It is often said that unemployment insurance is the first line of
defense in a recession. The line needs some strengthening, however,
because the program has not kept up with changes in the work force
and has been neglected by many state legislatures.
Economists have a well-worked-out theory of unemployment
insurance. The program helps laid-off workers maintain consumption
and search for a job that matches their skills. But these benefits
come at a cost: More generous or longer-lasting benefits reduce the
intensity with which unemployed workers look for a job.
To balance these intended and unintended effects, most states
replace only 40 percent to 50 percent of lost wages. Benefits are
also temporary, typically lasting up to 26 weeks. And through a
financing system known as experience rating, employers who lay off
workers more frequently pay somewhat more into the program.
This is a distinctly American brand of unemployment compensation.
In France, for example, benefits replace around 80 percent of
earnings and last up to two years, and there is no experience
rating. The relatively low level and short duration of benefits --
and the experience rating -- partially account for the lower U.S.
Unemployment insurance is the quintessential economic stimulus:
Benefits ramp up temporarily in a downturn and are aimed at those
most in need. Outlays soared from $14 billion in 1989 to $37 billion
in 1992, when the jobless rate peaked, and fell to $21 billion in
1995, when the labor market improved. By building up reserves in
prosperous times and spending them in weaker times, the program
helps stabilize the economy.
Unlike many other programs being considered for the stimulus
package, unemployment insurance also provides security for those who
do not directly receive benefits. Just knowing that benefits are
available in case of a job loss inspires confidence. A strong safety
net system also makes it unnecessary to have industry-by-industry
bailouts in response to adverse shocks.
President Bush recently proposed spending $3 billion to extend
unemployment benefits by 13 weeks for eligible workers. Extended
benefits are a sensible and traditional response in a recession. The
distortion caused by longer-lasting or more generous benefits is
less significant in a downturn because jobs are less plentiful
regardless of how hard people search for work, said Dale Mortensen
of Northwestern University, who has done pioneering research on
A bipartisan group in Congress is questioning whether Bush's
proposal goes far enough to mend the program, as well as the
particular way Bush would extend benefits.
In the president's proposal, benefits would automatically be
extended in Virginia, New York and New Jersey, and in other states
in which the jobless rate rises 30 percent, but only for those who
lost jobs after Sept. 11.
But this trigger mechanism has some peculiar implications. If the
unemployment rate rises from 3 percent to 4 percent in one state,
extended benefits will kick in, but if it jumps from 10 percent to
12.5 percent in another, that state will not qualify.
It is also unclear why Virginia, which has an unemployment rate
of 2.9 percent, the nation's third lowest, should qualify for
extended benefits, while Washington -- which is right next to the
Pentagon and has a 6. …