The Future of Social Protection in a New World of Work

This essay is included in the new book from the Parliamentary Network on the World Bank and IMF: The Future of Work for the People we Serve. To sign up for the launch of the book as well as a conference on the future of work and inequality, click here!

Monika Queisser and Raphaela Hyee, OECD

Technology, globalisation and demographic shifts are rapidly shaping a new world of work. More and more people are working part-time, are self-employed or are on temporary contracts – all forms of ‘non-standard’ work. Today, one in six workers in OECD countries is self-employed, and a further one in eight employees is on a temporary contract, while the number of ‘gig’ workers – recruited through online platforms for specific tasks – is growing.

In many countries, social protections, such as healthcare, sick leave, parental leave, unemployment insurance and pensions have long been based on the idea that people have a stable, full-time job with a single employer. Employers and employees alike paid into the protection programmes and benefitted from them. But is this still feasible today, when people are much more likely to be self-employed, work part-time, have short-term contracts, or even simply change jobs numerous times during their working lives?

Social protection systems need to be adapted to today’s world of work. Those with non-standard jobs should not be left behind. We must reduce the chances of people slipping through safety nets and falling into poverty.

Are our social protection systems still fit for purpose?

Social protection systems were designed with the model of a person having a stable, full-time job, for a single employer, in mind. However, the self-employed, those who often switch jobs, or those combining self-employment with working for an employer, do not easily fit into the traditional framework of contributory social protection systems, for a number of reasons.

First, when it comes to non-standard work, it is not clear who should be liable for the employer contributions to the system. Having the self-employed pay both employer and employee contributions is unrealistic for many, but subsidising their contributions may create the wrong incentives and raise issues of fairness. In addition, self-employed people who earn little money may ultimately receive very low benefits, especially from programmes based on earnings, such as pensions.

Second, the self-employed don’t earn a fixed amount every year: there are good times and bad times. Even if their contributions and entitlements are annualised, they might still struggle to contribute in lean years.

Third, when it comes to unemployment insurance, the self-employed have no employer to confirm that they have no work. It is hard to assess whether they are in fact involuntarily unemployed or are choosing not to work. As a consequence, unemployment is the least-insured risk for non-standard workers.

What works?

Examples from OECD countries show that there are ways to make social protection work for everyone.

Making sure everyone has social protection

Untying social protection from people’s jobs – for example, by granting individual entitlements based on residency criteria – could prevent people from having limited or no protection. Such benefits could be financed through contributions, such as the Dutch basic pension scheme and the Swiss public earnings-related pension scheme, or entirely tax-financed, such as the vast majority of social safety nets in OECD countries.

Making clients and customers contribute to social protection

This system already exists in some countries for workers whose employment may be unstable or occasional. In Germany, for example, qualifying writers and artists participate in a social insurance programme through which is funded 50% by their own employee social security contributions, while institutions that rely on the services of artists and writers cover 30% and the remaining 20% is covered by a public subsidy, justified by private households’ consumption of art and writing. However, attractive as this programme may seem, the insurance alone is not likely to fully protect its participants from poverty in old age, as their earnings – and thus their contributions – are low compared to other jobs.

Harmonising the rules for everyone

Some jobs blur the lines between self-employment and working for an employer, such as independent contractors who perform services for a few, or only, one client. Including workers that sit on the border between dependent and independent forms of work in social protection schemes can be effective in ensuring that such workers receive the same benefits as others and that the systems cover those who are most at risk. In Italy, for example, self-employed workers highly dependent on specific client(s) used to pay lower pensions contributions than those in standard work, which meant that they had lower future pension entitlements. They also lacked unemployment or sickness benefits. In response, Italy gradually increased such workers’ contribution rates and their prospective benefits.

Making benefits portable

Untying entitlement to benefits from specific relationships with employers and tying them to individual contributions instead not only makes it easier for workers to switch jobs, but it also makes it easier for them to switch between self-employment and working for an employer. Austria, for example, replaced its severance pay scheme by company-based pension accounts in 2003. While the old severance pay entitlements benefitted only laid-off employees, all workers now have a company-based pension account, which is portable across jobs. This measure makes it easier for people to move between jobs, including when their employer is in difficulty or a firm closing.

Better income security for those working flexible hours

Using flexible hour contracts, on-call employment or independent contractors (whether via online platforms or not) allows firms to cheaply adjust to fluctuations in demand. But for workers, this brings income insecurity. To offset this, some countries are introducing a wage premium for flexible work as a compensation for the workers assuming part of the entrepreneurial risk. In Australia, for example, casual workers are already entitled to 25% more for each hour worked compared to a worker doing the same job on a permanent basis. The Netherlands requires employers to pay on-call workers at least three hours of work each time they are called in to work.

Voluntary insurance programmes might not be the answer

Several countries have opted for voluntary programmes for non-standard workers, for example, Austria (in 2009) and Spain (in 2014). However, voluntary social protection programmes only work if coverage rates are very high. Any insurance depends on risk sharing across members. With a voluntary programme, those who have the highest risk have the greatest incentive to join. Unless the programme achieves a very high coverage rate, a pool of subscribers who have the highest risks – and thus place the most financial demands on the programme – can lead to a downward spiral in which premiums rise and coverage falls.

What next?

The OECD, along with partners such as the G7, is currently exploring how to address the rising inequalities in our labour markets and societies. In 2019, it will release policy recommendations to guide countries in responding to the increasing uptake of new forms of work in the labour market.