metadata: authors: 0: author: Hamermesh, Daniel S.
docna: 0: docna: Unemployment insurance for developing countries
docty: Policy Research Working Paper
subtopic: Labor Markets,Social Development & Poverty,Employment and Unemployment,Rural Labor Markets
teratopic: Health, Nutrition and Population
abstracts: cdata!: A major purpose of this essay is to
            provide an outline of the scope and nature of unemployment
            insurance (UI) programs in industrialized economies. This
            includes:  (a) laying out their potential goals, including
            an analysis of the rationales for these goals; (b)
            summarizing the characteristics of their structure; and (c)
            presenting a summary of evidence on the programs'
            economic effects.  Laying out the potential goals of the UI
            programs is crucial, since without goals, we have no basis
            against which to weigh the evidence of the programs'
            effects.  Without a summary of program characteristics,
            there is no basis for comparing programs or for
            understanding the choices available to policymakers
            elsewhere.  While summaries of the economic effects of UI
            programs have been provided elsewhere, linking them to
            specific policy choices is essential for appreciating their
            impacts on program goals.  The second major purpose is to
            consider issues in applying UI programs to developing
            economies.  The central question is the applicability of the
            institutions of UI in industrialized economies, and the
            evidence on their effects, to this different context.  This
            paper includes a discussion on research issues that should
            be investigated in order to learn more about this question.
repnme: repnme: Unemployment insurance for developing countries
display_title: Unemployment insurance for
            developing countries
listing_relative_url: /research/1992/05/699689/unemployment-insurance-developing-countries
topicv3: Labor Markets m1326488 855,Social Insurance m1326950 751,Jobs m1503931 2670,Unemployment m1504051 2747,Labor Supply m1504055 2751
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Health, Nutrition and Population
origu: Poverty Division (PRMPO)
no_of_pages: 49
model_extractions: **Policy Researchj**

# **Education and Employment**

WPS 897 This paper-a product of the Education and Employment Division, Population and Human Resources Department - is past of the department's program of studies **o01** employment and labor market issues. Copies are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Selina Khan, room S6-228, extension 33651 (May 1992, 44 pages).

Unemployment insurance, contends Hamermesh, provides compensation for lost income by requiring individuals or employers, or both, to pay taxes into a common fund. It is part of a general safety net constructed by citizens of developed countries. It is unique among social insurance programs in that it offers payment for an event that is partly preventable and that is not physically painful. Thus, it differs from old-age and disability insurance, from compensation for work-related injury and illness, and others. This exposes it to greater criticism from citizens opposed to any social insurance, criticism that planners who build unemployment insurance programs must takc into account.

Hamermesh analyzes the various goals that have been adduced for unemployment insurance and decides which ones make sense. Sometimes the supposed goals run counter to what unemployment insurance programs actually do, but - one goal providing consumption insuranccis at least partly met by typical unemployment insurance programs in developed countries.

Hamermesh lists the parameters of typical unemployment insurancc programs and their ranges in industrial countries. Evidence about the economic impact of these parameters provides planners with a basis for choice that can guide them in constructing unemployment insurance programs elsewhere.

Experience and evidence in developed economies may carry over into developing economics, Hamermesh concludes, but this is unclear. Several characteristics of developing economies, particularly the possibility that 2 .1ual ""bor market exists, are important. This suggests the need for care in introducing unemployment insurance programs in these economies. Hamermesh suggests several lines of research to answer questions about the validity of the consumption-insurance goal in developing countries, and about appropriate structures of taxes and benefits.

Hamermesh's discussions of dual labor markets and the size of the modem sector do not apply to the formcrly planned economies of Eastern Europe, but his discussion of program parameters and goals may be useful for policymakers there who must analyze expectations about any unemployment insurance program that is proposed.

I Thc Policy Research Working Paper Scrics disseminates the findings of work under way in thc Bank. An objective of the scries I is to **get thesc** findings out quickly, even if presentations are less than fully polished. The findings, intcrpretations, and concltsions in these papers do not necessarily represent official Bank policy.

Produced by **the** Policy Research Dissemination Center
# TABLE OF CONTENTS

||Page|
|---|---|
|Introduction -Purposes of the Discussion ........................................|I|
|Potential Goals of Ul Programs-<br>and Rationales for Govemment Intervention .............|.<br>2|
|The Structure of Ul Programs ........................|5|
|Evidence on the Economic Effects ........................|17|
|Transferring Ul Programs to Developing Economies .................................|29|
|Some Suggestions for Research ............|39|
|Conclusions<br>...............................|41|
|References<br>..............................|42|
|Text Tables<br>Tablel .......................|2|
|Table 2 ..............................|10|
|Text Figures<br>Figure la ...............................|32|
|Figure1b ...............................|32|
|Figure 2a ...............................|34|
|Figure 2b ...............................|34|

# Text Figures

This author is Professor of economics, Michigan State University, and Research Associate, National Bureau of Economic Research. This paper Is prepared as part of the Program of Studies on Employment and Labor Market Issues conducted by the Education and Employment Division of the Population and Human Resources Departm6nt of the World Bank.
# A. Introdugiotn - PuMoses of the DIJcussIon

A major purpose of this essay to provide an outille of the scope and nature of unemployment Insurance (UI) programs In Industrialized economies. This Includeo: (i) laying out their potential goals, Including an analysis of the rationales for these goals; (ii) summarizng the characteristcs ofthir structure; and (lii) presenting a summary of evidence on the programs' economic oefcts. Laying out th potential goals of Ul programs Is crucial, since without goals, we have no basis against which to weigh the evidenco of the programs' effects. Without a summary of program characteristics, there Is no **basis** for comparing programs or for understanding the chokes available to policymakers elsewhere. While summaries of the economic effects of Ul programs hava bsen provided elsewhere, linking them to **specific** policy choices is essential for appreciating their Impacts on program goals.

Having accomplished these tasks, the second major purpose Is to consider Issues In applying Ul programs to developing economies. The central question Is the applicability of the Instiutions of Ul in industrialized economles, and the evidence on their effects, to this different context. Following fromn this Is a discussion of the research Issues that should be Investigated to leam more about this question. Information on expenditures on Ul as a percentage of GDP Is shown In Table 1 for recent y%rs for many countries. Comparisons across countres In these data are problematic, both because the definKions of what constitute Ul benefits differ, and because the extent of unemployment differs sharply among the countries and over time. There is no available Index that shows the relative generosity of each country9 program under a fixed set of labor-market condimons. Sufflice it to say that we can be sure that In most deveioped economies Ul benefits are a very small fraction of total spending and as a fraction of GDP, they generally rise as the aggregate unemployment rat Increases.
2

**Table** 1. Ul **Beneffta as a** Percentage<sup>of GDP In OECD</sup> Countries, Recent Years

<!-- Start of picture text --> Country 1989 or 1990 Previous 3 Years<br>Australia 1.07 0.99<br>Austria 0.11 0.15<br>Belgium 2.04 °.39<br>Canada 1.57 1.69<br>Denmark 3.21 2.95<br>Finland 0.62 0.79<br>France 1.27 1.29<br>Germany 1.14 1.29<br>Groee 0.46 0.43<br>Ireland 2.79 3.26<br>Japan 0.32 0.39<br>Netherlands 2.30 2.65<br>New Zealand 1.77 0.97<br>Norway 1.15 0.64<br>Portugal 0.32 0.32<br>Spain 2.33 2.47<br>Sweden 0.59 0.61<br>Switzerland 0.14 0.18<br>Great Britain 0.90 1.17<br>United States 0.60 0.47<br><!-- End of picture text --> Source: OECD, Emoloyment Outlook,<sup>1991, pp. 238-248.</sup>

# B. Potentlal Goals of Ul Programs<sup>-</sup> **and** Rationales **For** Qovernment Intervention

# IndividualiBased Goac

Among the goals that have been adduced<sup>for Ul are two that can be viewed as hndiduai-</sup> based, in the sonse that they stem from<sup>theview that the govemment can directly improve economic</sup> oAtcomes at the micro level. To be reasonable<sup>these goals must be based on the belief that the private</sup> market, or the individual agents themselves,<sup>cannot optimize instantaneousiy or Intertemporally.</sup> The major motivation for Ul is the individual-based<sup>goal of consumption stabilization. This</sup> argument for Ul as social Insurance is<sup>that without Ul benets households will have insufticnt savings</sup> to prevent substantial welfare losses<sup>when a family member becomes unemployed. It is trueafortiori that</sup>
most workers do not know when they will be unemployed. For this goal to be valid it must be tnre that workers either estimate the probability of becoming unemployed correctly, but are so myopic that they do not save for the eventuality; or they underestimate the probability and thus have inh, sficient precautionary savings.

The first possibility, myopia, Is the best argument for all forms of social insurance. It is hard to believe that people unde%restimate probabilities of seasoial unemployment; and even differences in the probabilitles of cyclical unemployment are likely to be fairly well-known. It is easier to believe that workers simply are not farsighted enough to save sufficiently for these eventualities, especially for spells of unemployment that are not seasonal. That being the case, by forcing workers to save by financing a Ul program out of taxes on their incomes or consumption while they are employed, the policy allows them to smooth consumption and thus Increase their economic welfare. The Ul program becomes a way of socially overcoming individual myopia. The second possibility, the absence of good labor-market information, does underlie the justification for many govemment activities. It Is not clear, though, why Ul rather than a program that disseminates information about prospects In various jobs Is the appropriate response to what seems to be an informational extemality. This second possibility is a less acceptable justification for this Individual-based goal.

