Trade and Employment From Myths to Facts - International Labour ...

Chapter 6: Trade adjustment costs and assistance: The labour market dynamics
Figure 6.2: Severance pay in Asia
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8
6
4
2
0
A worker with 4-years experience at the firm and dismissed for economic reasons
Severance pay in no. of monthly wages
India Malaysia Philippines Singapore Thailand Indonesia
Source: Hill and Aswicahyono (2004).
To date, the incidence of unemployment benefit programmes is strongly related
to the level of development. Unemployment benefits are common in most developed
countries, though with varying degrees of entitlements. About 80 per cent of highincome
countries provide unemployment benefits – in general, these are not trade
related (ILO, 2010). Few developing countries have any unemployment benefits.
Provisions exist in only about 10 per cent of low-income countries and about half
of middle-income countries. In developing countries, often only a minority of the
labour force is covered. Coverage rates, in terms of the proportion of unemployed
who receive benefits, are lowest in Africa, Asia and the Middle East (less than 10 per
cent) (ILO, 2010). The low incidence of unemployment benefit schemes in lowincome
countries can partly be explained by the fact that they are administratively
more challenging to handle than, for instance, job security legislation. However,
prompted by increased market openness and fearing future global crises, more developing
countries – including lower middle-income developing countries, such as
the Philippines – are contemplating introducing those systems (Vodopivec, 2009).
Such considerations appear to be backed by the prospect of efficiency and distributive
advantages of reforming social protection programmes for workers in developing
countries. Due to the predominance of the informal economy, in low-income countries
social protection is typically confined to the minority of workers. Providing
social protection to workers in the informal economy remains, therefore, a major
challenge (Jansen and Lee, 2007). Vodopivec (2009) attempts to develop an unemployment
insurance scheme for developing countries that includes the informal sector.
Another challenge that policy-makers face when designing unemployment benefit
schemes is setting income replacement rates at such a level that they provide
income protection without having negative effects on the reallocation speed, as unemployment
benefits may provide a disincentive to take up a new job with a lower
wage (see, for example, Boone and von Ours, 2004). Another possible drawback of
unemployment benefit schemes is that they are not designed to improve workers’
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