Unemployment insurance: A safety net in need of repair
From The Economist print edition
The benefits awaiting America’s unemployed are outdated and skimpy
COMPARED with the systems in other industrialised countries, the American unemployment-insurance (UI) scheme pays lower benefits for less time and to a smaller share of the unemployed. In expansions this encourages the jobless to return quickly to work—and unemployed Americans do indeed work harder at finding jobs than their European counterparts (see chart). But in recessions, when there is less work to return to, it causes hardship. Like America’s training system, UI is ripe for attention from the incoming Obama administration.
Like much of the social safety net, the current UI system was a product of Franklin Roosevelt’s New Deal. States were prodded to provide benefits in accordance with federal guidelines; in return the federal government paid their administrative costs. But the system has not kept up with changes in America’s labour force.
States often require beneficiaries to have worked or earned an amount that disqualifies many part-time and low-wage workers. They also disqualify people seeking only part-time work—even though many people now work part-time for family reasons. Benefits typically last for only six months, more than enough time to find a new job in normal times but not in recessions. Extended benefits kick in automatically when unemployment reaches certain thresholds, but those thresholds are so high that they are almost never triggered.
Congress therefore has to pass special legislation to extend benefits, as it did twice last year, but political wrangling often delays such action. In the week that ended on December 20th, 586,000 workers filed a first claim for unemployment benefits, the largest number for 26 years. Yet such claimants are, in one sense, lucky: typically, 60% of unemployed people don’t qualify for the benefits at all.
Unemployment insurance is one of the economy’s most important automatic stabilisers, helping to maintain household purchasing power when the economy weakens. But that role is impaired by the short duration of benefits and their skimpy level. At just under $300, the average weekly benefit is less than half the average private-sector wage. Mississippi’s maximum benefit of $230 is not much more than the federal poverty threshold of $200 for an individual. Benefits are low, in part, because they are financed by payroll taxes that states levy on their employers. States don’t like to raise such taxes, even when times are good. But that means they lack the funds to pay benefits when times are bad, forcing them to raise other taxes or borrow from the federal government, as some 30 states are now considering.
One of the best features of America’s system is “experience rating”: employers that frequently lay workers off must pay higher payroll taxes, thereby discouraging such lay-offs. But according to Alan Krueger of Princeton, many states have neutered that feature by charging most employers the lowest tax rate.
Several moves are afoot to mend the flaws in the UI system. Under a bill put forward by Jim McDermott, a congressman from Seattle, the government would offer cash incentives to states to expand eligibility to part-time workers and make the benefit formula more generous. A second bill would significantly expand eligibility for the 46-year old Trade Adjustment Assistance programme, for example by including service-sector workers and providing more generous benefits. Both measures passed the House of Representatives but stalled in the Senate. As a senator, Barack Obama backed both. As president, he might make them reality.