Allowing the States to Innovate: Does Much-Maligned, Oft-Reformed Workers' Compensation Offer a Promising Model for Unemployment Insurance Restructuring?. (Labor)

By Conerly, Bill | Regulation, Spring 2003 | Go to article overview
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Allowing the States to Innovate: Does Much-Maligned, Oft-Reformed Workers' Compensation Offer a Promising Model for Unemployment Insurance Restructuring?. (Labor)


Conerly, Bill, Regulation


THE VERY NOTION THAT UNEMPLOYment insurance reformers should look to workers' compensation as a model for reform may sound absurd. Workers' compensation systems around the nation have been the subject of business criticism, "crisis" reports in the newspapers, blue ribbon study commissions, and major structural changes by the legislatures. Meanwhile, the unemployment insurance system appears to be running along quietly, much as it has since 1935. Why would anyone want to exchange the quiet system for the noisy system?

But look at the issue from another point of view. Do we prefer a system that changes or one that is stagnant? Do we prefer a system in which experiments in some states help policymakers in other states learn how to make a more effective system? Do we prefer a system in which results must be identified and compared to costs, or one in which costs are simply passed on without regard for effectiveness? In short, do we prefer a system that can adapt or one that is forever static?

The success of welfare reform highlights the value of state experiments. Before the federal welfare reform law was passed, a number of states had secured waivers to change their programs. The most successful state experiments emphasized the "work first" approach, and that strategy was later embodied in federal law. In short, the experience of varying state programs helped the entire country find a better way to help those on welfare.

The workers' compensation (wc) system has some very desirable features, notably flexibility for states to experiment with different industry and regulatory structures. As a result, WC has evolved over time, with growing self-insurance and a move toward less regulation of private insurance. At the same time, there has been substantial reduction in on-the-job injuries, suggesting that the wc system is providing employers with incentives to improve workplace safety. Further, the states that allow private insurance have lower injury rates than those whose wc systems are structured similar to their unemployment insurance (UI) systems: as exclusive state insurance pools.

UNDESIRABLE INCENTIVES

There are several compelling reasons to consider restructuring the unemployment insurance system:

* The system provides an incentive for unemployed workers to have longer durations of unemployment.

* The longer durations of unemployment do not yield higher wages in the new jobs, contradicting one argument for benefit generosity.

* Some people enter the labor force only because of the prospect of collecting UI.

* UI also allows some companies to shift the costs of their layoffs to other businesses and workers, thus increasing the incidence of layoffs.

Worker incentives The effect of the UI benefit on duration of unemployment is most easily identified by comparing the experience of young people who are similar, except that some receive UI benefits and some do not. UI benefits are paid only to those with recent work experience; those not eligible either have no recent work experience, were fired for cause, or quit their previous job. One would expect that people collecting UI would be better job candidates than those not eligible for UI. However, the evidence shows that the UI recipients take longer to find work than those youth who do not receive UI benefits.

Numerous studies have compared unemployment durations across states, and those studies allow us to assess whether more generous benefits lead to longer durations of unemployment. The literature is quite consistent: More generous benefits lead to more weeks of unemployment.

One claim sometimes made for the UI system is that it allows the unemployed job seekers more time to find better jobs. Unfortunately, that claim does not stand up to the data. Longer job searches do not result in higher wages. When experiments were conducted in which the unemployed could receive bonuses for rapidly finding work, they did find work more rapidly, and those jobs paid just as much as the jobs that the control group eventually found.

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