Unemployment Insurance in a Free Society

Studies | Welfare

No. 274
Tuesday, March 29, 2005
by William B. Conerly, Ph.D.


Improving the Unemployment Insurance System: State Innovation and Experimentation

Proposals to change the unemployment insurance system tend to be predictable products of two opposing camps. Business lobbies want to make marginal changes that limit benefit eligibility, such as clarifying that dismissal for drug usage disqualifies a person from benefits. Unions and worker advocates want to expand eligibility and increase benefits. Both groups are focused on minor changes that do not disturb the underlying structure of the system.

“Federal action is needed to reform the system.”

Since unemployment insurance is a federally-mandated, state-administered program, fundamental reforms require federal action. First steps could include individual states determining how they want to provide benefits; they could use the best state workers’ compensation programs as models for reform. If administrative and benefits funding were combined, and the system was managed by for-profit contractors, financial incentives would be properly aligned to control costs and encourage rapid reemployment. 13

“States need the flexibility to design their own benefit systems.”

Unlike unemployment insurance, there is no national mandate for the workers’ compensation system, which covers medical expenses and lost wages for workers injured on the job. All states have adopted some kind of program, and their freedom to experiment has led to different solutions. Similarly, if states had the flexibility to design their own benefit systems, including the ability to allocate both state and federal payroll tax funds as they chose, their experiments would produce model programs that could be copied in other states. For example, although workers’ comp coverage is mandatory in all states except Texas, most states allow private insurers to compete for the business of individual employers and allow employers to self-insure. In a number of states, government funds or insurers compete with the private sector. And in recent years, states have increasingly deregulated the market for workers’ comp insurance. For instance, between 1980 and 2000, the number of states where insurers are free to set their own rates, called “open competition,” increased from one to 37. Since employers can substantially lower their insurance rates by reducing the number of claims, programs to promote work safety have contributed to steadily falling injury rates. 14

“Eligibility review interviews save states an estimated $10 for every $1 spent.”

By contrast, unemployment insurance is federally mandated and highly regulated. If federal policymakers allowed each state to design its own unemployment insurance system, a variety of state experiments would ensue. 15

State Experimentation. Several state experiments suggest that incentives for more rapid reemployment can reduce both the length of unemployment and benefit costs. These incentives could be used in reformed state UI programs; however, the experiments have been limited in scope because only changes in federal law would give states flexibility in program design. Following is a description of some of the efforts that have been made.

Seminars on work search techniques have proved effective in prompting reemployment. Interestingly, though, two separate studies have found that most of the effect of the seminars occurs before they are held, but after participants are notified that they are required to attend. 16 People would rather find work than attend a seminar!

Figure VI - Eligibility Review Interviews Cost versus Benefit Savings

Another trial program, in Arizona, provided more intense supervision of unemployed workers. Administrative staff interviewed recipients on a regular basis to set goals and monitor their progress. The extra attention discouraged procrastination and provided emotional support for the workers’ job search efforts. As shown in Figure VI, the state estimated a savings in benefits of about $10 dollars for every $1 spent on administering the program. Unfortunately, the program was discontinued because the special grant used to fund it was exhausted. The benefits saved could not be used to continue the program. 17

“Search assistance from employers, subsidies for job creation, use of staffing agencies and making worker profiles available — all could be effective reforms.”

Search Assistance from Employers. Given the right incentives — such as access to UI funds — employers may be willing to assist former employees in finding new jobs. In one private program, a consortium of employers is providing work search assistance to the workers they lay off. The assistance takes the form of weekly telephone calls that offer services such as résumé preparation, as well as encouragement. Typically, the caller reviews the job seeker’s work search plan for the coming week, asks if the seeker needs any assistance, and then schedules a follow up call. The scheduled call hastens activities that lead to reemployment by counteracting the normal human tendency to procrastinate and providing accountability. Rough estimates show that the program saves $2 in benefit costs for each $1 of administrative costs. 18

Subsidies for Job Creation. Employers administering unemployment insurance might want to experiment with other approaches, such as subsidies for job creation. An Oregon experiment used money that would otherwise have funded unemployment benefits to subsidize programs that created jobs for people with relatively low skills and little experience. Program employees were assigned a mentor to coach them on basic job skills, such as arriving on time, following instructions, and getting along with coworkers. The program was found to save more in benefits than it cost. 19

Use of Staffing Agencies. Another opportunity that apparently is not being exploited is the increasing the visibility of staffing companies. The staffing industry — primarily temporary help agencies — could place many workers. State employment agencies should allow these agencies to rent space in their lobbies for the purpose of signing up potential workers. In addition to a paycheck, temporary jobs expose the workers and the employers to each other, which often results in offers of permanent employment.

Making Worker Profiles Available. Public availability of information about job-seekers could potentially speed up hiring. Delays between when a company wants to hire and when it finds the right worker are a deadweight loss to society. Reducing this friction will increase output. Computerized databases, accessible to any employer, could provide information about skills, experience and interests of job seekers. The system could be coded to allow employers to contact job seekers while protecting privacy.


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