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Unemployment Insurance: Strengthening the Relationship between Theory and Policy

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  • Walter Nicholson
  • Karen Needels
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    Abstract

    Ever since the U.S. federal-state system of unemployment insurance was founded in the 1930s, it has provided partial, temporary replacement of wages to eligible workers who lose jobs -- through no fault of their own -- (as determined by state-level regulations). Unemployment insurance is one of the largest social insurance programs in the United States, with benefits paid totaling about $34 billion in 2004. Economic theory can help us understand the challenges this complex program is likely to face over the next few years. We begin by summarizing the salient characteristics of the unemployment insurance program and then examine the theoretical and econometric research. Much of this research revolves around the main goals of the program, which include: 1) sustaining consumption for workers and their families; 2) helping recipients to make efficient job choices during a period of financial stress; and 3) minimizing the adverse incentives that may accompany partial wage replacement. Of course, these goals can come into conflict -- for example, if replacing wages for an unemployed worker also discourages that worker from aggressively searching for or accepting a new job -- and our discussion will focus on these conflicts. In conclusion, we address the key policy issues that the unemployment insurance system is likely to face in upcoming years and ways policymakers may be able to use economic analysis to adjust the program so that it remains effective in addressing the needs of unemployed workers.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.20.3.47
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 20 (2006)
    Issue (Month): 3 (Summer)
    Pages: 47-70

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    Handle: RePEc:aea:jecper:v:20:y:2006:i:3:p:47-70

    Note: DOI: 10.1257/jep.20.3.47
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    Cited by:
    1. Jorge Andrés Tamayo & Jairo Núñez & Carlos Medina, 2013. "The Unemployment Subsidy Program in Colombia: An Assessment," IDB Publications 82158, Inter-American Development Bank.
    2. David R. Howell & Miriam Rehm, 2009. "Unemployment compensation and high European unemployment: a reassessment with new benefit indicators," Oxford Review of Economic Policy, Oxford University Press, vol. 25(1), pages 60-93, Spring.
    3. Marc Fleurbaey & Stéphane Zuber, 2014. "Fair management of social risk," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00973480, HAL.
    4. Steven Craig & Wided Hemissi & Satadru Mukherjee & Bent E. Sorensen, 2012. "How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance," Working Papers 201302845, Department of Economics, University of Houston.
    5. Jennifer Brown & David A. Matsa, 2012. "Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms," NBER Working Papers 18208, National Bureau of Economic Research, Inc.
    6. Hassan Mohammadi & Daniel Rich, 2013. "Dynamics of Unemployment Insurance Claims: An Application of ARIMA-GARCH Models," Atlantic Economic Journal, International Atlantic Economic Society, vol. 41(4), pages 413-425, December.

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