copy the linklink copied!7. Left on your own? Social protection when labour markets are in flux

7.2.1. Statutory access

Statutory access varies by employment type and by SP branch. Temporary and part-time workers are in principle covered in the same way as permanent full-time employees in most countries and for most risks, as long as they satisfy minimum employment periods (Figure 7.1), earnings thresholds and other eligibility requirements, such as low family income. Some countries operate exemptions for specific non-standard contractual arrangements, such as casual employment, seasonal work or hybrid categories and some of these are noted below (see Chapter 4 for an overview of different non-standard forms of work). By contrast, statutory access to SP for self-employed workers is very frequently restricted in contributory SP systems (Figure 7.2). Indeed, SP provisions that were mostly set up with a steady employer-employee relationship in mind do not easily accommodate the self-employed:

1. 1. Double contribution issue: Who should be liable for employer contributions in the absence of an employer? In practice, total formal contribution burdens are frequently lower for the self-employed than for dependent employees (Section 7.3.5). Requiring the self-employed to pay the equivalent of both employer and employee contributions brings formal burdens in line with dependent employees. But effective burdens may be higher for the self-employed, especially those with lower earnings, because minimum wages typically do not apply to them or because they may lack the bargaining power to shift any contribution-related costs onto their clients by charging higher prices.3

2. 2. Fluctuating earnings and avoidance: The self-employed, along with some atypical employees such as on-call workers or those with zero-hours contracts, are often paid at irregular intervals, either because of time lags between work and payment, or because demand for their services is erratic (ISSA, 2012[17]). This complicates the calculation of contributions (as well as the assessment of entitlements). In particular, self-employed workers may be able to avoid or lower contributions by optimising their contribution base, e.g. through timing their work or earnings, see Section 7.3.3.

3. 3. Moral hazard: Demand or price fluctuations affecting self-employed workers are difficult to distinguish from voluntary idleness and this complicates the provision of unemployment insurance in particular. For instance, there is no employer to confirm a layoff and efforts to re-establish a business operation are more difficult to monitor than the search for dependent employment.4 Where self-employed individuals can claim unemployment benefits, they typically need to meet relatively stringent requirements to demonstrate that their business is no longer operational.5

When self-employed workers do have access to social protection, it is frequently on a voluntary basis. This partly reflects specific risk patterns and fairness considerations, e.g. as entrepreneurs seek to make a profit in return for taking on business risks, may be less risk averse, and therefore may not require insurance to the same extent as employees. However, the same rationale for opt-outs could be invoked more broadly, e.g. for employees who face lower risks or are less risk averse than others. Ultimately, strong reliance on selective or voluntary SP membership widens the scope for gaming social risk-pooling systems, resulting in insurance becoming inefficiently narrow and unaffordable for those who need it. In particular, low-earning individuals may underinsure even when social insurance provisions offer attractive cost-to-risk ratios.6 Country experiences with voluntary schemes illustrate that selectivity typically leads to low coverage or a need for significant subsidies to keep risk sharing financially viable (Box 7.1).

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Figure 7.1. Employment requirements for unemployment benefits range from 3 to 24 months

Number of months, 2018

Note: (1) And at least 30 days of employment in the 12 months prior to the start of the unemployment spell; (2) Or 200 days in last two years; (3) Earnings condition also; (4) Assuming 40 hour work week; (5) 6 months in any one of the past two years plus minimum-earnings requirement. (6) Must also have been a member of the insurance fund for at least 12 months; (7) Or 26 weekly contributions in each of the previous two years. Must also have made 104 weekly contributions in whole career; (8) 28 weeks for repeated employment; (9) Must have 12 months of contributions since a previous unemployment spell; (10) Must also have been continuously in work for last 120 days.

Source: OECD tax-benefit model and policy database, www.oecd.org/social/benefits-and-wages.htm.

 StatLink https://doi.org/10.1787/888933967224

7.2.2. How much protection is available in practice?

Comparisons of legal eligibility rules give an incomplete, and possibly misleading, picture of the support that is available in practice for different labour market groups. The limitations of “systems focussed” comparisons based on statutory access rules are twofold. First, beyond availability, the content and generosity of support will generally differ across types of workers and across countries. Second, statutory access is not the same as actual access:

• Non-standard workers may have characteristics that make it difficult for them to meet entitlement criteria, even when they are the same as for standard workers.

• The implementation of SP rules may differ between groups in practice and the implicit cost of claiming benefits may dissuade eligible people from applying.

• Contributions to some SP elements may be voluntary for some categories of workers, who may opt out of or seek to bypass applicable rules if they perceive future benefits as small relative to the immediate individual cost.

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Figure 7.2. Statutory access for independent workers is often limited

Statutory access to social protection for the self-employed compared to dependent employees (“employees”) by social protection branch and incidence of self-employment, 2017

Notes: Gaps between standard dependent employees (full-time open-ended contract) and self-employed workers. “Partial access” to benefits can arise if a) eligibility conditions, benefit amounts or receipt durations are less advantageous for self-employed workers; b) insurance-based and non-contributory benefits co-exist and individuals can access only the latter (e.g. only basic pension and not earnings-related); or c) the self-employed can choose to declare a lower contribution base while dependent employees pay contributions on full earnings (possibly subject to a ceiling). “No access”: compulsory for dependent employees but self-employed are excluded. * Data on self-employment incidence is missing/incomplete for Estonia, Iceland and Luxembourg and refers to 2015 for the Slovak Republic and to 2014 for Latvia.

Maternity and family benefits: “no access”: access to neither maternity benefits nor family allowances, “voluntary/partial access”: voluntary or partial access to both schemes, or full access to one, but no access to the other. “Not applicable”: schemes do not exist.

Sickness, invalidity and work injury benefits: “no access”: access to none of these benefits, “larger gaps”: less than full access to all of the benefits and no access to at least one; “some gaps”: no access to one benefit and at least partial access to the others, or voluntary or partial access to all three benefits; “similar to employee”: at least partial or voluntary access to all benefits, and at least full access to one.

Old-age pensions: “voluntary at low earnings”: coverage is generally similar to employees but opt-out is possible if earnings are below a certain threshold. “Similar to employees”: mandatory coverage as for employees but contributions may still differ.

Source: Pensions: OECD (2017[26]), MISSOC (2018[27]), Social Security Administration (2018[28]). Working-age benefits: Australia: Whiteford and Haron (2018[29]), European countries: adapted from Spasova et al. (2017[30]), Canada, Japan, Korea: Information provided by country delegations to the OECD, USA, SSA and ISSA (2012[17]). Share of self-employment: OECD (2018), “Labour Force Statistics: Summary tables” and OECD Employment and Labour Market Statistics (database).

