, theextension of the length of benefit may increase the number of the long-term unemployed.
Third, in Japan, UB is suspended as soon as the recipient is employed, even if hours worked
and earnings are very small. In other OECD countries, benefits continue to be paid to the recipient
who is employed or partially unemployed, if earnings or hours worked are within certain
thresholds. This might prevent decline in disposable income through part-time work andcontribute to promoting early re-employment.
Table 4 Generosity of unemployment benefits
Net replacement rates at different points during an unemployment spell, percentage, 2007
Year 1

Year 2

Year 3

Year 4

Year 5Five-year
average

Norway

72

72

72

72

72

72

Belgium

65

63

63

63

63

63

Austria

61

58

58

58

58

59

Denmark

68

68

68

68

9

56

Ireland

50

50

50

50

50

50

Portugal

79

79

56

24

3

48

Germany

64

48

42

36

36

45

France

67

64

31

31

31

45

Finland

60

58

33

33

33

43

Australia

42

42

42

42

42

42

Spain

69

65

25

25

13

39

New Zealand

38

38

38

38

38

38

Sweden

66

63

41

8

8

37

Iceland

57

54

54

8

8

36

United Kingdom

28

28

28

28

28

28

Netherlands

71

59

3

3

3

28

Switzerland

80

40

0

0

0

24

Luxembourg

87

8

8

8

8

24

Canada

52

14

14

14

14

22

Hungary

48

13

13

13

13

20

Poland

42

16

8

8

8

16

Czech Republic

33

11

11

11

11

15

Japan

45

3

3

3

3

11

T urkey

46

0

0

0

0

9

Slovak Republic

32

3

3

3

3

9

Greece

33

5

1

1

1

8

Italy

37

0

0

0

0

7

Korea

31

0

0

0

0

6

United StatesMedian

28

0

0

0

0

6

40

25

13

9

28

52
Source: OECD Employment Outlook 2009

Fourth, there is still a “chasm” between the EI system and the public assistance system, so
the majority of unemployed people are not current recipients of either benefit. But it should be125borne in mind, when considering possible increases in EI benefit duration, that the experience inEuropean countries suggests that long-term wage-related UI benefit tend to be more expensive interms of both direct costs and the active programs needed to limit benefit dependency, than benefit
coverage of the unemployed through assistance benefits, although it does not provide the samelevel of income protection.12
The amount of benefit is calculated by multiplying the daily salary before the separation by
a fixed rate in order to maintain the living standard as before the separation and to maintain thelabor force. The replacement rate is lower for higher daily salary workers.
However, there are many workers in Japan, especially among middle-aged and older
workers, whose re-employment wages are much lower than those before separation. If thereplacement rate is high, the benefit tends to be relatively high, compared with the re-employment
wages. It would hamper the re-employment of these unemployed. Thus, it is proposed that thelevel of benefit should be determined by taking into consideration the level of re-employment
wages. It should also be pointed out that in terms of disposable income, the current replacement
rate is not so low, because the unemployment benefit is tax-exempt, while the daily wages arecalculated on the basis of gross salary before separation.
The Job Seekers’ Support Program is a new program to cope with the increasing
non-beneficiaries among the unemployed and is expected to fill the gap between EI and thenational assistance system with training programs and employment support services. However, as
beneficiaries do not need to contribute to EI, moral hazard problems such as frequent
unemployment or non-intensive job search activities might come up. Rigorous monitoring andintensive employment support are needed to avoid such moral hazard or any fraud. Moreover,statistical research is also needed to evaluate the program.
8. Concluding Remarks
This paper provided an overview of the historical adaptation process of EI to the structuralchanges in the labor market and the recommended future reform of EI.
Long-term structural changes have been taking place in the Japanese labor market. The
labor force population is aging and decreasing gradually, reflecting the demographic changes,
accompanied by an increase in the female participation rate. Employment is decreasing in the
manufacturing and construction industries, while that in the service sector is increasing. The
unemployment rate has become persistently high since the burst of the bubble. Among others, themost salient structural changes are (1) increase in non-standard employment and (2) increase inlong-term unemployment.
In Japan, the ratio of recipients of unemployment insurance and social assistance to theworking age population is fairly low, compared with the OECD average. It may reflect the low
12

