Unemployment Insurance: Strengthening the Relationship between Theory and Policy

Abstract

Ever since the U.S. federal-state system of unemployment insurance was founded in the 1930s, it has provided partial, temporary replacement of wages to eligible workers who lose jobs -- through no fault of their own -- (as determined by state-level regulations). Unemployment insurance is one of the largest social insurance programs in the United States, with benefits paid totaling about $34 billion in 2004. Economic theory can help us understand the challenges this complex program is likely to face over the next few years. We begin by summarizing the salient characteristics of the unemployment insurance program and then examine the theoretical and econometric research. Much of this research revolves around the main goals of the program, which include: 1) sustaining consumption for workers and their families; 2) helping recipients to make efficient job choices during a period of financial stress; and 3) minimizing the adverse incentives that may accompany partial wage replacement. Of course, these goals can come into conflict -- for example, if replacing wages for an unemployed worker also discourages that worker from aggressively searching for or accepting a new job -- and our discussion will focus on these conflicts. In conclusion, we address the key policy issues that the unemployment insurance system is likely to face in upcoming years and ways policymakers may be able to use economic analysis to adjust the program so that it remains effective in addressing the needs of unemployed workers.

Negishi–Solow efficiency wages, unemployment insurance and dynamic deterministic indeterminacy

“…Another simplifying assumption we made here, namely that the probability of a worker getting a job offer in any period t was equal to the firms' labor demand n t < 1, and thus independent of the worker's past employment status, should be relaxed as it neglects important channels generating unemployment persistence, such as for instance job search. Relaxing such an assumption would allow one particular possible negative consequence of raising unemployment insurance that we abstracted from to be taken into account; namely, that increased unemployment compensation might lower the intensity of job search and thus hurt employment (Baily 1978; Nicholson and Needels 2006).…”

Continuing Down the Road to Reintegration: Status and Ongoing Support of the U.S. Air Force's Wounded Warriors

“…Previous studies have found that unemployment duration increases with unemployment benefits (Nicholson and Needels, 2006). Note, however, that rapid end of an unemployment spell can be considered only one positive outcome; others are also relevant, including good job match.…”

Lessons from the American Federal-State Unemployment Insurance System for a European Unemployment Benefits System

“…However, in recent years the triggers based on insured unemployment have rarely activated EB when total unemployment rises (Nicholson and Needels 2006). Under the original 1970 law, EB could be activated by a national trigger affecting all states, or a state-level trigger affecting EB only in that 14 The IUR is the rate of insured unemployed persons in a period as a percentage of the UI-covered employed persons in the period.…”