NCPA - National Center for Policy Analysis

Recession-Proof Welfare Reform?

April 11, 2003

State innovations led to the successful 1996 welfare reform law. Similarly, if states could receive waivers from requirements of the federal Unemployment Insurance (UI) system they could significantly improve the program.

The UI system is structured much like it was in 1935 -- as a monopoly insurance program funded by payroll taxes. There are a number of problems with this approach:

  • It gives unemployed workers an incentive to engage less intensively in job search activities, leading to longer durations of unemployment.
  • Its extended benefits -- and the longer periods of unemployment it encourages --do not necessarily enable workers to find higher-paying jobs.
  • It increases layoffs by allowing some companies to shift the costs of layoffs to other businesses and workers.

Between 5 percent and 30 percent of all layoffs are caused by the ceiling on UI tax rates, various researchers have found. A 1995 study from the W. E. Upjohn Institute for Employment Research suggests that the UI system may be responsible for 50 percent of all layoffs at the depths of recessions.

By contrast, Workers' Compensation (WC) systems are designed by the states, and there is evidence that they have been successful:

  • The rate at which workers are injured has been falling steadily over the last decade.
  • The cost of workers' compensation coverage per $100 of payroll has declined in the last decade.

Depending on the state, an employer secures WC coverage through private insurance, a state WC fund or self-insurance. [See Figure] Since 1980, the number of states where insurers are free to set their own rates, called "open competition," has increased from one to 37.

UI would look more like the dynamic, adaptive WC system if the federal role were limited to oversight, with the details left to the states.

Source: William B. Conerly, Ph.D. (NCPA senior fellow), "Is Workers' Compensation a Model for Unemployment Insurance?" Brief Analysis No. 435, April 11, 2003, National Center for Policy Analysis.

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