Reforming unemployment insurance

People rarely stop to think about just how bizarre our unemployment insurance system actually is. Imagine if automobile insurance worked as follows. After an accident, the insurance company paid you $400 dollars for each week that your car was out of commission, up to 26 weeks.

That system would obviously encourage people to delay repairing the car. This is why insurance companies pay the insured a lump sum, right after the accident. I’ve long advocated the same system for unemployment insurance, in order to reduce work disincentives.

Instead, the disincentive to work was actually increased by the UI reforms in the recent CARES Act. Some of the changes may have been beneficial, such as extending UI to independent contractors. But it’s hard to justify paying people who don’t work more than they received on their previous job, even during times when jobs are hard to come by.

A new study by Attila Lindner and Balázs Reizer suggests that paying UI as a lump sum after the “accident” of job loss could be a win-win proposition.  Here’s the abstract:

We estimate the effect of front-loading unemployment benefit payments on nonemployment duration and reemployment wages. Exploiting a sharp change in the path of benefits for those who claimed unemployment benefits after November 1, 2005 in Hungary, we show that nonemployment duration fell by two weeks, while reemployment wages rose by 1.4 percent as a result of front-loading. We show that these behavioral responses were large enough to offset the mechanical cost increase of the unemployment insurance. We argue that our results indicate that benefit front-loading was a Pareto improving policy reform as both unemployed and employed workers were made better off.

The post Reforming unemployment insurance appeared first on Econlib.

Visit the USSA News store!
Click this link for the original source of this article.
Author: Scott Sumner

This content is courtesy of, and owned and copyrighted by, and its author. This content is made available by use of the public RSS feed offered by the host site and is used for educational purposes only. If you are the author or represent the host site and would like this content removed now and in the future, please contact using the email address in the Contact page found in the website menu. The owner of this website may be paid to recommend American Bullion. The content of this website, including the positive review of American Bullion, the negative review of its competitors, and any other information may not be independent or neutral.