Reform of the unemployment insurance: “Risks of flexible benefits”

In theory, unemployment insurance systems aim to define “optimal” rules that make it possible to both maintain the consumption level of the unemployed, i.e. to cover their limited expenses such as rent or heating, without discouraging their search for employment, nor excessively so. extension of periods of unemployment. Stabilizing the economic situation of the individual unemployed in this way contributes to stabilizing the economic situation, all the more so as the number of beneficiaries increases when economic activity decreases, and vice versa. Having established this, it is understandable to wonder, as the government does today, whether “unemployment insurance that is more of an incentive when things are good and more protective when things are bad” would not be even more stabilizing for the economy.

The vast majority of the economic literature considers the unemployment insurance rules independent of business cycles, and this approach has always been largely dominant in practice. Conversely, the theory of a cyclical modulation of the same rules remains ambiguous. Some studies lean in favor of countercyclical insurance, while others, on the contrary, argue for procyclicality, but in both cases with limited estimated gains. The cyclical grading of the rules, which is rarely used, has therefore not been evaluated either.

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Only the expansions of rights in force in the United States have been able to and have shown clearly positive results. These extensions consist, for example, of of an automatic extension, from 50 to 75%, of the duration of compensation when unemployment accelerates or exceeds predetermined thresholds at the federal or state level. But the famous “Canadian model” from which the government wants to draw inspiration for its reform has not shown any noticeable effect on recruitment difficulties, macroeconomic stabilization or full employment. It must be said that this system is as unreadable as it is unpredictable: the different conditions of eligibility, duration of rights and level of benefits, determined according to the unemployment rate in each state, resulting in almost 3,350 different cases!

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It should also be noted that the rules in France are already strongly countercyclical. On the one hand, the contributions paid are independent of the economic situation – and therefore naturally countercyclical. On the other hand, the quotas turn out to be all the lower as prices and remuneration rise rapidly. The 2019 reform reinforced the latter effect, as older wages are now taken into account, which in most cases reduces the benefit. In a context of rising prices, these rules even end up bringing unemployment benefits well below the statutory replacement rate of 57%.

With Unédic’s inflation forecast (5.4% in 2022, then 4.0% in 2023), the replacement rate is only 52% on average in the first year of unemployment, i.e. 5 points less. And 49%, or 8 point difference, if ever the rights last longer. Countercyclicality is therefore very marked at the individual level and exaggerated when inflation accelerates, as the goal of maintaining consumption cannot then be achieved.

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Ambiguous theoretical foundations, complexity, low and random gains therefore explain why very few countries practice a temporary graduation of unemployment insurance rights. Apart from the undeniable budget savings this could generate, however, one can doubt its effect on the incentives to return to work. Faced with 300 pages of regulations and as many application circulars, most policyholders are already unable to anticipate the level and duration of entitlements in the event of job loss. Countercyclicality will therefore necessarily add complexity and unpredictability to these rules.

Essentially, the only successive incentives for entitlements that are harder to acquire, lower and shorter (but not cheaper for the insured) would result from the increased financial constraint burdening the unemployed, which would inevitably reduce unemployment. But there is no evidence that this would reduce recruitment difficulties or benefit employment and growth.

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*Bruno Coquet is a doctor in economics, expert in public policies associated with OFCE.