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Economic Outlook

KDI Economic Outlook 2017-1st Half

The Economic Effects of Enhanced Unemployment Benefits

SUMMARY ■ The simulations reveal that the macroeconomic effects of an nhancement in unemployment benefits vary according to the profile of the affected recipients and degree of their job seeking efforts (lower employment rate).

■ Thus, a method must be considered that enhances benefits by gradually expanding the benefits for relatively, more vulnerable recipients, taking into account a rise in premiums.
Report VOD
The number of workers continues to decline in the manufacturing industry,
and even more are expected with the upcoming restructuring of mainstay industries, including shipbuilding.

As a counter measure to the rising unemployment rate
and to expand social safety nets, many have called for the enhancement
of Korea’s unemployment benefits, which is currently below the OECD average.

On the other hand,
there are also concerns that better benefits
may diminish the recipients’ job-seeking activities,
which will in turn, have a negative impact on employment.

using an overlapping generation model,
this study examines the overall effects of enhanced unemployment
benefits on macroeconomic conditions, including employment,
consumption and social welfare, among others and draws on the policy implications.

Two much discussed simulations were conducted
to analyze the changes in social welfare.
The first assumed 10%p increase in the wage replacement rate
and the second a one-month extension of the maximum duration of benefits.

The first simulation reveals that if the wage replacement rate increases 10%p,
from the current 50% to 60%, Approximately 20% of all recipients,
that is, all those not subject to the lower benefit limit
and a small number of those who are
and receive 90% of the minimum wage, will be affected.

In this case,
the positive impact of the increase in the average consumption of recipients
is outweighed by the negative impact
of a falling employment rate and rising insurance rate,
and as a result, social welfare is reduced overall.

Meanwhile, a one-month extension of the benefit duration will affect all recipients.

And the negative impact will be relatively large
as the average consumption of recipients, mainly those subject to the lower limit,
and the overall employment rate falls and insurance premiums rise.

However, despite the fall in average consumption,
the consumption of asset-lacking, vulnerable groups will increase
and will therefore, offset the negative impact
and have a much greater positive impact on social welfare.

Through the simulations, we are able to see that under the current unemployment benefit system and distribution profile of recipients, it is more desirable to extend the maximum duration period than increase the wage replacement rate, from the perspective of social welfare. This implies that the enhancement of unemployment benefits should be pursed through the increased assistance for society’s vulnerable groups.

Still, as enhanced benefits demand higher insurance premiums, the burden of companies and those who are insured must be taken into account and the enhancement must progress gradually. Moreover, to minimize the side effects on employment,
job-seeking activities must be monitored and reemployment function reinforced.
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