The purpose of unemployment insurance is to ensure, by replacing part of their missing income, that those who lose their jobs do not suffer materially.
As a rule, the unemployed receive 60% of their most recent net wage – or even 67% if they have children - for a period of 12 months. These benefits are mainly financed by income-related contributions paid in equal shares by the insured and their employer. The rise in unemployment duringa recession effectively doubles the burden on the unemployment insurance system, which has to pay out more even as its revenues fall. This sets in motion a fateful mechanism whereby rising contribution rates make labour more expensive, thus creating more unemployment, which leads in turn to a further rise in contribution rates. If this upward spiral is to be interrupted, contributions must not be allowed to rise too steeply during the downturn, something which can only be avoided if the government does not overload the unemployment insurance system with additional tasks.
Active labour market policies include measures which raise the expenditures of the unemployment insurance system to questionable effect. Publicly subsidised employment, for example, displaces regular employment, whilst rarely easing participants into proper jobs. Extending the entitlement period for older claimants is expensive for contributors. At the same time, it does nothing to help the recipients, who are given an incentive to absent themselves from employment for even longer. During this time, their know-how becomes out of date, making it more difficult for them eventually to find a new job.