Over the last few decades, Pakistan’s economy has seen an unending cycle of boom and bust. Among other consequences, this cyclic trend has caused frequent episodes of lay-offs and redundancies in formal employment sectors, and outright unemployment in the informal sector. In addition to the macroeconomic fallout on the country’s GDP, frequent layoffs and unemployment further contract economic growth as people lose jobs and purchasing power that supports the manufacturing, production, and services industries. Many working in the formal sector are always at risk of falling into poverty as soon as they are laid off.
In the last few years, Pakistan’s labour market and recent crises such as COVID-19, successive floods, and macro adjustments as part of four IMF programmes in the last six years have left millions of households vulnerable. Labour force versus employment indicators show that the economy has not fully recovered from these shocks yet. If Pakistan had an unemployment insurance programme, even if not universal but voluntary and contributory, millions of people would not have abruptly fallen into poverty, as they would have had some considerable financial resilience.
But is the Pakistani economy ripe for unemployment insurance programmes? The answer is not an outright yes or no. Pakistan will have to learn from other countries with comparable economies, which have taken steps towards helping their citizens maintain some financial resilience.
For instance, Morocco has had an unemployment insurance programme since 2014. Although it covers only a limited section of workers in the formal sector, who meet a strict contributory requirement, the programme provides fiscal support capped at approximately 70% of the average salary for up to six months, in case of involuntary job loss for formal sector workers meeting contribution criteria of 780 days in three years, or at least 260 days in 12 months. The country is gradually moving to expand this programme.
A dedicated new entity dealing exclusively with unemployment insurance, with a close policy and oversight role from the Ministry of Finance, would be best suited to enter this area, as experience from other countries informs
Similarly, Indonesia is one of the latest entrants to the unemployment insurance programmes among middle-income countries. Since 2022, Indonesia has had a programme, albeit limited to formal sector workers, where participants receive approximately 60% of their average incomes for up to six months, provided they have been laid off involuntarily and have contributed to the insurance programme for at least 12 months in two years. The programme aims to help participants maintain a decent living standard while they attempt to re-enter employment.
Several other countries, including Sri Lanka and Bangladesh in our neighbourhood, are planning to pilot or initiate income insurance programmes. The lesson for economies with large informal sector workforces so far is to start with limited contributory unemployment insurance programmes coupled with pre-arranged shock-responsive cash transfer mechanisms.
In this context, it will certainly be impossible to start a universal unemployment insurance programme in Pakistan when as much as 70% of the labour force is in the informal sector. Yet, Pakistan should plan to launch an income/unemployment insurance programme. As global experience informs, it must start with a small programme offering capped benefits at 50% of net monthly income and for a limited duration of six months, where both the workers and employers contribute, linked to payroll taxes—in the formal sector industries, such as textiles, hospitality, telecoms, manufacturing, and other sizeable industries.
Existing entities such as the Employees’ Old-age Benefits Institution or provincial employees’ social security institutions may not be well placed to run an unemployment insurance programme; they may, however, serve as data and compliance partners rather than sole operators.
A dedicated new entity dealing exclusively with unemployment insurance, with a close policy and oversight role from the Ministry of Finance, would be best suited to enter this area, as experience from other countries informs. Certainly, this body will have to interface horizontally with government organisations, such as NADRA, SECP, FBR, and provincial labour departments, to ensure compliance and manage operational risks.
A phased unemployment insurance programme is set to benefit Pakistan at the micro and macro levels, as it will not only sustain household consumption by preventing cutbacks on food, health, and education in the aftermath of job loss but will also help preserve human capital and the formalisation of the economy, thereby broadening the tax base.
Not overnight, but if Pakistan moves ahead in this direction with a programme based on the learning from other countries, which are very well documented by the World Bank and ILO, in the long run, an unemployment insurance programme will help Pakistan’s economic growth become more stable and resilient.