Unemployment Insurance in a Free Society

Policy Reports | Welfare

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


A free society is marked by experimentation and variation, but there is little experimentation and variation in the U.S. unemployment insurance system. The public desire for a safety net can be met in a way that preserves incentives for reemployment, without providing artificial incentives for layoffs. Individual accounts for unemployment insurance most directly address the unemployed person’s disincentive to reemployment.

If the United States implemented a system of individual accounts, it would eliminate employer incentives to lay off workers. The cost of benefits would no longer be shifted from workers with unstable employment to workers with stable employment. Workers would demand a wage premium for unstable employment to make up for the smaller account balance expected at retirement. The safety net for workers who are new to the labor force or are frequently unemployed could be funded by experience-adjusted tax rates. Workers would have an incentive to find new jobs quickly, so that they will have more money in their accounts at retirement.

Private administration of unemployment insurance also offers the potential for improved performance through appropriate encouragement, as well as sanctions for failure to engage in active work search. We know that unless it is reformed, the mandatory monopoly entitlement program will continue to cause higher unemployment and a waste of human resources.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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