Unemployment Insurance and Unemployment Assistance: A Comparison

This paper compares unemployment insurance (UI) with unemployment assistance (UA) as alternative ways to protect workers against the effects of unemployment. While its scope is intended to be general, much of the discussion centers on Australia, and, to a lesser extent, the United States and Canada. The paper focuses on two topics: costs and labor market disincentives. It presents a framework for assessing the costs of unemployment protections and examines comparative data on costs. As will become obvious shortly, the paper is aimed at practitioners. Two conclusions are reached. 1) Even though UA systems base eligibility on family income, the costs of such systems (per percentage point of the unemployment rate) are not necessarily lower than the costs of UI systems. Examples of high cost and low cost UI systems are identified as are examples of high cost and low cost UA systems. 2) Each system has to deal with serious labor market disincentive issues. Because they are less common, there has been less analysis of disincentive issues for UA systems. Australia is the largest country with UA, and its system of unemployment protection is examined in some detail.