Making Unemployment Insurance Work

Tuesday, January 31st, 2006

I’ve often wondered why unemployment benefits weren’t in the form of a loan. Edward Lazear suggests just that in Making Unemployment Insurance Work:

The main purpose of unemployment insurance is to cushion temporary, unanticipated spells of unemployment. It is not intended to support system those who are chronically out of work or those in industries with relatively high wages and high expected unemployment, like construction.

Unfortunately, it is difficult to eliminate the abuses of unemployment benefits without also eliminating the insurance aspect. [...] To reform the system so that it would provide needed insurance and reward firms and workers who stay off the unemployment rolls, the current subsidy program should become more of a loan program. Under this system, workers would receive benefits during spells of unemployment but would repay a portion of the benefits after returning to work. Firms whose workers stayed off the rolls would pay less; workers who did not draw down benefits would receive more take-home pay.

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