The second individual-based goal is that of employment-smoothing. From the workers side the argument is that Ul benefits can provide the monetary assistance that might be complementary wih search time and that might overcome financial constraints that inhibit search. This is a highly dubious argument, as it assumes that overcoming this constraint has a larger positive effe-t on search effort than the negative effec **t** hat Ul benefits induce on the gains from search. From the firm side the argument is that the financing of Ul can be devised so that employers have Incentives to respond to shocks in product demand by alterng hours rather than employment. Gi!en a fixed structure of Ul benefits, that is true; but It misses the point that has been recognized In the literature on Ul and contracting (Feldstein, 1976; Baily, 1977): Payment of any Ul benefits will provide Incentives for greater fluctuations in employment unless taxes that finance them are assessed In an actuarially fair way on the
4 irms that generat the unemployment. This<sup>goal makes no economic sense per</sup><sup>**as**as an original</sup> **justification** for Ul. It Is worth considering only once one<sup>has some other basic justification for the</sup> program.

**Socially-Based Goals**

Although the Individual-based goal of consumption-smoothing was the major motivation for Ul programs, since 1950 and until quite recently<sup>economists and others have adduced other, more</sup> - socially-based goals for the programs. The<sup>oldest among these is macroeconomic stabilization</sup> providing an automatic ftiscal stimulus to the economy<sup>by Increasing purchasing power at times of slack</sup> final demand. Even on its own terms this narrow<sup>Keynesian view requires that the net low of Ul benefits</sup> and the taxes that finance them be countercyclical.<sup>That will always be true in programs financed by</sup> general revenues or ficed-rate payroll taxes, but<sup>not necessarily</sup> so if the program Is financed as In the United States (see below).

Even assuming that the net low Is countercyclical, the question remains whether the program can have any effect on final demand. All<sup>of the concerns od the various macroeconomic</sup> sects apply here. These Include: (i) The possibility that<sup>without compensating</sup> monetary ease no real Impact _AIll_ be felt; (ii) The concem that the Impact of the<sup>additional deficit will be ofset by the effects of the</sup> accompanying Increase In the debt on people's savings; (iii) The worry<sup>that, to the exten</sup><sup>**t**hat the policy</sup> Is expected, any Impacts will disappear as people's<sup>behavior adjusts in response; and no doubt otheis</sup> too.

Even beyond these fairly subtle arguments, though, there<sup>Isabasic flaw in this goal.</sup> Admitting the possible usefulness of automatic fiscal stabilizers, why create one in the<sup>complex way that</sup> Ul Is constructed? Why not create a simpler countercyclical spending or tax program not based on the proviion of Income to unemployed workers? Viewed this way, fiscal stabilization may be a good reason for countercyclical spending; but it Is not a basic justification for Ul.
5 Equalizing Incomes, or redistributing purchasing power, is another justification for Ul that has been cited. For Ui to accompilsh this it must be the case that the Incidence and duration of unempioyment are negatively correlated with household Incomes and that the taxes that finance benefits are not too regressive. There are no fundamental Inconsistencles In this goal, though here too one wondes whether U! Is the bust way to redistribute Income. Ignoring this, the question becomes whether a particular Ul program is redistributive.

Using Ul to encourage industrial restructuring is a recently popular socially-based goal. The argument here is politico-economic, essentially based on a compensation principle: Offer Ul to workers In Industries that had previously been protected or subsidized and that now face retrenchment. Ul benefits become a way of spreading the otherwise narrowiy-bome costs of the restructuring that will benefi **t** he entire economy. Presumably this sharing reduces oppositon to the structural change. This goal I intemally consistent, though whether Ul Is the best form of compensation to achieve it Is again an empirical question.

# C. The Strucwre of Ul Programs

Viewing the programs as evolutionary processes, this section illustrates the various paths that the poicy can take, and gives examples from Ul programs in a variety of OECD countries. (The sources for the information are OECD, 1991; Blaustehn and Craig, 1977, and Reubens, 1989.) There are three basic areas In which decisions must be made: Coverage - independent of the characteristics of the workers spell of unemployment, should that worker be covered by a Ul program?

Benefits - how much will be paid to the worker during each week of unemployment, and for how many weeks?

- FinancIng who should pay for the benefits, and how? Before even these choices are made, though, the national govemment must determine whether the program Is to be a national one, or one In which the basic determination about benefits and financing
6 Is made at a subgovemmental level. Whila most OECD countries have chosen national programs. In the United States and Switzerand most essential issues are decided at lower levels of govemment.

# Coverage

The issues here have to do chiefly with exclusions relating to the characteristics of the worker or the employer that make it difficult or politically or economically undesirable even to consider the worker as potentially eligible for benefits. The potential areas for consideration are: Industrv exemptions. Should highly seasonal Industries, such as agriculture, forestry or fisheries, be excluded, presumably because coverage would either be wery ., or diffic0 'it to administer, or because the Industry Is not viewed as generating unemployment? Examples of the first of these three types of noncoverage are the failure of most Ul systems In the U.S. to cover farm workers, or the Swiss exclusion of some hotel and restaurant workers. The other reasons are illustrated by the partial or complete noncoverage of domestic seivants in France and the Netherlands, and by many countries' noncoverage of govemment employees. For various reasons some countries either do not cover railroad employees or have special programs for them.

Firm-size llmits. These are Imposed mainly for administrative reasons (though poliical pressure may also explain some of them). In the U.S., for example, employers whose payrolls are below some (usually low) limits are excluded from their state's Ul system.

Occupational exempts. Uke Industry exemptions, these arise mainly because of the potential expense of coverage or because the occupations are viewed as not characterized by unemployment. For example, Italy does not cover performing artists or clergy.

Demooraohic exemptions. These are usually imposed because the worker Is not viewed as having an entktlement to regular participation In the labor force, or because the worker is not an employee in the conventional sense. Recent examples include noncoverage of people above the normal age of retirement (under state pension plans) in France, Norway and others, and underage workers In
7 Italy and the U.K. Also excluded from coverage in scme countries (Germany is a good example) are students, family workers and apprentices.

Benefit.

The dir-cussion is In terms of the weekly benefit amount (WBA). The policy choices flow logically In order from the determination of whether any bonefits will be paid, to the determination of the size of the WBA, the payment of extra benefits beyond the WBA, the numbb r of weeks over which benefits can be collected, alternative activities for the unemployed worker in conjunction with the receipt of benefits, and miscellaneous Issues. Elicibiliy. Based on the conditions of the worker's relation to the employer, will the worker receive any benefis? Considerations Include: () Disqualification for reason of unemployment. Most states in the U.S. do not pay benefits to workers who leave their jobs voluntarily, and none do so to workers who have been discharged for cause (for misbehavior on the job). In most other CCCD countries quitters do qualify for benefits, but they are disqualified for some period of time. Disqualifications range from I to 26 weeks, with siX weeks being common (Canada, Finland, Ireland and New Zealand).

(ii Work history. The Idea here Is to determine whether the unemployed worker is sufficiently attached to the labor force to qualify for Ul benefits. The purpose of looking at work history Is to avoid the moral hazard of offering benefits to someone who might enter the labor force for a short period of time In order to qualify for benefits payable over a much longer period. Within the Individual's work history the Ul program needs to define: What is the accounting, or base period over which the worker's attachmen **t** o the labor force Is gauged? In many countries this Is one year (e.g., Canada, the U.K., and most U.S. states), but In some continental European countries it is longer. A longer base period, other
8 tings equal, offers the possibility of a more stringent test of the worker's labor-force attachment.

During the base period, wore the weeks worked andior the &se-perlod samings **suffIcient** to qualify the worker for benefits? There are many choices here, irsluding whether to rest the qualification: a) Solely on weeks worked, regardWss of earnings per week; b) Solely on eamings; or 3) On some com-inatlon o! these. The range of policies that have been chosen varies tremendously, and Includes: Minimum number of weeks worked, for example, 6 months In a 4-year base period In the U.K.; 20 weeks worked In a one-year base period, with minimum eamings per week, In Michigan; earnings In the highest quarter above some minimum level, with total base-period eamings at least 1.5 times high-quarter eamings, In some U.S. states. All of these altematives are different ways of getting at the attachment of the worker to the labor force.

Relation of WBA to work history. Given the worker's eligibility, does the benefit Increase with the worker's prior eamings, and if so, how rapidly? The first Issue Is whether benefits are proportional to eamings, as In Canada and most U.S. states (but see below); are at least in part a fixed amount, as in some parts of the Ul programs in Belgium, France, the Netheriands, and others; and whether there Is a maximum WBA, as In most U.S. states?

The more basic Issue here Is the determination of the replacement rate - the ratio of tho WBA to arnings. n other words, how much of the eamings loss does the program seek to make up? In the U.S. 50 percent Is the typical gross (excluding tax considerations) replacement rate, but In Canada it Is 60 percent, and other countries that set benefits proportional to eamings replace anywhor from 60 to 80 percent under the regular phase of Ul benefts. Table 2 shows the gross replacement rate for an eligible unmarried worker who experiences a full year of unemployment during a calendar year. The very
9

> how feplacr ient rates In some countries resut from wviuming a full year of unemployment where the Ul **system** lmimb the payment of benefts to less than a year.

Extrauloffets !o the WBA. The qu3stions here revolve around demogmphle reasons for supplementing the WBA, taxation of the WBA and oftets for other eam'r.gs.

(i) Dependents' beneits. A few U.S. states and parts of the Ul programs in Europe, partcularly wher benefs are a ftxed amount, offer extra beneftts to unemployed workers based on their fmily status. The amount can vary with the employment status of the spouse, and addlt!onal benefits can be offered n dependent children are present. The Issue here Is whether the program Is to be viewed as trsting people tl- sam.e based on their labor-force behavior, implying dependents' benefits are not warranted, or based on the severity of the Impact on consumption of a loss of oamings.