 StatLink https://doi.org/10.1787/888933967243

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Box 7.2. Old-age pensions for workers with careers breaks or non-standard employment

Alleviating risks of old-age poverty can be particularly challenging for workers on non-standard contracts with low contribution levels and patchy contribution records. Pension systems in OECD countries have a number of features and characteristics that are relevant for non-standard employees and for the self-employed.

Contribution breaks and first-tier pensions

Where pension benefits are linked to contributions (and thus earnings), eligibility rules may require minimum contribution periods. Taking account of mandatory and quasi-mandatory schemes, a 10-year out-of-work spell combined with a late career start reduces pension entitlements by 20% on average across OECD countries (Figure 7.3, Panel A). In some countries with basic public pensions (Ireland, New Zealand, United Kingdom), mandatory pensions are not affected at all, while the penalty exceeds 30% in Mexico, Turkey and Chile.

Policy makers have a number of policy tools at hand to loosen the link between contribution histories and pension entitlements. Contribution periods can be credited for some out-of-work spells, such as unemployment or childcare-related leave, and first-tier pensions can be designed to be independent of work histories.

First-tier pensions are either contributory or non-contributory. Minimum pensions and contribution-based basic pensions are only granted to retirees with contributory records and their level may depend on the total contribution period. By contrast, residence-based basic pensions and guaranteed minimum income (social assistance) provisions for retirees are unrelated to contributions. Pension systems in most OECD countries include either a residence-based basic pension, a minimum pension, or a social assistance benefit alongside earnings-related pension provisions. Across the OECD, the level of income provided by non-contributory pensions is about 35% of median disposable income on average (Figure 7.3, Panel C). Access requirements vary considerably across countries with contributory first tier-pensions, however (Figure 7.3, Panel B). When minimum contribution requirements are relatively stringent, meeting them can be challenging for non-standard workers.

Old-age pensions for the self-employed

Figure 7.2 (right bottom panel) shows the extent to which pension scheme membership provisions differ between standard employees and the self-employed (see main text in Section 7.2.1). In addition, total old-age pension contribution rates are frequently lower for the self-employed than for employees, e.g. in Austria (18.5% versus 22.8%), Ireland (self-employed pay the employee part of 4% only), Norway (11.4% versus 22.3%) and, as from 2019, in Portugal (a reduction of roughly one fourth for self-employed). Some countries provide for lower contributions or exemptions for certain categories of self-employed workers, e.g. for some sectors or types of activity (Germany, Italy), during an initial period of business operation (Austria, Finland, France, Norway or Poland), for those combining independent and dependent employment (Belgium, Greece, Slovenia) or below an earnings threshold (Italy, Ireland, Luxembourg, the Slovak Republic and the United Kingdom). As a result, some self-employed might expect lower pension replacement rates than dependent workers with similar earnings, and they face higher risk of relying only on non-contributory benefits.

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Figure 7.3. Pension provisions for workers with unstable careers vary widely across countries

Note: Panel A: Parentheses show the additional years required for a full pension in countries where later retirement allows people with incomplete careers to access a full pension (i.e. without actuarial penalty). Panel B: Values for “Full” pension are not shown if they are the same as for the “Lowest” pension. In the Slovak Republic, there is no upper limit for the minimum pensions as it increases with each additional contribution year. Panel C: Non-contributory pensions include social assistance and residence-based basic pensions.

Sources and definitions: OECD (2017[15]; 2018[31]; 2017[26]).

 StatLink https://doi.org/10.1787/888933967262

An indirect way of lowering contribution burdens is to allow self-employed some flexibility in the contributions base that they declare (Finland, Latvia, Lithuania, Poland and Spain). When the contribution base can be chosen relatively freely, contribution floors are needed to counter avoidance strategies and the potential pension gaps that these create. But, depending on their design, contribution floors either lead to very high effective contribution rates for those with genuinely low earnings, or they exclude those with earnings below the minimum base from earnings-related pensions altogether. Most countries use taxable income as the contribution base for self-employed but some provide additional adjustments. In some countries, clients of the self-employed are required to pay part of the pension contributions that are due for some categories of self-employed workers (Austria, Germany, Italy and Portugal). This solution can be administratively demanding but can be an attractive method for broadening coverage while sharing SP financing costs.

• Access to the overall support package is difficult to assess from the rules that govern separate individual SP elements. Depending on countries’ policy approaches, support for out-of-work or low-income groups is frequently spread across two or several SP branches. For instance, in-work support or guaranteed minimum income programmes can fill some of the gaps that first-tier out-of-work support leave for workers in independent, unstable, or part-time employment.

• Finally, a focus on relative access gaps between standard and non-standard workers hides country differences in terms of the overall reach of support, and the coverage gaps that may exist for standard workers as well. For instance, on average across countries, two out of three jobseekers did not receive unemployment benefits in 2016, but coverage differed markedly between countries, ranging from under 10% in Italy, Slovak Republic, Poland, Greece and United States to more than 50% in Belgium and Finland (Figure 7.4).

From an inclusiveness perspective, a people-centred policy discussion requires information on the actual support that people receive in different labour market circumstances. This section presents new results on SP gaps that are observed in practice. The approach consists of estimating a statistical model of benefit entitlements controlling for the most important determinants of social benefits. As benefit access and amounts often depend on past events, the analysis relies on longitudinal household data that include information on current and past employment and earnings. The main variable of interest is the value of the total benefit package, rather than any individual category of social transfer, reflecting the fact that countries provide support through different channels and programmes. The sample comprises all working-age individuals aged 18-64 who are not retired and not in full-time education. The policy scope comprises the most important social transfers to working-age individuals and their families: unemployment and disability benefits as well as housing, family, in-work and guaranteed minimum income (GMI) transfers. Box 7.3 summarises the main steps of the empirical approach.

The focus on working-age cash benefits is a practical consequence of limitations in the panel data, which contain no systematic information on support that is provided in kind rather than in cash. Moreover, the panels are restricted to a time window of four years or less making the approach unfeasible for retirement benefits (which often depend on contribution histories over much longer periods). However, in the future-of-work debate, reasons other than data quality may motivate a specific interest in working-age support that is provided in cash. Indeed, for those experiencing technology-related unemployment or employment changes, income-support entitlements during working age are likely to be the most immediate concern. In addition, in-kind support, such as housing or active labour market programmes, is often tied to working-age benefits. While the rest of this section therefore focuses on working-age benefits, Box 7.2 above discusses implications of non-standard work patterns for retirement incomes.

