8
May

An overview of the features of the Mahatma Gandhi National Rural Employment Guarantee Act (2005)

By Krushna Ranaware, Intern, IFMR Finance Foundation

Continuing on our series on Unemployment Support In India, this post provides an overview of the Mahatma Gandhi National Rural Employment Guarantee Act (2005).

The notion that public works programs can provide a strong social safety net through redistribution of wealth and generation of meaningful employment has been integral to the Indian policy-making agenda. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005 is currently a major part of this agenda. The Act was enacted at a point in time when more than a decade of sustained high growth in GDP experienced in the 1980s and the 1990s was perceived not to have made a sufficient dent in poverty in the rural India.

The Act was notified on 5 September 2005 and was implemented in rural districts in 3 phases. Each state is required to design an employment guarantee scheme based on a set of national guidelines. Public work programmes or employment generation programmes like the Maharashtra Employment Guarantee Scheme (MEGS), Food for Work Programme (FWP), Sampoorna Grameen Rozgar Yojana (SGRY) and National Food for Work Programme (NFFWP) have been used to address the issue of unemployment and generate employment through the creation of labour- intensive productive assets and have thus provided the foundation for the MGNREGA.

MGNREGA_UnS1

Rationale

A common feature of all the schemes mentioned above was that they were formulated and executed by implementing agencies and their termination was at the will of the executive. The theoretical rationale behind employing these programmes is fourfold: i) mitigation of unexpected and seasonal shocks ii) mitigation of idiosyncratic shocks iii) anti- poverty measures; and iv) provision of public goods and services.

Mandate

The Act mandates enhancing livelihood security in rural areas by providing at least 100 days of guaranteed wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work.

Objective

The primary objective of the Act is augmenting wage employment for the poorest of the poor while the secondary objective is to strengthen natural resource management through works that address causes of chronic poverty, like drought, and thus encourage sustainable development. (MoRD 2012).

MGNREGA_UnS2
Rationale behind Employment Guarantee Programmes

The Act is an attempt to provide a legal guarantee of employment to anyone in rural areas willing to do casual manual labour at a statutory minimum wage. What makes the MGNREGA distinct from any other public employment programme is that it is a universal and enforceable legal right concurrent with some of the provisions of Article 391 and Article 412 of the Directive Principles of State Policy in the Indian Constitution that enshrine the ideals of the Right to Work.

Planning, Implementation and Funding

The graphic below depicts the processes and agencies involved in planning, implementation and funding of works under the MGNREGA.

MGNREGA_UnS3

Design features

Key design features in the context of social security and unemployment support:

  • Guaranteed Employment – Any adult member of a rural household applying for work under the Act is entitled to employment. Every rural household is entitled to not more than 100 days of employment.
  • Guaranteed Wages – Wages are to be paid on a weekly basis and not beyond a fortnight. Wages are to be paid on the basis of:
    1. Centre- notified, state- specific MGNREGA wage list
    2. Time rates and Piece rates as per state- specific Schedule of Rates (SoRs)
    3. In any case, the wage cannot be at a rate less than Rs. 100 per day.
  • Unemployment Allowance – If work is not provided within 15 days of applying, the state is expected to pay an unemployment allowance which is one- fourth of the wage rate.
  • Provision of Work – Work is to be provided within a 5km radius of the applicant’s village, else compensation of 10 per cent extra wage is to be provided to meet expenses of travel.
  • Gender Equity – Men and women are entitled to equal payment of wages. One- third of the beneficiaries are supposed to be women. Worksite facilities like creches are to be provided at all worksites.
  • Financial Inclusion – Since 2008, all wage payments have had to be transferred to bank or post office accounts of beneficiaries.
  • Social Security Measures – In 2008, a provision was created which made it possible to cover beneficiaries under either the Janashree Bima Yojana (JBY) or the Rashtriya Swasthya Bima Yojana (RSBY).
  • Transparency and Accountability – All MGNREGA- related accounts and records documents have to be available for public scrutiny. Contractors and use of machinery is prohibited.
  • Rights- based, demand- driven approach – Estimation and planning of work is conducted on the basis of the demand for work. Hence, beneficiaries of the scheme are enabled to decide the point in time at which they want to work.