Duell et al. (2010)126

coverage of EI and the low ratio of UB recipients to unemployment (ILO definition) as well as thefact that there is no unemployment assistance system. Thus, it is a challenge to adapt EI to thestructural changes in the labor market, especially the growing non-standard employment.
EI has been reformed consecutively to adapt to the growing non-standard employment since
its start in 1975. The coverage of EI has been extended to cover more non-standard employees, by
relaxing the conditions to be insured on the minimum earnings (abolished), the scheduled working
hours before separation (shortened to 20 hours per week) and the condition of the expected lengthof employment (shortened from one year to 31 days). In addition, the Job Seekers’ Support
Program started in 2011. It is a new program to assist those unemployed who are not eligible for
UB by providing training and employment support as well as a Professional Training Participation
Allowance. Efforts have been made to prevent any moral hazard by shortening the duration of
benefit for ordinary unemployment as well as introducing a Re-employment Allocation topromote early re-employment. Further reforms of EI are recommended to adapt to the extended
coverage of EI covering much of short-term employment as well as to fill the chasm between EI
and national assistance.

127References
Shinozaki, T. (2004), “Long-term Unemployment in Japan”, The Japanese Journal of Labour
Studies, No. 528, pp. 4-18 (in Japanese).
Duell, N., D. Grubb, S. Singh, and P. Tergeist (2010), “Activation Policies in Japan”, OECD
Social, Employment and Migration Working Papers, No. 113, OECD Publishing.
Hamaguchi, K. (2010), “Safety Net in the Labour Market”, Labour Policy Report, Volume 7, The
Japan Institute for Labour Policy and Training.
Higuchi, Y. (2010), “The Employment Insurance Reform”, in H. Miyajima, S. Nishimura and T.
Kyogoku ed., Public Finance and Income Support, Social Security and Economy, Vol. 2,
Tokyo University Press, Tokyo, pp. 261-288 (in Japanese).
ILO (2009), The Financial and Economic Crisis: A Decent Work Response.
Mitani, N. (2010), “Employment Insurance and Active Labor Market Programs in Japan”,
Towards a More Resilient Society: Lessons from Economic Crises, Report of the Social
Resilience Project October 2010, The Japan Institute of International Affairs (JIIA)
Mitani, N. (2011), “Structural Unemployment in Japan”, a paper presented at the 26th Pacific
Economic Community Seminar: Examining the Mid- and Long-Term Structural
Unemployment, held in Taipei.
OECD (2007), Wages and Benefits

128

Varieties of Labor Market and Social Security in East Asia:
Tackling the Barrier of Informal Employment1
Yasuhiro Kamimura∗

Wide variations exist in the characteristics of the labor market in East Asian economies. In
order to upgrade and expand the existing social security system, it is necessary to base theinstitutional design of such system on an in-depth understanding of the characteristics of the labormarket of each economy—in which the issue of informal employment is pivotal. In this study, I
argue that in order to expand social security coverage for informal workers, it is necessary first to
clarify and operationalize the concept of informal employment. This paper first provides a schemathat explains how various forms of informal employment emerge from the interaction between
state regulations and the labor market. Next, I examine strategies aimed at expanding social
security coverage.
In the first section, after presenting an overview of unemployment in East Asia, I maintainthe necessity of focusing on various types of informal employment, such as the self-employed,
migrant workers who shuttle between wage employment and self-employment, and workers who
are not covered by unemployment insurance.
In the second section, the literature on informal employment and related discussions within
the International Labour Organization (ILO) are reviewed. Then, I explain the perspective that
informal employment develops out of the interaction between the regulatory capacity of thegovernment and the characteristics of the labor market.
In the last section, based on a review of the preceding sections, I propose a novel schema tocapture the phenomenon and attempt to measure the scale of informal employment. Finally, I
argue for the need for governments to enhance their capacity to formalize each type of informal
employment.
1. A New Age of East Asian Unemployment
East Asia is witnessing a new age of unemployment. In addition to the increase in theunemployment rate, we need to look at the structural changes taking place in the labor market thatare behind this increase. We also need to focus on the issue of informal employment, which does
not appear in unemployment statistics.
Trends in Unemployment

The various impacts caused by the Lehman shock that took place in September 2008 do not
1This paper is based on the original Japanese version, which will be printed in the Journal of Social Science (Institute ofSocial Science, The University of Tokyo), Vol. 63, No. 5-6, 2012.
∗
Associate Professor, Nagoya University, Japan.

129appear uniformly. Figure 1 charts the monthly unemployment rates for several East Asian
economies before and after the shock.
Figure 1. Unemployment Rates before and after the Lehman Shock (%)
14.0

12.0

10.0
Philippines
Indonesia

8.0

Chinese Taipei
Japan

6.0

Hong Kong China
Korea

4.0

Singapore
Thailand

2.0

2004Jan.
2004May
2004Sep.
2005Jan.
2005May
2005Sep.
2006Jan.
2006May
2006Sep.
2007Jan.
2007May
2007Sep.
2008Jan.
2008May
2008Sep.
2009Jan.
2009May
2009Sep.
2010Jan.
2010May
2010Sep.
2011Jan.
2011May
2011Sep.

