Individual unemployment accounts.

• Author: Brunner, Lawrence

The Current Unemployment Insurance Compensation System

The current unemployment insurance system's principal objective is to provide unemployed workers with temporary financial assistance to tide them over while they search for work (Ledvinka and Scarpello 1991). Each state administers its own unemployment insurance program under federal guidelines, but there are substantial similarities in financing and in benefits from state to state. Employers contribute a small percentage of employees' wages, up to a limit, to the insurance fund. An average employer in Michigan, for example, pays an unemployment tax of 2.7 percent of wages, up to the maximum wage base of $9,500 per employee (State of Michigan 2001). (1) However, states can also "experience rate" firms' unemployment taxes. This rating involves raising tax rates on firms that lay off large proportions of their employees and lowering tax rates on firms with stable employment; almost all states use such rating. The current unemployment insurance system is a defined benefit system. Regardless of what is paid into it, states are obligated to pay defined amounts of benefits to eligible workers. Most states also have a minimum and a maximum unemployment benefit. Benefits normally last for twenty-six weeks, unless Congress grants extensions.

A key concept here is the replacement rate, the rate at which unemployment benefits replace earnings. The cap on maximum benefits makes the replacement rate fall with earnings. In Michigan, the unemployment benefit is calculated at 53.3 percent of gross earnings, up to a maximum of $300 per week. Thus, an individual earning $20,000 per year would have a benefit of $205 per week and a replacement rate of 53.3 percent of gross income (72.9 percent of net income) for six months. (2) A person earning $80,000 per year, however, would receive the maximum benefit and have a replacement rate of 19.5 percent of gross income (32.2 percent of net income) for six months. (3) The current unemployment system is designed for persons with a permanent attachment to the labor force. For a worker to be eligible for benefits, the system requires a minimum number of weeks of employment and a minimum amount of earnings prior to becoming unemployed. To be eligible for unemployment benefits in Michigan, an individual normally must have wages of at least $2,000 in the highestearning quarter and total wages of at least 1.5 times the wages of the high quarter during the year that he became unemployed (State of Michigan 2001, 9-13). This provision disqualifies new entrants and reentrants to the labor force. One result of this provision has been a decline in the percentage of unemployed people who receive unemployment insurance benefits--from approximately 50 percent in the 1960s to 35 percent in the 1980s and 1990s (Bruce 1998, 326; Council of Economic Advisors 2003, table B-45; authors' calculations).

The current system is based on at least four assumptions, most of which are now questionable. The first assumption is that unemployment taxes collected during good times should cover the payout costs during bad times. The second assumption is that unemployment is primarily seasonal or frictional (short term), not cyclical or structural (long term). (4) Frictional unemployment consists of people looking for jobs or waiting to take jobs in the near future. Cyclical unemployment arises from recessions, and structural unemployment springs from fundamental changes in industries and the economy. Thus, the current system assumes that the unemployed can find employment in a similar line of work within approximately six months. Career changes and lengthy retraining will be unnecessary. A third assumption is that employees have continuous careers: workers do not leave the labor force (for example, to have children or retrain themselves) except for temporary unemployment and when they retire. The fourth assumption is that the current system's incentive structure will prevent the unemployed and employers from taking unfair advantage of the system.

Problems with the Current System

The current system is inadequate for dealing with unemployment problems in the twenty-first century. It cannot meet its financial obligations during recessions without federal aid or deficit spending, and its benefits to the unemployed are insufficient. In addition, the system is out of touch with today's economic and employment realities. Unemployment now is often structural, affecting many white-collar and professional employees. Many workers now leave the workforce for extended periods. Women, who constitute almost 50 percent of the workforce, often take extended leaves from full-time work to bear and rear children. Moreover, the current system has the unintended consequences of encouraging layoffs and unemployment. Finally, unemployment can no longer be considered an isolated, short-term problem unrelated to other economic and social issues, such as savings, training, and retirement.

Financial Problems

Employers pay into a general fired that is supposed to have adequate financial reserves for both prosperous times and recessions. Yet the reserves are often insufficient. Increased unemployment during recessions raises the number of payments to the unemployed and increases the tax burden required to pay for these benefits. As a result, during recessions in the past twenty-five years many states had to borrow money to finance unemployment payments. The length of recessions is not predictable, and they are often longer than expected. Congress therefore regularly extends the length of benefits during recessions. Such extensions occurred four times in the 1991-93 slowdown and twice during the recession of 2001-2003. They increase the problems of the unemployment insurance fund.

In addition, the benefits are inadequate. In Michigan, the maximum benefits are $7,800 over six months. This figure assumes that unemployment is short in duration and primarily affects blue-collar employees, but unemployment may persist for months, perhaps years, and affects all categories of workers. Some people now must prepare for new careers before they can become gainfully employed. (5) Unfortunately, most workers do not have sufficient financial reserves to supplement meager unemployment benefits--which, in many cases, are necessary to cope with the new realities of extended unemployment. The personal saving rate now is less than 3 percent, which is approximately one-fourth of the saving rate of thirty years ago. (6)

The Changing Nature of Unemployment

Unemployment is becoming endemic because of structural shifts in the U.S. employment structure. Many professional, technical, and managerial (PTM) jobs are no longer secure. Until the early 1980s, most PTM employees had secure jobs, with lower unemployment rates (U.S. Bureau of the Census 1990, 398) and with longer years of employment in their occupations than the average worker had. (7) However, beginning with the 1982 recession, and especially with the 1990-91 slump, PTM workers began to experience higher rates of job loss (Council of Economic Advisors 1992, 105). The number of semiskilled and unskilled jobs is also permanently declining. This decline is occurring for several reasons. Jobs in the United States require more skills now than they did twenty-five years ago (Howell and Wolff 1991). U.S. manufacturing companies often relocate manufacturing operations to Third World countries, where unskilled labor is abundant and inexpensive. Manufacturing has become team oriented and uses more high technology. A team orientation requires a new breed of skilled employee, and the high-technology plants require fewer employees.

More women are full-time participants in the labor force. Perhaps the greatest structural change in the labor market in recent years is the growth in the number of employed women. From 1965 to 2002, employment grew by 63 million jobs. Women took 60 percent of these new jobs, and at least 75 percent of women between the ages of twenty and forty-four are participating in the labor force. (8) Because women bear the bulk of the responsibility for care of young children, they have more intermittent career patterns than do men (Browne 2002). Whereas men leave the workforce an average of 3.6 times during their lifetimes, women leave an average of 5.4 times (U.S. Bureau of the Census 1990, 388). Women in their childbearing years are 3.0 times more likely to be out of the labor force than men are (Colgan 2003). Yet the current unemployment insurance system does not accommodate women's career realities because eligibility requires a current attachment to the labor force. If a woman worked for five years and then voluntarily left the labor force for two years to have a baby and care for it during infancy, she would forfeit benefits accrued from her initial five years in the labor force. If she reentered the labor force after two years and was laid off within, say, two months, she again would be ineligible for unemployment benefits.

A fourth structural shift is the increase of contingent workers--that is, workers without a long-term attachment to a particular business. At least one-fourth of the labor force is contingent, and this group is growing faster than the total labor force (Belous 1989). Yet the unemployment system does not accommodate the career realities of contingent workers. If a temporary worker were employed for three months and then laid off, he would be ineligible for unemployment benefits. Because contingent workers often have a sequence of temporary assignments, they rarely become eligible for unemployment compensation.

People who have lost jobs because of these structural shifts in the economy need to do more than find another job. They must learn new skills. The current unemployment system, however, provides neither the time nor the money for the structurally unemployed to learn new skills. The unemployment benefits in most...