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1 – Article 39- Certain principles of policy to be followed by the State: The State shall, in particular, direct its policy towards securing
a) that the citizens, men and women equally, have the right to an adequate means to livelihood;
d) that there is equal pay for equal work for both men and women
2 – Article 41- The State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.
References – Ministry of Rural Development (MoRD). “MGNREGA 2005: Report to the People”. New Delhi (2012).

21
Feb

Unemployment Support in Argentina, Chile and Brazil

By Darshana Rajendran & Vishnu Prasad, IFMR Finance Foundation

Continuing our analysis of International Unemployment Support schemes, we now discuss designs in three South American countries: Argentina, Chile and Brazil.

Unemployment support in Argentina, Chile and Brazil can be divided into three types: severance payments, unemployment benefits and temporary public work programs.

1. Severance Payments

Severance payments are the compensation that an employer provides to an employee upon termination of employment. An unemployed person is not entitled to severance payments if she voluntarily leaves, retires or is laid off with “fair cause” (e.g. theft or repeated absence at work).

Severance Payments
Argentina
  • One month salary of advance notice (two months for workers with more than 5 years of tenure),
  • One month salary per year of tenure, unused vacation time and a proportional share of Christmas bonus payment.
Chile
  • One month’s wages per year of tenure, up to a limit of eleven months of wages. 
Brazil
  • 8% of the employee’s monthly compensation.-  In case of termination without a just cause, the company must pay a fine of 50% of the total amount existing in the employee’s account.
  • One month advance notice before firing. During this worker is allowed to take two hours a day to look for a new job.

2. Unemployment Benefits

The table below lays out the design of unemployment insurance programs in Argentina, Chile and Brazil.

Country Coverage Funding Benefits Duration
Argentina All private sector employees including temporary and casual workers, provided they have made at least six months’ contribution in the 3 years preceding lay-off The program is financed by a 0.89% or 1.11% (depending on type of enterprise) premium on gross payroll, to be paid by the employer. The benefit amount is calculated as half of the best salary of the beneficiary in the previous six months of work (within a maximum and minimum threshold of 250 pesos and 400 pesos respectively). 2-18 months
Brazil Employees who have had a formal labour contract during the last six months or  have been legally self-employed for at least 15 months 0.65 percent tax on revenues of private firms, 1 percent tax on revenues of public firms and a 1 percent of costs in non-profit firms. Workers with a minimum of six and maximum of 11 months of prior employment earn three monthly payments; four monthly payments for 12-23 months of service; and five monthly payments for more than 24 months of service 3-5 months
Chile All wage-earners in the labour force, aged between 18 and 65, who have a contract The program is financed by two funds:- A Solidarity Fund (Government’s share from annual budget +employer pays 0.8% of each employee’s monthly wage)- Individual account (employer contributes  1.6% of employee’s monthly wage and the employee contributes 0.6% of her monthly wage) The benefit amount is calculated as a percentage of the worker’s average payment in the last twelve months (benefits decrease by 5% of calculated average wage each month, ranging from 50% of average wage in the first month to 30% in the fifth month). Max 5 months

3. Temporary Public Work / Workfare/ Training programmes:

These forms of unemployment support are resorted to during times of crisis and are temporary in nature.

Argentina Plan Jefes de Hogar (PJH) guarantees 150 pesos in exchange for 4-6 hours of work per day in community projects. Any unemployed head of the family with children is eligible for participation.

Seguro de Capacitacion y Empleo (SCE) offers training and counseling services for low-skilled workers who receive a monthly benefit of 225 pesos up to two years. Alternatively, workers can choose to complete primary or secondary school. 

