The fiscal impact of unemployment insurance programmes as automatic stabilisers : the South African experience

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.