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Figure 7.4. Only a minority of jobseekers receive unemployment benefits

Coverage among unemployed and discouraged workers, 2016

Note: In some countries, unemployment benefits can be received by people who have some work attachment (part-time unemployed) or who are not available for work (labour market inactive). The number of unemployment-benefit recipients can then be much higher than suggested by these coverage rates. See OECD (2018[32]) for detailed results by employment status. The OECD SOCR database provides benefit recipients totals by country (www.oecd.org/social/recipients.htm). “Discouraged” refers to people without employment who are available for work but are not actively looking for a job. “ILO unemployed” (based on the definition of the International Labour Organization) refers to out-of-work individuals who want a job, have actively sought work in the previous four weeks, and can start working within the next fortnight. Those who have made arrangements to take up paid employment or self-employment in the near future are also included in the definition of ILO unemployment. OECD-24 corresponds to the unweighted average of the countries shown. 2015 figures for Australia. LFS data for Sweden do not include benefits that are accessible to jobless individuals who: i) are not in receipt of core unemployment benefits; and ii) satisfy other conditions such as active participation in employment-support measures. ILO: International Labour Organization.

Source: OECD (2018[32]) using Household, Income and Labour Dynamics in Australia (HILDA) for Australia; European Union Labour Force Survey (EU-LFS) for European countries; and Current Population Survey (CPS) for the United States. Some European countries are excluded due to missing information in EU-LFS data.

 StatLink https://doi.org/10.1787/888933967281

Results are intended as shorthand summaries of benefit accessibility and generosity in comparative perspective and for both standard and non-standard workers (see Figure 7.5). The implied access gaps between standard and non-standard forms of work reflect policy provisions that were in force during the income reference period in the data (around 2014) and therefore do not account for policy reforms that were enacted since then, including in some of the countries where the estimated gaps are large.9 With that qualification in mind, estimated access gaps were largest in Estonia, where non-standard workers were only half as likely as standard workers to receive benefit support following job loss, and more than 60% of out-of-work individuals with past non-standard work are estimated to go without any benefit support during a 12-month out-of-work spell (Panel A). Gaps were also large in Czech Republic, Latvia, Portugal and Slovak Republic. A notable result is that several countries with comparatively good access to out-of-work support for standard employees also provide accessible support to those with past non-standard work (Austria, Belgium, France, Hungary and Luxembourg). Benefit accessibility for those with past continuous full-time work was also high in Iceland, Slovenia, Spain and the United Kingdom, but moderate gaps for non-standard workers existed in these countries (albeit statistically insignificant in the United Kingdom). In Greece and Italy, even standard workers only had a 50% chance of receiving benefits following a job loss.

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Figure 7.5. Non-standard workers receive little support in some countries

Overall support package for working-age individuals, 2014-15

Note: Predicted benefit receipt during an entire year comparing: i) an able-bodied working-age adult who is out of work, had uninterrupted full-time dependent employment with median earnings in the preceding two years, and lives in a two-adult low-income household without children (“baseline: past-standard work”, triangle-shaped markers); and ii) an otherwise similar individual whose past work history is “non-standard”: mostly in part-time work, mostly self-employed, or interrupted work patterns during the two years preceding the reference year (“past non-standard”, light and dark diamond-shaped markers). Additional results for different categories of non-standard work are available for some countries (see main text).

Statistical significance refers to the gaps between baseline and comparator cases (90% confidence interval). Full-time students and retirees are excluded from the sample. Details on data and model specification are summarized in Box 7.3 and presented in further detail in Fernández, Immervoll and Pacifico (forthcoming[33]). The data source, the European Union Statistics on Income and Living Conditions (EU-SILC) covers additional countries but they are excluded here because effective sample sizes were small (e.g. Ireland, Lithuania), because the required micro-data were entirely unavailable (Germany), because key employment-status variables are recorded only for one individual per household (Denmark, Finland, the Netherlands and Sweden), or because of partial or partly conflicting information on income or benefit receipt (Norway).

Source: OECD calculations using EU-SILC panel data.

 StatLink https://doi.org/10.1787/888933967300

The predicted average size of the overall benefit package for recipients (Panel B) also varies enormously across countries, ranging from around 20% of national median incomes or less in parts of Central and Eastern Europe (Czech Republic, Slovak Republic, Poland, Hungary) to above 40% in France, Italy, Portugal, Luxembourg and Belgium. Generosity gaps for non-standard workers were largest in Southern Europe (Greece, Italy, Portugal, Spain), as well as in Estonia and Slovenia, exceeding 10% of median household income. As benefit amounts are measured over a year as a whole, these country patterns reflect differences in benefit levels in a given month, as well as in the duration of benefit payments.10 They also account for the full range of benefits that may be available to the different out-of-work individuals shown, i.e. not only unemployment benefits but also any cash housing or social assistance transfers.

Across countries, there is no obvious link between accessibility and generosity. For example, both the accessibility and generosity scores were high in Belgium and comparatively low in Poland. Benefit access in Italy was comparatively difficult for both standard and non-standard workers, but benefit levels for recipients were fairly high. Hungary shows the opposite pattern, with high implied coverage but low benefit levels. There is also no clear link between overall benefit generosity and the size of the gap between standard and non-standard workers. Generosity gaps were statistically insignificant in some countries with comparatively modest benefit amounts (e.g. close to 15% of median income in the Czech Republic and below 25% of median income in Hungary), but also in others where benefits exceeded 50% of the median (Belgium and Luxembourg).

In five countries both coverage and generosity gaps between standard and non-standard workers were statistically insignificant: Belgium, France, Hungary, Luxembourg and the United Kingdom. These results suggest that effective support for non-standard workers is achievable in the context of quite different social-protection systems and targeting strategies. For instance, out-of-work support in the United Kingdom is flat-rate, comprising an initial insurance benefit for dependent employees with the required contribution record, and means-tested support for active jobseekers with low family incomes and assets. Hungary and Belgium offer earnings-related unemployment protections to both standard and non-standard workers. In Hungary, non-standard workers, including the self-employed, can be entitled to unemployment benefits (Albert, Gáspár and Gal, 2017[34]). In Belgium, non-standard workers are also entitled to unemployment insurance benefits though benefit amounts are much more generous than in Hungary, and benefits for self-employed workers in Belgium account for household needs (De Wispelaere and Pacolet, 2017[35]). In both countries, means-tested support provides further layers of protection for those not entitled to insurance benefits. Recipient numbers of lower-tier social assistance are also substantial in Luxembourg but non-standard workers had (statutory) access to first-tier unemployment benefits as well (Pacolet and Op De Beeck, 2017[36]). In France, a key explanation for the insignificant coverage gaps is the very short qualification period for unemployment benefits (Figure 7.1), paired with a possibility to retain unused benefit entitlements for future out-of-work periods and to cumulate benefit rights across successive out-of-work spells for the (large and growing number) of workers with short-duration employment contracts. France also provides multi-layered income support that benefits workers in other types of non-standard employment (as well as others who may not qualify for first-tier insurance benefits). For instance, self-employed workers in France did not have access to unemployment benefits during the 2014-15 period shown in the results, but income-targeted social assistance and housing benefits do provide additional layers of income security for jobseekers with low household incomes.11^,12

The empirical results highlight instances where SP gaps between standard and non-standard workers were large. But it is important to note that policy challenges can also arise in countries where the reported gaps are small or insignificant. First, the results refer to someone who remains out of work for an entire year, whose income is in the bottom 10%, and who has worked prior to the reference period. In other words, this is an individual who would qualify as deserving of income support by most standards and the provision of adequate support in such circumstances arguably represents a modest benchmark of effectiveness for SP systems. Support gaps may be significant and widespread for non-standard workers in other situations, for example: for those with some intermittent work during the year; for individuals with a working partner whose earnings lift household income beyond the poorest 10%; for those losing employment as a result of poor health; or for recent parents who take time off work to care for their children.

Second, gaps are calculated on the basis of micro-data that are necessarily backward looking. They therefore reflect recent labour-market realities and employment categories as recorded in these data. The present results therefore do not capture gaps that may exist for newly evolving alternative working arrangements, such as platform work. Updating the estimates at regular intervals, and as data with more granular information on employment categories become available, would allow monitoring SP gaps as the future of work takes shape. Such regular monitoring is desirable and should examine support gaps for a wider set of circumstances than is reported here.

Third, the gaps in Figure 7.5 are calculated taking an average across several types of past non-standard work, including part-time dependent employment, temporary work and self-employment. As shown in Figure 7.2 above, statutory access to many benefits is often especially limited for the self-employed, which suggests that obtaining support could be very difficult for some subcategories of independent workers, even in countries where gaps are insignificant between standard and non-standard workers more broadly. Caution is therefore required in drawing conclusions on specific policy challenges across countries solely based on Figure 7.5. Breakdowns of SP gaps for different types of non-standard work would further enrich policy reform discussions and preliminary results from such a more granular analysis are presented in Figure 7.6. These results disentangle part-time employment, unstable employment and self-employment and are available for six countries where data samples are sufficiently large for a disaggregated analysis: France, Greece, Hungary, Italy, Spain and the United Kingdom.

The estimates indicate that support gaps can indeed vary markedly across different forms of non-standard work but that this need not be the case.13 In Spain, part-time workers were somewhat less likely than standard employees to receive benefits during an out-of-work spell, but the difference was comparatively small (10 percentage points, Panel A). In the other five countries, benefit accessibility gaps between part-time workers and standard employees were statistically insignificant.

In Italy and Spain, those with interrupted work histories were less likely to receive out-of-work support than standard employees. But in four of the countries shown, benefit accessibility gaps for workers in unstable employment were statistically insignificant. In some of them, workers can qualify for unemployment insurance benefits after comparatively short periods in work (e.g. three months in France and six months in the United Kingdom, see Figure 7.1). It should be noted, however, that the gaps were calculated assuming the same earnings levels for the different worker categories (see figure notes). They therefore do not reflect accessibility issues that may exist for low-paid workers in particular. For instance, some countries require minimum earnings levels for employment to count towards unemployment insurance entitlements (e.g. approximately 16% of average full-time earnings in the United Kingdom). In these cases, accessing support can be more difficult for individuals with very short working hours or with extended out-of-work periods in-between employment spells.

Accessibility gaps for those with past self-employment were sizeable in four of the six countries, with implied coverage rates for out-of-work individuals as low as 10% in Italy and around 25% in Greece, Spain and the United Kingdom. Where unemployment insurance is not open to the self-employed (see Figure 7.2), they will need to rely on lower-tier income support, such as unemployment assistance or guaranteed minimum income benefits. These transfers typically feature strict access requirements, including income and asset tests, and are subject to significant non-takeup, which lowers their effective reach. Assistance benefits also tend to be less generous than insurance transfers. For those self-employed who do receive income support, predicted benefit amounts are therefore frequently lower than for standard employees. Exceptions are the United Kingdom (where flat-rate insurance and assistance benefits pay similar amounts), as well as France (where the generosity gap for the self-employed was bigger than in the United Kingdom, but statistically insignificant).

Benefit accessibility in France and Hungary did not vary substantially across different types of non-standard work: relative to standard employees, accessibility gaps were minor for all three categories (part-time work, self-employment and unstable work). Benefit levels were much lower in Hungary, however, while estimates for France suggest that income support may have been somewhat more generous for out-of-work individuals with a recent history of unstable or intermittent employment.

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Figure 7.6. Support gaps can be sizeable for the self-employed

Overall support package for working-age individuals, 2014-15, selected countries

Note: Predicted benefit receipt during an entire year comparing: i) an able-bodied working-age adult who is out of work, had uninterrupted full-time dependent employment with median earnings in the preceding two years, and lives in a two-adult low-income household without children (“baseline: past-standard work”, triangle-shaped markers); and ii) an otherwise similar individual whose past work history is “non-standard”: mostly in part-time work, mostly self-employed, or interrupted work patterns during the two years preceding the reference year (“past non-standard”, light and dark diamond-shaped markers).

Statistical significance refers to the gaps between baseline and comparator cases (90% confidence interval). Full-time students and retirees are excluded from the sample. Details on data and model specification are summarized in Box 7.3 and presented in further detail in Fernández, Immervoll and Pacifico (forthcoming[33]). The data source the European Union Statistics on Income and Living Conditions (EU-SILC) covers additional countries but they are excluded here because effective sample sizes were small (e.g. Ireland, Lithuania), because the required micro-data were entirely unavailable (Germany), because key employment-status variables are recorded only for one individual per household (Denmark, Finland, the Netherlands and Sweden), or because of partial or partly conflicting information on income or benefit receipt (Norway).

Source: OECD calculations using EU-SILC panel data.

 StatLink https://doi.org/10.1787/888933967319

7.3.1. Challenges in insurance-based social protection

Limited transferability of entitlements between jobs is a problem in earnings-related systems when entitlements differ across contractual arrangements or when they are tied to occupational schemes or to specific employers. Harmonising contributions and entitlements across the entire workforce, possibly accompanied by unified governance and administration structures, would make existing entitlements more portable.