Chile Most work programs are of temporary duration (3-6 months) and pay minimum wages to workers in exchange for public works. It is estimated that the work program of 1999 reduced the official unemployment rate by almost 1%.

Hiring subsidies were last used during the economic downturn following the East Asian crisis. Employers received a subsidy of 40% of minimum wage for hiring workers for a period of four months. In addition, employers received funds for employee training programs. The cost of this program was approximately US$ 60 million. 

Brazil Brazil has workfare programs mainly concentrated in the Northeast for drought relief. In 1998-99 during the drought, R$ 1 billion was spent in drought related public works. The projects pay R$65 per month for a 27 hour work week. The federal government also pays 20 percent of this amount for non-wage costs (tools and material).  The wage is roughly the same as the wage for casual labour in the Northeast. Plano Nacional de Qualificaçâo Profissional (PLANFOR) is another program that was started in1995, has a budget of R$ 500 million, and provides training for around 4 million people per year. 



References
1. Acevedo, Germán; Eskenazi, Patricio & Pagés, Carmen. Unemployment Insurance in Chile: A New Model of Income Support for Unemployed Workers. SP Discussion Paper No: 0612. The World Bank
2. Gonzalez-Rozada, Martin; Ronconi, Lucas and Ruffo, Hernan. Protecting Workers Against Unemployment in Latin America and the Caribbean: Evidence from Argentina. April 2011
3. Iturriza, Ana; Bedi, Arjun S and Sparrow, Robert. Unemployment Assistance and Transition to Employment in Argentina. IZA Discussion Paper No. 3579. June 2008.
4. Sehnbruch, Kirsten. Privatized Unemployment Insurance: Can Chile’s New Unemployment Insurance Scheme Serve as a Model for Other Developing Countries?. UC Berkeley: Center for Latin American Studies. Available at: http://escholarship.org/uc/item/22k705wf
5. Social Security Programs Throughout the World: The Americas. US Social Security Administration. 2011. Available at: http://www.ssa.gov/policy/docs/progdesc/ssptw/2010-2011/americas/argentina.html
6. Reducing Poverty in Brazil : Lessons Learned and Challenges for the Future, Tools & Case Studies for Development Specialists, USAID
7. Mazza, Jacqueline. Unemployment Insurance: Case Studies and Lessons for Latin America and the Caribbean, Inter-American Development Bank.

20
Jan

Unemployment Support in East Asia

By Anand Sahasranaman, IFMR Finance Foundation

This post is a continunation of our series of posts on Unemployment Support in India. The below post borrows heavily from Kamimura’s “Employment structure and Unemployment insurance in East Asia: Establishing social protection for inclusive and sustainable growth” and Schmitt’s “Promoting unemployment benefits and income security measures for workers in Asia: Current debate, situation and way forward”. All tables and charts based on data from Kamimura’s paper.

Before delving into the unemployment support mechanisms, it is useful to take a look at the labour market structures in East Asian countries.

It is clear that in industrialized countries like Japan and Singapore, close to 80%-90% of the workforce are formal sector employees and a small proportion of elf-employed workers. But this image is turned on its head in Thailand and Vietnam, where the formal workforce is 40% or less, and self-employed and unpaid family workers predominate. There is a much higher level of informality in Thailand and Vietnam, which would indicate the need for different types of strategies to combat unemployment.

However, if one were to expect that the more industrialized economies were more likely to have unemployment insurance, this is not the case. Hong Kong and Singapore do not have unemployment insurance, while Vietnam and Thailand do.

The following table uses data from the International Social Security Association’s “Social Security Country Profiles” (www.issa.int/aiss/observatory) and lays out the design of unemployment insurance programs from Japan, Korea, Thailand and Vietnam. While qualifying conditions vary, it is clear that the unemployment insurance programs cover only formal sector workers. Apart from Korea, where government does not contribute, all the other countries have contribution from employers, employees and government. The amount and duration of benefits vary, but at a minimum it appears that 50% of the insured employee’s wage is paid as benefit for a period upward of 3 months.

