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Unemployment Insurance Over the Business Cycle: Does it Meet the Needs of Less-Skilled Workers?

August 2005

Phillip B. Levine, Department of Economics, Wellesley College.

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The unemployment insurance (UI) system is one of the primary ways that the government seeks to alleviate the hardship associated with an economic downturn. It was first introduced in the United States at the national level as part of the 1935 Social Security Act to provide financial support for the millions of workers that lost their jobs during the Great Depression. The system is still designed to provide greater relief at times of economic hardship. Workers are more likely to receive benefits in a recession as benefits are paid only to those who lose their jobs through no fault of their own and these circumstances are much more common at such times. But the system of UI financing also helps offset the hardship associated with a downturn. Firms pay a tax to fund benefits that is at least partially “experience-rated” in that those firms who lay off more workers often have to pay a higher tax. This higher tax provides them with an incentive to lay off fewer workers. Since layoffs are more common during a recession, experience rating has the ability to reduce layoffs the most during those periods. On the other hand, the insurance aspect of unemployment insurance serves to lessen the ability of the system to help out during hard times. Benefits are not paid out according to need, but according to the loss incurred. In fact, eligibility rules make it more difficult for those with the greatest need to qualify for benefits. To satisfy those rules, workers cannot have left a job voluntarily, although this serves as less of a constraint during a recession. But more importantly, they must have had a sufficient work history prior to the job loss, typically measured as minimum earnings requirements, to qualify for benefits. Lower-wage workers and those who have difficulty maintaining steady employment because of lack of skills may have a tougher time satisfying these requirements, particularly during periods in which jobs are scarce...

Employment, Unemployment, and the Labor Market