0.0

Data Source: ILO Department of Statistics, Short Term Indicators of the Labour Market, 2011.
(http://laborsta.ilo.org/sti)
There was an apparent increase in unemployment after the Lehman shock only in Japan,
Chinese Taipei, Hong Kong China, and Singapore—all of which have wage employment-centeredlabor markets. As for Indonesia, Thailand, and the Philippines, where self-employment isdominant, there were no short-term impacts.

130Figure 2. Unemployment Rates in 1990, 1998, and 2009 (%)
10.0
9.0
8.0
7.0
6.0
5.0
1990
4.0

1998

3.0

2009

2.0
1.0
0.0

Data Source: ILO, Key Indicators of the Labour Market.
Figure 2 compares the unemployment rates in various East Asian economies in 1990, 1998
(after the Asian economic crisis), and in 2009 (after the Lehman shock)—which shows a more
dramatic change. Hong Kong China, Korea, Indonesia, and Japan experienced a sharp rise in
unemployment around 1998, while Chinese Taipei and Singapore experienced one around 2009.
On the other hand, there was no such clear change in the Philippines, Malaysia, China, andThailand. Here we should be careful with the different definitions of “unemployment” as used ineach economy. In China, jobless rural residents are not counted as being “unemployed,” while theunemployment rate in Thailand excludes the “seasonally inactive labor force;” and theunemployment rate in Indonesia after 2000 includes discouraged workers (Kamimura 2010).

131

Figure 3. Number of Unemployed (thousand)
12,50010,000Indonesia
China
Philippines

7,500

Japan
Viet Nam
Korea

5,000

Thailand
Chinese Taipei
Malaysia

2,500

Hong Kong China
Singapore

0

Data Source: ILO, Key Indicators of the Labour Market.
Figure 3 shows the trends in the numbers (not rates) of the unemployed, which shed light on
the problem from a different angle. The fact that two highly populated economies, China andIndonesia, are experiencing a sharp increase in unemployment holds great significance for theregion as a whole.
Between Unemployment and Informal Employment

The problem is not limited to unemployment, nor is an adequate solution to establish
unemployment insurance schemes that cover the currently unemployed. According to Pellissery
and Walker (2007), unless constructed on the basis of an understanding of the characteristics of alabor market, social security is, in fact, likely to impede social integration. In most developing
economies, “The fluidity of jobs and employers makes registration and compliance difficult toensure, while low wages and productivity undermine actuarial viability and inhibit provision anduptake. Consequently, social security often serves as a discriminating feature of the formal
employment sector, rather than as a mechanism for social cohesion” (Pellissery and Walker 2007:403). In short, Western-style social insurance, which presupposes a wage employment-centeredlabor market, is not adequate as a measure for social security for developing economies.
A theory of unemployment proposed by Okochi (1952) 60 years ago may provide asuggestion for considering this issue. In those days, Japan had a large agricultural sector, and the132industrial sector was also supported by many migrant workers from rural areas—which arecharacteristics common to the current situation in developing economies. In this context, Okochi
argued:First, unemployment denotes that a worker who does not have his own means of production
has lost his workplace. If he has his own workshop, land, or store, he cannot be unemployed. Insuch a case, if that worker cannot earn enough money to live, he is called “poor” or“underemployed,” but he is not “unemployed” in a precise sense (Okochi 1952: 9).
Second, the idea of unemployment presumes that the unemployed worker retains his
willingness to work. It implies that he shares a characteristic of modern wage workers that Weber
calls “the spirit of capitalism.” Such a worker should not be idle and should make every effort toearn his own bread (Okochi 1952: 12).
Third, if a worker cannot find a job that suits his skill or ability set, it can be said that he is“unemployed.” In countries where unemployment insurance is inadequate, dismissed workers
may be ready to accept whatever job is possible. If they get a new job that is not appropriate totheir skills, however, it is a kind of unemployment, in the sense that they are misallocated fromthe viewpoint of the efficiency of the whole of industrial society (Okochi 1952: 16).
The first point suggests that the concept of unemployment is aimed only at wage workers,
and cannot be applied to poor self-employed workers or the problem of underemployment. The
issue of self-employed workers, however, cannot be ignored in the context of considering an
extension of social security in East Asia.
The second point reminds us of migrant workers who shuttle between wage employment
and self-employment. In developing economies, dismissed workers may go back to their homevillages and join the family business as unpaid workers. Although they may not appear to be
unemployed, there certainly is a problem here.
The third point implies the fact that the existence of unemployment insurance itself enables
the status of unemployment, allowing the maintenance of the improvement of the skills of theunemployed. In an economy without unemployment insurance, a low unemployment rate does not
automatically equate to an efficient industrial society as a whole.
Based on Okochi’s argument, it is not enough to pay attention to unemployment only.
Instead, we need to focus on the problems of various types of informal employment, such as theself-employed, migrant workers who shuttle between wage employment and self-employment,
and workers who are not covered by unemployment insurance. Before defining informal
employment in the next two sections, here I present some data on the situation regarding
self-employment, which has a deep connection with informal employment.
Self-Employment: Shrinking But Remaining