Kamimura also analyses the effectiveness of coverage under these social insurance schemes finds that Japan has highest coverage of workforce by social insurance (56%) , while Vietnam has the least (11.8%), which is as we would expect on account on the higher informality of Vietnam’s workforce. What it also indicates is that in response to unemployment, countries like Thailand and Vietnam have to develop creative mechanisms to incorporate larger segments of the informal or unorganized sector into social insurance programs and also design other strategies like work programs to reach out to this sector.

26
Nov

Unemployment Insurance – Hungary and Poland

By Vishnu Prasad, IFMR Finance Foundation

As part of our series on Unemployment Support in India, this blog post explores the unemployment insurance schemes in Hungary and Poland.

Hungary

Social security in Hungary is composed of 5 components: pensions, health services, unemployment insurance, family support system and social assistance system. All persons who are gainfully employed and those of “equivalent status” are insured. These persons include those in paid employment ((including those in public administration), the self-employed (including members of co-operative societies), persons receiving income subsidy, jobseeker benefit and job-seeker aid. Everyone is automatically affiliated to a social insurance scheme as soon as he or she begins to work in Hungary and is not exempted from being compulsory insured. Self-employed people register themselves, and employers register their employees.

Hungary is estimated to have about 9.4% of its labour force in the informal sector1. Hungary introduced an unemployment compensation scheme in 1989 and an unemployment insurance system in 1991.

Financing

The scheme is financed primarily by employee and employer contributions. Employees pay 1.5% of gross earnings to the unemployment insurance scheme. Employees pay 27% of gross monthly payroll in the form of a social contribution tax, which includes pension, survivor benefits, disability benefits, work injury benefits, sickness and maternity benefits, and unemployment benefits. Deficits are covered through government funding.

Eligibility

A job-seeker who has in contributory employment for at least 365 days in the four years (before becoming a job-seeker) is entitled to one day’s benefit for every five days worked. This means that the minimum entitlement is for 73 days, and the maximum 270 days.

Benefits

There are two types of unemployment benefits in Hungary: active and passive. The former consists of information about employment and the labour market, occupational guidance and counselling, local employment tips and job offers. Additionally, there are training and business start-up programmes. If an eligible person enrols in a training program, she is entitled to a minimum wage allowance.

Passive benefits are financial benefits and are divided into two: job-seeker benefit and job-seeker aid.

Job-seeker benefits are divided into two stages. In stage one; an eligible person is entitled to 60% of her previous average pay up to a maximum of 91 days. The allowance is subject to a minimum and maximum cap of 60% and 120% of minimum wage respectively. In stage two, an eligible person is entitled to a benefit of 60% of minimum wage up to a maximum of 179 days.

Job-seeker aid is paid to a job-seeker:

  • who is not receiving invalidity pension, work-accident-related invalidity benefit or sickness benefit, and
  • who wants to work but has not found a job and for whom the competent employment agency cannot find appropriate work, and who:
    1. has received job-seeker benefit for at least 180 days and whose allowance has stopped at the end of the prescribed period or
    2. has worked for 200 days in the four calendar years before becoming a job-seeker and is not entitled to job-seeker benefit or
    3. at the time of application is within five years of legal retirement age and has received job-seeker benefit for at least 140 days and is no longer entitled to that benefit.

For categories 1 and 2, the aid period is 90 days and for category 3, aid continues until they are eligible for old-age pension. The aid amount is 40% of minimum wage.

Subsidised Employment

Wolff (1997) reports that there are three types of subsidised employment schemes in Hungary: subsidy for employment in the private sector, start-up allowances and public works.

An unemployment insurance beneficiary, who has been unemployed for six months, can qualify for subsidy for employment in the private sector. Up to half the wage cost for a year is paid for. The employer is required not to make redundant workers in a similar line of work (in order to avoid displacement effects).

