Supporting livelihoods during the COVID-19 crisis: Closing the gaps in safety nets

 1. Introduction

Across the globe, many countries have introduced strict confinement measures to “flatten the COVID‑19 curve”; to assuage the otherwise unbearable pressure on hospitals and, ultimately, reduce the death toll of the pandemic. The side effect of these measures has been a major supply shock, as workers are forced to stay home and many businesses are temporarily shut down. At the same time, demand for many goods and services has plummeted, as households and companies are no longer able, either physically or financially, to maintain their spending. In this unprecedented situation, as countries grapple to minimise the impact of the lockdown on the livelihoods of their citizens, the usual trade-offs between support and incentives, and between generosity and fiscal sustainability, have been temporarily laid aside. Concerns about undermining incentives to work appear secondary as workers have been asked to stay at home; worries of fiscal sustainability have been put on pause as policy makers move fast in attempts to avert a deeper social and economic crisis.

The speed and severity of the shock have been met with unprecedented levels of support, both in depth and in scope. As employees fell ill, were quarantined or lost their jobs, paid sick-leave schemes and unemployment insurance kicked in. Some countries expanded the support provided by unemployment benefits, made them more accessible, or extended their duration. Alongside this, many European countries have eased companies’ access to short-time work schemes, and made them more generous with lower conditionalities. These job retention programmes often replace a significant share of lost wages for employees who work reduced hours on a temporary basis; thereby they seek to minimise job losses and enable a quick resumption of economic activity once the shut-down period ends. Such measures have helped provide a degree of income security for many, but have not reached all those whose livelihoods are affected. Indeed, while unemployment benefits and short-time work schemes are, quantitatively, the most prominent tools in countries’ early policy response, they mostly benefit dependent employees.

The COVID‑19 pandemic is accentuating a range of structural challenges of social protection systems which existed well before the crisis and will need to be addressed to ensure that social protection serves inclusive growth (see also OECD (2020[1])). Even in countries with well-developed social protection systems, many workers without standard employment contracts (e.g. across the OECD on average, one in seven workers is self-employed (OECD, 2019[2])), who have suddenly lost their income, are struggling to make ends meet. Those who were already out of work before the crisis began now face protracted periods of hardship. Meanwhile, in countries with large informal sectors and weak social protection systems, many affected workers do not have access to any form of income support.

Countries across the OECD but also emerging and developing economies have introduced a raft of new programmes to cover those whose incomes may have been unprotected while being particularly exposed to deteriorating earnings prospects (Table 1). The focus of this brief is on these complementary and safety-net programmes – those aimed at reaching the groups most at risk of falling through the cracks of existing social protection systems. The brief also highlights avenues for post-crisis reforms to ensure that social protection systems reach all people regardless of their employment situation, thus contributing to inclusive growth.

 2. Which groups are in urgent need of support?

Some self-employed, including own-account workers and small business owners, are particularly at risk of falling through the cracks of existing social protection schemes in the current crisis. They are overrepresented in some of the industries that have been restricted or shut down because of quarantine, e.g. in the hospitality and culture sectors, but also in services such as hairdressers. For instance, a survey carried out in the Netherlands immediately after the start of lockdown shows that 48% of self-employed workers experienced a reduction in hours, compared to only 27% of employees (von Gaudecker et al., 2020[3]).

In most OECD countries, self-employed workers had limited access to unemployment and sickness benefits before the COVID‑19 crisis (Figure 1, (OECD, forthcoming[4]; OECD, 2019[5])) There are a number of challenges of extending unemployment and sickness benefits to the self-employed. First, there is the consideration of moral hazard. In the case of unemployment benefits, the absence of an employer confirming a layoff makes it difficult to distinguish demand fluctuations from voluntary idleness, and efforts to re-establish a business operation are more difficult to monitor than the search for dependent employment. In the case of sickness benefits, it is difficult to ascertain whether the self-employed actually ceases work or not. Second, the self-employed often have highly fluctuating earnings. This complicates the calculation of both contributions and entitlements. Self-employed workers may also be able to avoid or lower contribution payments by optimising their contribution base, e.g. through timing their work or earnings. Finally, many of the self-employed are simply unable or unwilling to pay both the employer and employee social contributions.

