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Free Content Unemployment Insurance: Strengthening the Relationship between Theory and Policy

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Ever since the U.S. federal–state system of unemployment insurance was founded in the 1930s, it has provided partial, temporary replacement of wages to eligible workers who lose jobs "through no fault of their own" (as determined by state-level regulations). Unemployment insurance is one of the largest social insurance programs in the United States, with benefits paid totaling about $34 billion in 2004. Economic theory can help us understand the challenges this complex program is likely to face over the next few years. We begin by summarizing the salient characteristics of the unemployment insurance program and then examine the theoretical and econometric research. Much of this research revolves around the main goals of the program, which include: 1) sustaining consumption for workers and their families; 2) helping recipients to make efficient job choices during a period of financial stress; and 3) minimizing the adverse incentives that may accompany partial wage replacement. Of course, these goals can come into conflict—for example, if replacing wages for an unemployed worker also discourages that worker from aggressively searching for or accepting a new job—and our discussion will focus on these conflicts. In conclusion, we address the key policy issues that the unemployment insurance system is likely to face in upcoming years and ways policymakers may be able to use economic analysis to adjust the program so that it remains effective in addressing the needs of unemployed workers.

Document Type: Research Article


Publication date: 2006-06-01

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  • The Journal of Economic Perspectives (JEP) attempts to fill a gap between the general interest press and most other academic economics journals. The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of thinking; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and readings for classroom use; and to address issues relating to the economics profession.
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