Job-seekers can avail a lump sum equal to six months’ insurance benefit and 50% reimbursement on training and counselling services as start-up allowance. Public works targets long-term unemployed and engages them in temporary works.

Poland

The social security system in Poland is composed of the social insurance and welfare system, health insurance system, unemployment benefits as well as the social assistance system. Poland introduced unemployment insurance in 1989 as a measure to tackle the large scale unemployment that was feared as a result of the ‘shock therapy’ induced structural transformation of the economy.

The initial scheme had a broad eligibility criterion- anyone without a job was eligible for unemployment insurance and benefits could be availed indefinitely. As unemployment rose in the 1990s, the insurance scheme became unsustainable due to rising costs.

Poland is estimated to have about 21.6% of its labour force in the informal sector.

Financing

The Polish unemployment insurance scheme is financed by a 2.45% payroll tax, paid by the employers. The government covers any deficits.

Eligibility

Any unemployed person who has paid compulsory contribution to the labour fund for a period of 365 days out of the last 18 months, was working (on the basis of an employment contract, a contract of mandate, business activity, etc.) and receiving remuneration equal to at least minimum wage is eligible to avail unemployment benefit.

Benefits

The beneficiaries get a flat rate per month(calculated as a percentage of the average national wage). Beneficiaries with less than 5 years of work experience get 80% of this amount and those with more than 20 years of work experience get 120% of basic benefit. Benefits are paid for 6 months to 18 months, depending on the unemployment rate of a region (district).

There are active benefits like job placement, vocational assistance and guidance in active job search and training programs.

The Polish law has additional provisions like subsidised jobs, public work schemes, reimbursing enterprises for costs of equipment, lump-sum aid for unemployed persons starting up a business, apprenticeships for graduates, special programmes and fellowships.

Impact

As of December 2011, Hungary had an unemployment rate of 10.9% and there were about 0.5 million registered job seekers. Approximately 19% of them were receiving either job seeker benefits or job seeker aid. As of December 2011, Poland had an unemployment rate of 12.5%. There were 1.9 million registered unemployed persons and 16.4% were receiving unemployment benefits.

Vodopivec (2009) finds that the unemployment insurance schemes in Hungary and Poland were among the most generous among the European transition economies in the 1990s. The study also reports that the insurance programs had a substantial contribution in bringing down poverty rates in Hungary and Poland. 5.2% of the population in Hungary and 3.5% of the population in Poland were drawn out of poverty by unemployment benefits in the mid-1990s.



1 – Informal sector comprises of:
a. Informal dependent employment-employees (persons in a dependent employment relationship) without a contract or who is uncertain of their contract.
b. Family workers- Persons working without a contract for own family’s business
c. Informal self-employment- includes the following two groups:

(i) All non-professional self-employed operating solely;
(ii) Employers with 5 or fewer workers

2 – 794.20 PLN during the first three months and 623.60 PLN during the subsequent months.

References:
1. Hazans, Mihails. Informal workers across Europe: Evidence from 30 European countries. Background paper for In from the Shadow: Integrating Europe’s Informal Labor. 2011
2. Mazza, Jacqueline. “Unemployment Insurance: Case Studies and Lessons for Latin America and the Caribbean”. Inter-American Development Bank Technical Study. May 1999
3. Report on Labour Market Situation based on data from the National Employment Service, National Employment Agency. 2011
4. Social Insurance in Poland. Zakład Ubezpieczeń Społecznych (ZUS Social Insurance Institution). 2012
5. Unemployment Benefits, Fourth Study Commission-Public and Social Law. International Association of Judges. 2011
6. Vodopivec, Milan. “Introducing Unemployment Insurance to Developing Countries”. IZA Policy Paper No.6. April 2009
7. Wolff, Joachim. “Unemployment Benefits and Incentives in Hungary: New Evidence”. William Davidson Institute Working Paper No.111. October 1997
8. Your social security rights in Hungary. European Commission. July 2011

31
Oct

Unemployment Support: An Introduction

By Anand Sahasranaman, IFMR Finance Foundation

This is the first post in the Unemployment Support in India series. In this series, we will explore the unemployment support mechanisms in India today; use comparative case studies of national experiences in Eastern Europe, South East Asia, and Latin America to throw light on those aspects in India that are lacking; and explore possible ways forward for a comprehensive program of unemployment assistance.