Although, as it will be explained later, self-employment is not equal to informal
employment,

the

two

categories

do

have

a

connection

with

each

other.

Inaself-employment-centered labor market, the ratio of informal employment is high. The decline of133self-employment may lead to a reduction of informal employment.
Figure 4. Self-Employed Workers (%)
90.0
80.0
70.0

Viet Nam
Indonesia

60.0

ThailandPhilippines

50.0

Korea
40.0

Malaysia
Chinese Taipei

30.0Singapore
Japan

20.0

Hong Kong China
10.0

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

0.0

Data Source: ILO, Key Indicators of the Labour Market.
Figure 4 indicates the ratio of self-employed workers (including contributing family
workers). While the ratio is apparently declining in Japan, Chinese Taipei, Korea, Thailand, andVietnam, there is no such change in Indonesia, the Philippines, and Malaysia. In Vietnam,
Indonesia, Thailand, and the Philippines, self-employed workers are in the majority.

134

Figure 5. Contributing Family Workers (male, %)
35.0

30.0

Viet Nam

25.0

ThailandPhilippines

20.0

Indonesia
Malaysia

15.0

Korea
Japan

10.0

Singapore
Hong Kong China

5.0

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

0.0

Data Source: ILO, Key Indicators of the Labour Market.
Figures 5 and 6 show the ratio of unpaid contributing family workers, who are the mostvulnerable within the ranks of the self-employed, and who are most easily excluded from theapplication of social security. Figure 5 shows the data for males. The ratio is relatively high in
Vietnam, Thailand, the Philippines, and Indonesia. Although they are declining, the ratios in
Vietnam and Thailand account for more than 15%.

135Figure 6. Contributing Family Workers (female, %)
70.0

60.0

Viet Nam

50.0

Indonesia
Thailand

40.0

Philippines
Korea

30.0

Malaysia
Japan

20.0

Singapore
Hong Kong China

10.0

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

0.0

Data Source: ILO, Key Indicators of the Labour Market.
Figure 6 shows the data for females. The ratio is relatively high in Vietnam, Indonesia, andThailand. Although they are also declining, the ratios account for more than 30%. In most East
Asian economies, the ratio of female unpaid contributing family workers is twice that of males.
Female workers are inclined to engage in informal employment, and are therefore easily excluded
from the application of social security.

136

Figure 7. Non-Agricultural Self-Employed Workers (%)
30.0

25.0
Indonesia
20.0

Korea
Chinese Taipei
Viet Nam

15.0

ThailandSingapore
10.0

Philippines
Malaysia
Japan

5.0

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

0.0

Data Source: ILO, Key Indicators of the Labour Market.
Figure 7 shows the ratio of non-agricultural self-employed workers (calculated byextracting the agricultural population from the number of the self-employed) in various East Asian
economies. The ratios show different tendencies from those of self-employed workers as a whole.
The ratios are relatively high in Indonesia, Korea, and Chinese Taipei, while they are relatively
low in Japan, Malaysia, and the Philippines. There is an increasing tendency in Indonesia,
Vietnam, and Malaysia. This indicates that a reduction in the agricultural population does notalways result in a decline in self-employed workers.
2. What Is Informal Employment?
For extending social security in East Asia, I have argued that it is necessary to focus on
informal employment in addition to unemployment. What then is informal employment? The
existing definitions are somewhat inadequate. Here I examine the literature on informal
employment and related discussions within the International Labour Organization (ILO).
Various Definitions