(Ii) Taxation of benefits. In most OECD countrles benefits are fully taxable, but In Greece, Irelknd, Japan and Spa they are not. Slnce households' tax liabilities will differ even f the unemployed workers who generate the Ul benefits have had the same work history, taxation of benefits chanUes their Impact differently among households. This means that the focus should always be on net replacement ates, the ratios of after-tax Ul benefits to after-tax eamings losses.

(Ili) Eamings tests. Is there a reduction in benets If the Ul recipient has some eamings during the week beneMs are received? One possibiliy Is complote disqualification If the worker eams anything. Others include complex scales relating the reduction to the amount earned. In the U.S. some states reduce banefits by a (usually large) fraction for each dollar eamed, while others reduce benefits by discrete amounts when eamings cross various thresholds. The Issue here is whether the worker has suffered a loss of eamings large enough to justify the payment of benefits that will help maintain the household's consumption.

Duration of bonefits. The major Issue Is when benefts will become payable and how long they _ill_ romain payable. The Issue of potential duration - the maximum number of weeks during which the WBA can be received - is, along with the determination of the WBA, the central choice to be made In any Ul program. In most countries those workers whose perods of unemployment exceed the
10 potential duration of benefts - who have exhausted their entitlement - receive some kind of govemmental support; but the level of that support Is usually lower. Thus potential duration does affect the total amount of earnigs replaced during many spells of unemployment. Potential duration varies from as low as 26 weeks or less In most states In the U.S., to 30 weeks in Japan to a year or more in many European countries. In those countries, such as Spain, where the rate of flow out of unemployment Is very low, Ul laws generally specify a longer potntial duration.

Table 2. Gross Replacement Rates, 1989, for a Single Worker Country Rate Australla 24 Belgium 50 Canada 59 Denmark 64 Finland 57 France 59 Germany 58 Japan 28 Netherlands 70 Norway 62 New Zealand 27 Spain 62 Sweden 90 United Kingdom 16 United States 25 Source: OECD, EmDlovment Outlook, 1991, p. 233.

Within the general choice of potential duration, is that duration variable or fixed, and what determines how potential duration varies? In most U.S. states potential duration Is variable, and Is determined by considerations of work history similar to those that determine the WBA.

Is there a second-tier Ul program that becomes effective after regular benefts are exhausted? For example, Austria and Ireland offer unemployment assistance at lower leveis of support to very long-term unemployed workers. These programs are not, strictly speaking, Ul programs, but
11 rather are more reflections of general income-support policy. None of the subsequent discussion deals with them. But any newly-constructed Ulpolicy should be structured In such a way that it<sup>dovetails easily</sup> with existing or proposed second-tier programs.

Is there a waiting period at the start of a compensable period of unemployment during which no benefits are paid? This Is the equivalent of a deductible amount in a private insurance program. The argument for this institution is partly to<sup>avoid the necessity of incurring the administrative</sup> cost of compensating very short spells that probably do not generate<sup>any economic hardship, partly to provide</sup> incentives for workers and employers not to generate<sup>short spells. A one-week waiting period Is most</sup> common in the U.S., but 10 states require no<sup>waiting period, as do nearly half of the other OECD</sup> countries, Including France and Germany.

Requiremen **t** s o maintain WBA. Because Ul programs<sup>seek to maintain consumption</sup> among unemployed workers while at the same<sup>time encouraging, or at least minimizing the</sup> discouragement to employment, a variety of provisions have been and can be<sup>imposed to accomplish</sup> this. The main issue is whether the Ul recipient<sup>is available for work. The decisions involve:</sup> (i) Search requirements. What constitutes effective<sup>search? The items of concem here</sup> are: job contacts and suitable work. How much<sup>effort is the recipient required to make, in terms of</sup> contacting employers and demonstrating that the contacts have been made? What constitute **s**<sup>ufficient</sup> proof of the contacts, and who verifies them? In the<sup>U.S. many states require that the recipient present</sup> lists of contacts actually made. An unemployed bricklayer can draw benefits until exhaustion by<sup>insisting</sup> that he will only take work as a bricklayer. Is there<sup>some point during the spell of unemployment</sup> at which the definition of wsuitable" becomes broader, as in Denmark, the U.K. and elsewhere?<sup>The argument for</sup> this broadening is that the length of the spell itself<sup>demonstrates</sup> that no work is available in the recipient's previous occupation, so that the value of any occupation-specffic skills is greatly diminished. That justffies requiring him or her to accept a job in another occupation.

(ii) Training requirements. In addition to requiring<sup>that the worker seek jobs under a</sup> broader definition of suitable work after some duration<sup>of unemployment,</sup> some programs require the
12 worker to participate in a subsidized or public training<sup>or job creation program. For example, Denmark</sup> usually requires entry Into a training program after<sup>12 months of unemployment. Clearly, unless there</sup> are worthwhile training opportunities available, this<sup>requirement just becomes a way of extending the</sup> payment of Ul benefits.

(iii Bonuses and cash-outs. Several states in the U.S.<sup>have offered Ul recipients lump-</sup> sum bonuses if they leave the Ul rolls before some<sup>(usually short) period of unemployment</sup> iscompleted. The idea here Is to cash out part of the Ul entitlement<sup>and thus provide an incentive</sup> to workers to accept jobs more quickly.

MiscellaneouI **s** sues. A variety of miscellaneouI **s** sues involving benefits also needs to be or can be considered in constructing a Ul program. These have to do with the general administrative conditions characterizing the program and are not specific to the particular spell of unemployment that is potentially compensable. Though the first two are<sup>seemingly minor, in fact the choices made about</sup> them affect how well the program can meet its goals and<sup>avoid negative secondary effects.</sup> (i) Frequency of payment. Though many of the issues<sup>in benefits revolve around</sup> determining the weekly benefit amount, it Is not necessary that the payments be made weekly. Several states In the U.S. have experimented with biweekly payments as a way to reduce administrative costs. The potential problem is that lower-frequency payments may detract from the goal of maintaining the unemployed household's consumption ifrecipients are unable to budget well in the face of their reduced Incomes.

(I) Method of payment. Administrative costs are reduced If Ul benefits can be paid by check or by bank transfer without any contacts between<sup>the recipient and the program agency. Programs</sup> vary greatly as to whether they require the recipien **t** o<sup>report In person. France and the Netherlands</sup> do not require regular reporting, while Australia, Japan,<sup>Sweden and many others do. The time interval</sup> between visits varies among programs from as little<sup>as 1 week up to 3 months. The cost of a longer</sup> Interval (or of no reporting) Is the lost ability to determine<sup>the quality of the recipient's job-search efforts</sup> and to aid In matching the recipien **t** o a job vacancy.
13 (ii) Triggered benefits. Are there labor-market triggers that alter the WBA or potential duration depending on the state of the<sup>labor market? In the U.S., for example, thereisa national</sup> program that lengthens maximum potential<sup>duration when the state and/or the nationa</sup><sup>**l**abor market</sup> exhbit higher unemployment. The arguments<sup>in favor of these triggers are: a) When the labor market</sup> is looser, the expected duration of a worker's<sup>spell of unemployment</sup> is greater. That increases the likelihood that unemployment imposes some hardship, and justifies higher<sup>weekly benefits and/or longer</sup> potential duration; b) With higher unemployment<sup>the likelihood that the worker's skills depreciate</sup> increases, justifying greater compensation to replace this loss.

# Financlng

This Subsection considers the options on financing<sup>separately from those on coverage</sup> and benefits. In terms of the evolution of<sup>the program, though, the choices are not separable. Ul</sup> programs that rely on different methods of financing<sup>generate different structures of benefits, because the</sup> poliical pressures to limi costs come from different<sup>sources. The options are listed in a hierarchy from</sup> basic to Increasingly specialized.

Should the program be public or private?<sup>This seems like a siliy option, since all</sup> programs have public involvement. But the Swedish<sup>program, though under public supervision, has Ul</sup> funds administered by trade unions (a real possibility In a country<sup>that is 90 percent unionized). Before</sup> the British Ul program was Introduced in 1911,<sup>several private firms offered Ul as an Insurance option.</sup> Wih the current world-wide pressures for privatization, similar programs have been proposed In the U.K. and the U.S. The early British companies went<sup>bankrupt, and the classic argument in favor of social</sup> Insurance for unemployment isthat private carriers cannot insure against the<sup>common risk of a nationwide</sup> recession. A compulsory privately-operated program, with very large carriers that have sufficient<sup>reserves</sup> or borrowing capacity to weather a recession,<sup>might not have such problems.</sup> If the unusual route of a private program is chosen,<sup>would it be compulsory or voluntary?</sup> Would it be administered through indidual<sup>Obeneficialfundse by trade unions, or would there be</sup>
14 coverge by private insurance carriers? How much govemment<sup>regulation of the provisions of the</sup> program would be Imposed, including controls over all those<sup>Issues In benefts that were discussed In</sup> the last Subsection?

Assuming the program will be public, will it be financed out of general<sup>revenues or</sup> earmarked taxes? An earmarked tax has the virtue that it creates In the public mind the notion<sup>of a self-</sup> financing program. The existence of a Ul fund both limits excesses and<sup>establishes that the program</sup> differs from a welfareP-type income tranisfer. Some countries - Austria, Canada, Denmark and others - - combine the approaches by using general revenues to finance any delicts In the Ul fund when benefit outflows exceed reserves.

If an earmarked tax is used, policy-maker must determine which among the three parties - govemment, employers and employees - are taxed to finance the fund, and how much each should pay.

