Unemployment Insurance in China: Expanding Coverage and Improving Benefits
By Jiwei Qian

Unemployment Insurance in China: Expanding Coverage and Improving Benefits

Jun. 24, 2016  |     |  0 comments


Unemployment insurance has become an important component of the social safety net in urban China, especially given the increased turnover rate in the labor market in the recent processes of economic restructuring. In 2015, the number of enrolees of unemployment insurance reached over 173 million and there were over 4.5 million people who claimed unemployment insurance benefits, compared to 4.2 million in 2014. The total amount of reimbursements of unemployment insurance reached RMB 73.6 billion in 2015, an increase of about 20 percent compared to 2014 (Ministry of Human Resources and Social Security, 2016).


Unemployment insurance was initiated in the 1990s as a response to State Owned Enterprise (SOE) reforms. However, the benefit level is still relatively low. Also, rapid urbanization and changes in economic conditions in urban China imply that the design and management of unemployment insurance may need to be re-evaluated. First, there is an increasingly larger portion of accumulated surpluses for the unemployment insurance fund (over RMB 500 billion by the end of 2015). How to efficiently design and manage unemployment insurance plans should be examined. Second, the importance of SOEs in urban China is changing. In 1994, about 60 percent of the urban labor force worked in SOEs (China Statistical Yearbook, 1997). In 2013, only 9.7 percent worked in SOEs (Ministry of Finance, 2014). The majority of the urban labor forces are now employed in the private and informal sector. How to protect these workers is an important issue that needs to be addressed.


How Unemployment Insurance is Managed


The current unemployment insurance scheme is a social insurance program managed by the Ministry of Human Resources and Social Security. Unlike OECD countries, the benefits of the unemployment insurance scheme are not earnings-related. The scheme offers benefits based on a flat rate set by the local government, usually prefecture level governments (Qian, forthcoming). The scheme is financed in the manner of payroll taxes. Employers contribute 2 percent of their total payroll and employees contribute 1 percent of their wages. A flat rate applies to all benefits set by the local government. Claimants of unemployment insurance benefits must satisfy three conditions. First, contribution to unemployment insurance must exceed a year; second, the worker is involuntarily terminated; and third, the claimant has to register his or her unemployment status. All workers in the urban areas including state-owned, foreign-owned, collectively owned, and privately owned enterprises are required to enrol into the scheme. Workers in rural areas as well as civil servants are not covered.


A beneficiary can claim benefits up to 24 months and the eligibility period to claim benefits depends on the length of contribution to the scheme. In principle, the benefit level of unemployment insurance must be higher than the level of the Minimum Livelihood Guarantee Scheme (“Dibao”) and lower than the local minimum wage level. For example, for the year of 2014, in Shanghai, the benefit per month for the first 12 months was around RMB 1,200 and the benefit was reduced to around RMB 900 in the next 12 months. The minimum wage and “Dibao” line in Shanghai for the year of 2014 were set at RMB 1,820 and RMB 710 per month respectively.


The coverage of unemployment insurance has widened since the 1990s. The number of enrollees has increased from about 80 million in 1997 to 173 million in 2015 (Ministry of Human Resources and Social Security, 2016). In particular, the number of migrant workers covered by unemployment insurance increased from 11 million in 2007 to over 42 million in 2015 (National Bureau of Statistics, 2016). The average benefit of the unemployment insurance has been increased from RMB 3,281 in 2004 to RMB 10,224 in 2014 (Figure 1). The ratio between the benefit level of unemployment insurance and “Dibao” has increased from 1.8 in 2004 to 2.07 in 2014.


Figure 1. Benefit level of Unemployment Insurance and Minimum Livelihood Guarantee Scheme (“Dibao”)

Source: China Human Resources and Social Security Yearbook and China Civil Affairs Statistical Yearbook, various years.


Low Benefit, Large Surpluses and Under Coverage for Urban Private and Informal Sector


While many achievements have been made, there are still some serious concerns for unemployment insurance in China. One concern of current unemployment insurance plans is the huge amount of the surpluses. The surplus was RMB 63 billion and accumulative surpluses reached RMB 508 billion in 2015, roughly seven times the figure for expenditure under the unemployment insurance fund in 2015. The surplus has been increasing very rapidly (Figure 2). The accumulated surpluses amounted to about RMB 30 billion in 2003. The annual growth rate of the accumulated surplus between 2003 and 2015 is about 26 percent.


How to efficiently manage and use this fund is a big issue now. Given the huge amount of surpluses and economic slowdown, in 2016 several local unemployment insurance plans decreased the contribution rate for both employers and employees. For example, Shanghai has reduced the contribution from employees by 0.5 percent of payroll since March 2016. In May 2016, Beijing municipal government has announced that the contribution from employees will be reduced by 0.2 percent of payroll since June 2016.


