Unemployment Insurance Reform

• DOI: 10.1177/0002716219885339
• Published date: 01 November 2019
• Date: 01 November 2019
• Author: Till von Wachter
• Subject Matter: Social Insurance

ANNALS, AAPSS, 686, November 2019 121

DOI: 10.1177/0002716219885339

Unemployment

Insurance

Reform

By

TILL VON WACHTER

885339ANN The Annals of The American AcademyUnemployment Insurance Reform

research-article2019

The Unemployment Insurance (UI) system is the larg-

est general social insurance program for working-age

individuals in the United States and currently insures

more than 140 million workers against temporary

income losses related to unemployment. UI has been

the bedrock of U.S. social policy in recessions, but the

system has remained largely unchanged since the mid-

1970s despite substantial changes in the labor market

that include deindustrialization, higher female partici-

pation, increases in wage inequality, and technological

changes. This article summarizes existing empirical

evidence on the state of the UI system and its effective-

ness in achieving its stated goals. A range of reform

proposals are discussed that aim to address both the

well-known, long-term issues with UI, as well as UI’s

readiness to support the workforce of the twenty-first

century.

Keywords: unemployment insurance; experience rat-

ing; worker behavior; firm behavior

The unemployment insurance (UI) program

has been the bedrock of U.S. social policy in

response to job loss and swings in unemploy-

ment during recessions. The UI program pro-

vides temporary benefits to employees who lost

their job through no fault of their own.

Individuals with a minimal degree of prior labor

market attachment are insured but benefits are

only a fraction of a worker’s prior earnings.

Since its inception in the mid-1930s, the

primary goals of the UI program have been to

Till von Wachter is a professor of economics at the

University of California–Los Angeles, faculty director of

the California Policy Lab, and associate dean for

research of the Social Science Division. His research

examines how labor market conditions affect the well-

being of workers and the role of social insurance pro-

grams in buffering economic shocks.

NOTE: I thank Brenda Garcia Lemus for excellent and

indispensable research assistance and the two editors of

the special issue for helpful guidance. All remaining

errors or omissions are my own.

Correspondence: tvwachter@econ.ucla.edu

122 THE ANNALS OF THE AMERICAN ACADEMY

prevent declines in consumption of individuals who lose their jobs and their fami-

lies without their having to spend down or liquidate their assets. In addition, the

program is meant to enable unemployed workers to find productive employment

rather than quickly take available lower-wage jobs. One important function of the

UI system is to also help unemployed workers continue to spend as a means of

automatically stabilizing the economy in hard-hit local labor markets.

The UI program is the largest social insurance program available to the gen-

eral working-age population in the United States. As of the fourth quarter of

2018, the program provided monthly benefit payments to around 1.6 million

unemployed individuals. During the Great Recession in 2007 to 2008 and its

aftermath, the UI system saw a massive expansion of its program from a duration

of six months to as long as two years, and it provided benefits to more than 10

million individuals (see Vroman 2011).

Despite important secular changes in the labor market over the last decades,

the core UI program has remained relatively unchanged since the mid-twentieth

century, with little reforms since the 1980s, with the exception of a brief reform

push in the course of the American Recovery and Reinvestment Act (ARRA). In

the face of an evolving labor market and difficulties of the UI system during the

Great Recession, including delays in approving benefit extensions and funding

shortfalls, an increasing number of observers have called for a systemic approach

to reforming UI. Absent such a system-wide approach, in the aftermath of the

Great Recession, several states have begun to cut UI benefits and UI durations

to address recent financing shortfalls of their UI state programs.

Some of the potential issues in the UI system have been well known to policy-

makers and researchers alike. On one hand, as with any program involving both

conditional benefits and taxation, the UI system has been shown to affect employ-

ment decisions of both workers and employers. While the value of the insurance

provided is usually found to outweigh such costs, these considerations are relevant

for setting the right parameters of the system. On the other hand, problems of

solvency of the UI state trust funds have plagued the UI system, especially in the

aftermath of larger recessions, highlighting the need to address the financing of

the system and the state-federal partnership embedded in the UI program.

This article provides an overview of the UI program as it stands today and

summarizes some of the main reform proposals put forward to address the vari-

ous issues that the system is facing. These deal with, among others, whether the

current UI program adequately supports a workforce that has undergone sub-

stantial changes in recent decades, including a higher female labor force partici-

pation rate, increased inequality, deindustrialization and the rise of service jobs,

ongoing technological changes, and the recent rise in contract work. Reform

proposals also address concerns over states’ ad hoc benefit reductions to address

financing needs, as well as the current way in which the UI program is extended

in recessions to account for rising unemployment. I also discuss extensions of the

UI system that have been proposed to address the large costs of layoffs through

temporary wage subsidies, sometimes called job sharing, and options to keep

some of the benefits as workers resettle into initially lower-paying jobs. I do not

provide a thorough analysis of proposals to replace the UI program as a whole,