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Employment and Social Protection

Updated by Sven Nef on 06.04.2017

Employment and social protection are indispensable  avenues to socio-economic development, poverty reduction and human dignity. Better and more productive jobs raise incomes and help finance social protection, which not only contributes to stabler and better household incomes but also improves the productivity and employability of the population. As it has been found that actions in these two areas are mutually reinforcing, the linkages between social protection and employment have  been placed in the centre stage in current development policy debates.

Why do we need social protection in a working world?

Men and women in modern societies depend mainly on income from work in order to have access to the goods and services produced and provided by others. While employment is the main and usual source of income, and decent work the best form of income security, the global deficit in quality jobs means that enough well-remunerated work is not always available for everyone. A temporary or permanent drop in income may result from a range of contingencies, of which unemployment is just one. Contingencies include, for example, unemployment, sickness, disability or old age, and they can affect individuals throughout their lifecycle. They may not only alter the ability to work and earn but also create a burden of high levels of out-of-pocket expenditure, such as health care costs in the case of sickness. The basic aim of social protection is to protect people from uncertainty and poverty that may result from the vagaries of the market and the contingencies and changing circumstances of life by compensating for temporary or permanent shortfalls in income and redistributing risk. Social protection is redistributive in nature, transferring income from the more to the less fortunate; it can be argued that it is also redistributive across time. In addition, social protection ensures access to health care (social health protection) and may facilitate access to social services, such as education, which are crucial for creating an employable and productive workforce and guaranteeing human development in the longer-run. In sum, together social protection and employment may alleviate the problems of short- and long-term poverty.

Is social protection only a right of formal workers?

Different mechanisms, such as informal family and community arrangements, have always existed to shield people against the negative effects of contingencies. Yet, they provide a limited level of protection and are based on altruism and reciprocity, which means that their outcomes are not necessarily the most favourable for the poorest. In a modern, industrialised and urbanised world, institutionalised forms of protection, based on large risk pools, are essential. Building on the experience of workers’ clubs, founded at the time of the industrial revolution in Europe, mandatory contributory social insurance, as it is now understood, was first established in Germany at the end of the nineteenth century, when local governments set up sickness funds to which workers, and their employers, were required to pay contributions. Reflecting this  history, social insurance benefits usually depend on earnings or contribution history. For instance, the calculation of pensions is often done based on the number of years worked or contributions paid. The resulting benefits may not, however, meet the real needs of recipients, for example in the case of short or interrupted employment careers in the formal economy or low levels of earnings. Also, workers in the informal economy are usually excluded from contributory social security. For this reason, in many, if not most countries, social insurance schemes are complemented by non-contributory social  assistance schemes (also known as e.g. cash transfers or minimum income support). These schemes, in which the qualification for benefits is established on the basis of, for example, citizenship, residence or need, rather than a history of contribution payments, make sure that the right to social security is realised regardless of employment status or history.

Employment, economic performance and social protection: complex linkages

While social protection can be financed through various means (general government revenue, employers' and workers' and possibly State's) contributions, employer provision), and may be complemented by workers' private savings or insurance, social protection financing depends ultimately, either directly or indirectly, on workers' ability to work and earn an income so as to pay taxes to the government or social security contributions. Therefore, economic growth and the impact of that growth on the quantity and quality of jobs are crucial for the sustainability of social protection. These linkages are complex: Employment contributes to the tax base which finances social protection and other policies. Both social protection and employment increase people's purchasing power, which is necessary for a dynamic and growing domestic market. This, on the other hand, is necessary for further and better employment.

While these positive links have been found to exist, the discussion about social protection systems and their perceived effects on economic performance has been intense. These debates concern incentives which interact in complex ways and revolve around the impact of social provisioning on labour supply (i.e. hours worked) and the incentive to engage in work (i.e. to work or not to work). For instance, high or progressive taxation, the revenue from which finances social protection, has been claimed to create incentives to work less hours. Or high levels of pension benefits may cause workers to want to retire early, which consequently burdens the social security system and government budget. Also, as social expenditure is financed by taxes and contributions, which influences labour costs and the tax burden on employers and employees, it has been perceived as a factor lowering competiveness and employment. These unwanted consequences can be solved through a close coordination of social and employment policy. Also, in recent years, much effort has been put into designing systems of social protection which explicitly complement programmes of employment creation. A well-known example of this kind is public works and  employment guarantee schemes, such as the MGNREGS in India.

Increasingly, it is becoming well-understood that social protection contributes to the dynamism of the whole economy, as well as the number and quality of jobs. Social protection strengthens the multiple channels through which this happens: distribution, protection, production and reproduction. Therefore, it is actually an investment that enhances the productive potential of individuals, or "unlocks human potential", for instance by directly providing employment to those who lack it, improving employability and encouraging entrepreneurship. It is argued that, historically, because poor people seek to reduce their vulnerability to risk, they have chosen to engage in economic activity that is of low productivity and low profitability. Investing in a risky activity can cause a significant economic loss in case the risk materialises, and may well push a family into deep poverty in the absence of an appropriate social protection mechanism. Reducing risks and protecting families against possible losses through social protection measures can thus stimulate innovation and growth. Social  protection may also facilitate the inclusion of the poor in the labour market , as it lessens the risk of, for instance, undertaking an entrepreneurial activity, investing in a business or studying a new degree.  Finally, well-designed social protection policies may promote equal opportunities and boost female employment as they allow people to balance family responsibilities with work and other social roles. For instance, child care or long-term nursing services make it easier for both fathers and mothers  to work. Yet, it is  clear that social measures for boosting employability cannot be effective  without employment opportunities with decent remuneration and working conditions.

 


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