NCPA - National Center for Policy Analysis


October 5, 2006

Much of the machinery of America's domestic economic policy dates from the 1930s and is in need of repair.  Unemployment insurance -- with its inefficient handouts -- is a case in point, says the Economist.

To that extent, Jeffrey Kling, an economist at the Brookings Institution, has designed a plan to make the unemployment benefit system function less like a handout from the government and more like an insurance policy that individual workers finance themselves.  This includes:

  • Giving every worker a "temporary earnings replacement account" or TERA, to set aside money while employed, and used when unemployed.
  • The level and duration of withdrawals when unemployed would be set by the government and would be the same as under today's unemployment system.
  • In addition, wages of those who return to work on less pay would be supplemented for up to six years and would be worth 25 percent of the gap between the new wage and the lesser of the old wage and $15 an hour.
  • The subsidy would be financed from a payroll tax on the firms that laid people off.

By limiting the subsidy to a quarter of the drop in a worker's hourly wage, Kling makes sure no one is rewarded for simply putting in fewer hours.  And by combining wage insurance with TERAs, he ensures that the new system, overall, would cost no more than today's unemployment insurance.

The new scheme might also enhance economic efficiency:

  • Most workers would have a bigger incentive to find a job quickly than they do now, because they would bear the burden of paying for their unemployment benefits directly.
  • Firms would have fewer incentives to make temporary lay-offs and firms in declining industries would have more reason to cut wages before jobs.

Source: Editorial, "Dolling up the dole," Economist, September 23, 2006.


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