UNEMPLOYMENT INSURANCE, SOCIAL WELFARE, AND THE NAIRU
The headline of a May 1993 article on the editorial page of the Wall Street Journal proclaimed, "To Ensure Unemployment, Insure It."1 In other words, all we have to do to ensure that the United States has a great deal of unemployed workers is to pay people to be unemployed. The article specifically argued that extending the time period during which people can receive unemployment insurance benefits may increase the unemployment rate. Does unemployment insurance increase unemployment in general and the NAIRU in particular?
This chapter analyzes the U.S. unemployment insurance system and asks whether it has contributed to an increase in the NAIRU. It also briefly examines the broader topic of the effect of social welfare payments in general on unemployment. Let us begin with a brief review of the history of unemployment insurance in the United States and an outline of the essential elements of our present system. Then let us roughly examine the relationship between unemployment insurance coverage and actual unemployment.
The U.S. unemployment insurance (UI) program was enacted as part of the Social Security Act in 1935. It was intended to be a self-financing social insurance program that levied payroll taxes on covered employers and paid benefits to eligible unemployed workers. Currently, workers laid off by their employers are potentially eligible to collect benefits for a limited time, usually 26 weeks, until they are recalled, find another job exhaust their benefits, or leave the labor force. Most unemployed workers now receive a maximum of between 50 and 60 percent of their previous wages, depending on which state they live in.