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The Labor and Welfare Committee of the Knesset has approved a proposal that sharply reduces the amount and duration of unemployment insurance for workers under 28. According to the new rules, the amount will be reduced by 25 percent; the duration will be reduced by a third from 100 to 67 days; and after only two weeks young workers will be obligated to take work even if it is not in their profession. (ie, an electronics engineer obligated to pump gas at a filling station.)
As background, it is worth knowing that Israel's unemployment insurance system is already one of the sparest in the developed world. In particular, the 100-day duration of benefits currently granted is one of the shortest among developed countries.
In order to analyze the wisdom of this cut, we need to understand the underlying justification for a government unemployment insurance program to begin with.
The reason for unemployment insurance is simple: losing your job is like any other random adverse event, such as a fire or an auto accident, and most rational individuals seek to insure themselves against these events, preferring to pay a fixed monthly premium for protection against huge losses in case of disaster.
But we obtain fire and auto insurance from private companies. Why then is unemployment insurance nationalized all over the world? The main answer is something called "adverse selection," which means that insured people know their risks better than the insurance companies do. When obtaining insurance is an option, those who secretly know that their risk is high find the insurance a bargain, while those who know their risk is low find it a bad deal. So even if the rate is such that it is fair and beneficial for the population as a whole, say 3% of the salary, there will be a small number of people who will decline.
But the fair rate for those people who choose to buy in, even if they are the majority, will be somewhat higher, since they are on average more likely to lose their jobs. This means that the rate will have to be higher than for the population as a whole, perhaps 4%. When the rates go up again, even more people will choose to drop out. In the end, there may be no rate that makes voluntary insurance profitable for the insurer - everyone loses out. But if we compel everyone to buy insurance at the average rate, then almost everyone benefits, and even those few who would have preferred to buy out don't lose much. After all, they do get a valuable insurance service, they just pay a little more than they would have chosen.
To make a long story short, that means that a good system is one that approximates the insurance coverage that people would buy for themselves. Since people do buy private insurance in zillions of other areas, we have a pretty good idea of what that is.
First of all, we know that people love insurance. For example, almost everyone gets comprehensive car insurance for a newish car, even though it's not mandatory. People also like full insurance. In theory, many people might want to insure themselves only against catastrophe. For instance, someone with a luxury car might theoretically want to save money on insurance and get a policy that would enable them to buy a '94 Corolla (what I drive) if their 2007 Lexus was totalled or stolen. But that almost never happens.
What is "full insurance" against unemployment? Based on the car example, we would want it to provide pretty close to your whole salary for as long as it typically takes to find a comparable job. Actually about 70% of regular salary is close to full recompense, because a lot of your salary actually subsidizes your work. (Clothing, transportation, etc.) Most people on Israel's sliding scale get less than that, but the benefit levels for older workers are not unreasonable.
What about the 100-day maximum duration, or the 60 days they give you to find a new job in your profession? That just seems way too short. For comparison's sake, the US average for total duration is around six months (each state is different), and in Europe even longer. (Probably far too long.)
In today's specialized economy, it's pretty unusual to find a new job that suits your ability in only two months. In my opinion, that's like insuring a 2007 Lexus for the value of a 1994 Corolla.
Now we can get to the special restrictions for younger workers.
In a market system, would younger workers choose to buy less insurance, or for a shorter period, than older ones? Perhaps they would, and there are other countries that have shorter benefits for young workers. But I don't think they would buy less than what is currently offered older workers. I would guess that young workers actually need insurance more, since they haven't had time to accumulate savings, which are themselves a kind of "self-insurance."
Above all, I wonder if any worker would pay a penny for insurance that made him take any job offered him after only two weeks. That's not even enough time to show up for an interview, much less to actually land a decent new job.
It's ironic that pressure from the Israeli Treasury is behind this initiative. The Treasury's supposed guiding principles are respect for markets and encouraging growth. The proposal recently approved deviates sharply from anything markets would invent, and will compel trained workers to waste their talents. I hope that this proposal will be replaced by a more humane and truly market-oriented version.
The writer is research director at the Business Ethics Center of Jerusalem (www.besr.org), an independent institute in the Jerusalem College of Technology.
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