According to Cambridge Dictionary, unemployment is the number of people who do not have a job that provides money.

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The incidence of unemployment benefit programs is strongly related to the level of development (Vodopivec). But prompted by increased exposure to foreign markets and fearing future global crises, more and more developing countries (including lower middle-income countries such as the Philippines and Sri Lanka) are contemplating to introduce UI. Such considerations are bolstered by the potential efficiency and distributive advantages of reforming social protection programs for workers in developing countries. Namely, in many developing countries the balance between job and worker protection is tilted in the favor of the former: virtually all have – typically exceedingly restrictive – severance pay programs, and very few have UI programs (Holzmann). It is often argued that removing excessive job protection would not only boost the creation of more and better jobs, but also improve job prospects for vulnerable groups (Heckman and Pagés). And it goes without saying that reducing job protection is an extremely sensitive task that can often be implemented only if accompanied by introducing or strengthening income protection programs for workers – UI being one of them.

While providing an excellent opportunity to bolster both worker protection and economic efficiency, the introduction of UI programs in developing countries poses major challenges. When is a country ready to introduce an UI program? Which factors influence whether UI programs operate successfully and how can the programs’ design be adjusted with respect to coverage, eligibility rules, the generosity of benefit, structure of incentives, and monitoring? In particular, how to account for factors such as a lack of administrative capacity, a large informal sector, and the profoundly different nature of unemployment in developing countries?

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To address these questions, the paper analyzes key labor market and institutional features of developing countries that affect the functioning of UI: a large informal sector, weak administrative capacity, and large political risk. It argues that these countries should tailor an OECD-style UI program to their circumstances, among others by relying on self-insurance (via unemployment insurance savings accounts), complemented by solidarity funding, as a key source of financing; by simplifying monitoring of job-search behavior and labor market status; and by piggybacking on existing networks to administer benefits.

The rest of the paper is organized as follows. Section 2 addresses a difficult question of whether and when developing countries should introduce UI. Section 3 provides stylized facts about the UI program, focusing on its income protection as well as efficiency properties, thereby outlining possible opportunities to strengthen worker protection of countries contemplating UI introduction and establishing limits of such endeavor. Section 4 discusses how to adjust program design to account for developing countries’ specific circumstances, and section 5 concludes.