Thursday, October 19, 2006

Fixing Unemployment Insurance

Arnold Kling and Tyler Cowen are offering five King-For-The-Day policy recommendations so I'm going to use it as an excuse to offer one of my own.

During the economic turmoil that followed the dot-com bust and the 9/11 attacks I knew several people that lost their jobs. Most of these people took advantage of the generous unemployment benefits and some of those turned down jobs or half-heartedly searched for new jobs taking full advantage of the (extended) benefit. One of the guys timed the start of his new job to be on the precise day that he was going to lose unemployment compensation.

As long as government is going to pay for people to be unemployed some people are going to choose to be unemployed. One could argue that government shouldn't provide protection from unemployment at all, but that would be an impossible political sell. Since elimination isn't possible, reshaping the program to offer the right incentives is the right approach.

Before you can just eliminate the hard-outs you have to understand what it is that you want to accomplish. Unemployment insurance needs to make sure that people do not lose their house, their cars, their livelihood and generally avoid bankruptcy if they are unlucky enough to lose their jobs.

The easiest way to accomplish this without just handing out money is to implement a government provided low-interest loan for the unemployed. The loan could cover mortage, utilities and car payments for sure and perhaps minimum payments on credit cards and other miscelaneous bills. The loans would be very low interest and could be paid back over a very reasonable amount of time - say five or ten years. The repayments could even be setup to come out of payroll before taxes.

This approach has several benefits over the current system.

  1. It could cover involuntary and voluntary termination.
    Right now, if you quit your job you can't get unemployment. This means that people have to tolerate conditions that they wouldn't normally put up with if they could afford to be without work for a month or two. This gives some additional power to employees which should please any liberal and gets rid of some legal processes that are used up fighting over whether or not a termination was warranted or not since some states view termination with cause as uneligible for unemployment benefits.

  2. People will only borrow what they really need.
    If someone has six months of bills squirreled away in a bank account (don't we all?) then they are unlikely to ask the government for money. The current system rewards people for taking something that they really need.

  3. People will be motivated to find jobs quickly.
    See above. If you have to pay back everything that you borrow you aren't going to be turning down perfectly good jobs so that you can spend more time watching soap operas.

  4. Its very cheap to implement.
    At the end of the day the program essentially revenue nuetral since most of the money will be paid back. The costs of running the program should probably be cheaper than the current system because you don't the enforcment mechanisms. You don't need lawyers and judges to decide if someone deserves unemployment or not. You don't need social workers checking to see if you are really looking for a job or just freeloading. You don't need accountants making sure that Big Bad Corporation is paying the unemployment insurance.
I can already hear some bleeding hearts complaining that it isn't fair to make poor people pay back unemployment loans. To assuage those types of fears I think that it would be reasonable to make the system slightly progressive. Perhaps people at or near the povery line would only have to pay back 90% of the loans assuming that there is a borrowing maximum.

As long as there was a real cost for being unemployment - or at least making sure that it wasn't profitable - it should be quite easy to eliminate much of the fraud associated with unemployment while providing the type of protection that liberals want.

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