Don't Destroy Unemployment Insurance in the Name of 'Reform'

Lawmakers should not destroy the unemployment insurance system with misguided reforms.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

Last week in this space, Dean Baker pointed to the work-sharing provision in the payroll tax/unemployment insurance bill Congress passed Friday as a rare victory of common sense and bipartisanship in Washington—and it was. But beyond that, I don't see much evidence of bipartisanship in the way the two parties view unemployed workers or the Unemployment Insurance system.

Is it a lifeline for workers struggling to find a job in an economy where there are still four unemployed workers for every job opening, or a precursor to what House Budget Committee Chairman Paul Ryan described as "a future in which we will transform our social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency?" Is it working as it should to provide support to a weak economy, or is it a budget-busting program in need of serious reform?   

[ Read the U.S. News debate: Should Congress Extend Federal Unemployment Benefits?]

It turns out that research mostly supports the view that Unemployment Insurance helps people through tough times rather than turning them into lazy slackers. As the Congressional Budget Office points out in a recent report, the slack we should be concerned about is the slack in the economy:

Slack demand for goods and services (that is, slack aggregate demand) is the primary reason for the persistently high levels of unemployment and long-term unemployment observed today, in CBO's judgment.  However, when aggregate demand ultimately picks up, as it eventually will, so-called structural factors—specifically, employer-employee mismatches, the erosion of skills, and stigma—may continue to keep unemployment and long-term unemployment higher than normal.

Policymakers should be concerned with the devastating effects of long-term unemployment. But stigmatizing unemployed workers doesn't help. Policies that increase demand would help, and CBO finds that Unemployment Insurance is the most cost-effective policy for doing that of the 13 they examine. Reducing it for budgetary reasons is short-sighted. The increase in the deficit from it is inherently temporary; as the economy improves, its cost goes down, and policymakers have always let the program expire once the unemployment rate is significantly lower than it is now, as seen below.

Most fair-minded people believe that people receiving Unemployment Insurance should be looking for work and be ready, willing, and able to take a suitable job. Most people also agree that government can play a useful role in facilitating the return of unemployed workers to productive employment. There is much to fix both in the unemployment system, especially in restoring it to solvency after the Great Recession, and in the labor market, such as finding innovative ways to reduce structural barriers to people returning to work (the CBO report discusses numerous options).

[ See a collection of political cartoons on the economy.]

Anyone seriously interested in Unemployment Insurance reform would do well to look at the findings and recommendations of the bipartisan, blue-ribbon "Norwood Commission" (the Advisory Council on Unemployment Compensation) from the 1990s. As the commission's statement of purpose (Page 10) recognized:

The most important objective of the U.S. system of Unemployment Insurance is the provision of temporary, partial wage replacement as a matter of right to involuntarily unemployed individuals who have demonstrated a prior attachment to the labor force. This support should help to meet the necessary expenses of these workers as they search for employment that takes advantage of their skills and experience. Their search for productive reemployment should be facilitated by close cooperation among the Unemployment Insurance system and employment, training, and education services. In addition the system should accumulate adequate funds during periods of economic health in order to promote economic stability by maintaining consumer purchasing power during economic downturns.

The Norwood Commission recommendations were aimed at strengthening the system while continuing to meet its primary purpose of providing a wage replacement to unemployed workers. In contrast, "reform" proposals that would deny benefits to unemployed workers and allow states to divert UI funds for purposes other than paying benefits are seriously misguided. You don't destroy the system in order to "save" it.