Collecting and combining contributions from different schemes in one account, irrespective of the economic activity, is another – administratively simpler – way of ensuring that built-up entitlements are not lost in labour market transitions. For instance, Austria replaced its severance pay scheme with individual pension accounts in 2003. The previous severance-pay scheme only benefited employees upon lay-off, and therefore hindered labour mobility. In the new system, all dependent employees have pension accounts that receive regular employer contributions, but the account itself is independent of the employer and transferable across jobs. Transitions to self-employment suspend further employer contributions but they do not lead to a loss of entitlements. The measure increased job mobility for workers especially in distressed firms (Kettemann, Kramarz and Zweimüller, 2016[39]).

Entitlements derived from individual accounts can be subsidised explicitly (through credits) or implicitly (through the benefit formula). However, without substantial subsidies, individual accounts are a form of government-mandated saving whose scope and objectives differ from social insurance (see Section 7.1). In particular, “pure” individual accounts do not provide any risk sharing mechanisms and therefore cannot insure against catastrophic risks (such as long-term disability). Depending on how contributions are invested, they may also carry significant financial-market risks. As “pure” individual accounts do not incorporate redistribution, they are typically of less value to marginal or part-time workers.

Similar challenges limit the scope of publicly subsidised non-mandatory individual savings accounts that, in combination with means-tested safety-net benefits, have been suggested as an option for achieving adequate income protection for all, while keeping labour costs down (World Bank, 2018[6]). Disadvantaged and budget-constrained individuals can be unresponsive to savings incentives because of myopia, inertia, or information deficits. Subsidies then mainly divert savings toward subsidised products and crowd out unsubsidised savings. As a result, such programmes may mainly benefit individuals who already save even in the absence of subsidies or additional incentives (Chetty et al., 2014[40]).

One option to improve transferability of SP entitlements while maintaining acceptable replacement-rates for middle-income workers is to differentiate between earnings-related benefits (such as pensions, unemployment and short-term sickness benefits) and benefits that have no relation to earnings (health and long-term care) or where income smoothing is not a primary objective (longer-term unemployment or disability). Making the latter broadly accessible would help to safeguard basic entitlements irrespective of labour market transitions. As complements to these safety nets, earnings-related benefits could then be harmonised across contractual arrangements, to improve transferability (Cahuc, 2018[41]; Levy, 2008[42]).

7.3.2. Challenges in universal or means-tested social protection

Evolving labour markets arguably blur lines between traditional employment and different forms of independent work. Moreover, new types of atypical employment make it harder to reliably assess whether someone is working at all and how many hours they are putting into their job or jobs. As a result, tying social-protection entitlements and contributions to people’s employment status becomes more difficult. If existing strategies do not provide adequate coverage for all those in need, loosening the link between employment and entitlements could be one option for keeping social protection accessible, for resolving imbalances in SP entitlements across employment types, and for supporting labour market dynamism.

Moving towards greater universality through a form of basic income (BI) is an interesting proposal in this debate that has received considerable attention. No country has introduced a BI as a principal pillar of SP, however, and replacing large parts of existing support systems with a universal payment would be a major change. OECD simulations show that an unconditional payment to everyone at meaningful but fiscally realistic levels would require large tax rises as well as reductions in most current benefits, and would often not be an effective tool for reducing income poverty (OECD, 2017[43]; Browne and Immervoll, 2017[44]). Some disadvantaged groups would lose out when existing benefits are replaced by a BI, illustrating the downsides of SP without any form of targeting at all. In view of the immediate fiscal and distributional consequences of a fully comprehensive BI, reforms towards more universal income support would realistically need to be introduced gradually for specific groups (such as youth) or would need to be restricted in other ways.16 It would also require a parallel debate on how to finance a more equal sharing of the benefits of economic growth. From a broader economic-policy perspective, a downside of universal support is that, unlike out-of-work or needs-based benefits, it does not act as an automatic stabiliser: since it is paid regardless of income or employment status, spending levels do not go up during a downturn, and they do not fall during an upswing.

Another option is to strengthen needs-based support programmes by transforming some insurance programmes into means-tested assistance, or by expanding existing “safety-net” benefits for people with low incomes and no other resources. For example, Italy introduced a social assistance benefit, the Reddito di Inclusione in 2018. This will be replaced with the Citizen’s Income in 2019, which provides much higher benefit levels and aims to combine income support with activation measures (Bulman et al., 2019[45]). Such safety nets seek to ensure that those with high poverty risks receive basic support regardless of their past employment history or current work patterns. As tightly targeted schemes are financed from general revenues, their financing does not fall exclusively on workers. Non-wage labour costs can be reduced as a result, attenuating the incentives for automation (World Bank, 2018[6]) and encouraging formal employment (Levy, 2008[42]). Replacing contribution-based with general revenue-financed benefits can also help to align non-wage labour costs across employment forms, and thus ease distortions that arise from an unequal legal treatment of contractual arrangements (see Section 7.3.5).

Minimum-income safety nets are therefore an important element in countries’ strategies to alleviate poverty. However, targeted minimum-income schemes can be difficult to access in practice due to costly benefit-claiming processes, e.g. because of negative stigma, considerable information requirements and uncertainty regarding eligibility and entitlements, leading to substantial non-takeup (Bargain, Immervoll and Viitamäki, 2012[46]). They also do not offer significant income smoothing, except during spells with zero or very low (household) income. Unless complemented by benefits that provide significant replacement rates for middle-class workers, they do not provide insurance against major income losses for the majority with incomes well above the poverty line. In particular, out-of-work benefits paid in relation to household needs often do not provide any cash support to job losers in dual (or multiple-) earner households. Since re-employment support is typically tied to benefit receipt, the reach of active labour market programmes would then often exclude these groups as well (Section 7.3.4). A related challenge is that, while public support for safety nets can derive from an expectation that only the poorest require assistance, an exclusive reliance on targeting the poor minimises the majority’s stake in social protection and risks making funding less stable and potentially more susceptible to political cycles (Lindert, 2004[47]).

Needs-based provisions also risk crowding-out wages or support that is provided by employers as part of the pay package. In decoupling SP entitlements from jobs, a key policy challenge is therefore to ensure that government-provided transfers reach their intended recipients. The combination of an expanded in-work benefit and the introduction of a statutory minimum wage in the United Kingdom during the late 1990s provides a prominent example of such concerns, and of an approach for ensuring that income-tested in-work transfers benefit low-paid workers rather than their employers.17 However, an expansion of the number of low-paid independent workers who do not benefit from minimum-wage protection makes wage floors less effective in this respect.

7.3.3. Technical issues related to volatile careers and earnings

Despite these challenges, needs-based support will remain an essential complement to universal, insurance-based and employer-provided SP, and a necessary form of fall-back support while other SP pillars are adapted to a future world of work. For both needs-based and contributory systems, labour market changes present a number of very practical issues, however. In particular, the earnings of non-standard workers are typically subject to considerable fluctuations, notably in the case of self-employment. This complicates a reliable and timely assessment of household income and need, but also of the base for social contributions in insurance-based systems.18 Contribution payments that are not deducted at source but paid infrequently are also more visible and more likely to be perceived as taxes (Hershfield, Shu and Benartzi, 2018[48]).

Improved data transmission and real-time reporting of earnings tends to be costly (National Audit Office, 2018[49]) but can alleviate technical income measurement problems. Yet, a more fundamental question is what constitutes an appropriate payment or assessment frequency and a suitable reference period for assessing incomes and earnings. Payment modalities have implications for the responsiveness of SP systems, but also for the behaviour of claimants and contributors. Short reference periods make SP systems more responsive to people’s circumstances but can create incentives for gaming the system by timing incomes so as to maximise benefit entitlements or minimise contributions in a given period. For instance, earnings from self-employment can be shifted across periods, while contribution thresholds and ceilings depress individual contributions and total revenues when earnings are volatile. Longer reference periods sidestep such incentives especially in the case of contribution payments. But they can result in delayed and untimely support that does not match people’s current, and possible urgent, need for income or employment assistance. A related issue is that self-employed workers can struggle to fulfil minimum work or contribution requirements for benefit entitlement if there are significant time lags between performing work and receiving payment for it, e.g. if they only receive one payment for an extended period of work.

Volatile earnings may affect a growing number of workers in the future and accommodating earnings fluctuations in SP systems may therefore become more urgent. It is, however, not a new problem but rather a “legacy” issue that countries have been addressing in different ways, illustrating the trade-offs involved:

• The Netherlands provides self-employed workers with interest-free loans to bridge temporary low-income periods and related liquidity problems (de Graaf-Zijl, Scheer and Bolhaar, 2018[50]). Building on such a system, one policy option could be a subsequent conversion of (some part) of such loans into benefits, e.g. once the low-income spell turns out to be persistent.

• Denmark has harmonised unemployment-benefit entitlement rules for different types of dependent and independent workers by tying eligibility to taxable income over a three-year period, irrespective of the contractual arrangement. This also improves access for those who combine dependent and independent work. As an accompanying measure, self-employed workers who have ceased their business and receive benefits must not start a new one for six months. This “job search” period seeks to prevent self-employed from combining benefit receipt with continued independent work (OECD, 2018[51]).

• Claimants of the Universal Credit, including the self-employed, in the United Kingdom are required to report earnings on a monthly basis. For longer-term benefit recipients, any earnings from self-employment are presumed to amount to at least the national minimum wage and reduce entitlements accordingly. This circumvents measurement problems for many self-employed claimants and is intended to avoid subsidising small businesses that are economically unviable, or independent workers who would be better off taking up employment in a regular minimum-wage job. However, while simple, this approach puts the self-employed with genuinely low earnings at a disadvantage (Citizens advice, 2018[52]; Low Incomes Tax Reform Group, 2017[53]). In particular, presuming minimum-wage earnings for a group that does not benefit from wage-floor regulations may exacerbate labour market disadvantages for workers who are faced with a choice between low-paid independent employment or not working at all, or who are actively encouraged by employment service providers to seek and accept independent work in the first place.19

• New Zealand has instituted a welfare advisory group to address technical and broader issues related to labour market changes, including a growing availability of self-employment options, and their implications for SP capacity and responsiveness (Ministry of Social Development, 2018[54]).

7.3.4. Prevention and promotion: Activation policies in future labour markets

Large shares of workers transition in or out of jobs every year. Prior to the global financial and economic crisis, annual job separations and hires amounted to nearly 15% of total employment on average across the OECD. Job reallocation statistics were similar after the crisis, even if trends differed across countries (Falco, Green and MacDonald, forthcoming[55]) – see also Chapter 3. If accelerating technology adoption quickens the pace of job reallocation, the readiness and ability of workers to move from jobs in declining sectors or firms to expanding ones is likely to become an increasingly crucial determinant of future employment trends.

Changing work patterns and new forms of employment raise new questions about the scope and ambition of activation policies and employment-oriented SP. For instance, compared with out-of-work individuals with past standard employment, jobseekers with a history of self-employment can be less likely to rely on public employment services (PES) for their job search, e.g. if a lack of benefit entitlements means that there is no immediate financial incentive for regular interaction with the PES (Figure 7.7). The data in this figure do not provide information on people’s main channels for job search, or on the type of past self-employment (see figure notes), and this may explain why the differences between dependent employees and self-employed are in fact comparatively small in several countries, even in those where unemployment benefits are not typically available for self-employed. For some past self-employed, limited PES engagement may also reflect the availability of alternative job-search channels or a preference for a type of independent work that the PES is not perceived to facilitate. But limited engagement with the PES, for whatever reason, can become a growing concern when independent forms of work increasingly become substitutes for dependent employment.

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Figure 7.7. In some countries, only a minority of jobseekers are in regular contact with the public employment service

By past employment status, 2017, in %

Note: Share of unemployed stating, in the context of questions about individuals’ job-search methods, that they “contacted the public employment office to find work during the previous four weeks”. Most respondents report more than one job-search method and data do not permit assessing the main one; this can be one reason why differences by previous employment status frequently appear small. Ages 25-64. 2013 data for Germany. Data for Ireland do not include information on past self-employment. Countries with fewer than 30 observations in any category are omitted.

Source: OECD calculations using EU Labour Force Survey.

 StatLink https://doi.org/10.1787/888933967338

Activation of whom and towards what?

PES may need to adopt more effective outreach strategies to engage with workers who currently have work but may be at elevated risk of unemployment, such as those in unstable forms of work. Even though many countries support some groups of low-paid workers through in-work benefits or wage subsidies, the bulk of existing job-search assistance and related active labour market programmes exclude workers and focus on jobless people receiving out-of-work benefits. With the easier availability of task-based and independent forms of work, and a growing range of options for occasional short-duration or part-time employment, the traditional “in work” / “out of work” dichotomy appears increasingly anachronistic. In fact, in some countries, workers with intermittent employment and/or limited working hours already outnumber key categories of out-of-work individuals, such as those not working for family reasons, those unfit to work, or the longer-term unemployed (Figure 7.8). A strict focus on the jobless denies support from a large number of precarious workers who face barriers to higher-quality employment. It therefore becomes more and more unsatisfactory as basis for targeting activation and re-employment programmes.21

Extending access to active labour market support should move in tandem with tackling unintended benefit coverage gaps. For people with intermittent or precarious work this requires a careful review of key qualifying criteria for existing unemployment benefits, such as waiting periods, past employment requirements (see Figure 7.1) and rules regarding the extent and type of work that can be combined with benefit receipt (“part-time unemployment benefit”).22 In many OECD countries, some part-time work is compatible with the receipt of unemployment benefits and some countries offer partial benefits to workers whose working hours are cut.23 Yet, workers may not always be aware of this possibility (Stettner, Cassidy and Wentworth, 2016[57]). In contributory systems, effective out-of-work support for intermittent workers also requires provisions that allow “unused” entitlements (those that were not used in a given out-of-work spell) to be carried forward to future claim periods. An alternative (and partly functionally equivalent) strategy is the broader integration of out-of-work and in-work support programmes. The United Kingdom’s Universal Credit reform is a primary example of such a comprehensive strategy (Browne, Hood and Joyce, 2016[58]; Office for Budget Responsibility, 2018[59]).

The content and delivery of employment-oriented support also need to adapt. First, an evolving target group for active support requires sufficient and reliable resources for employment services and enough qualified frontline staff and caseworkers. User-friendly online services for jobseekers and automated systems that facilitate inter-agency access to relevant data (such as jobseekers’ labour market history and programme participation) can speed up initial jobseeker registration and other routine tasks.24 In general, technology can reduce pressures on operating budgets by creating more time for personal interaction between staff and jobseekers, and it enriches the toolkit for implementing broader activation strategies. For instance, IT-supported systems can support tailored and well-targeted services, e.g. through statistical profiling (OECD, 2018[60]). Yet, highly automated processes also create significant new risks, especially when introduced or used in a context of tight budget envelopes. An aggressive push towards replacing interpersonal contact with digital interfaces can compromise service accessibility and quality, notably for those with limited digital skills or those with complex needs where caseworker discretion is needed. Interventions and programme assignments using new generations of artificial-intelligence based profiling tools and decision support systems may also appear obscure or unfair and, as a result, might reduce their acceptance among some jobseekers, and their readiness for cooperating actively with PES.

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Figure 7.8. Unstable work is common, but it may be outside the scope of activation measures

Employment Status over a 12-month period, average across seven countries

Note: “Weak labour market attachment”: working for less than 45% of the potential full-time working hours in the calendar year (“unstable jobs”, “restricted hours”), or earning less than one third of the annual full-time statutory minimum wage (“near zero earnings”). Unweighted average across seven countries (Australia, Estonia, Ireland, Italy, Lithuania, Portugal and Spain), for 2014 and for ages 18-64 excluding students and military service.

Source: OECD Faces of Joblessness country studies (www.oecd.org/els/soc/faces-of-joblessness.htm) using EU-SILC for European countries and the Household, Income and Labour Dynamics in Australia (HILDA) survey.

Second, new or growing forms of non-standard work require weighing the intended role and objectives of publicly provided labour market intermediation and employment services. A key issue is to what extent PES should actively connect people to very short-term work engagements (“gigs”), casual work (e.g. on-call employment or “zero hours” contracts) or independent forms of employment. Although the PES’ intermediation role can be partly redundant for platform work that is readily accessible online, some PES today already use web scraping technology to consolidate vacancies from a number (sometimes hundreds) of vacancy repositories. For instance, in the Netherlands, more than one third of vacancies that are listed on the PES job portal are sourced from other web resources using such technology. More fundamentally, however, a growing availability of alternative work arrangements raises the question whether employment services can and should prioritise different employment forms when recording openings in their vacancy databases or when offering vacancies to jobseekers. For instance, some Workforce Boards in the United States have held recruitment events for ridesharing services that are offered through online platforms (McKay, Pollack and Fitzpayne, 2018[61]) but such approaches frequently remain experimental and policies and practices differ both across and within countries. Even when active referral to non-traditional work is desired and compatible with PES procedures or guidelines, existing PES funding or reporting mechanisms may discourage it, e.g. if future earnings levels or stability are used for assessing the performance of reintegration measures but PES do not have ready access to information on earnings from self-employment. A growing availability of non-standard work contracts also highlights risks of creating “one-way streets” away from traditional forms of employment, e.g. if jobseekers are encouraged or assisted into self-employment but then have no clear route back to standard employment if they do not succeed in making a living from independent work.

More broadly, governments should review whether existing activation strategies for jobseekers, and those with unstable or low-paid work, strike a suitable balance between encouraging standard and non-standard employment, and are in line with policy objectives regarding job quantity and quality (OECD, 2018[2]). In the context of rights-and-responsibilities frameworks, such a review should for instance encompass the definition and application of “suitable-jobs” criteria, i.e. the type of jobs that benefit claimants must look for and accept in order to avoid benefit sanctions (Immervoll and Knotz, 2018[62]). In particular, integrating jobseekers into any kind of job may not be sufficient for individuals experiencing recurring cycles of precarious work and joblessness. Workers in sectors with significant exposure to automation or restructuring may also require access to employment services that re-assess their employment prospects, provide career guidance and develop coherent re-employment and, when needed, re-skilling strategies (see also Chapter 6).

Balancing incentives and support

Weak work incentives are rarely the only employment barrier for jobseekers, and often not the main one.25 But they are central to activation approaches which tie benefit receipt to active job-search and participation in labour market programmes. Importantly, a more fluid labour market with more options for when and how long to work creates more opportunities for acting on positive and negative incentives. This has significant implications for the scope of job-search and other behavioural requirements for benefit claimants, and for the design of tax-benefit systems more generally. First, incentives that favour specific employment forms can become more distortionary and economically damaging than they had been in the past (see Section 7.3.5).

Second, tax-benefit provisions, which create sudden income drops or gains as people vary earnings or working hours, are more likely to affect working time and earnings when choices are no longer constrained to, say, 40, 30 or 20 hours per week – see e.g. Saez (2010[63]). Avoiding excessive marginal effective tax rates (METRs), as caused by very high benefit withdrawal rates or by thresholds for tax liabilities or benefit entitlements, then becomes more desirable. Significant work disincentives, with METRs approaching or exceeding 100%, currently exist in a large number of OECD countries at lower earnings levels (Figure 7.9). With working hours and employment choices becoming more “elastic”, there may also be greater policy scope for setting explicit positive incentives towards socially desirable outcomes. This could for instance include tax reductions for inactive spouses taking up work as second earners (Immervoll et al., 2009[64]), or specific tax concessions or benefit bonuses for low-paid workers who move beyond marginal employment and work a certain minimum number of hours.26

Third, and perhaps most important, governments should review whether benefit reforms that are intended to tackle benefit coverage gaps create a need to rebalance the demanding and supporting elements of existing rights-and-responsibilities frameworks. Job-search and related activation requirements help in targeting support to genuine jobseekers and restrict opportunities for benefit receipt by others. An emergence of alternative working arrangements, with additional scope for arranging work or earnings patterns in a way that is compatible with benefit receipt, calls for additional efforts to formulate and enforce clear and reasonable responsibilities for benefit recipients. Likewise, extending the scope of job-search responsibilities and provisions for active participation in re-employment measures may be a necessary counter-weight to any extensions of benefit rights to new groups of jobseekers, such as part-time unemployed, those with intermittent employment, or those who entered unemployment after periods of self-employment.

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Figure 7.9. Very high marginal effective tax rates can discourage people from working longer hours

Marginal effective tax rate (METR) for part-time workers, 2018

Note: Marginal effective tax rates (METRs) are the share of an earnings increase that is taxed away through higher taxes or reduced benefits. They are shown for an employee earning half the average hourly wage and working between 5 and 40 hours per week. The bars show the overall METR when moving from 5 hours per week to 40 hours per week. "Peak" is the maximum METR when increasing hours in 5-hour steps from 5 hours per week to 40 hours per week. Light-coloured bars indicate countries where peak METRs are at or above 100%, i.e. if there are situations when adding 5 working hours may not lead to higher net income. Calculations are based on four different family types (single, lone parent and dual-earner couple with and without children) and account for income taxes, employee-paid social contributions, and the following social benefits: minimum-income, cash housing, family, in-work benefits.

Source: OECD tax-benefit model TaxBEN (www.oecd.org/social/benefits-and-wages.htm).

 StatLink https://doi.org/10.1787/888933967357

7.3.5. Ensuring that social protection resources match evolving demands

Labour market transformations create new challenges for financing SP systems and can exacerbate existing, longer-standing ones. For a number of reasons, the resources that are needed for the provision of adequate working-age support can be expected to grow as a result. Accelerating labour market turnover in many countries (see Chapter 3), means that a higher share of workers would seek support both at any one point in time and throughout their careers. Closing SP gaps to include non-standard workers and supporting the transition and reintegration of displaced workers in declining industries will require corresponding SP budgets.

At the same time, the resource base for working-age support is being squeezed from several directions. The main funding base of SP systems is at risk of erosion if megatrends combine with rising market power of firms to perpetuate a decline of the labour share in national income – e.g. OECD (2018[32]), Sachs (2018[65]). On the spending side, population ageing puts growing pressures on pension, health and long-term care systems, which absorb increasing shares of available SP resources. Indeed, expenditures on old-age and survivor benefits over the past 25-30 years have grown substantially not only in total but, in spite of pension reforms, also on a per-capita basis. For instance, averaged across OECD countries with longer series of social spending, the spending on old-age and survivor benefits per individual aged 65 and older has grown from 22% of GDP per capita in 1990, to 32% in 2000 and 38% in 2013.27

Counteracting a decline in resources for working-age support requires a determined, coordinated and comprehensive approach that will need to include a policy debate on how new or expanded initiatives will be paid for, and who should pay. Key issues in this debate include ensuring that available resources are used efficiently. But it will also require debating options for broadening the tax base and strengthening revenue-collection technologies and enforcement (OECD, 2018[66]). In a context of a future of work with a growing choice of alternative working arrangements, a further challenge is that selective opting-in or opting-out raises sustainability risks in SP systems with voluntary membership (see Sections 7.1 and 7.2.1). This section focuses on two specific financing issues that are closely linked to the design of SP systems: incentives that SP financing provisions can create to encourage non-standard work, and achieving a suitable sharing of SP financing burdens across different employers.

Tackling financial incentives in favour of non-standard work

SP entitlements that are financed through an employment relationship represent non-wage labour costs. Where the cost of SP coverage is uneven across employment forms, employers and employees can lower costs by choosing between alternative working arrangements. Although these incentives are only one of many considerations that determine the choice of the most suitable employment form, differences in non-wage labour costs can be large. This is shown in Figure 7.10, which reports gaps in the “total payment wedge”, defined as the sum of personal income tax, social security contributions and other compulsory payments as a share of total labour costs, between dependent employees and different types of independent employment. For illustration purposes, results refer to someone with gross earnings equal to the average full-time wage in all cases.

Gaps are large where non-standard workers are excluded from certain parts of SP or if membership is voluntary. In both cases, legally mandated contributions can be significantly lower for non-standard workers as a result. In the Netherlands, the total payment wedge for an employee (51%) is more than twice as high as for an independent contractor (22%), meaning that total employment costs are 60% higher for an employee in this case.28 Most of the gap in the payment wedge (22 percentage points) is due to employer social security contributions, and a tax deduction for self-employed workers widens this gap further (OECD, 2018[67]).29 Of the seven OECD countries studied in Milanez and Bratta (2019[68]), the cost difference between hiring a dependent employee and the lowest-cost alternative working arrangement is smallest in Sweden, where independent contractors are included in most public SP programmes, with the exception of the bankruptcy fund (Kolsrud, 2018[19]). While Figure 7.10 focuses on statutory payments, further cost differences between employment forms can stem from employer contributions to SP measures that are part of collective agreements and provide top-up benefits for workers that fall within the scope of these agreements (see Section 7.2.1). De-facto gaps in contribution burdens can also be sizeable if participation in SP provisions is voluntary or allows some type of workers additional flexibility in the contributions they wish to make (Sections 7.1 and 7.2.1).

For workers, non-standard employment is especially attractive if contributions are lower than for standard dependent employment, while benefit entitlements are broadly similar (see Chapter 4). Where possible, both contributions and entitlements should be aligned across employment forms to prevent employers from engaging in regulatory arbitrage in the composition of their workforce. Several countries have taken steps to extend SP coverage to non-standard workers in order to curb a continued growth in their numbers. Austria gradually integrated independent contractors (freie Dienstnehmer), a hybrid between self- and dependent employment, into the social insurance system following concerns that employers used this contractual arrangement to avoid or evade social contributions. Since 2008, independent contractors are liable for the same (employer and employee) social security contributions as standard employees. While the number of independent contractors had grown steadily until early 2007, it began to fall after the reform was announced, reaching an all-time low in 2016 (Fink and Nagl, 2018[20]).30 In Italy, the gradual integration of para-subordinate workers into the general social insurance system since 2012 had similar effects (Raitano, 2018[24]).

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Figure 7.10. Non-wage labour costs vary substantially across contractual arrangements

Total payment wedge by employment form, 2017, in percent

Note: Relevant categories vary by country and country-specific employment forms are noted directly in the figure. The total payment wedge is the sum of income taxes, social contributions and other compulsory payments as a percentage of total labour costs.

Source: Adapted from Milanez and Bratta (2019[68]).

 StatLink https://doi.org/10.1787/888933967376