Annie Lowrey and Even The Conservative Josh Barro argue in favor of reforming the Unemployment Insurance system so as to make extended benefits eligibility automatic in times of economic depression. Barro:
I haven’t seen any specific formulas proposed (if a reform is on the table, readers, please alert me) but in general UI should be extended when unemployment is high and/or rising, and contracted when it is low and/or falling. A formulaic adjustment program could mimic what Congress habitually does already, but without generating market uncertainty — or incurring risk that Congress will be too timid to pull the trigger on abbreviating UI benefits in recovery.
I agree with the spirit here. One of the big lessons of the Great Recession is that relying on discretionary congressional action in the middle of a downturn is not a great idea. We need to set up systems that have more automaticity. That said, I saw a mind-blowing chart on Mike Konczal’s blog a couple of weeks ago that suggested that everything I think I know about Unemployment Insurance is wrong.
Here, then is some hot, hot empirical research from Austria:
What happens at 36 months? Well, in Austria if you’ve worked a job for at least 36 months, then you get your UI in terms of a single lump-sum payment, rather than a sporadic paycheck. Conventional UI in effect pays people to not work, and thus creates a disincentive to find a job. The general view is that this disincentive effect needs to be balanced against humanitarian issues and aggregate demand considerations during a severe slump. But the Austrian evidence suggests that conventional wisdom is badly misconstruing the situation. Instead of the lump sum encouraging people to take new jobs more quickly by removing the disincentive, it encourages them to wait even longer before finding a new position. Konczal says this is a more efficient reallocation of resources: “This is people searching for a job they fit into better, this is people making their basic payments and obligations, hedging against future risks and future financial ruin, this is people being able to efficiently make the choices for how to fix back into the economy.”
Interestingly, whether you agree with Konczal’s interpretation or want to stick with the traditional disincentive view, either way the lesson seems to be that the main reform UI needs is not automatic extensions, but transformation into lump-sum payments. If you want to do something automatic, you could add some criteria that triggers a new round of payouts.