Taxing employers on their payroll Is done In every OECD program except<sup>Sweden's</sup> (essentially private) program and Switzerland's cantonal-based programs. In most countries the burden is shared between employers and employees, with employers paying a greater<sup>share of taxes In most</sup> countries (paying 100 percent of costs in most U.S. states and Italy). Clearly,<sup>the incidence of the tax -</sup> its eventual burden - will not depend on which party in these countries is assessed the<sup>tax. Participants'</sup> attitudes about the program do depend on this, though. Assessing<sup>the tax on the employer heightens</sup> employer groups' concems about lowering benefi costs and controlling<sup>the provisions that generate</sup> them. Assessing the tax In part on the employee makes workers feel that Ul benefits<sup>are something they</sup> - - have paid for. The cost rate the ratio of taxes to payroll Is tied through what can be two-way causality to the generosity of the program's benefit provisions. This means<sup>that In constructing</sup> a program the tax rate that is set to some extent determines the eventual cost rate.

If an earmarked payroll tax is used, the first major Issue is how the tax rate should<sup>vary</sup> with a workers payroll cost. The tax can be flat-rate or not.<sup>Most countries, both those that tax</sup> employers and workers, and those that tax just one of the parties,<sup>assess flat-rate taxes; but in South</sup>
15 Africa the tax rato explicitly varies Inversely with a worker's earnings. Though the tax is almost everywhere flat-rate, in most countries (but not In Italy and Japan) there Is a tax base - a maximum weekly, monthly or annual earnings beyond which no tax on the worker's payroll cost, or his or her eamings, Is assessed. Umiting the tax base generates complex economic effects (see the next Section). The main choices are: What is the relationship between the tax base and the average wage? Setting a higher base (with a flat-rate tax) makes financing less progressive. The choice of a tax base also can interact with choices about a maximum WBA, as there may be political pressure to limit the latter based on limitations on the tax base. Tied to this Is whether and how to allow the tax base to change as nominal wages increase. Over what accounting period Is the tax base calculated? Choosing a longer (annuai) period over which to calculate the base creates incentives for employers to alter turnover, since there Is some point during the year for at least some jobs when the incumbents cease generating tax liabilities for the employer.

The second issue in an earmarked payroll tax is whether the tax on employer **s** hould be linked to the amount of benefits their unemployed workers have collected in the past - whether the tax should be experience-rated or not. Only In the United States is the payroll tax experience-rated. The main argument In favor of experience-rating Is that it helps the program simulate a private insurance program more closely by making employers pay for the unemployment that they and their workers "generate." Also, It provides employers with incentives to reduce the Instability of employment in their establishments. If an experience-rated tax structure is chosen, a variety of choices must be made.

Most important, what benefits are to be charged agains **t** he employer's experience-rated account? Should a wnrker's entire entitlement be charged, or just the initial part (under the assumption that the employer Is no longer responsible for the worker's unemployment if the worker has not found
16 a job after many weeks)? This question has been resolved<sup>in the U.S. by making employers fully</sup> responsible for the first 26 weeks of benefts, and parlty responsible for the next 13 weeks (if such benefits are payable). Should benefits for short-tern workers who<sup>qualify for Ul based on prior base-period</sup> employment be charged to the firm from which they<sup>are laid off, or to their previous employer? The</sup> standard rule is to charge the previous employer, but that<sup>means that the tax cost that Is produced Is not</sup> linked to the decision that generated the spell of unemployment.

How wide is the range of tax rates to which the employer<sup>is subject? The wider the</sup> range, the more closely each employer can be made to finance<sup>the benefits collected by his ur her</sup> employees, and presumably the tax can accomplish more employment-smoothing. (With no experiencerting, no such charging is possible.) Subsumed in this Issue are choices about minimum and<sup>maximum tax rates. In the U.S.</sup> the maximum tax rate to which employers may be subject must now be at<sup>least 5.4 percent (on a tax</sup> base that is less than half the average wage).

A choice must be made about the reserve method on which<sup>to base employers'</sup> experience-rated taxes. The most common method in the U.S., the reserve-ratio method, bases the tax rate on the ratio of accumulated reserves In the employer's<sup>account to the payroll.</sup> The range of experience-rated tax rates may differ depending on labor-market conditions - - there may be multiple tax schedules. The justification<sup>is that a higher schedule of rates may be an</sup> appropriate way of socializing the co_ts of the addAlonal Ul<sup>benefits that are generated when</sup> unemployment rises. The counterargument Isthat this departs from the purpose of experience-rating by reducing burdens on the employer in whose firm the additional unemployment originates.

Because of limits on the range of tax rates, some employers will have<sup>negative balances</sup> In their accounts. Should Interest be charged on these negative balances,<sup>and, If so, at what Interest</sup> rate? To be actuarially fair Interest should be charged at a rate equal<sup>to the market rate on equally risky</sup> assets (perhaps a short-term bond rate). In practice, negative-balance accounts are not assessed any interest charges.
17 In an experience-rated system choices must also be made about the accounting period over which past benefit payments can be related to the current tax rate. A longer accounting period allows for to rapid adjustment of tax rates in response to changes In the employers benefit experience. This has the posiive offect of reducing shocks to employers' labor costs, but the negative effect of lessening the Incentives that the program can provide to mitigate employment fluctuations.

# D. Evidence on the Economic Effects

There have been masses of empirical evidence on the economic impact of Ul programs; and the overwhelming majority of these empirical studies have been done in the past 15 years. However, whA. they have focussed our knowledge on a few of the issues discussed here, on many others there is so little empirical analysis, or what exists is so poorly done, that economic theory provides the sole guide to the potential effects of the programs. In a few cases the discussion refers to individual studies whose results specifically imply a conclusion. In most, though, it relies on the available syntheses of empirical work to draw the conclusions.

This Section Is organized by linking the programs' provisions that were detailed In the last Section to the economic questinns that underlie the goals outlined in Section B. Some of the questions cut across the various provisions, so that discussions of them rely on evidence on the effect of several provisions at once. Thorough discussions of some of these cross-cutting issues are In Hamermesh (1977), Gustman (1982) and Topel (1990).

## **Benefts**

The major economic questlon about benefits, and about Ul programs more generally, is how greater generosity of the program affects unemployment. This is linked to the Individual-b*ased goal of employment-smoothing and the socially-based goal of reducing macroeconomic fluctuations. The question has been answered In so many ways, and relates to such a variety of provisions of Ul programs, that this Subsection discusses a number of different aspects of the evidence on the IndMdually-based
**18**

goal. The massive evidence on this issue has been summarized by BJorklund and Holmiund (1988), Bwutss (1990), Cox and Oaxaca (1990), and Atkinson and Micklewright (1991). The evidence on the socially-based goal Is left until a later Subsection. Much of the discussion relies on the distinction between the duration and Incidence of unemploymient (measured in percent of the labor force), which are linked to the unemployment rate (measured in percent) by the identity: _unemployment rate . 100 x (Incidence x Dura4d 52_ What is the impact of a hihher net replacement rate on the duration of unemDloRment? This has been the most heavily-researched question in Ul. There are two related theoretical bases for inferring that there would be an effect. The first stems from search theory. A higher replacement rate raises the relative cost of spending additional time searching for work (and remaining unemployed). It allows the Ul recipien **t** o be more choosy in looking for work. If search effort per week (search intensity) is unaffected by additional Ul benelits, any positive effect on unemployment duration will a!so be accompanied by a positive effect on the post-unemployment wage. Search theory also predicts that the effect of additional benefits is smaller when there is more unemployment: Because the competition for the few job openings makes the probability of successful search so low, less search is taking place. Offering higher benefits will not reduce search as much as at other times, because there Is little scope for reducing search any further. Whether search intensity is unaffected by benefits, Is Increased because benefits provide the means to search more efficiently (see Section B) or Is reduced, and how greater replacement through Ul affects subsequent wages, are empirical questions that should be subsumed under the general question of the effects on duration.

The altemative way of viewing higher replacement isin the context of choices about labor supply. A higher WBA decreases the net retums to working. So long as we believe labor supply curves are upward-sloping (and the evidence suggests that Is especially so among lower-wage workers who are more likely to be UI recipients), this means the program will reduce recipients' work effort by Increasing
19 the number of weeks they remain unemployed once a spell of unemployment has begun. This is the same prediction as offered by search theory; but here there are no implications about the effects of higher replacement on post-unemployment wages or on how disincentives change as labor-market-wide unemployment changes.

Empirical research on this issue has proceeded for the U.S., the U.K., Sweden, Germany, Canada, Spain and other countries too. At this point the evidence Is completely c' ar that higher net replacement increases the duration of spells of unemployment. Obviously there Is substantial variation among the estimates of the magnitude of the effect. A good consensus estimate, though, Is that each additlonal 10-percent Increase In the net replacement rate raises duration by 6 percent. As the theory of job search predicts, this disincentive effect diminishes as the duration of a spell of unemployment Increases.

This conclusion clearly implies that higher replacement reduces search intensity. (Devine and Kiefer, 1991, presen **t** he evidence on replacement and duration in the context of search behavior.) The direct evidence on this issue (e.g., Barron and Mellow, 1979) demonstrates this: People receMng a hlgher WBA, other things equal, spend fewer hours per week searching. The evidence on the Impact on post-unemployment wages Is less clear, but there Is little indication of any positive effect. Taken together, the evidence strongly suggests that recipients use a higher WBA to increase the duration of their spells of unemployment, that search Intensity Is reduced, but that total search effort during the (longe) spell of unemployment isunchanged. For a given incidence of unemployment, a higher WBA Increases the unemployment rate because it lengthens duration. The evidence on this effect suggests Ul operates counter to its goal of employment stabilization.