Social Security is widely seen as a fundamental building block of a just and equitable society. While ideas of welfare, pension and charity have been with us since the times of the earliest civilizations, the modern concept of social security can arguably trace its origins to the aftermath of the industrial revolution. The profound changes in social and economic structures wrought by the industrial revolution created the environment for the development of organised systems of welfare provision spearheaded by the state.

The International Labour Organisation1 defines “social security” as comprising of nine elements: medical benefits, sickness benefits, unemployment benefits, old-age support, employment injury support, family support, maternity benefits, invalidity benefits and survivor’s benefits. As per this definition, unemployment support or benefit is a core component of a well-functioning social security system.

Unemployment benefits enable households to smooth consumption at times of job-related distress, which is especially critical for middle and low income households who may otherwise slip into poverty. Unemployment benefits could also accelerate economic recovery by boosting domestic demand for goods and services.

What does “unemployment” mean? The definition of this term is critical in determining eligibility for unemployment programs and products. Okochi (1952)2 stresses three aspects of unemployment: that it denotes a worker who has no means of production and has lost her job; that the unemployed worker retains her willingness to work; and that the worker remains unemployed if she does not find a job that is appropriate for his skills and ability. Self-employed workers therefore fall outside the purview of unemployment related social security policy and their problems of poverty or underemployment should be tackled by other industrial or educational policies3.

In general, we find that unemployment benefit programs under the social security framework consist of ‘active’ and ‘passive’ policy options to provide support to those who are without a job. ‘Passive’ policies aim to provide temporary income support for the unemployed – severance pay, unemployment insurance, and unemployment assistance. ‘Active’ policies involve support to unemployed to enable transition to new employment – work programs, career counselling and training4.

Labour law could require severance pay for the employee upon termination of work contract. Unemployment Insurance Programs involve contributions from employer, employee and in some cases, government, and provide pay-outs for a defined duration upon unemployment. Unemployment Insurance Savings Accounts (UISA) are private savings accounts that workers can draw on in case of unemployment and they generally contain no risk-pooling mechanisms. Unemployment Assistance provides for means-based benefits for those in greatest need. Finally, Work Programs are designed to select the neediest households at minimum wage in exchange for the creation of public works.

Most countries have some combination of active and passive market policies, which are largely dependent on their political philosophies and labour market structures. A country like India, where 93% of the workforce is in the informal sector5 may well need a vastly different approach to unemployment support than western economies, where the labour markets are predominantly formal. These structural characteristics are critical both to understanding the rationale for current strategies for unemployment assistance in India and gaps in the present design. Additionally, lessons from global experience in unemployment support mechanisms will provide us useful pointers to alternate approaches and frameworks, which could be appropriately adopted to the Indian context .



1 – ILO Social Security (Minimum Standards) Convention 1962
2 – Okochi, Kazuo, “Overview” Okochi (ed.), Unemployment, Kawade Shobo, 1952
3 – Kamimura, Yasuhiro, “Employment Structure and Unemployment Insurance in East Asia: Establishing Social Protection for Inclusive and Sustainable Growth
4 – Berg, Janine and Matthew Salerno, “The Origins of Unemployment Insurance: Lessons for Developing Countries” in Janine Berg and David Kucera (eds.), In Defense of Labour Market Institutions: Cultivating Justice in the Developing World, Palgrave Macmillan, 2008
5 – Based on Ajaya Kumar Naik’s paper titled “Informal Sector and Informal Workers in India”