Why insuring against unemployment is good for a future “Covid-19”

Governments and other actors in countries that do not have comprehensive insurance protection schemes against unemployment should consider having one if they are to safeguard workers and their countries' economic stability amidst future unforeseen crises, experts have said.

This is in light of the previous global crisis, Covid-19, that struck the globe, triggering a tremor in the job market.

Ideally, unemployment insurance refers to a short-term monthly stipend for employees who lose jobs for reasons not of their making such as redundancies and crises such as pandemics.

In their report, "Effect of Covid-19 Pandemic on Employment Status and Income," the economic experts from the Kenya Institute for Public Policy Research and Analysis (KIPPRA) note that the lack of a safety net during the Covid disruption made many workers vulnerable to job losses.

This without adequate support, a situation that exacerbated poverty and inequality.

In Kenya specifically, the report says Covid-19 reduced the likelihood of being employed due to business closures, economic slowdowns and sector-specific vulnerabilities.

"Time-related underemployment rose from 4.0 per cent in 2019 (pre-Covid period) to 5.7 per cent in 2020 (during the Covid-19 period), and 5.3 per cent in 2022 (post-Covid-19 period)," reads the report.

"Income losses were substantial, with public and private sector workers experiencing a 10-19 per cent decline, while the self-employed experienced income reductions of up to 22 per cent."

The report adds that sectors such as trade, transport, education, tourism and hospitality were particularly affected.

"Although there has been some recovery, the unemployment rate in 2022 remains higher than pre-pandemic levels, showing the persistent effects of Covid-19 on the labour market."

KIPPRA therefore emphasises that the suggestion among many others, to introduce unemployment insurance, would provide a critical cushion for workers during future economic shocks, helping to stabilise household incomes and maintain consumer spending.

Kenya's unemployment insurance scheme

In 2022, Kenya proposed a parliamentary bill to introduce an unemployment insurance system. However, the Bill continues to gather dust on the parliament shelves to date.

Notably, the debate on the scheme was first ignited by the Kenya Association of Manufacturers (KAM) and consultancy firm KPMG in September 2020 in the wake of Covid-19-induced shocks on earnings that prompted firms to resort to job cuts, reduced pay and unpaid leave to survive.

The 2022 proposed legislation sought to institute an Unemployment Insurance Fund, with contributions expected from both employers and employees.

Additionally, the bill outlines the establishment of the Unemployment Insurance Authority, tasked with supervising the fund's administration to ensure its effectiveness.

Since its introduction however, the proposal has faced a substantial challenge concerning its funding model, with the source of contention lying in the proposed approach, which entails deducting a percentage of employees' salaries to be matched by employers to fund the scheme.

The proposal raised concerns among employers and employees, with the Kenya Federation of Employers (FKE) in 2023 citing that company earnings and pay slips were already stretched by numerous taxes and levies.

This was in reference to the hit from the new levy, Affordable Housing, at the rate of 1.5 per cent for both the employer and the employee from July 2023.

The employers body further noted that although in principle employers support the formation of the Unemployment Insurance Fund, it cannot be financed through more taxes or levies imposed on both workers and employers.

"Any proposals must also consider the current national realities. FKE strongly proposes that the idea be subjected to a wide and meaningful social dialogue for purposes of building consensus on the best structure and financing model to be adopted," FKE said.

Kippra's analysis in early 2024 also revealed a significant gap in the proposed scheme.

It highlighted that the current unemployment insurance bill, based on data from the Kenya Economic Report (KER), aims to provide protection for 15.7 per cent of the wage employees who may lose their jobs.

"This approach highlights a significant inclusivity gap. About 83.4 per cent of the workforce operates within the informal sector and would remain without this protection," Kippra said.

"This underscores the urgent need for a more inclusive unemployment insurance system that prioritizes the well-being of all workers, regardless of their formal or informal employment status."

Solution

To address the questions surrounding the funding of the proposed scheme, and to alleviate the fears of the immediate impact of the deductions on paychecks, Kippra reiterates that the government should initiate further discussions among various stakeholders, including employers, labour unions and other stakeholders.

"Collaboratively, they could develop a fair and lasting method for funding the insurance programme, potentially by utilizing funds from existing social security contributions and seeking government budget support," the research firm said.

It adds that to better address the needs of informal sector workers, Kenya could consider the establishment of Unemployment Insurance Savings Accounts (UISAs).

This comprehensive approach would involve contributions from both formal and informal sectors, creating a robust safety net for all workers during periods of unemployment.

Apart from insurance, KIPPRA says in order to address the long-term impacts of unforeseen crises on the job market, the government should prioritize skills development in resilient industries.

These include renewable energy, agribusiness and IT.

It also says the government should enhance support for small and medium enterprises (SMEs) with better access to finance and business services and expand social protection programmes, including public works initiatives.

Further, prioritizing the deepening of the ICT sector by ensuring robust and resilient digital infrastructure is essential as it enables rapid adaptation in the face of a similar shock, it adds in part.

"This can be achieved through expanding high-speed internet access to underserved areas to bridge the digital divide, enhancing network connectivity, and implementing comprehensive training programmes to enhance resilience and ICT adaptability across all sectors."