Figure 2. Accumulated Surpluses of Unemployment Insurance (RMB Billion)

Source: China Human Resources and Social Security Yearbook, various years.


Another concern is about the benefit level. The benefit level of unemployment insurance is not high enough. The average nominal wage rate in China increased from RMB 6,400 in 1997 to about RMB 56,300 in 2014. The annual growth rate of nominal wages was about 14 percent; a rate which unemployment insurance benefits cannot match. Also, China offers a flat rate for its unemployment insurance benefits while the benefit level is usually earnings-related in many other countries. The flat rate of benefits in China implies a low replacement rate for middle- and high-income people. For instance, the ratio of unemployment insurance benefits to average wage per person has decreased from 25 percent in 2001 to 18 percent in 2014. This rate is relatively low compared to other countries. For example, in the US, the benefit level is set at about 50 percent of the preceding wage level. In Japan, the benefit level varies between 60 percent and 80 percent of the preceding wage level. In South Africa, the benefit level is set at between 30 percent and 58 percent of previous earnings. In 18 European countries, the average ratio of unemployment insurance benefit and preceding wage level is about 60 percent (Qian, forthcoming).


The last — but not the least — concern is that in the urban private and informal sector, access to unemployment insurance is limited. Informal sector workers include those who are self-employed, employed in small private enterprises, and those who do not have formal labor contracts. The informal sector has been estimated to account for about half of the urban labor force in recent years (Jin, Qian and Wen, 2016). However, many workers in the informal sector do not enroll with unemployment insurance. For example, there were about only 43 percent of urban labor force enrolled with unemployment insurance in 2015 (Ministry of Human Resources and Social Security, 2016). Many migrant workers are also employed in the informal sector. While there were over 40 million migrant workers enrolled with unemployment insurance in 2015, there were still about 85 percent of migrant workers who did not enroll with unemployment insurance (National Bureau of Statistics, 2016). In our recent research about social protection for the urban informal sector, we found that many informal sector workers may not contribute to unemployment insurance with the expansion of the social assistance program, which also covers low income and unemployed urban residents (Qian and Mok, 2016). By using a nationwide survey, other researchers have recently found that the informal sector’s enrollment rate is significantly lower than that of the formal sector in urban China (Jin, Qian and Wen, 2016).


There are two reasons for this under-coverage in unemployment insurance in the urban informal and private sector. First, the “hukou” (household registration system) still is an institutional constraint for people to access unemployment insurance. While the local household registration status is not necessary for enrolling into the scheme, “hukou” is an important condition for claiming the benefit. Many workers without local “hukou” have the incentive to opt out of the insurance. For example, it was reported in Beijing that unemployment insurance benefits can only be claimed from the place the beneficiary’s “hukou” is located at. For those workers whose “hukou” is not registered in Beijing, it is very difficult to claim benefits (“Unemployment insurance balance”, 2013). Second, many informal sector workers may opt out of unemployment insurance given the low benefit level. In principal, the unemployment rate is a payroll tax and many high-income informal sector workers may not want to register with unemployment insurance. In our research, we found that high-income informal sector workers and self-employed workers were less likely to enrol with unemployment insurance (Jin, Qian and Wen, 2016).


In the next step of the reform, increasing benefits will be critical for unemployment insurance. First, with a higher benefit level, the large amount of fund surpluses will be spent to some degree with an improved financial protection for the urban unemployed. Second, more informal sector workers may enrol with unemployment insurance if there is a better benefits package linked with it.


References


Jin, J., Qian, J. and Wen, Z. (2016). Social protection for informal sector workers in urban China: Institutional constraints and self-selection behaviors. Working paper.


Ministry of Finance. (2014). SOE’s Budgetary Condition in 2013. Retrieved from http://www.mof.gov.cn/preview/qiyesi/zhengwuxinxi/gongzuodongtai/201407/t20140728_1118640.html


Ministry of Human Resources and Social Security. (2016). Statistical Communiqué on Human Resources and Social Security in China.


National Bureau of Statistics. (2016). Monitoring Report on Migrant Workers 2015. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201604/t20160428_1349713.html


Qian, J. and Mok, K. H. (2016). Dual decentralization and fragmented authoritarianism in governance: Crowding out among social programmes in China. Public Administration and Development.


Qian, J. (forthcoming). Social programs for urban working class in China: Unemployment insurance and minimum livelihood guarantee scheme. In Zheng, Y., Zhao, L. and Tong, S. (eds), China's Great Urbanization. London: Routledge.


Shiye baoxian jieyu 3 qianyi [Unemployment insurance balance worth 3 hundred billion]. (2013, December 27). Sina . Retrieved from http://news.sina.com.cn/newobserv/sybx/

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