What Is the effect of areater potential duration on the duration of spells of unemrlovmen1? With the first question, this one exhausts the issue of the Impact of Ul on unemployment duration. The impact of greater potential duration can also be explained both by search and by labor-supply behavior. An additional week of benefits changes the cost of search for that week. Witi an additional week of potential duration, the point at which the costs of search drop because Ul benefits are no longer available
20 changes. This suggests that we should observe a<sup>large fraction of the unemployed taking jobs very</sup> shortly after they exhaust benefits, and very few taking<sup>jobs just prior to exhaustion. Viewed In the context</sup> of labor supply, an increase in potential duration (at a fixed<sup>WBA)is equivalent toan increase in uneamed</sup> Income. Since we assume people value leisure, a higher<sup>potential duration reduces the supply of labor</sup> and Increases actual duraton.

Two approaches have been used to examine this<sup>question. The first, and much more</sup> widesproad, simply compares the duration of spells<sup>among a group of unemployed workers or across</sup> indivduals to the potential duration of benefits.<sup>(These studies are most convincing when dierences in</sup> potential duration arise from differences In laws across<sup>jurisdictions, or from legislated changes in</sup> potential duration.) The evidence generally supports the prediction<sup>that longer potential duraton results</sup> in longer spells, other things equal. More recently, several<sup>studies (e.g., Meyer, 1990) have examined</sup> the fractlon of unemployed workers whose speils have lasted t weeks who find jobs<sup>during week t+ 1 (the</sup> hazard rato of leaving unemployment). The hazard<sup>rate drops sharply during the last few weeks of</sup> eligibility, and rises sharply immediately after benefits are exhausted.

Taken together, the evidence suggests that Increasing potential<sup>duration does Increase</sup> the average duration of spells of unemployment. Unlike<sup>in the answer to the first question, though, no</sup> consensus Is possible about the size of the effect. All we can<sup>be sure of Is that longer potential duration</sup> increases average duration, and thus the average rate of<sup>unemployment.</sup> Here too, a more generous Ul program generates impacts counter to the goal<sup>of stabilizing employment.</sup> An Important policy question is how the impact of a 1-week<sup>increase in potential duratlon</sup> on the unemployment rate varies with existing rules on potential duration. On one<sup>level the answer is</sup> nearly clear Since the number of unemployed workers decreases steadily as duration Increases, t Is almost certain that the effect is larger If potential duration<sup>Is short.Amore subtle question is how a 1-</sup> week Increase In potential duration affects the hazard rate as<sup>potential duration Increases. No theory</sup> yields unambiguous predictions on this question, and there Is<sup>no evidence on it.</sup>
21 How does a more generous UI system affete the Incidence of unemolovment? Define generosity as weaker oiigibility critoria, higher net replacement and a longer potential duration. The question Is how these affect the probability of moving fom employment to unemployment.

Assumethat workers know that some businesses, and the industries they operate In, have more variablb demand. That being the case, In the absence of a Ul program, these firms will have to pay a wage premium to attract otherwise equally capable workers to this more risky activity. Consider what happens when a Ul program is Instituted (and is financed by goneral revenues or by a payroll tax on employers or employees that is not experience-rated). Employers can attract equally qualified workers with lower wage rates than before, because Ul benefits now compensate for part of the potentia **l** oss of Income stemming from the risk unemployment. This Induces the employer to reduce employment by more when product demand drops, because the govemment (or all workers, or all firms) now bears the cost of the decision. This Is especially so In the riskiest businesses, so the program leads to their expansion as their costs, and eventually the prices of their products, are cut relative to those of the average business. An imperfectly experience-rated Ul program thus also cross-subsidizes risky businesses and industries, leading to their expansion and to an increase In the average incidence of unemployment among labor-force participants. The more generous benefits are under such a program, the greater the Impact on the incidence of unemployment.

Much of the evidence on the Impact of Ul programs looks at the effects of more generous benefits on the unemployment rate In an area or at its variation over time In an economy. Other studies examine the probability that a worker Is unemployed during a particular survey week. Both of these essentially consider the impact on both duration and Incidence together. A very few studies use retrospective data to examine the Impact of higher benefits on the probability that a worker was unemployed during some time Interval (usually the previous calendar year). The first group of studies generally shows the unemployment-increasing effects of higher benefits, while the latter group Indicates that the Incidence of unemployment Is greater among otherwvise Identical workers who are eligible for
22 higher benefits. Taken together, the results<sup>show that, Independent of its impact on duration, a more</sup> generous structure of benefits increases the incidence<sup>of unemployment as well.</sup> How does a more aenerous Ul oroaram affect emolovment?<sup>The Issue Is what is the</sup> effect of Ul on the total amount of goods and services<sup>produced In the market (GDP), since in the long</sup> run worker-hours are combined with other<sup>productive Inputs (that It makes sense to assume stay</sup> unchanged).

The three previous questions dealt with Impacts on<sup>the unemployment rate. For a fixed</sup> labor supply the answers to them Imply that more<sup>generous benefits reduce employment and thus GDP.</sup> But It is incorrect to assume that the supply of labor<sup>does not change when beneffts Increase or eligibility</sup> Is eased. Instead, as with any other nir*rance program,<sup>when the risk Is compensated more generously,</sup> the Insured will undertake more of the risky<sup>activity. In this case the risky activity Is participation in the</sup> labor force, and the risk Is that participation<sup>will include weeks of unemployment. Put differently, more</sup> generous I makes participation relatively more<sup>attractive by raising the expected retums to time spent</sup> In the labor force.

There has been a small amount of research on<sup>this issue, and it generally supports the</sup> theoretical predictions. A more generous benefit<sup>structure, especially less stringent qualifying restrictions,</sup> Induces more participation and hence more employment,<sup>other things equal. To some extent this offsets</sup> the impacts noted In the answers to Questions<sup>I through 3, though the evidence suggests the offset Is</sup> only partial. Because those workers induced<sup>to participate by more generous Ul programs tend to have</sup> higher probabilities of becoming unemployed, the<sup>change in the composition of the labor force ra:ses the</sup> unemployment rate.

# Financing

Much less empirical research has been produced<sup>on the economic effects of alternative</sup> methods of financing Ul than on those of benefits.<sup>Except for empirical studies of various provisions of</sup> experience rating In the United States (see the<sup>summary by Hamermesh, 1990), the results that are used</sup>
23 to infer the impact of financing st3m from more general studies of labor-market issues. The major questions about financing are dealt with In order from general to specific.

Who really Pavs for Ul benefits? This is a standard Issue of tax Incidence, or, viewed more generally, of the Incidence of a govemment program. I the method of financing Is a payroll tax that Is not experience-rated (as In all countries but the U.S.) the answer to the questhn Is the same as to questions about the Incidence of payroll taxes generally. The effect depends on thne elasticity of labor supply to the market: If it Is completely inelastic, the entire impact of the payrli1 tax Is to reduce wages (and leave the net cost of labor, and thus employment, unchanged).

In an experience-rated system the Issue is much more complex, and there are no simple theoretical Inferences to be drawn. Assume that, as in a non-rated system, the burden of the tax Is entirely on labor. Is the burden disproportionately on labor in those firms that use the system more heavily? Indeed, In the extreme, Is a perfectly experience-rated systein neutral, in the sense that the market fully adjusts so that each dollar of expected benefits is financed by higher expected tax rates that in tum generate reductions in expected wages of one dollar? This kind of supemeutrality ispossible, but only In a perfectly experience-rated system, and only If one believes that markets are that efficlent. In an imperfectly rated system, the nonrated part of the tax will be bone as a general payroll tax; but will the rated part be adjusted fully and differentially across firms and across workers depending on correct expectations of their likelihood of generating Ul costs?

lgnoring Issues of experience-rating, the empirical literature on the Incidence of payroll taxes is inconclusive on this question. While some specific studies sugges **t** he payroll tax burden is not entirely bome by labor, the huge genera **l** terature on labor supply suggests that for most groups it is almost completely inelastlc. This Implies that a nonrated payroll tax in industrialized countries will be bome by workers generally. There is no empirical evidence on whether an experience-ated tax affects wages differentially across firms that differ in their propensity to lay off workers; and there Is no evidence on whether a partly or fully experience-rated Ultax affects the wages of workers within a particular firm differentially depending on dffferences in the likelihood of their being laid off (and generating higher Ul
24 tax costs). At this point the -o, nclusion about the payroll tax that finances Ul benefts In developed economis is that it Is probably bome by labor In the form of lower wage rates. We cannot create a program of Ul benefits and view it as a transfer of Income from firms to workers.

How does a limit on the tax base affoct emlovment and wanes? The Issue here is the differeMntial Impact of the limit on worker whose labor cosb diffWr. For a given tax rate a lower tax base raises the relative cost of employing low-wage workers. Wih a nonrated tax, this means that either wages adjust, reducing the relative take-home pay of lowwage workers (and keeping the relative not cost to the employer constant); employment adjusts, so that the ratio of employment of more- to less-skilled workers economy-wide Increases, implying an increase in the nonemployment of low-skilled workers; or some combination of both, implying that there Is at least some decrease In the relative earnings of low-skilled workers. The empiical issue Is how large the change will be, which depends on the substitutability of woers by skill.

In an experience-rated system the Issue is more complex, as i depends on employers' ability to recognize relationships between the amount of Ul costs that a group of workers generates and their average wage level. If this Is fully recognized, we get the suporneutrality resui **t** hat the program has no impact on relative employment (or nonemployment) by skill group. Absent this recognition, an experience-rated system will produce the same relative decline in the position of low-skilled (low-wage) workers as a nonrated system.

