Tag Archives: Chile

New Tax Foundation Study on Unemployment Insurance across the States

On Monday, the Tax Foundation released a new study by Joe Henchman on Unemployment Insurance policies in the 50 states. The study highlights that while the federal-state program is supposed to be counter-cyclical, in reality states do not use periods of high growth to prepare their unemployment trust funds for recessions. At the beginning of 2008, most states were prepared to pay less than one year’s worth of high unemployment benefits, leading to quick insolvency for many states’ funds in recession.

In order to provide benefits, states have had to borrow from the federal government. Henchman explains:

Beginning on September 30, 2011, states must pay approximately $1.3 billion in interest on those outstanding balances; in many cases, businesses and employees in those states will also face increases in federal unemployment insurance tax rates as a result of those federal loan balances. These new interest obligations and tax increases, if they ultimately occur, come at a time when private sector hiring is already at a low level and states are under significant fiscal pressure. These unemployment insurance fiscal policies may exacerbate negative job growth and tax trends, instead of operating countercyclically as the program was intended.

The study also provides analysis of the different taxes and benefits across the states. The compilation of the variation of tax rates, duration of benefits, funding gaps, and other policy factors makes this paper an excellent jumping off point to look at state level reforms based on states that have performed relatively well in this program compared to the neighbors.

In a more ambitious policy proposal, Henchman recommends Individual Unemployment Benefit Accounts as an option for reform. These accounts, which Chile adopted in 2002, provide a measure of income stability during periods of unemployment. Unlike state-administered UI programs, though, private accounts do not carry the perverse incentives that may dissuade people from finding work while they are receiving these benefits because money which goes unused during unemployment can be accessed upon retirement. In 2010 Eileen Norcross and I did a brief analysis of the incentives that the current UI program provides and came to the same general policy recommendation.


Is There Room for Compromise on Unemployment Insurance?

Last night the Senate allowed unemployment insurance benefits to lapse for those Americans who have been receiving such benefits for 99 weeks or more. What will happen to the unemployment rate? Let’s look at it in the short-run and in the long-run.

Short Run:  

I would argue that in the short-run, it is unclear. On the one hand, Keynesians believe that unemployment insurance is one of the more effective forms of fiscal stimulus: by putting money in the hands of those who are likely to spend it, the Keynesian multiplier can work its magic, rippling throughout the economy leaving prosperity in its wake. That is, unless the estimates of the Keynesian multiplier are widely off-target. And there are some reasons to believe they are.

But even if we grant the Keynesians this argument, we have to consider the countervailing evidence. There are numerous studies that show that extensions in potential benefit duration are correlated with longer unemployment spells. Moreover, other studies show that the probability of finding employment rises just prior to the lapse of benefits.

Of course, aside from the macroeconomic effects, we have to consider the fact that unemployment checks help people. And maybe we should be willing to harm the economy at-large for the sake of helping those who are out of work.

Long Run:

The long run story is clearer. From 2000 to 2004, the U.S. unemployment rate averaged about half that of France, Germany, Italy and Spain.


In 2004, among the unemployed, the U.S. fraction that was unemployed for more than a year was about one-fourth that of other nations.


So compared with other nations, we have an extremely healthy labor market and we all benefit from this. As I have noted before, numerous studies attribute our relatively low long-term unemployment rate to our more competitive labor market. Compared with other nations, U.S. labor taxes are lower, labor regulations are less-burdensome, and unemployment insurance benefits are less-generous. Because of this, employers are more likely to hire and employees are more likely to accept offers. This is an incredible advantage. And we should not take it for granted.

Reconciling the Short with the Long Run:

So in the short run, unemployment insurance may help the economy while it undoubtedly helps those who find themselves unemployed. But how do we achieve this short-term aim without jeopardizing the competitive labor markets that have benefitted all Americans?

Perhaps there is room for compromise. One option may be to agree to extend benefits now in exchange for reform of the system. As Eileen has noted, we would do well to consider systems such as that of Chile. They have two systems that work side-by-side: one is a social insurance system that is similar to our own unemployment insurance program; the other is an Unemployment Insurance Savings Account (UISA) program in which workers are required to save a fraction of their earnings in a personal account. Workers have an incentive to get back to work quickly because whatever amount they leave in the account becomes theirs when they retire. Former Clinton Administration economist and Nobel laureate Joseph Stiglitz has made a similar proposal for the U.S. that would integrate unemployment insurance with retirement insurance. Maybe now is the time to give it a thought?

Congress Rejects Unemployment Benefit Extension

After 99 weeks of unemployment benefit extensions, Congress has voted ‘no’ to extending the program for a further 13 weeks, adding $12.5 billion to the nation’s debt. Instead, legislators suggest that unspent stimulus money be dedicated to financing any continued benefits for the unemployed.

While some may think the measure is unduly harsh, consider one of the well-known moral hazard results of public unemployment benefits: the longer they are awarded, the longer the time it takes for people to look for a job. A recent paper by the Institute for the Study of Labor in Bonn shows that Chileans who rely on private Unemployment Insurance Savings Accounts (UISAs) are more likely to find a job sooner, than those who rely on Chile’s publicly-funded social insurance fund.

Hopefully, the doublespeak that unemployment benefits create jobs will also be put to rest. What Congress should instead consider is encouraging job creation via tax cuts, spending and regulatory reform.

And also, it’s important to get unemployment insurance right. Congress should move to institute a more stable safety net for individuals who experience unemployment. Workers should be given individual savings accounts,  funded by an employee/employer contribution. The savings can be used during periods of unemployment or used in retirement.

Two Problems in One: Unemployment Funds Used to Balance Budget

On Tuesday New Jersey voters will be asked if the state should end the practice of using surplus Unemployment Compensation funds to balance the budget. Such “trust fund sweeps” are used by many states to fill budget gaps, something I describe in a recent paper Fiscal Evasion.

Shaking the unemployment piggy bank into the general fund I think raises another important problem. How do we ensure governments don’t raid social insurance programs? Why not give workers individual control of their own unemployment savings accounts.

Implemented with success in Chile not only to Unemployment Insurance Savings Accounts (UISAs) shift control away from budget-rule bending politicians, they also alleviate the moral hazard problem with government unemployment benefits. A recent paper by Hartley, Ours and Vodopedic, offers empirical evidence of how Chile’s UISAs improve the incentive of the unemployed to seek employment.

Finding another way to weather unemployment

The Bureau of Labor Statistics recently released its latest unemployment figures. The Atlantic Online notes, it isn’t pretty. The national unemployment rate remains at 10 percent. However, for many states, December brought deeper unemployment. Mercatus Center economist Veronique de Rugy shows how “unstimulated” our economy remains with a mass exodus of 600,000 workers from the economy since December.

It may seem like obvious policy for the federal government to extend unemployment benefits for a record fifth-time. It’s something they’re considering. But, as Emily Washington and I discuss in our recent Mercatus On Policy, expanding the current Unemployment Insurance (UI) program isn’t the best medicine for the economy or for the unemployed. UI has become an poor safety net. At worst the program actually helps to extend unemployment.

Now may be the time to start discussing another approach to helping workers weather recessions: Unemployment Insurance Savings Accounts. Chile did it in 2003. Rather than dedicating employer payroll taxes to a state-administered fund, states should let workers set up individual savings accounts. With contributions from both the employer and the employee, UISA’s are available to individuals when unemployment occurs, or can be converted into savings upon retirement.