 

Figure 1. Self-employed workers often have limited access to income replacement benefits

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

Note: Differences in statutory access rules between standard dependent employees (full-time open-ended contract) and self-employed workers. “Not applicable”: no compulsory sickness benefit scheme for dependent employees in Korea and the United States. “No access”: schemes are compulsory for dependent employees but self-employed are excluded. “Partial access” to benefits can arise a) because eligibility conditions, benefit amounts or receipt durations are less advantageous for self-employed workers; or b) if insurance-based and non-contributory benefits co-exist and individuals can access only the latter (e.g. only basic pension and not earnings-related). *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.

Source: OECD (2019[5]), “Left on your own? Social protection when labour markets are in flux”, https://doi.org/10.1787/bfb2fb55-en.

Without adequate support, many self-employed workers will struggle to cover recurring expenses such as housing costs, which are the single largest expenditure item for most households. Housing costs are difficult to bring down in the short term, especially during lockdown periods when moving house is not an option (OECD Affordable Housing Database).1 And, while others will be able to cushion a short-lived drop in income by eating into their savings, requiring the self-employed to run down their savings is problematic when business closures are part of a government-mandated health measure (Baldwin and Weder di Mauro, 2020[6]).

Means-tested minimum-income benefits are often the only form of support that is available to workers who are not covered by social insurance. These benefits are meant to alleviate poverty and protect against entrenched livelihood risks. But they typically do not provide immediate help for the middle-class, such as workers on moderate earnings, whose primary income source suddenly falls away, and who are therefore unable to meet ongoing expenses. Another problem can arise from asset tests for social assistance benefits; many of the self-employed who are now in urgent need may own illiquid assets, such as firm capital or equipment, which makes them ineligible for cash benefits. More importantly perhaps in the current situation, processing claims takes time; time that these individuals do not have as they see their livelihoods disappear and their bank accounts empty.

Low-income households, who relied on income support before the crisis, also stand to lose much of their income. For instance, those receiving unemployment support before the crisis may have run out of entitlements, and experience very poor re-employment prospects even in the de-confinement phase. In the United States, Finland, France, the United Kingdom amongst others, low-income workers, including many part-time employees, receive earnings top-ups through in-work benefits. When they lose their jobs, they lose these benefits as well, since payments are tied to wages and working hours. Low-income individuals with limited or irregular working hours, as well as young people with short work histories, may also not qualify for short-time work schemes or unemployment benefits.

In addition, the lockdown has resulted in the closing of childcare facilities and schools, depriving children from low-income families of free school meals. In the United States for example, almost 70% of school districts surveyed at the onset of school closures feared that some children would go hungry until schools re-open.2 At the same time, many food banks and other social services are closed or reduced due to social-distancing rules and staff absences while simultaneously they face vastly increased demand. Feeding America projects an increase of 46% in the share of American families facing food insecurity as well as a decline of 60% in the volunteering workforce at food banks.3

Informal workers remain beyond the scope of most income-support schemes. This includes employees who are not registered for mandatory social security, who are paid less than the legal minimum wage, who are employed without a written contract (where this is a legal requirement), and the self-employed who fail to declare some or all of their income for tax purposes (e.g. working cash in hand). For example, many of the 40 000 Romanian care workers for the elderly in Austria are now stranded in either Romania or Austria without qualifying for financial support in either country.4

Similarly, workers in ‘partial informality’ (those registered but working some of their total hours for cash) will not receive full compensation for their lost earnings during the confinement phase. Many of these workers, already among the most vulnerable, risk falling into poverty and may therefore seek to continue their work despite quarantine restrictions. Many temporary visa holders are also not entitled to financial support, such as the nearly 90 000 temporary graduate visa holders in Australia, many of whom have previously worked in the heavily hit hospitality sector.5 As migrants across the OECD lose their jobs and their livelihoods, they also lose their ability to send remittances to their families. With remittances estimated to fall by close to 20% in 2020, this is likely to put even further strain on the budgets of vulnerable households, including in emerging and developing countries (Kolev and La, forthcoming[7]).

The situation is far more dramatic in emerging and developing countries where the vast majority of the population does not have access to formal social protection arrangements. For example, a large fraction of workers in South Africa cannot access income support as many employers did not register their employees for unemployment insurance.6 In India, up to 100 million citizens might be left out of the countries’ COVID‑19 food security scheme as coverage at the state level is calculated using outdated population figures.7 Box 4 illustrates and discusses policy responses to support people’s livelihoods in the wake of the COVID‑19 crisis in emerging and developing economies.

