Privatization Issues

Private Market for Unemployment Insurance

The nation's unemployment insurance system is one of the most costly federal programs. Critics call it counter-productive and out-of-date.

Established by the Social Security Act of 1935, its purpose is to pay out benefits to workers who lose their jobs and are seeking reemployment. It is funded by state and federal taxes on employers.

Among the flaws economists see in the system:

  • Benefits -- usually for 26 weeks -- tend to extend the duration of unemployment by slowing down the individual's job search.

  • Firms with relatively low layoff rates -- such as those in wholesale and retail trade, services and transportation -- essentially subsidize firms in such industries as construction, manufacturing and mining.

  • Benefits do not address the needs of individual workers -- many of whom may need education and training, or a little capital to start their own businesses.

If responsibility were shifted to the states, each could set up its own insurance system, including the option to transform the entire system from a government monopoly to a private market system.

  • Prior to 1935, some unions and businesses operated their own programs for supporting and retraining displaced workers.

  • When the government stepped in, private insurance companies were effectively prevented from operating such programs.

If the entire unemployment insurance program were de-federalized, states, private insurance companies and other private entities would be at liberty to experiment and develop systems which would truly benefit workers.

Source: John Hood and Don Carrington (John Locke Foundation), "Reform Unemployment Insurance," Investor's Business Daily, November 9, 1995.

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