The concept of informal employment (or the informal sector) was first coined by Hart
(1973), the economic anthropologist, when he explored the urban sub-proletariat in Ghana.
According to him, “The distinction between formal and informal income opportunities is based137

essentially on that between wage-earning and self-employment” (Hart 1973: 68). In other words,
his concept of informal employment is equivalent to self-employment.
On the other hand, according to Feige (1990; quoted by Portes and Haller 2005: 404), theinformal economy is one of the four types of “underground economy” (the other three types
being: illegal, unreported, and unrecorded economy). “The informal economy comprises
economic actions that bypass the costs of, and are excluded from the protection of, laws andadministrative rules covering ‘property relationships, commercial licensing, labor contracts, torts,financial credit, and social security systems’” (Feige 1990; quoted by Portes and Haller 2005:
405).
Castells and Portes (1989; quoted in Portes and Haller 2005: 405) classified things
differently. They classified economic activities into three categories: formal economy (process of
production: licit, final product: licit); informal economy (process of production: illicit, final
product: licit); and criminal economy (process of production: illicit, final product: illicit).
While Hart limits the scope of informal employment and then explores its characteristics,
Feige as well as Castells and Portes first define the concept of informal economy. Feige defines“informality” as economic activities that “bypass costs and are excluded from protection,”whereas Castells and Portes define it as economic activity in which “the final product is licit, but
the process of production is illicit.”
Here we should pay attention to the fact that the extent of self-employment is not always
congruent with that of the informal economy. Although they are correspondent with each other in
Ghana—where Hart conducted his research—in advanced economies, most of the self-employedneither bypass the costs of taxes and social security, nor are they excluded by labor laws and otherlegislation. In this case, it is not appropriate to count the economic activities of the self-employed
as being “informal.” On the other hand, without the distinction of advanced and developing
economies, there are some employees at large companies who are legally exempt from theapplication of social insurance or labor regulations. Of course there may also be some employees
who bypass the application illegally. Although not being self-employed, they are all informal
workers in the sense of the definitions of Feige as well as Castells and Portes.
The 2002 Consensus of the ILO

Recently, the issue of informal employment has once again been receiving increased
attention in relation to the concept of “decent work,” which has been promoted by the ILO since1999. This is because, in order to achieve decent work for all, the existence of informal
employment cannot be ignored. The most important document in this respect is ILO (2002),
which is known as the “2002 consensus” (ILO 2007: 2).
According to the consensus, intensified global competition has made the labor market more
flexible, boosting informal employment both in advanced and developing economies. Therefore,“increasingly, ‘informal sector’ has been found to be an inadequate, if not misleading, term toreflect these dynamic, heterogeneous and complex aspects of a phenomenon which is not, in fact,138

a ‘sector’ in the sense of a specific industry group or economic activity. The term ‘informal
economy’ has come to be widely used instead to encompass the expanding and increasingly
diverse group of workers and enterprises in both rural and urban areas operating informally” (ILO
2002: 2).
In summary, this is a proposal to define informality by its characteristics, rather than by thescope of “sector.” Here “informal economy” indicates “all economic activities that are, in law orpractice, not covered or insufficiently covered by formal arrangements” (ILO 2007: 3). This is
close to the definition by Feige given above (“economic activities that bypass costs and are
excluded from protection”).
Although this definition can decide the scope of people who are included within an informal
economy, the outline is not as clear as Hart’s classic description. “The informal economy includes
wage workers and own-account workers, contributing family members and those moving fromone situation to another; it also includes some of those who are engaged in new flexible work
arrangements and who find themselves at the periphery of the core enterprise or at the lowest endof the production chain” (ILO 2007: 3). This is nothing more than saying that one is an informal
worker if one is not a formal worker—no matter for which sector one works.
The classification by Chen (2008) gives concrete expression to the concept of informal
employment in the 2002 consensus. According to it, informal employment consists of “informal
self-employment” and “informal wage employment.”
Informal self-employment (Chen 2008: 19):1) employers: owner operators who hire others,2) own account workers: owner operators of single-person units or family businesses/farms who
do not hire others in informal enterprises,
3) unpaid contributing family workers: family members who work in family businesses or farms
without pay,4) members of informal producers’ cooperatives (where these exist).
Informal wage employment (Chen 2008: 20):5) informal employees: unprotected employees with a known employer (either an informal
enterprise, a formal enterprise, or a household),6) casual or day labourers: wage workers with no fixed employer who sell their labour on a dailyor seasonal basis,7) industrial outworkers: subcontracted workers who produce for a piece-rate from small
workshops or their homes (also called homeworkers).
Among these, informal self-employment is equal to the scope of informal employment,
which Hart initially supposed. Employers and own account workers, however, is not informal, if

139they are covered by formal arrangements. On the other hand, informal wage employment includes
not only employees of informal enterprise, casual or day laborers, industrial outworkers, but also
employees of formal enterprises if they are not covered by formal arrangements.
As shown in the first section, in most East Asian economies, the ratio of self-employedworkers is declining in association with the reduction of the agricultural sector. As for
non-agricultural self-employed workers, however, there are some economies in which the ratio is
being maintained or is even increasing. It is reasonable to suppose that informal self-employment
at various ratios exists in these economies. Then how can we measure the ratio? Is it also possible
to measure the increase in informal wage employment? Before considering these problems in thenext section, here I examine the factors that increase informal employment.
Why Has Informal Employment Increased?

