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Uncoordinated unemployment insurance and
severance pay do a poor job of insuring against losses resulting from job
displacement
Job displacement poses a serious earnings threat
to long-tenured workers through unemployment spells and lower re-employment
wages. The prevailing method of insuring job displacement losses involves an
uncoordinated combination of unemployment insurance and severance pay. Less
developed countries often rely exclusively on public mandating of employer
severance pay due to the administrative complexity of unemployment insurance
systems. If both options are operational, systematic integration of the two
is important, although perhaps not possible if severance pay is voluntarily
provided.
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Disability is associated with labor market
disadvantage; evidence points to this being a causal relationship
In Europe, about one in eight people of working
age report having a disability; that is, a long-term limiting health
condition. Despite the introduction of a range of legislative and policy
initiatives designed to eliminate discrimination and facilitate retention of
and entry into work, disability is associated with substantial and enduring
labor market disadvantage in many countries. Identifying the reasons for
this is complex, but critical to determine effective policy solutions that
reduce the extent, and social and economic costs, of disability-related
disadvantage.
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Unemployment insurance can protect against
income loss and create formal employment
Unemployment insurance can be an efficient tool
to provide protection for workers against unemployment and foster formal job
creation in developing countries. How much workers value this protection and
to what extent it allows a more efficient job search are two key parameters
that determine its effectiveness. However, evidence shows that important
challenges remain in the introduction and expansion of unemployment
insurance in developing countries. These challenges range from achieving
coverage in countries with high informality, financing the scheme without
further distorting the labor market, and ensuring progressive
redistribution.
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Key labor market institutions, and the policies
that shape them, affect the restructuring that leads to economic growth
Economic growth requires factor reallocation
across firms and continuous replacement of technologies. Labor market
institutions influence economic dynamism by their impact on the supply of a
key factor, skilled workers to new and expanding firms, and the shedding of
workers from declining and failing firms. Growth-favoring labor market
institutions include portable pension plans and other job tenure rights,
health insurance untied to the current employer, individualized
wage-setting, and public income insurance systems that encourage mobility
and risk-taking in the labor market.
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Wage losses upon re-employment can seriously harm
long-tenured displaced workers if they are not properly insured
Job displacement represents a serious earnings risk to
long-tenured workers through lower re-employment wages, and these losses may persist for
many years. Moreover, this risk is often poorly insured, although not for a lack of
policy interest. To reduce this risk, most countries mandate scheduled wage insurance
(severance pay), and it is voluntarily provided in others. Actual-loss wage insurance is
uncommon, although perceived difficulties may be overplayed. Both approaches offer the
hope of greater consumption smoothing, with actual-loss plans carrying greater
promise.
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Appropriate timing and targeting of activation
programs for the unemployed can help improve their cost-effectiveness
Activation programs, such as job search
assistance, training, or work experience programs for unemployed workers,
typically initially produce negative employment effects. These so-called
“lock-in effects” occur because participants spend less time and effort on
job search activities than non-participants. Lock-in effects need to be
offset by sufficiently large post-participation employment or earnings for
the programs to be cost-effective. They represent key indirect costs that
are often more important than direct program costs. The right timing and
targeting of these programs can improve their cost-effectiveness by reducing
lock-in effects.
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How do they affect re-employment rates and flows
into states of inactivity for older unemployed workers?
Many OECD countries have, or have had, a policy
that exempts older unemployed people from the requirement to search for a
job. An aging population and low participation by older workers in the labor
market increasingly place public finances under strain, and spur calls for
policy measures that activate labor force participation by older workers.
Introducing job search requirements for the older unemployed aims to
increase their re-employment rates. Abolishing the exemption from job search
requirements for these workers has been shown to initiate higher outflow
rates from unemployment for the older unemployed.
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Selection and incentives in retirement plans
affect job transitions
The relationship between retirement plan type
and job mobility is more complex than typically considered. While
differences in plan features and benefit structure may directly affect
employees’ mobility decisions (“incentive effect”), the type of plan offered
may also affect the types of employees a given employer attracts (“selection
effect”), thereby affecting mobility through a second, indirect channel. At
the same time, some employees may not be able to accurately assess
differences between plan types due to limited financial literacy. These
factors have implications for policymakers and employers considering
retirement plan offerings.
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