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HomeInsuranceCOUNTERCYCLIC EMPLOYMENT INSURANCE? IT'S ALREADY STRONG | That's the job!...

COUNTERCYCLIC EMPLOYMENT INSURANCE? IT’S ALREADY STRONG | That’s the job! | Bruno Coquet

The proposal to modulate the unemployment insurance rules according to the situation, “more incentive when things go well and protection when things go bad” has all the appearance of simplicity and common sense.

However, the government’s proposal is imprecise, particularly because it ignores the already highly countercyclical nature of the current rules, reinforced by the 2019 reform, the effects of which are problematic.

Economic graduation: an ambivalent option

The theoretical foundations of cyclical gradation are ambivalent: we can maintain that countercyclical rules can be optimal, but that procyclical or acyclical rules can also be that modulation is a possibly interesting option for unemployment insurance that was previously parameterized in an optimal, and that this option provides only minimal gains. Empirical studies are positive, but concern only the various mechanisms of “extensions of entitlements” specific to US unemployment insurance (very different from ours, e.g., the labor market of which it is a part). Finally, the tight and unpredictable rules of the Canadian “model” have not proven anything tangible.

Unemployment insurance is counter-cyclical in nature, in that the higher the unemployment rate, the more benefits it distributes – to a greater number of beneficiaries and for a longer period of time, and vice versa. In addition, unemployment insurance in France is not subject to an annual budget balance, so it is also countercyclical from this point of view, as contributions are higher than expenditure “when things are going well” and vice versa when unemployment rises. : for example, in 2022 the contributions (EUR 43.6 billion) exceed the compensation expenses (EUR 32.9 billion) by EUR 10.7 billion. EUR, which is strongly countercyclical.

In the current state of unemployment insurance, any complication of the rules is risky: 300 pages of regulations and as many application circulars that are incomprehensible at key points already create confusion that is unlikely to provide the clear incentives provided. A cyclical graduation would not improve matters.

Maintenance of consumption: nominal lift, real degressivity

At the individual level, the aim of the insurance company is to “maintain the consumption” of the unemployed person until he finds a job that matches his skills. Technically speaking, this consumption is estimated based on the salary received in employment, which is also the basis for contributions. This has the effect of freezing the consumption that should be to insure at its previous nominal level. In France, the replacement rate of 57% means that the level of essential consumption is 57% of the previous gross salary[1].

The way in which this previous level is calculated is therefore crucial: until 2018, the “calculation reference period” (PRC) covered at most the last 12 months. From now on, all wages on jobs used to open the entitlements are taken into account, these can go back up to 24 months back, 36 months for the seniors. The nominal consumption that must be maintained is therefore older on average, which, other things being equal, reduces the performance level.

If the benefits are not written up or at a lower rate than inflation, the unemployed lose purchasing power. For example, with a stable and low inflation of 1.1% (annual average observed from 2010 to 2021), the theoretical replacement rate of 57% is reduced: in reality, the unemployed can only maintain 55.8% of the consumption that was his the previous year (what can we call the real effective replacement rate), which corresponds to a reduced purchasing power of 1.6% compared to what the replacement rate would imply at a contractual 57%. For the unemployed who are entitled to longer potential rights and for those whose rights have been postponed because they have practiced a reduced activity, the decline in purchasing power reaches 2.7% on average the following year.

The 2019 reform and inflation have compounded the problem

The compensation must at least maintain incompressible consumption and cover the costs of job hunting. Simply put, an unemployed person must provide for food, rent, energy, etc. at their current prices, not at the average prices of the last 24 or 36 months. This is all the more important as prices are rising rapidly.

Galloping inflation and falling unemployment increase the likelihood that wages have risen sharply in China, so taking into account old wages that have not been updated (such as wages transferred to the pension account) erodes the purchasing power of the reference wage, and therefore the benefit even faster. In the example above, the real effective replacement rate would have only fallen to 56.4% before the 2019 reform. The reform therefore doubled the decline in the purchasing power of unemployed workers receiving unemployment benefits. Rising inflation multiplies these effects.

With an inflation rate of 5.4% in 2022 and 4.0% expected in 2023 (Unedian forecasts), the real effective replacement rate for an unemployed person entering at the end of 2022 will be 52.0% in 2023 (see graph), a loss of purchasing power of 6.3% compared to an award of up to 57% of his most recent wages. With the old method of calculating the reference wage, the loss of purchasing power would have been smaller, but still 3.8% in 2023. For an unemployed person still present in 2024, the loss of purchasing power for supplements would reach 8%, despite inflation reversing back to 1.5% in the Unedic forecast.[2]

The countercyclicality of the rules is already very strong

These elements show that unemployment insurance is already strongly countercyclical when things are going pretty well on the unemployment side, but pretty bad on the inflation side, like today.

They also show that benefits undergo a strong real degression (decline in purchasing power), especially as the unemployment episode lasts a long time. This was reinforced by several aspects of the 2019 reform, in addition to the regulatory degression of quotas that was reintroduced on this occasion.

This decrease in the real effective replacement rate is of an order of magnitude comparable to the modulation of the replacement rate recommended by Landais, Michaillat, Saez (2010), and this in the absence of modulation of eligibility and the potential duration of the rights (with all the limits for a comparison with a theoretical model, calibrated on the American case, accompanied by necessary but sometimes too stylized hypotheses to survive in the real world, etc.). Compared to this model, the addition of a short-term modulation of these last two parameters would therefore be redundant and even harmful, as it is suboptimal.

At present, it does not appear to be a priority or desirable to add to the already strong countercyclicality of the current rules, at the cost of increased complexity.

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