Although there are several explanations for the recent increase in informal employment,
here I follow the summary by Huitfeldt and Jütting (2009). According to them:Firstly, informality could to a large extent be seen as a result of the type of development that fails togenerate sufficient good jobs for all. This has been accentuated by low capacity in the private and public
sectors to accommodate rapid population and labour force growth and has been worsened by labour
market discrimination and segregation between men and women, social groups and different occupations.
Secondly, an increase in subcontracting driven by globalisation and economic liberalisation has led togreater diversity in the forms of informal employment. This in turn has led to a greater heterogeneity
among informal workers, and an increase in the number of those with higher skills and productive
capacity.
Thirdly, formal regulations have mostly been designed for larger enterprises and are therefore often
inadequate for the needs and conditions of the growing sector of micro-enterprises. Changes in labour
regulations and/or in implementation of labour regulations may also have had an impact on the share of
informality in the economy.
Fourthly, there has been informalisation by employers of once-formal jobs as a strategy to lower labourcosts and deal with competition.
(Huitfeldt and Jütting 2009: 100)

The first point attributes the cause to the weak capacity of the actual market economy forjob creation. The second point refers to the increased flexibility of employment caused by
globalization. The third point discusses the limit of the regulatory capacity of the government. The
fourth point, which is related to the second one, mentions the informalization caused by the140competitive strategies of companies.
It may go beyond the scope of this paper to determine the cause for the increase in informal
employment by data analysis, but based on the summary by Huitfeldt and Jütting, it can be said
that the quality and quantity of informal employment are dictated both by the regulatory capacityof the government and the characteristics of the labor market. Moreover, the regulatory capacityof the government and the characteristics of the labor market are not independent of each other.
Here the following explanation by Portes and Haller provides a clue. “Variations in the scope of
official regulations and states’ differential capacity to police them interact with the characteristicsof the population subject to these rules. It stands to reason that societies vary in their receptivity or
resistance to official regulation and in their ability to organize underground forms of enterprise”(Portes and Haller 2005: 411). It can be supposed that the interaction between state and society(here the government and labor market) may create various types of informal employment.
3. Social Security and Informal Employment
In order to expand social security coverage to informal workers, it is necessary first to
clarify and operationalize the concept of informal employment. In this section, I propose a novel
schema to capture the phenomenon, attempt to measure the scale of informal employment, andfinally discuss policy implications.
Interaction between State and Market

Based on a review of the preceding sections, a coordinate plane such as that shown in
Figure 8 can be considered for capturing the interaction between the regulatory capacity of thegovernment and the characteristics of the labor market. Although “formal employment” means
employment that is covered by regulations and protection such as tax systems, labor laws, andsocial security, the following argument mainly focuses on the application of social security.

141

Strong state or regulation

Formal (1)Formal (2)Informal (1)Informal (2)Self-employment centered labor market

Wage employment centered labor market

Figure 8. Interaction between State and Market

Weak state or deregulation

Formal (1), upper left, is a combination of a state with a strong regulatory capacity (or atightening of regulations) and a wage employment-centered labor market. Western welfare statesthat were established in the mid-20th century fit into this type. The conditions for a workablesocial insurance, which is contributed to by employers and employees, are the state’s capacity to
run the scheme and a type of labor market wherein most employers can afford to pay thecontribution premiums for their employees. In such a system, informal employment can hardly
proliferate. There is, however, a possibility of a move to Informal (1) as a result of deregulatory
reform.
Formal (2), upper right, is a combination of a state with a strong regulatory capacity (or atighteningofregulations)andaself-employment-centeredlabormarket.

