Changes Needed in Unemployment Insurance Programs across Nation

By Alan B. Krueger New York Times News Service | THE JOURNAL RECORD, January 24, 2001 | Go to article overview

Changes Needed in Unemployment Insurance Programs across Nation


Alan B. Krueger New York Times News Service, THE JOURNAL RECORD


The unemployment insurance program was neglected during the steady stream of good economic news in the 1990s.

States usually add to their unemployment insurance trust funds in prosperous times, so they can draw them down in weak times. Perhaps believing the good times would never end, however, many states have failed to replenish their unemployment insurance funds or make other fundamental changes that would strengthen the system.

Even in the "new economy," unemployment insurance still serves a valuable purpose. The amount a family spends on food -- a bare necessity -- falls 7 percent, on average, when the head of a household becomes unemployed, according to a study published in The American Economic Review by Jonathan Gruber of the Massachusetts Institute of Technology.

Absent unemployment benefits, he estimates that a spell of unemployment would cause food consumption to fall 22 percent -- about three times as much.

Indeed, with workers increasingly being promised stock options in exchange for lower base pay, laid-off workers who are ineligible to cash in on their options -- even if they are still worth something - - are likely to depend on unemployment benefits even more to help pay for housing and groceries.

Offsetting the salutary "consumption smoothing" effect of unemployment benefits, many economists have also documented a distortionary effect: As benefit generosity increases, workers tend to remain unemployed longer.

Higher benefits apparently reduce the amount of effort people devote to searching for a job.

In addition, research indicates that some employees and employers game the system, placing workers on temporary layoff so they can receive benefits while on vacation.

But these unintended consequences do not mean the program should be scrapped.

Doctors do not stop prescribing medicines just because they have unintended side effects; instead, they weigh the expected benefits of treatment against the cost of the side effects, and proceed accordingly.

Ideally, the optimal unemployment benefit would balance the desired consumption-smoothing effect against the undesired distortionary effects.

According to Gruber's calculations, the average unemployment benefit in the United States, which replaces around 40 percent of previous earnings, after taxes, is close to the optimal level given worker aversion to the risk of job loss.

The program is worth preserving. So it is important to ensure that sufficient financing is accumulated in state trust funds to weather a possible downturn.

A common measure of the solvency of unemployment insurance funds is the "reserve ratio," or accumulated funds as a percent of annual payroll.

A higher reserve ratio provides more protection in the event of a downturn. Phillip B. Levine, an economist at Wellesley College, calculates that to remain solvent through a severe recession, like the one experienced in the early 1980s, unemployment insurance funds would require a reserve ratio of at least 1.25 percent.

Using this standard, 14 states are now at risk of insolvency in a severe recession.

Texas and New York, with reserve ratios of 0.31 percent and 0.44 percent -- the lowest in the nation -- are skating on particularly thin ice. …

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