 3. What systems are in place to help people with urgent income needs?

Countries use different policies to support those in need: Some rely very strongly on means-tested benefits, which are delinked from employment and paid only to households below a certain income or wealth threshold (for example, the United Kingdom and Australia). This results in tightly targeted transfers. Other countries instead provide the majority of support in the form of insurance-type transfers which require beneficiaries to have made contributions to the system (for example Italy and Spain). In insurance-based social-protection systems, a high share of total social expenditure can go to higher income households (Figure 2). Many continental European countries use “layered” systems that combine insurance-based benefits for people not working with universal support for families with children and minimum-income benefits as a lower-level safety net (e.g. Austria, Germany, France, and the Slovak Republic).

All OECD countries have some form of minimum-income schemes in place, but their benefit levels, eligibility conditions and actual coverage of low-income households vary widely across countries, even in normal times. A forthcoming OECD study (Hyee, Fernández and Immervoll, forthcoming[8]) looks at the de-facto accessibility and generosity of minimum-income schemes selected in European countries. It shows how many households in acute economic need – defined as jobless households whose income from market sources and insurance-based transfers (including unemployment benefits) puts them into the poorest 10% of households – receive means-tested support. 8

 

Figure 2. Insurance-based transfers tend to be less targeted to the poor

Transfers received by working-age individuals in low and high-income groups, 2018 or latest year available

Note: Working-age person are defined as those aged 18 to 65 years. Transfers include all public social cash benefits. The lowest and highest quintile are defined as the 20% of the population living in households with the lowest / highest equivalised disposable income, respectively. OECD refers to all Member countries of the OECD except Colombia.

Source: Calculations based on the OECD Income Distribution Database.

The study finds that accessibility of minimum-income support for this group varies widely across countries: for example, more than four out of five poor workless households in the United Kingdom receive these assistance benefits, but only one out of five in Greece (Figure 3, left panel). Receiving minimum-income support is more common in countries that provide comparatively little insurance-based support (e.g. United Kingdom, Figure 3, left panel), or who have “layered” systems combining insurance-based support with last-resort, means-tested benefits (e.g. France, Austria and Germany). It is lower in countries who mainly rely on insurance-based benefits, including those where coverage with insurance benefits is limited as well (e.g. Italy, which introduced minimum income only recently, and Greece)9. Less demanding asset tests can make benefits more accessible: in the United Kingdom, for example, primary homes do not enter the asset tests at all, whereas they are at least partly taken into account in Austria, Belgium and Greece (Marchal et al., 2020[9]). For those receiving minimum-income support, expected benefit levels are well below commonly used (relative) poverty thresholds, ranging from under 20% of median household income in Greece, Italy and the Slovak Republic, to around 40% in Belgium and the United Kingdom (Figure 3, right panel).

In the current crisis, countries with “tried and tested” minimum-income benefit programmes may be in a good position to scale them up quickly. By contrast, poor accessibility already before the crisis may signal significant bottle-necks during the claiming process. In these cases, existing safety-nets may not be able to cope with significant additional demand and may need to be complemented by other, more accessible support measures.

 

Figure 3. Accessibility and value of non-contributory benefits, 2015

Workless, low-income adult living alone

Note: How to read the chart: in Belgium, 60% of workless, low-income (in the bottom 10% of the income distribution, income from market sources and contributory benefits) one‑person households receive at least some non-contributory benefits (left panel). The expected amount for those who receive benefits is about 40% of the median equivalised household income in Belgium (right panel). Bars indicate 90% confidence intervals. Predicted non-contributory benefit receipt for able-bodied low-income working-age adults in privately rented accommodation paying a “low” rent (bottom quintile of the national rent distribution). Benefits include refundable means-tested tax credits. Data refer to 2015, before the introduction of national-level minimum-income benefit in Greece and Italy. See Hyee, Fernandez and Immervoll (forthcoming[8]) for details.

Source: Estimates based on EU-SILC and GSOEP, 2016 waves.

