The Effect of Unemployment Benefits and Other Labour Market Institutions on Unemployment

Abstract

Unemployment is a threatening issue as it causes adverse effects on the economy especially because it is associated with poverty widespread thus contributing to some detrimental effects on individuals. One of the government’s efforts to prevent the unfavourable effects of unemployment is through unemployment benefits in the labour market institutions that replace a part of income before termination, which also can boost employment through active labour market programs (ALMPs) that aim to reintegrate the unemployed to the labour. Meanwhile, labour market institutions facilitate the arrangement of quality employment with decent wages and working conditions. However, unemployment rate trends are still diverse in countries that have implemented the unemployment benefits system. Likewise, the literature depicts that all those labour market institutions may affect unemployment growth where in some findings they increase unemployment and vice versa in other results. Outside those institutions, unemployment is also affected by some non-institutional factors in which the literature finds various conclusions regarding unemployment as the cases in the labour market institution. This study becomes more indispensable because the unemployment benefits system is moderately new in Indonesia, thus, understanding the impact of the scheme in other countries is necessary, primarily in those with similar socio-economic conditions. Hence, this study's objectives are to analyse the effects of unemployment benefits and other labour market institutions on unemployment and formulate policy implications for more optimal implementation of unemployment benefits and other labour market institutions in Indonesia. To answer these objectives, the data was analysed through descriptive and quantitative analysis. Descriptive analysis is presented in the form of tables and graphs. As for quantitative analysis, the study uses secondary datasets from the cross-section of thirty-two countries (middle and high-income countries) in 2018 that have implemented unemployment benefits before 2010, estimated with multiple linear regression analysis with ordinary least squares (OLS). The findings indicate that 3 out of the 4 variables in labour market institutions that are estimated to affect unemployment have a significant effect where high unemployment benefits, the existence of collective bargaining, and less stringent employment protection will raise unemployment. Meanwhile, the non-institutional factors that increase unemployment significantly from the lowest effect to the highest are increased corporate taxes, a high inflation rate, population growth and appreciated domestic currency. Besides that, the effect of these variables on the unemployment rate is more prominent than that of labour market institutions. Thus, as lessons learned for Indonesia, to lessen unemployment employment protection legislation and the exchange rate should be handled first as they have more effect on unemployment respectively in labour market institutions and non-institutional factors.