As with Question 1, there is no specific evidence from Ul systems. There is, though, a growing literature on substutibon of workers by skill class, Including disaggregations of the labor force that are correlated with wage level (Hamermosh, 1993, Chapter 3). The clear suggestion from these studIs Is that employers do substitute between skill groups as the relative costs of employing them change. The empirical work Is too diverse to allow any conclusion about how great this substitution is; but it is surely sufticient to allow us to conclude that, unless the Ul tax Is perfectly experience-rated and employers can essentially assign Ul costs to groups of workers, a lower llmit on the tax base results In lower empicyment and/or lower wages of less-skilled workers.
25 What are the effects on emplovment and unemployment of choosing an exDerience-rated over a nonrated financina scheme for Ul benefits? All the theoretical argurrents show that, within a particular system of benefits, and _v_ ith the behavior of a particular labor force, choosing experience-rated payroll taxes generates lower layoff unemployment, and higher employment on average, than does a nonrated system. The argument was suggested above. Charging employers for the Ul benefits genorated from their firms allows the price of labor that they face to reflect all costs, both wages and Ul benefit costs. This Induces firms that produce greater costs to the Ul system to contract relatively, and it encourages all firms to reduce fluctuations in employment. Both effects raise the average level of employment economy-wide and reduce the unemployment rate. CondHitonal on a given structure of eligibility and benefits, the theory suggests that experience-mrating will do a better job of achieving the goal of stabilizing employment (will reduce the destabilizing effects of Ul benefits).

The ideal evidence for this proposition would be a before-after comparison of the impact of imposing experience-rating on a system whose benefit structure remained unchanged. No such evidence exists; and we must rely on the rather extensive literature that examines the effects of the various provisions of experience-rated financing in the U.S. The difficulty with this restriction is that we cannot tell how applicable the results are to other economies, given the institutional and behavioral dffferences. All we can infer is the impact of marginal changes in the parameters of states' experiencerated tax structures.

Within this very narrow framework there is a rapidly-growing and now quite convincing body of empirical research. The strongest evidence is that a lower maximum tax rat or a lower tax rate on employers with negative balances in their accounts increases the incidence of unemployment (increases fluctuations in employment). Beyond this, there is some slight evidence that a higher minimum tax rate, and thus a higher tax on firms that generate little or no unemployment, raisps unemployment and increases employment fluctuations. A fair conclusion from this literature is that in general more experience-rating does reduce employment fluctuations in the U.S. This suggests that imposing a payroll
26 tax that Is at least paitly experence-rated on a Ul system would reduce its costs and lower unemployment, but that particular experiment has never been attempted.

# Other Economic Impacts

All of the questions discussed In this Subsection involve issues in both benets and inanoing. Moreover, each relates to the potential non-labor market goals of the Ul program that were presented In Section B.

Do Ul benefits smooth consumption? This Issue was for many years analyzed as one of *benefit adequacy,n that Is, were the benefits sufficient to replace a large fraction of the reduction in family income? This gets toward the consumption-smoothing goal that was discussed In Section B, but I is not directly on target. A family might lose income as a result of a spell of unemployment of one family member; but total consumption, including of goods produced in the home, may not change or may drop substantially. To examine the sucCess of Ul in smoothing consumption one must examine consumption directly. The Issue Is the extent to which Ul benefits (and any changes In the shifted tax burden that accompany the payment of higher benefits) loosen the liquidity constraint that may be engendered by the loss of income.

There is a large literature of studies of benefit adequacy. These generally find that other labor-force responses do not suffice to make up the difference between the lost eamings and the Ul benefits received by the unemployed worker. Only one study (Hamormesh, 1982) has examined the extent to which Ul benefits loosen the liquidity constraint facing unemployed American households. The evidence suggests that roughly half of all benefts are spent In a way that suggests the household would face a drop In consumption without them. Applying the resuits to other countries, the longer duration of benefits suggests that they accomplish even more In this regard (since households presumably face a more svere liquidity crunch the longer a member has been unemployed).

This discusslon Ignores the Impact of the provision of publicly-funded Ul benefits on private saving. Without Ul individuals would accumulate precautionary savings to cover spending during
27 spells of unemployment. To some extent Ul will displace some amount of this saving. We might thus find that Ul benefits appear to overcome liquldity constraints, even though those constraints would not exist if there were no Ul program. There has been no empirical analysis of this Issue. It does Imply, though, that the empirical evidence provides an upper bound on the efficacy of Ul In meeting the goal of consumption-smoothing.

Does Ul stabilize the macroeconomv? The discussions of the stabilization effects of Ul all dealt with tho behavior of Indidual agents. Keynesian macroeconomics argues that the automatic increase In benefit payments that accompanies cyclical declines In product demand will at least partly maintain consumer spending and lessen the reduction In aggregate demand. This assumes that the taxes used to finance Ul do not change along with benefits to reduce their Impact. This suggests that in a long recession any countercyclical effect of benefits will be offset somewhat by experience-rated financing, as taxes are Increased based on recent Increases In benefit payments. In the framework of more general macroeconomic theory any Impact of the Ul system on spending wIll be lessened. To some extent fluctuations In aggregate spending will be reduced by changes In the money market; and some of the effects will be offset by workers' and employers' responses to their expectations of the changes that generate the Increase In unemployment.

A strand of empirical wo* from the 1960s through early 1980s examined the countercyclical Impact of the Ul program. The best Inference trom this literature I that the American program reduced the magnitude of cyclical fluctuations of GNP by no more than 10 percent, an efet that may even have diminished during the 1980s (Dunson et al, 1991). The Impact may be somewhat larger In European programs that offer more generous replacement and longer potential duration. Both Inferences, though, !gnore the possibility that the program displaces private savings (see above) that would to some extent mitigate fluctuations In GDP as unemployed workers dissave to maintain their consumption. Taking all this together, it Is reasonable to Infer that Ul programs are not very Important In mitigating cyclical fluctuations In spending, and presumably in unemployment too. Any
28 macroeconomic Impacts are likely to be small, suggesting that the goal of cyclical stabilizatlon should not be central In considering whether or what type of U! program to adopt.

Do Ul oroarams redistribute incomes? In groping toward a partial answer to this question, make the apparently reasonable assumption that benefits by themselves equalize the distribution of income. Indeed, the best evidence on this issue (for example, Ehrenberg et al, 1978) is based on comparisons of the distributlon of Ul benefits and household Incomes. The studies sugges **t** hat they do not go to households in the lowest two deciles, but are most heavily concentrated in households with Income at or somewhat below the median.

Beyond this assumption, the answer to the question Is tied up with all the Issues of tax Incidence that wwro crucial In answering questions In the previous Subsections. The answer Is more complex for an experience-rated program, since there Is greater opportunity for sorting of workers by propensiy to become unemployed. Regardless of whether experience-rating is used, we can be fairly confiden **t** hat a lower limit on the tax base, other things equal, reduces the ability of the program to redistribute Income. Obversely, lower maximum benefits, and longer potential duration (since low-wage workers tend to be unemployed longeo strengthen the redistributiv **e** ffects.

Does a Ui oroaram affect GDP jW shifting resources away from their most efficient uses? The theoretical argument here Is that the program subsidizes risky actMiMes and leads to their relative expansion. This will be true to the extent the financing Is not perfectly experience-rated among firms. At the margin resources are diverted from their best uses, so that total output Is reduced. Some simulatlons have attempted to measure the size of the reduction. Not surprisingly given the small scope of the program, the loss is a tiny fraction of GDP. Nonetheless, there clearly is some reduction.

# Gneral Conclusions

A consideration of the evidence on this very diverse set of economic issues leads to some Interesting overall conclusions. If the program is perfectly experience-rated and workers and employers on average have unbiased expectations about the risks of unemployment and save accordingly, the only
29 ffect of Ul Is to substituto payroll taxation of worker' eamings for their private savings. There Is no chango in the level of employment or n its fluctuatons. Tho only net Impaot is a reduction in the aggregate rat of private savings. If private savings did not suffice to avoid liuidity problems during some workers' spells of unemployment, economic welfare may be raised. It is a matter of trading off the gains trom allowing somr unemployed worker to reduce the fluctuations In thoir consumption against the costs to society of the reduction in private saving.

In the real-wold **cases** of imperfect xperience-ating, as in the United States, or no experience-rating, as in other developed countries, additional economic Impacts arise. There Is more scopeo for rodistributing Income, with the direction of the redistribution dependent on the structure of benefits and limits on the tax base. However, introducing such a Ul program Increases the extent of fluctuations in employment, and, by making labor a relatively more expensivo input Into production, blases employers toward moro capital-intensivotechniques. Offering Ul benefits aids an economy chiefly by maintaining spending of households that contain unemployed workers. The costs of helping worker who would become unemployed even In the absence of a Ul program are reductions in average employment and In GDP, and the additional unemployment that the Ul program Induces when shocks to product demand occur.

# E. Transferrina Ul **Proar*ms** to **Develoolng** Econome_s

This Section highlights those areas where differences In labor-market structure between developed and developing economies could lead to differences in how one might structure Ul programs In them. Rather than going through all the goals and features listed in Sections B and C, the discusslon Is organized around our knowledge of the behavioral differences between the two types of economie that might be Important for Ul. Since this Is designed to be a broadly applicable guide, It Ignores specif institutional problems that must be accounted for when constructing a Ul program In a particular country.

While very few developing economies have Ul programs, they are not unknown. As of 1983, Barbados, Bolivia, Chile, Cyprus, Ecuador, Egypt, Ghana, Mauritania, Mauritlus and Panama had
30 some sort of Ul program (ISSA, 1983; ILO, 1988).<sup>A detailed comparison of the provislons of these</sup> progmrms to those of Ul systems In OECD countris that were discussed<sup>in Section C Is not Informative;</sup> but a gnemal comparison between the two groups of countries<sup>points out some Interesting dierences</sup> and similarities. In decreas-.g order of thoir<sup>starkness, these are:</sup>

* Ul systems in developing countries are more<sup>likely to rely on shared</sup>

employerAworker financing of benefits.

