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The Economics of Unemployment Insurance- Oman نظام الأمان الوظيفي - YouTube
Channel: Economics with Dr. A
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recently Oman announced establishment of an
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unemployment insurance program this is a
great move for several reasons
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first Oman is making a shift towards
diversification of its economic activity
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and the private sector will have a
bigger role in the economy
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second a social safety net liberalizes
the private labor market allowing for
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more flexibility with respect to labor decisions finally
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economies experience business cycles the
ups and downs of the economy will
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impact individuals unemployment
insurance allows for automatic
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stabilizers to smooth consumption and sustain
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spending for an example an unemployment insurance
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program would have been helpful
in the current Covid experience I have
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received many requests for more
information on UI
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programs and how to analyze them today
I would like to take the time to discuss
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unemployment insurance programs
and how to design them this is a
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complicated matter
but I want to go through some of the
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highlights so that we are
all informed about what UI programs are
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and how to navigate the pros and cons of
unemployment insurance
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when designing unemployment insurance
programs you want to consider
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one the benefit the contribution or the
funding into the program
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the eligibility the application process
or administrative burden
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before we get started let us define what
unemployment insurance is
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like any insurance you are protecting
yourself against the probability of an
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undesirable outcome for UI you are
protecting your income
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in the event that the economy goes
through a recession
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like any policy UI has costs and benefits
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free market economists would argue that
a UI system is
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unnecessary if everyone considers their
own risk and saves their own money for
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possible unemployment spells
then there is no need for government to
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interfere on the other hand
economists that argue for the UI do so
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because they believe this market fails the uncertainty
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and the lack of information about
business cycles
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and the unpredictability of them makes
it difficult to plan
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also benefits to consumption smoothing
help the entire economy
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so they are positive externalities most
world economies have UI programs
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but they vary in how they are designed I
would like to talk about
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the features of the UI program and the
policy options available the first
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question is who qualifies for unemployment
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insurance most UI programs are designed to ensure
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against economic downturns
to qualify you must have lost your job
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because the firm is no longer in
business or you are laid off due to
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downsizing UI programs do not cover those that lost
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their job for cause there are requirements for who
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qualifies based on the duration of their
previous employment
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or contribution into the UI system
the United Kingdom requires you to have
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been employed in the system for 12 months
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in the past two years the U.S.
requires 20 weeks of employment and a
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minimum earnings threshold to qualify
for unemployment insurance Iceland
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requires employment for 10 weeks in the
past year
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Australia has no requirements once we
decide on who qualifies
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we need to define the benefit that means
we need to define how much will they
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receive and for how long the main issue
with designing a UI
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program is designing the payout or benefit
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the payout must balance between two objectives
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you want the payout to be high enough to
allow for consumption smoothing
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but you don't want it to be too high
that it introduces
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moral hazard moral hazard is present
because UI recipients
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might not search for a job as intensely
if their income is being replaced so
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policy makers have to design a system
that balances these two possible
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outcomes when designing a UI program you have to
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also decide on which
income are you replacing the Omani
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proposal is to replace the average
income of the past
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24 months the qualifying condition or
contributions vary drastically around
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the world Hungary uses the income from the past
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year Czech Republic uses income from the past
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three months Sweden replaces the most recent income
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once you decide on which income to
replace you have to decide how much of
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it to replace the proposed policy in Oman is 60% of the
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average income for the past 24 months
this is called a flat replacement rate
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replacement rates are easily adjustable
but need to be transparent
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here's a graph of several replacement
rates for international comparison
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we can see that the rates vary across
countries and across time
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UI programs can also have a declining
payout rate with respect to income
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the replacement rates start off high at
lower incomes
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and decrease as income increases and
these programs can
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also have a maximum amount that UI
recipients can receive this is an
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example from the recent CARES act in the United States
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which adjusted UI replacement rates
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in the U.S. UI replacement rates vary by
state in this next figure we can see
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that the replacement rates vary by hourly wages
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this is an example of a declining
replacement rate
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the next feature to discuss is the
duration of UI
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once again you want to design a program
that helps people while they search for
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new jobs but not create an incentive to stay on
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UI for too long
there are drastic differences across the
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world on how long UI programs replace
lost wages the United States provides 26
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weeks of UI benefits
Iceland offers three years Finland has
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500 days we've talked about the benefits
let's talk about how to fund these
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benefits the proposed method in Oman
would be through a one percent employee
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and one percent employer contribution
therefore each month the unemployment
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insurance fund will be funded with
two percent of all wages in Oman when
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designing a UI
program you want to pool all the risk
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and therefore you want as many people
contributing into the system
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private and government employees must
participate in the program
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once again there are variations in how
different countries fund their UI
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programs one thing that we need to keep in mind
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is UI programs are funded during expansions
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and they are used during recessions
it is important to keep these funds
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secured when it seems that they
are needed the least the last thing I
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want to discuss
is policy makers can control how many
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people apply for UI
programs through the design of the
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administrative application process
transparency of process eligibility and
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turnaround time
are as important as other features that
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we've discussed
this is a really quick overview of
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unemployment insurance programs designing an
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effective program requires technical analysis
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understanding labor markets and the
economics of business cycles
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I want to be clear that this video
provides a quick summary
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as always if you want to learn more and
discuss UI programs reach out
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