Abstract:
Theoretically, unemployment insurance (UI) contributions and benefits act
in tandem to serve as counterbalances to the direction of the economy.
Government transfers to households to cover costs related to unemployment
are usually the principal source of automatic fluctuation in government
expenditure. This article investigates the interaction between such transfers and
economic performance with the South African economy as a case study. The
main finding is that UI contributions destabilised economic activity most of the
time, but that the stabilising effect resulting from UI benefits was sufficient to offset
these destabilising effects so that the UI balance acted as an automatic fiscal
stabiliser over the period 1970 to 2000. The article points out that although UI
benefits demonstrate countercyclical properties, the same could not be said with
confidence about other components of general government expenditure in South
Africa. Furthermore, the stabilising effect of the South African Unemployment
Insurance Fund can be expected to be relatively insignificant due to its small
share in the total public finances. However, the possible psychological benefits
of the UI system and the evidence provided in this paper emphasise the potential
of the Unemployment Insurance Fund as an effective automatic fiscal stabiliser
also in South Africa.