* Potential duratlon of bonefits Is generally shorter.

* Waiting periods are more likely.

* Programs rarely cover govemment workers.

X Net replacement rates are about the same.

Obviously a major, indeed a defining difference<sup>between labor markets in developed and</sup> developing economies is the absence of industrialization<sup>in the latter. Instead, there are large urban</sup> trdiftonal sectors characterized by casual employment<sup>and very small-scale and often short-lived</sup> operations, with the modern sector being relatively small, and with<sup>both dwarfed by traditional agriculture.</sup> Even these essential, but very broad differences offer<sup>some guidelines for structuring Ul</sup> programs. Given the small size of establishments,<sup>their rapid tumover, and the lack of standard record-</sup> keeping, covering urban traditional employees seems undesirable.<sup>Similarly, covering small firms is likely</sup> to be diflicuit administratively; and their ubiquity and high<sup>failure rates suggest that offering benefts to</sup> their former employees would add tremendously<sup>to the costs of a Ul program. Taken together, these</sup> consierations suggest that coverage be llmited to firms<sup>above some size threshold that have been In</sup> opoeation for some period of Ume. At least one year's operation<sup>should be required; and perhaps a lower</sup> llmit of 10 employees should be necessary for coverage of<sup>a</sup> fOrm's workers.

In the theoretical analysis of developing labor markets the<sup>major contribution has been</sup> the model of economic dualitm. An essential characteristic<sup>of this model is the assumption that the</sup> supply of labor to enterprises In the modem sector<sup>Is perfectly elastic (i.e., that real wages, and</sup> presumably also wages relative to traditional Industry<sup>are rigid). The source of this rigidity may be</sup>
31 behavioral, stemming from the payment of profit-maximizing efficiency wages by modem-sector employers. Or t may be Institutional, arising from spillovers trom wage-setng in the govemment sector, or trom pressures by govemment-supported labor organizations. Whie wage rigidity may not characterize all developing countries (for examples, the NICe of East Asia), it Is a potentially Important characteristic of many of them. It provides an Important structural/behavioral distinction between them and developed countries (Fields, 1987).

In order to see how recognizing the existence of labor-market dualism should affect how we structure Ul programs, it Is worthwvhile examining briefly the Impact of Ul on wages and employment. (This Is just a formalization of the discussion In Section D.) Figures Ia and lb depict a labor market under the assumption (which was Implici **t** hroughout Section D) that real wages are flexible. In both figures the initial equilibrium Is shown by the Intersections of S and D. In Figure la a payroll tax Is imposed on employers. If there Is no response by workers to the Ul benefits financed by this tax, the only effect Is a drop In the real wage paid to the intersection of S with the new labor-demand curve, D, and a slight drop In employment to ic. The supply curve Is drawn as nearly vertical, reilecting the discussion In Section D, and leading to the conclusion that the tax is bome by labor.

Labor supply will, though, be affected by the creation of a system of Ul benefits, for they make participation in the labor force more attractive. This leads to a rightward shift In supply, to<sup>S, a</sup> further decrease in the real wage paid, but an Increase In employment. (This Is the effect discussed In Section D under Question 4.) Whether or not E, exceeds Eo depends on the magnitude of workers' responses to the insurance the program offers.

If the tax Is Imposed on workers' eamings rather than on employers' payrolls, as In Figure lb, the effects on wages received are similar. The real wage paid rises, as supply Is reduced trom S to S; but the net wage falls, since the vertical distance between S and S exceeds the rise In the equilibrium wage paid. if, as Is likely, workers respond to the benefits that the tax finances by increasing their willingness to assume the risk of labor-force participation, supply Increases trom S, perhaps back to S'
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33 (equals S In the Figure). The real wage pald, and the net wage, are decreased further. Employment rises above i, perhaps back to E, (equals **EJ).** These are standard results In the theory of tax Incidence. The only novelty Is the fllip added by allowing supply to respond to the existence of the Ul benefts that are financed by the tax whose Incidonce Is being analyzed. The results depend crucially on the assumption of fledble wages. They show that the nominal payor of the tax that finances the program has no important Impact on its eventual burden.

The Invariance of the wage burden to the choice of how to assess the tax no longer holds if real wages are rigid (for example, due to labor-market dualism). Consider a labor market described by Figures 2a and 2b, with Initial equilibrium in the modem sector at the constant real wage paid, wth employment at E,o, and with the urban labor force at Lo. (This means that the fraction unemployed before a self-financing Ul system is created is [LO-EJ/Lo.) What are the effects of financing a Ul system by a payroll tax? In that case (as in Figure la) the demand for labor Is reduced to D. Because wages are rigid, the only effect is on employment, which drops to E,. If rural workers are aware of the availability of Ul beneft, the supply of labor to the urban sector shifts outward to S, just as In Figure la. The net result Is a decline In urban modem employment, and a rise in the urban unemployment rat (in the size of the urban traditional sector). These are not desirable outcomes.

These outcomes need not arise In a self-financing Ul system. If Ul benefits are financed by a tax on eamings, as in Figure 2b, there is no reduction in labor demand. Instead, and as In Figure Ib, the supply of labor shifts lefiward (to S) in response to the tax. If, as seems reasonable, urban and rural workers are aware that the tax finances Ul benefits that on average equal total taxes, the net effect is to shift the supply of labor to the urban area back to S (equals S). In this case there is no net Impact on either employment or urban unemployment.

The same results hold in a dynamic model that explicitly accounts for rural-urban migraton (e.g., Harris and Todaro, 1970). In equilibrium the unemployment rate is an increasing function
84 Figure 2a. Ul **Taxes** and Bnefits with Dualim (Fixed Wages): Tax on Employers <!-- Start of picture text --> ReAW Mes Pad 8<br>w ww 8 8D<br>S\ 0S 0<br>3 U~ L L<br>Emoyment<br><!-- End of picture text --> Figure 2b. Ul Taxes and Benefits with Dualism (Fibd Wages): Tax on Workers <!-- Start of picture text --> a Waa 8' 88<br>D<br>. ,<br>o . . i.<br>X L' ~o s Emploment<br><!-- End of picture text -->
35 of the size ot the difference In net incomes between the modem sector and the rural area and of th rate of growth of productivity In the modem sector, and a decreasing function of the rate of growth of modemsector product demand. If the tax Is assessed on employers, but urban works are eligible for Ul benefits, the Initial effect Is to Increase the rato of rural-urban migration. In equilibrium the result **are** the same as In Figure la, except that the dynamic model tells us in aaditlon that the urban sector will grow. If the tax Is assessed on workers' earnings, there is no net effect on the **size** of the urban sector, just as there Is no impact on employment or the unemployment rate.

This analysis demonstrates that, to the extent we believe that labor-market dualism characterizes developing economies, Ul benefits should be financed by taxes on the eamings of workers in the modem sector. Unless this Is done, the Ul program will reduce modern-sctor employment, Increase the size of the urban traditlonal sector, and stimulate rural-urban migration. Unlike in economies where we are sure that real wages are flexible, the choice between parties on which to assess the tax that finances Ul benefits matters crucially N real wages are rigid.

The discussions In Sections B and D made it clear that the best justification for Ul Is its role as insurance that allows households to stabilize consumption. Whether this goal is a better justification in developing countries depends on two Issues: () For a given uninsured loss of consumption, Is the resulting loss In utility greater In developing countries? (ii) Is the lost consumpton that is insured against greater (in percentage terms)? Consider each of these Issues In tum.

The Impact of the lost income on the unemployed household's utility depends on two things. First, was the household able to save during good times, I.e., to self-insure against the potential loss In consumption that might occur during a spell of unemployment? There is no evidence, or even intuition, to suggest whether modem-sector workers in developing economies are more or less able to save. Second, if there is a shortfall of savings, and consumption were to drop if Ul benefits wore not received, what is the loss In the household's well-being? Assuming, as seems reasonable, that the household in the developing economy starts with a lower living standard than its developed-country counterpart, the issue Is whether relative risk aversion - the percentage Increase In utility in response
36 to a given pecentage gain - Increases or decroases with Income. Here the intuition and theoretical discussion (e.g., Arrow, 1971) provide some guide, suggesting that relative risk aversion is probably Increasing. This implies that a given percentage drop In consumption is more burdensome the higher the initial consumption. By **itsef,** this Inference suggests less of a justification for Ul as consumption insurance in dewvoping countris than elsewhere.

Income losses among unemployed workers are unlikelv to be equal In developed and developing economies. In the former unemployment rates are usually quite low, so that the duration of unemployment Is not very long in most cases. In the latter urban unemployment rates are huge, suggesting that the odds of finding another high-paying modem-sector job are low. With a much larger loss in income, the utility loss from the decline in consumption Is larger In developing countries, so long as workers are no lOeS myopic than their counterparts elsewhere. These considerations suggest that Ul is at least as well justified as consumption Insurance In developing countres as elsewhere.

The existence of higher unemployment rates In developing countries (or, viewed differently, the relatively large urban traditlonal sectors) suggests that tie optimal net replacement rate and potential duration may differ from developed economies because the disincentive effects on jobseeking may diffet. The evidence In Section D suggested that the disincentive effects of higher replacement diminish with the duration of the spell of unemployment. Together with the assumpffon that the duration of unemployment (of employment outside the modem secto Is very long, this suggests that the disincentive effects of higher replacement or longer potential duratlon will be small In developing econombs.

