State and Local Issues

Unemployment Insurance Increases The Unemployment Rate

Unemployment insurance increases the unemployment rate and lowers workers' pay, says a new study of Oregon's state-run system by economist William B. Conerly. Alternatives could lower costs by more than two-thirds -- in Oregon's case saving hundreds of millions of dollars annually.

Conerly says unemployment insurance beneficiaries react to the system's economic incentives by taking more time to find jobs.

  • Generally, the percentage of unemployed recipients who find jobs triples in the last week of eligibility, according to a study in the journal Econometrica, and data from Oregon's Employment Department show a similar pattern.

  • By contrast, if all the unemployed made the maximum job search effort from the beginning, overall person-weeks of unemployment would be cut by 58 percent.

  • Other studies have found that recipients have longer durations of unemployment than those not eligible; that the unemployed find jobs faster when paid bonuses for fast re- employment and more intensive job-search requirements speed up re-employment.

Although employers write the checks to the government, it is the workers who bear the burden of the unemployment insurance payroll tax through lower wage rates.

Instead of paying people to be unemployed, the system could pay people to actually work, says Conerly. For example, Oregon's JOBS-Plus program has helped over 50 percent of welfare recipients leave the rolls for employment, using money that would otherwise have gone to fund cash benefits to subsidize private-sector jobs.

If traditional unemployment insurance were replaced by an JOBS-Plus program in Oregon, it would save an estimated 68 percent over paying benefits, net of costs, or $258 million annually.

Source: William B. Conerly, "Jobs, Not Unemployment: Reforming Unemployment Insurance," Policy Insight No. 104, American Institute for Full Employment and Cascade Policy Institute, 813 Southwest Alder, Suite 300, Portland, Ore. 97205, (503) 242-0900.

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