Emerging economies often use a mix of insurance-based protection, social assistance and in-kind support. In Chile, for example, employers and employees pay into an individual unemployment account that workers can draw on in the case of unemployment; on top of this the Ministry of Social Development selects certain vulnerable households for a range of social assistance and personalised support measures (OECD, 2020[10]). India offers a wide range of in-kind support programmes, the two biggest programmes being a reduced-price food distribution programme and an employment guarantee for rural households (Srivastava, 2013[11]). Turkey combines statutory unemployment insurance for employees with social-assistance cash transfers and in-kind benefits for education, heating and food for working-age households in need (OECD, 2020[10]).

 4. Income support during the COVID‑19 crisis – what are countries doing

The COVID‑19 pandemic has required policy makers to ramp up their income-support programmes and get money into the hands of those who need it most as quickly as possible. OECD countries’ responses to this challenge fall into four broad categories:

• Stepping up means-tested support to bolster the incomes of those with the least resources (11 of 37 OECD countries, see Table 1);

• Providing targeted transfers to support those whose vulnerability has been revealed by the crisis 28 countries);

• Offering universal transfers, to ensure a rapid pay-out and limit the number of people that fall through the cracks (3 countries); and

• Providing direct relief to those unable to meet their expenses (27 countries).

Most countries have pursued a mix of policies in order to maximise the speed, coverage, and efficiency of support to provide as much protection as possible to those who need it most.

 5. Where next? Income support beyond COVID‑19

The immediate lockdown measures to contain the COVID‑19 pandemic have put social protection provisions, across the OECD and beyond, to an unprecedented test: never before have so many people lost their income so quickly. Many countries have reacted decisively, employing a panoply of tools to support those who have lost their livelihoods. They have created, or stepped up, short-time work schemes to save jobs, and support workers though the crisis. They have made unemployment benefits more generous and accessible to new applicants. They have also sometimes scaled up means-tested assistance of last resort, introduced new ad-hoc cash transfers, and provided direct support for expenses.

With the guiding policy principle of supporting all affected households, and supporting them fast, the usual concerns involved in designing social-protection programmes – such as effective targeting, or preserving work incentives – have temporarily faded into the background. As countries move into the gradual de‑confinement phase with activities in many areas re-starting, governments need to re-assess the design and balance of these programmes and carefully consider their effectiveness and longer-term sustainability. While the medium-term economic outlook is uncertain, it is likely that many will continue to require income support for the coming months, and even years. Ensuring an inclusive recovery will require paying particular attention to the most vulnerable, to make sure that no groups are left behind on the path back to inclusive growth.

This crisis has also laid bare pre-existing gaps in social protection systems. In many countries, this insurance function of social protection works well for employees with stable work histories. Those with unstable, or short contribution, histories, as well as the self-employed and other non-standard workers, however, are often not or poorly protected. This crisis has shown that workers in independent forms of employment need to be able to build up rights to the types of out-of-work support that are already available to standard employees. While including non-standard workers in earnings-related social-protection schemes can be fraught with moral hazard and other logistical and administrative concerns, several countries have already been successful in establishing well-designed policies that work for their circumstances. For instance, a number of OECD countries do include the self-employed in their unemployment and sickness insurance schemes34 (OECD, 2018[23]; OECD, 2019[5]) for specific country examples). A more equitable treatment of different forms of employment can help minimise future needs for makeshift programmes – that are necessarily less targeted and cost-effective and can be prone to leakage.

Even with well-designed social insurance schemes in place, providing a minimum level of assistance to those in need is a basic function of social protection systems. Minimum-income benefits are the last resort safety-net for households without access to any other resources. Yet, even in normal times, the accessibility, the reactivity, and the generosity of these programmes differ markedly across countries. In many cases complex criteria and claims procedures result in low take-up and receipt rates, long waiting periods, and sometimes inadequate levels of support. Country experiences, for example in the United States during the Global Financial Crisis, show that targeted programmes can be made more accessible and scaled up rapidly (Immervoll and Richardson, 2013[24]). One-off or temporary lump-sum transfers may well have a role in providing fast and scalable support during the immediate crisis. But beyond the very short term, as fiscal pressures mount, sustainable and effectively targeted programmes will be needed. Thus, making minimum-income protection more responsive, through timely reassessments of entitlements in the face of rapidly changing circumstances remains an urgent policy priority during the present crisis and a prerequisite for countries to embark on an inclusive recovery post-COVID‑19.