Before one draws the obvious Inference that net replacement should be quite high In Ut programs, rather than roughly the same as In the few developing countries that already have Ul programs, some economic and poitical consideratlons are In order. First, the justification for Ul as maintaining consumptlon diminishes as the replacement rate Is increased, since at least some of the lost consumption should have been insured against. Second, paying a relatively high Ul benefit over a long potential duration poses the political problem of creating a visible class of reatively (to urban tradional
37 employment) high-income areom who are nonproductive. Taken together, these points suggest that while narrow economic considorations argue for high net replacement and long potential duration, other consildrations sugget these be kept lower and shorter.

The Impacts of Ul on the level of economic actvity and on the distribution of net Incomes will difr from what the discu3sion In Section D predicted, n we assume that the labor market Is charactwized by rigid wages (as In Figure 2). if the system Is inanced by a tax on eamings, as recommended above, thee Is no impact on resource allocation across sectors, since the relative costs of labor to paricular ctors are unchanged. The Incidence of the costs and benefit of the system are entirely on labor, so that the distributional Impact of a Ul system Is easier to trace than if wages were flexible. I the earnings tax is proportional, or proportional up to a ceiling, and If net replacement rates are constant up to a maximum benefit that is related to the ceiling on the eamings tax, the direction of the Impact depends solely on the correlation of the probability of being unemployed wih the household's Income (among households in the modem secto". Making the reasonable assumption that this correlation Is negative, we may Infer that such a Ul system would equalize net Incomes within the modem sector.

nf we maintain the assumption of rigid real wages, but finance the Ul system by a payroll tax, the implicatons about the ectoral Impacts change somewhat. Assuming that the supply of labor to each ctor Is elsti ovr the relevant range of employment, failure to epeience-mat the tax will not aiterthe mix of actvities across ectors. Relative labor costs would be unaffctod by sectoral difrences in the variabiity of employment. However, experince-rating the payroll tax would lead employers to avoid laying off worker when product demand drops, and would reduce the overall rate of urban unemployment. This would party ofset the shift In demand in Figure la from D to D and the concomitant reduction In modemn-sctor unemployment. It Implies that any payroll tax used to finance the Ul system should be experence-rated.

Institutional and behavior differnces sugget several miscellaneous oonsiderations In tructuring Ul programs In developing countrie. Employment In the gavenment sector, or by
38 government-owned enterprises, constitutes a much greater proportioAi of modem-sector employment. In many cases wage-seting by the public sector spills over Into private-sector wage setting. A pay increase In the govemment sector will aventually raise labor costs In modem private-sector firms, leading to a reduction In the amount of labor those firms demand, and an increase in costs to the Ul system. With a Ul system the potential Impacts of govemment wage policy expand, and the agency In charge of the Ul system must take the impact of that policy Into account In planning its finances.

Many developing countries lack well-developed postal systems: and the bureaucratic apparatus for paying benefits and aiding In job search does not exist either. This offers planners a choice about how to structure the physical aspects of paying Ul benefits. The answer seems quite clear: Pay benefits In person at an office that aids in job search. This requires creating an administrative superstructure; but such a structure Is much more reliable, and more likely to be acceptable, than the payment of benefits by mail. The use of mail payments In OECD countries is a recent development that grow out of long experience with payments in person.

in the transition to a newly constructed, self-financing system, every planner is faced with a problem of when to start assessing taxes ano paying benefits. To avoid using govemment contributions to finance benefits during the phase-in period, payment of benefits could be delayed for some time after taxes are initially assessed; or, as in the Unitod States, the initial tax rates can be set high enough to allow the fund to build for several years. The difficulty with the delay, especially if the taxes are on eamings as was recommended, Is that workers are unlikely to wish to be taxed now to fir2nce benefits several years In the future, given high turnover rates in modem-sector jobs. That being the case, the more desilble path is to begin assessing taxes and paying benefits simultaneously, setting an initial tax rate that is well above projected benefit payments.
39 F. 8ome Sugae_tlons for **ReseH r** While a compendium of provisions of Ul programs In developing countris exists (ISSA, 1983), there has been no basic research on the economics of these programs that might bo useful In modifying them and In structuring programs for other countries. The research summarized In Section D all Is from developed economies. Studies from developing countries are needed; but such research should not merely replicate the myriad studies of microaconomic behavior In the presence of Ul programs In developed countries. Rather, it should aim toward providing answers to the theoretical questions raised In Section E that determine the transferability of what we have leamed In developed countrbies.

The Issue underlying the most Important recommendation In Section E Is the existence of labor-market dualism. Clearly, much effort has been devoted to studying this Issue empiricaly. It should, though, be examined in the context of Ul programs. If dualism Is not Important, and Ul programs are financed by Imperfectly experience-rated payroll taxes, we will observe greater employment fluctuations In covered Industries than In otherwise similar uncovered employment. The question, of course, Is what Is 7otherwise similar." A study that can answer the questions would use Industry data on employment and output In several developing countries that have Ul systems, and compare employmentoutput elasticities there to those from similar industries In carefully chosen developing countries that do not offer Ul. Essentially, pairwise comparisons of elsiticitles by Industry should be examined.

If we find that the elasticitles are higher In covered industries compared to the same Industries In countries wthout Ul, we can infer that labor markets In countries with Ul are not characterized by dualism, at least for the purposes of analyzing the Impact of Ul. Alternatively, if we cannot discem any difference between elastickles, we may Infer that the Ul program does not alter employment pattems, perhaps because real wages are Indeed rigid. That Information should be useful in determining the appropriate structure of Ul programs In developing countries, as it tells us whether Figure 1 or Figure 2 Is more appropriate.

The other major Issues In Section E were the transferability of the goal of maintaining consumption, and the appropriate potential duratlon of benefts and the net replacement rate. Studying
40 thee requires teaming how providing Ul beneflts affects consumption pattems and unemployment duration. Again, an ideal approach would Involve palmiwse comparisons between carefully chosen developing countries, with one in each pair having a Ul system and the other not. This affords a test that is Impossible in advanced countries, since no potential comparison group (that does not offer Ul) exists. While some budget studies have been conducted on households In developing countrios, none has focussed on adjustments that are made In response to unemployment (or to an Involuntary shift from modem to traditional employment) of a household member. Longitudinal diary data on the expenditures of a large sample of households can be used to Infer how consumption responds to a period of unemployment, or to a permanent shift into or out of the modem sector. Moreover, by using the same quetionnaire In otherwise similar countries that do or do not offer Ul benefits, their Impact on pattems of adjustment of consumption can be Inferred. If we find no differences In pattems of adjustment between pairs of countries, we can infer that households in the country offering Ul are sufficiently farsighted to smooth consumption in response to the expectation of unemployment. Obversely, greater smoothing in the country offering Ul provides a good justification for offering benefits as a way of easing the hardships facing myopic or liquldity-constrained households.

A similar set of sampling frames should be used to Infer how benefits affect job-finding. During the past 15 years labor economists have inreasingly relied on the distincton between incidence and duation to analyze unemployment Unfortunately, we have lIttle Information from developing economies that would enable us to apply this very fruitful dichotomy. Discovering what pattems of unemployment and nonemployment duratlon are In developing countries, and then comparing the micro data across matched Ul-non-UI countries, is essential for understanding the structure of unemployment In developing countries and how Ul programs might affect it differently from their Impacts In developed labor markets.
41

# **0.** Conclusions

Unemployment Isa social Insurance program, one of a class that provides compensation for lost Income by requiring Individuals and/or employers to pay taxes Into a common fund. It Is part of a general safety net that ckizens of developed countries have built up around themselves. It Is unique among wich programs, in that ft offers payment for an event that Is partly preventable and<sup>that Is not</sup> physically painful. It thus differs from old-age and disability Insurance, fom compensation for workrelated Injury and Illness, and others. This exposes it to greater crP.iclsm from citizens who are opposed to any social Insurance; and these characteristics Impose on planners who construct Ul programs an obligation to take them Into account.

This study has considered In detail the various goals that have been adduced for Ul and tried to distinguish which make sense. In some cases the goals run counter to what Ul programs actually - - do; but one goal the provision of consumption Insurance Is at least partly met by typical Ul programs in developed countries. Part of the paper outilned In detail the parameters of a typical Ul program and their ranges in Industrialized countries. The evidence on the economic Impact of these parameters should provide planners with a basis for choice that can guide them in constructing Ul programs elsewhere.

Experience and evidence In developed economies may carry over into LDCs, but we just do not know. Several characteristics of developing economies, particularly the possibility that labormarket dualism Is Important, sugges **t** he need for care in constructing Ul programs there. In order to provide the evidence necessary for this effort, this study suggests severa **l** ines of research that can answer questions about the validity of the consumption-insurance goal in developing countries and the appropriate structures of taxes and benefits.

As nations develop their industrial sectors Ul becomes an increasingly attractive policy option. Developing countries are fortunate in having the experience and evaluations of Ul programs In developed economies. Thoughl each country must account for the unique aspects of its labor market,
42 and though tho infbmton gleaned about Ul In developed ooonomies Is not fully transferable, itIs at least somewhat instue.

Nothing **has** been said about the possibility of constructing Ul programs In the formorly planned economIes of Eastern Europe. The program outline presented In Section C Is as useful there as In developing countries. But the discussions In Section E about dualism and the size of the modem ector are hardly apptlcable. What I appropriate Is absolutely unclear at this point, sInce the eventual nature of the more basic economi institutions that will arise Is unknown. Nonetheless, the evidence from Wetem counties can still proide guidelines for choosing program parameters; and the discussion of program goals should forco people who make policy to think about their expectations for any Ul program that is proposed.