Inaself-employment-centered labor market, it is not easy to collect premiums from workers regularly
and constantly, let alone from their employers. Accordingly, states with a strong regulatory
capacity devise efficient methods to collect premiums from self-employed workers, or devise
schemes based on a government budget. For example, it could be a personal saving accounts
scheme or non-contributory social allowances. The idea of basic income may be worth
considering.
Informal (1), lower left, is a combination of a state with a weak regulatory capacity (orderegulation) and a wage employment-centered labor market. This type of system can emerge
from two different paths. One is as a result of neoliberal deregulatory reform in advanced
economies where a Formal (1) type combination was once established. The other is whereself-employment-centered Informal (2) type economies, as a result of economic development,
move to a wage employment-centered labor market without establishing comparable social

142security schemes. Here informal wage employment is dominant. We should strengthen thecapacity of the government to place the responsibility for social security on employers.
Informal (2), lower right, is a combination of a state with a weak regulatory capacity (orderegulation) and a self-employment-centered labor market. Most developing economies have thistype of feature. This type of system can also emerge for two different reasons. One is whereformal schemes exist, but their coverage cannot be extended to most workers as a result of either
the weak regulatory capacity of the government or the self-employment-centered labor market.
The other is where a specific scheme has not existed from the outset. Here informal
self-employment is dominant. We should strengthen the capacity of the government to devise
suitable methods to a self-employment-centered labor market.
I would like to add two comments on these models. First, where a specific scheme does notexist in Informal (1) or (2): In the case, for example, of economies that have not introduced an
unemployment insurance scheme yet, it may be possible to say that workers who are not coveredby unemployment insurance are not informal workers, for all workers are out of coverage. If so,
the problem of informal employment can be resolved by eliminating all state regulations andprotection. This is illogical. Therefore, it may be pointless to classify formal/informal employment
by domestic criteria. We need a certain kind of international standard. All employment in an
economy in which a certain scheme does not exist should be judged as being informal in terms of
the specific area.
Second, as mentioned later, in reality, there are only a few cases that fit into the Formal (2)type. Most developing economies are located in Informal (2). On the other hand, in a case where ashift toward Informal (1) occurs due to economic development, it is recommendable to introduce
a Western-style social security system, i.e. Formal (1). As for cases, however, of economies thatremain in Informal (2) or of remaining informal self-employment in an economy of Informal (1),it should also be considered to construct a developing economy-style scheme, i.e. Formal (2).
Here we should refer to the Japanese experience of implementing the National Health Insurance,
which covered farmers and the self-employed before the Second World War (Hiroi 2003,
Kitayama 2011).
Measuring Informal Employment

As mentioned in the second section, it is not easy to measure the proportion of informal
employment (including informal self-employment and informal wage employment). This does notalways result from the inadequacy of statistics. When we say “not covered by formal
arrangements” or “bypass costs and are excluded from protection,” there are always grayareas—such as cases that are covered by some schemes but are excluded by others, or cases thatare excluded from protection even when taxes are being paid. Accordingly, I propose to measure
the proportion of informal employment in each specific scheme separately. Here I concentrate on
analyzing data on pensions and unemployment insurances. It is not surprising that there are casesthat are covered by a pension scheme, but are not covered by unemployment insurance. There is143

no way to proceed other than to synthesize the measurements of each specific area.
Figure 9. Effective Coverage of Pensions

Data Source: ILO, World Social Security Report 2010-2011, Table 21, p. 240 (For Japan: National
Institute of Population and Social Security Research, Statistical Yearbook of Social
Security). For the ratio of self-employed: ILO, Key Indicators of the Labour Market.
Figure 9 shows the effective coverage of pensions (i.e. share of the population above legal
retirement age in receipt of a pension). The horizontal axis shows the share of self-employedworkers in each economy. Most advanced economies, including Japan, are concentrated in theupper left. This corresponds to the Formal (1) type. The Philippines, Thailand, Indonesia, andVietnam are located in the lower right, which corresponds to the Informal (2) type. Malaysia andKorea are located in the lower left, which means that the process of formalization does not keep
up with the increase in wage employment (i.e. Informal (1)). On the other hand, in some CIS
economies—Kyrgyzstan, Azerbaijan, and Tajikistan—the share of informal employment is small
for their relatively high ratio of self-employment (i.e. Formal (2)). Although somewhat distant,
Mongolia has a similar tendency.

144

Figure 10. Legal Coverage of Pensions

Data Source: ILO, World Social Security Report 2010-2011, Table 21, p. 240 (For Japan: National
Institute of Population and Social Security Research, Statistical Yearbook of Social
Security). For the ratio of self-employed: ILO, Key Indicators of the Labour Market.
Figure 10 shows the legal coverage of pensions (i.e. share of active contributors to apension scheme in the working-age population). The horizontal axis shows the share ofself-employed workers in each economy. The overall picture shifts downward from Figure 9. Thismeans that the ratio of Figure 9 includes not only social insurance-type pensions, but also pension
financed by the government budget. On the other hand, in Malaysia, Korea, the Philippines, andChinese Taipei, the legal coverage surpasses the effective coverage. Presumably because thepension schemes of these economies have recently been extended, the participation rate (i.e. thelegal coverage) of the working generation is higher than the ratio of beneficiaries (i.e. theeffective coverage). This implies the process of formalization is currently proceeding.

