Congress is facing the thorny issue of extending unemployment benefits beyond 26 weeks to almost 1.3 million people who saw their benefits end at the start of the New Year. Most Republican congressmen are against and most Democrats are for the extension. Let us first briefly look at the current unemployment insurance (UI) system before examining reform proposals.
According to a Center of Budget and Policy report, unemployment insurance, a social insurance program, was created in 1935 for involuntarily unemployed persons. It is mainly run by states, with oversight of the U.S. Department of Labor. Employers pay state and federal taxes on behalf of workers to finance UI. Benefits normally last for 26 weeks and are paid by states to eligible persons, replacing close to their average salaries in their last employment.
Historically, when unemployment rates were higher compared to some norm, temporary extensions were granted, wholly funded by Federal government. UI has been extended many times since the 2008 recession.
In recessions, UI directly helps to stabilize the economy by maintaining consumption spending, which is close to 70 percent of the gross domestic product. Those supporting extension now are motivated by the fact that unemployment rate, at 7 percent, is still higher than the long-term norm of 5 percent. There are fewer vacancies per job seekers, even though seasonally adjusted unemployed persons per job opening have declined from 6.2 to 2.9 from June 2009 (end of recession) to October 2013 (www.bls.gov). UI also facilitates job matching in the labor market.
However, critics of extension point out that UI also incentivizes unemployed to increase job search duration to match their wage expectations and contributes to temporary unemployment spells. Thus, it contributes to higher unemployment rates and financial stress on state and federal budgets.
Bureau of Labor Statistics data show that since November 2012, unemployment rate is declining, long-term unemployed (27 weeks and more) are decreasing, unemployed persons per job opening are declining, median duration of unemployment has declined and economy is growing. For critics, currently improving economic conditions do not warrant UI extension.
Professor Martin Feldstein of Harvard has proposed an Unemployment Insurance Savings Account (UISA) for each worker. Workers will contribute a fraction of their salary (close to 4 percent) to their UISA's, earning market interest rate, and will derive benefits from their accounts when unemployed. Positive balances in UISA will go into their retirement incomes, and if there are negative balances and they need benefits during unemployment, they can borrow from the federal government at market interest rate.
Feldstein's proposal goes against the idea of involuntary unemployment and social insurance. It makes workers responsible for their unemployment and would hurt especially long-term unemployed low-income workers. My preference would be for a UI program that preserves its property of automatic stabilizer, as well as provides incentives to employers and workers to minimize duration of unemployment benefits and spells of unemployment episodes. For example, a partial wage subsidy to employers to retain workers for a limited period, gradually declining benefits to unemployed workers after 26 weeks, and limiting frequency of benefits received during lifetime unemployment episodes, would preserve stability of the economy and improve efficiency in labor markets.
My proposal would also help reduce financial stress on budgets. However, it should be field tested before fully implementing it. In the meantime UI should be extended for extra 13 weeks in light of higher unemployment rate than the norm of 5 percent.
Vijay K. Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden.