Unemployment Insurance as an Automatic Stabilizer

Abstract

George E. Rejda, Ph.D., C.L.U., is Associate Professor of Economics and Insurance in the University of Nebraska. Dr. Rejda, who was a Fellow in the Huebner Foundation, has taught at Loyola University of Los Angeles, University of Southern California, and Creighton University. He is a member of the Board of Graders of the American College of Life Underwriters. The author wishes to thank the Research Council of the University of Nebraska for a Summer Research Fellowship which made this study possible. He is also indebted to the following individuals who read an earlier draft of this study and offered many helpful suggestions: Dr. Campbell R. McConnell, Professor of Economics, University of Nebraska; Dr. Wallace C. Peterson, Professor of Economics, University of Nebraska; Dr. Theodore Roesler, Associate Professor of Statistics, University of Nebraska; Dr. Thomas Nitsch, Associate Professor of Economics, St. Mary's University; and Dr. Joseph Belth, Associate Professor of Insurance, Indiana University. This paper was presented at the 1965 ARIA Annual Meeting. 1 Unemployment insurance is composed of several separate and distinct programs. First, each state, as well as the District of Columbia and Puerto Rico, has its own program. Second, unemployment benefits are provided for railroad workers under the Railroad Unemployment Insurance Act. Third, beginning in 1955 unemployment benefits were provided to Federal civilian employees (UCFE). Fourth, unemployment benefits are paid to ex-servicemen under various programs. For example, benefits were paid under the Servicemen's Readjustment Act (1944) and the Veterans' Readjustment Assistance Act (1952). In addition, in 1958 a permanent unemployment compensation program for ex-servicemen (UCX) was established. Finally, additional unemployment benefits were provided under the fluctuations in economic activity. Unemployment insurance is widely recognized by economists as a significant automatic stabilizer in the arsenal of counter-recessionary weapons. The primary purpose of this paper is to analyze empirically the effectiveness of unemployment insurance as an automatic stabilizer in the economy. The scope of the study is limited to the state unemployment insurance programs, the program for federal civilian employees, and the program for railroad workers provided under the Railroad Unemployment Act. Benefits paid to ex-servicemen are excluded.3 The time limit of the study is confined to 19451964. This period is indicative of modern postwar economic conditions, and includes four business cycles, as well as part of the upswing of a fifth cycle. Attention is also devoted to the concept of experience rating in order to determine empirically the extent to which such a technique is a destabilizer and/or stabilizer of economic activity.