Centralised vs decentralised unemployment insurance programmes: an overview

In each country, social insurance programmes, and in particular unemployment insurance programmes, come in two flavours: centralised and decentralised. In the context of this blog, centralised systems will refer to those programmes that are administered by the central (federal) government of a country, while decentralised programmes will refer to those administered at the state or provincial level. The contrast between these two systems necessarily raises the question of which of these two models is the most efficient. While the motivations behind how each model is structured will depend on the political culture and policy demands of each country where an unemployment insurance programme is implemented, decentralised programmes provide pronounced disadvantages in contrast to those programmes in which unemployment insurance is overseen primarily by a central government.

This blog will use the examples of China and the US as models that demonstrate the flaws of decentralised unemployment insurance programmes, contrasting them with examples in which unemployment insurance is centralised, allowing labour mobility and preventing inequity between the country’s regions. I therefore propose that centralised models of unemployment insurance within a country prove more efficient at reducing inequality than decentralised models, which, although rooted in a country’s political culture and internal policy demands, prove to create an inherently flawed system.

Two decentralised models: The United States and China

The US system of unemployment insurance is one of the most notable examples of a decentralised model. Although it is referred to by the US Department of Labor as a “joint federal-state” (US Department of Labor, 2020) programme, the system allows a great deal of autonomy on behalf of each state’s government. The conversation about centralisation and decentralisation proves particularly timely to hold in this context, as a record 3.3 million individuals in the United States have applied for unemployment insurance benefits in the wake of business shutdowns as a result of the COVID-19 pandemic (Davidson, Peter, & Jones, 2020).

Some of the drawbacks of this model reveal themselves in the fact that payouts to individuals applying for unemployment insurance vary greatly between the different states of the US. For example, the state of Florida’s low payout and short window of eligibility for unemployment claimants, at $275 weekly as of 2018, was one of the lowest in the country, and capped off at 12 full weeks of eligibility for unemployment insurance recipients (Diaz, 2018). As in other US states, the payout amount and timeframe are influenced by political factors: specifically, the desire to keep unemployment statistics relatively low (Diaz, 2018). In other words, the US shows the flaws of a decentralised system in that its unemployment insurance programmes reflect a notable amount of inequity between its states.

Another example of a country in which unemployment insurance is decentralised is China. China’s decentralisation polices have been implemented over several decades. While this would at first glance appear to contrast with China’s political culture that historically places emphasis on the power of a strong central government, this change is reflective of the gradual adoption of an economic model that reflects the influence of western neoliberal capitalism on post-Mao China (Liu & Wang, 2019). While this emphasis on modernisation in keeping with other countries may at first seem advantageous in spreading the authority responsible for unemployment insurance across multiple provinces, it results in similar disadvantages to those found in the decentralised model of the US. Much like the US, for example, China has recently seen a spike in unemployment numbers as a result of COVID-19 (Tang, 2020) that could put a strain on its decentralised unemployment insurance model.

Centralised models of unemployment insurance

In contrast to these two models of decentralised unemployment insurance, several countries provide an unemployment insurance scheme in which unemployment insurance “is typically the responsibility of the highest level of government” (Fischer, 2017). Examples of countries built around this model include Switzerland, Germany, and Canada (Fischer, 2017). There is little need here for a country-by-country discussion, as all of these countries rely on a relatively similar model, and one that uniformly demonstrates such advantages as the fact that it increases labour mobility without creating additional bureaucratic complications (Fischer, 2017).

Additionally, this model prevents the regional economic disparity and uneven cost-cutting measures that plague countries such as the US and China whose unemployment insurance programmes are significantly more decentralised. Countries with such programmes also, because of their centralised structure of unemployment insurance, show greater potential for a coordinated response utilising unemployment insurance resources in the event of an economic catastrophe or other major crisis, in contrast to decentralised models in which unemployment insurance, already a regional patchwork, varies greatly in efficiency across a country’s states or provinces. Centralised unemployment insurance programmes are thus considerably less vulnerable than decentralised unemployment insurance programmes.

Conclusion

From a bureaucratic perspective, a decentralised model of unemployment insurance at first appears more efficient in that it prevents a country’s central government from taking on excessive administrative burdens. Indeed, such decentralised programmes even appear, at first glance, to be a good ideological fit in countries such as the US whose political culture is based on a historic tradition of rejecting central authority, or in countries such as China that seek modernisation programs rooted in the narrative of neoliberal economic policy. However, decentralised models of social insurance reveal their weaknesses in a number of situations and for a variety of reasons.

Situations that might put a strain on a decentralised system of unemployment include a public health crisis such as the current COVID-19 pandemic, or an economic crisis such as a recession or a depression. In the event of such crises, although the governments of countries with a centralised unemployment insurance program may chip in with temporary financial relief, it would be of clear benefit for them to centralize unemployment insurance, even if temporarily. To do so in the long term would help reduce regional inequity and allow clear, consolidated management of unemployment insurance programmes. It should therefore be firmly concluded that a centralised unemployment system can work more efficiently than a decentralised one. A centralised program typically provides greater societal benefit as a long-term model, while decentralised models of unemployment insurance programmes make their flaws readily apparent.

 

List of References:

Fischer, G. (2017). The US Unemployment Insurance, a Federal-State Partnership: Relevance for Reflections at the European Level, IZA Policy Paper No. 129. Accessible: http://ftp.iza.org/pp129.pdf

Liu, T., & Wang, C. (2019). The Institutional Development of Employment Protection and the Perception of Western Concepts and Values in China, Sustainability, Accessible: https://www.mdpi.com/2071-1050/11/2/480

Davidson, P., Peter, J., & Jones, C. (2020 Mar 6). “A Record 3.3M Americans File for Unemployment Benefits as the Coronavirus Takes a Big Toll on the Economy”, USA Today, Accessible: https://www.usatoday.com/story/money/2020/03/26/coronavirus-jobless-clai...   

Diaz, G. (2018 Sep 27). “Ask Orlando: Why are Unemployment Benefits in Florida Only $275 weekly with a 12-week cap?”, The Orlando Sentinel, Accessible: https://www.orlandosentinel.com/opinion/os-ne-florida-unemployment-benef...

Tang, F. (2020 Mar 16). “Coronavirus: China Unemployment Rate Rose More Than During US China Trade War”, South China Morning Post, Accessible: https://www.scmp.com/economy/china-economy/article/3075411/coronavirus-c...

US Department of Labor. (2020). How Do I File For Unemployment Insurance?, Accessible: https://www.dol.gov/general/topic/unemployment-insurance

 

Social Protection Programmes: 
  • Social insurance
Social Protection Building Blocks: 
  • Policy
    • Governance and coordination
  • Programme implementation
    • Benefits payment / delivery
Social Protection Approaches: 
  • Social protection systems
Cross-Cutting Areas: 
  • Disaster risk management / reduction
Countries: 
  • Canada
  • United States
  • China
  • Germany
  • Switzerland
Regions: 
  • Global
The views presented here are the author's and not socialprotection.org's