145

Figure 11. Effective Coverage of Unemployment Benefits

Data Source: ILO, World Social Security Report 2010-2011, Table 22a, p. 245 (For Chinese Taipei:
Council of Labor Affairs, Yearbook of Labor Statistics). For the ratio of self-employed:
ILO, Key Indicators of the Labour Market.
Figure 11 shows the effective coverage of unemployment benefits (i.e. percentage of theunemployed receiving unemployment benefits). The horizontal axis shows the share ofself-employed workers in each economy. Differing from pensions, the effective coverage of
unemployment benefits varies even among advanced economies where the ratio ofself-employment is similarly low. Economies such as Japan have experienced informalization interms of unemployment insurance. It is worth noting that the effective coverage in Japan was over
80% in the 1960s (Statistics Bureau, Longitudinal Statistics Series of Japan). This was partly
because the unemployment rate at that time was quite low. Still, one of the main reasons of thedecline seems to be neoliberal regulatory reforms. Although the coverage in other East Asian
economies is similarly low, we should also pay attention to the fact that there are many economies
that have not introduced unemployment insurance yet (Kamimura 2010).

146Strategies for Extending Social Security

Bearing these conditions in mind, how can we formalize both informal self-employment
and informal wage employment? Setting the problem of the informalization of employment inadvanced economies aside, here I concentrate on the issue of extending social security (here,
mainly unemployment insurance) in developing economies.
There are difficulties peculiar to the implementation of unemployment insurance indeveloping economies. The causes are attributed to both government and market. A World Bank
labor economist, Vodopivec (2009), maintains:
The most important circumstances which dictate deviations from a standard UI [unemployment
insurance] program are the low stage of development of the labor market and weak administrative
capacity. In developed countries, UI has emerged in response to the developments of the labor market,
specifically, the emergence of the unemployment as a “discrete event.” In important ways, labor market
conditions in developing countries―particularly the prevalence of large informal sector―makeunemployment more a “continuous” variable, with important consequences for the design of
unemployment insurance. Moreover, the administrative capacity of developing countries (even inupper-middle income group) lags behind the capacity of developed countries, which is likely to worsen
the efficiency properties of UI program.
(Vodopivec 2009: 10)

Vodopivec recommends Unemployment Insurance Savings Accounts that have no
risk-pooling functions and place stress on individual responsibility, considering that it is notrealistic to introduce a Western-style unemployment insurance scheme into developing economies.
On the other hand, the ILO Office for Indonesia emphasizes the importance of introducing
unemployment insurance even in economies such as Indonesia.
The [Indonesian] government’s strong policy response [for the economic crisis] has included
infrastructure development, which is critical for providing jobs, in particular for the unskilled. The
government has also put in place various social assistance programmes for the poor, which have beenstrengthened as a result of the crisis. What is missing, however, is protection for the semi-skilled, inparticular for women and the near-poor. They do not qualify for the social assistance programmes for thepoor and, given their relatively higher skill levels, the lower skilled jobs in infrastructure often do not
represent appealing alternatives. Furthermore, as infrastructure works typically attract mainly maleworkers, they cannot sufficiently absorb the large number of women who have been laid off inexport-oriented industries. For these groups, unemployment insurance can function as an automaticstabilizer that may cushion the impact of the economic shock and help maintain aggregate demand.
Unemployment insurance could also slow down the transmission of the crisis from urban to rural areas,147especially in countries where large numbers of rural migrants have lost jobs in export-oriented industries.
(ILO Office for Indonesia 2009: 22)

In short, even in economies such as Indonesia, there are types of workers that should becovered by unemployment insurance, rather than by social assistance or public-works programs.
Of course there is no need to narrow formalization strategies down to a single way. Wageearners, who are increasing, should be covered by Western-style social insurance schemes.
Although it is not easy to cover casual or day laborers, the experience of Day Laborers’
Unemployment Insurance in postwar Japan (Ujihara 1989: 45) may serve as a useful reference tofind solutions, setting the Unemployment Insurance Savings Accounts aside. On the other hand, it
may not be realistic to cover the remaining self-employed workers by unemployment insurance. It
is better to give priority to establishing a community-based insurance in the area of health andpensions.
Nevertheless, we should not forgive the survival of informal employment on the grounds of“weak regulatory capacity of the government” or “self-employment-centered labor market.”Instead, we should consider strategies for formalizing each type of informal employment, andmake governments enhance their capacity to realize such strategies.

148

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