Unemployment Reform Would Eliminate Waste, Inefficiency

Study Shows Personal Accounts Minimize Unemployment & Benefit Workers and Employers

DALLAS (March 31, 2005) – The current system of unemployment insurance encourages lay-offs, discourages workers from seeking new jobs and needs to be reformed, according to a new study from the National Center for Policy Analysis (NCPA). http://www.ncpa.org/pub/st274.

“Unemployment insurance shields employers and employees from the true cost of unemployment,” said NCPA Senior Fellow William Conerly, the author of the study. “Fortunately there is a better way – personal employment accounts.”

Intended as a financial safety net for laid-off workers the unemployment insurance system is not fair, according to the study.

  • Part-time workers are taxed but often are ineligible for benefits, and receive no benefit in exchange for the taxes they pay unless they file a claim.
  • The system is wasteful and inefficient. In some states nearly 20 percent of benefit payments are made in error or are fraudulent, and state administrators have no incentive to be efficient.

The study also found that unemployment insurance is a powerful disincentive to find a new job, citing abundant evidence that workers respond to the incentives the current system provides:

  • Workers eligible for unemployment insurance remain unemployed longer than those who are ineligible.
  • Workers offered bonuses for rapid re-employment find work much faster than those who are not, and wages at the new job are slightly better than their former pay.
  • The probability of a jobless person finding work rises dramatically the week before the end of their eligibility for unemployment insurance.

“The simplest solution is personal employment accounts that are individually owned, totally portable and provide a benefit to workers even if they are never unemployed,” Conerly said. Under a system of personal accounts, a portion of payroll taxes would be put in investment accounts that workers own and control. Workers could withdraw the funds during periods of unemployment, and unused funds would add to their retirement incomes. Chile has already successfully implemented such a system.

“Personal accounts allow workers more flexibility in changing employment,” Conerly added, “and give workers and employers incentives to minimize unemployment. It’s their money.”

William Conerly is a senior fellow with the American Institute for Full Employment and the National Center for Policy Analysis. He also is principal of Conerly Consulting LLC of Lake Oswego, Oregon.