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Putting unemployment insurance to work

November 5, 2014

The recent political squabble in Arizona over whether to extend unemployment benefits from 79 weeks to 99 weeks underscores a broader problem with the unemployment insurance (UI) system in the U.S. today.

The system was created in the 1930s and was designed to be centralized. The states collect unemployment insurance taxes and send the money to the federal government. Although states control the tax rates, benefit levels, and eligibility requirements, the federal government controls the money.

The federal government puts the money states collect into two buckets: one to pay for the costs of administering the UI program and another to pay out benefits. But there is never any crossover between the two buckets: if a state is able to cut administrative costs, the money can’t be redirected toward benefits.

In addition, the current structure forces states to fixate on the length of time benefits should be offered and the level of those benefits instead of new ideas that can better help the unemployed. That’s because the federal government does not let states experiment with different ways of dealing with cyclical spells of unemployment.

An idea that many states – including Arizona – could benefit from is allowing employers and workers to divert the revenue from the UI tax into a private account that the worker could access if they became unemployed. The state could still offer a basic level of time-limited benefits. But if these types of accounts were available, workers would have more incentive and tools available to prepare for the possibility of long-term spells of unemployment.

States should not be forced into a one-size-fits-all system. Instead, states should petition the federal government to decentralize the program and allow them to create more innovative unemployment insurance systems that can better serve their workers and employers.

Stephen Slivinski is senior economist for the Goldwater Institute.

Learn More:

Goldwater Institute: Policymakers should audit, not expand, the unemployment insurance program

Cato Institute: Failures of the Unemployment Insurance System

National Center for Policy Analysis: Unemployment Insurance in a Free Society



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