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Lessons from the American Federal-State unemployment insurance system for a European unemployment benefits system

Author

Listed:
  • Christopher J. O'Leary

    () (W.E. Upjohn Institute for Employment Research)

  • Burt S. Barnow

    (George Washington University)

Abstract

The federal-state system of unemployment insurance (UI) in the United States was established by the Social Security Act of 1935 during the Great Depression. Under the program, states provide temporary partial wage replacement to involuntarily unemployed workers with significant labor force attachment. The federal government induced states to establish UI programs through two means: 1) a uniform federal tax imposed on employer payrolls, with a 90 percent reduction granted in states operating approved UI programs, and 2) grants to states to administer their programs. The system has evolved into a collection of separate state programs adapted to different regional, economic, and cultural contexts that all meet the same standards. This paper reviews state practices concerning applicant eligibility, benefit generosity, and benefit financing, with the aim of revealing lessons for a possible European unemployment benefit system (EUBS). We examine areas of federal leadership, explicit federal-state cooperation, and state innovation. While the U.S. system offers some good ideas for setting up an EUBS, there are also lessons in some shortcomings of the U.S. experience. We identify areas of risk for individual and institutional moral hazard in a multi-tiered UI system, and give examples of monitoring methods and incentives to ameliorate such risks. We suggest approaches for gradual system development, encouraging lower-tier behavior, benefit financing, and responses to regional and system-wide crises.

Suggested Citation

  • Christopher J. O'Leary & Burt S. Barnow, 2016. "Lessons from the American Federal-State unemployment insurance system for a European unemployment benefits system," Upjohn Working Papers and Journal Articles 16-264, W.E. Upjohn Institute for Employment Research.
  • Handle: RePEc:upj:weupjo:16-264
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    References listed on IDEAS

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    2. Christopher J. O'Leary & Robert A. Straits, 2004. "Intergovernmental Relations in Employment Policy: The United States Experience," Book chapters authored by Upjohn Institute researchers,in: Alain Noel (ed.), Federalism and Labour market Policy: Comparing Different Governance and Employment Strategies, pages 25-82 W.E. Upjohn Institute for Employment Research.
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    Cited by:

    1. Lenaerts, Karolien & Paquier, Félix & Simonetta, Suzanne, 2017. "Unemployment Insurance in America: A model for Europe?," CEPS Papers 12684, Centre for European Policy Studies.
    2. Léo Aparisi de Lannoy & Xavier Ragot, 2017. "Une (ré) assurance chômage européenne," Sciences Po publications info:hdl:2441/69i5rbio799, Sciences Po.
    3. Beblavý, Miroslav & Lenaerts, Karolien, 2017. "Feasibility and Added Value of a European Unemployment Benefits Scheme," CEPS Papers 12230, Centre for European Policy Studies.

    More about this item

    Keywords

    unemployment insurance; European unemployment benefit system; multi-tiered system; moral hazard; incentives; public finance;

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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