Unemployment Insurance: Survey and Extensions

Abstract

employment, and they are generally viewed as programmes of social insurance wherein the costs of financing UI benefit payments are shared by all workers and firms in the covered (insured) sector. As is common in such situations, however, problems of moral hazard may arise: the frequency and severity of periods of unemployment are to an important degree products of the employment decisions of workers and firms, and these may be affected by the provision of benefits. There may therefore be important causal links between the provision of UI benefits and the magnitude of unemployment. In this paper, we survey some of the major theoretical and empirical issues relating to causal links between UI and unemployment, with particular emphasis on the role played by systems of UI financing. It has long been recognized that the flow of UI benefit payments to unemployed individuals will affect job search decisions and hence their probability of leaving unemployment. More recently, following the work of Joseph Becker (1972), methods of financing UI benefit payments have found a prominent place in the literature. The issues in this area focus primarily on the behaviour of firms in influencing an individual's probability of entering unemployment, and are related to methods of experience rating (or the lack thereof) in determining Ul tax rates. This practice, which is meant to alter UI tax liabilities on the basis of a firm's history of generating unemployment, is unique to UI systems in the United States, although its policy implications are quite applicable elsewhere.2 We believe that the effects of experience rating represent the most important set of unresolved empirical issues in the analysis of UI, and we therefore devote a large portion of our discussion to the theoretical implications of this practice and to potential methods of measuring its effects. By way of introduction, it is worthwhile to consider some simple empirical background, including the magnitude of UI programmes relative to other social insurance and welfare programmes, and the types and sources of potentially compensated unemployment. While these data are for the United States, we expect that the thrust of the argument applies to other UI systems as well. Table 1 gives the percentage distribution of benefit payments by social insurance beneficiary, and each category's benefits as a percentage of total personal income, for the United States over the period 1973-1976. All categories other than UI are dominated by programmes under the Social Security Act, and hence it is clear that UI is small relative to social security. As one might expect, UI's share of social insurance benefits and of personal income moves counter-cyclically, being