Insuring Unemployment

March 31, 1958

The history of unemployment insurance in this country is a classic illustration of how a “welfare” program keeps expanding almost automatically while the safeguards against abuses keep dropping away.

The Social Security Act, under which the individual states were in practice forced to set up unemployment-insurance plans, was passed in August 1935. The average weekly benefit of $10.54 paid to the unemployed in 1940 has about tripled to $30.11 in January of this year. This rise in itself is not surprising. The average weekly wages of covered workers went up from $26.60 in 1940 to slightly more than $80 now. But the same inflation that raised wages forced up benefit payments.

Most states started by requiring a waiting period of two to three weeks before benefit payments began; the waiting period in all states has now been reduced to one week or less. More significantly, in 1937 the most frequent maximum duration period for the payment of unemployment benefits was sixteen weeks; by 1955 this had risen to 26 weeks.

INSURANCE INTO RELIEF

New York State has just jumped the maximum weekly benefit from $36 to $45. It is variously proposed by the Administration and by Democrats that the Federal government pay unemployment benefits out of its own funds or deficits for up to thirteen or sixteen weeks beyond the maximum provided by the states. Anyone acquainted with the realities of politics or the “welfare” history of the last 25 years should know that once the Federal government adopts this “emergency” proposal its contribution will probably be permanent and increasing. It will turn an insurance plan into thinly disguised relief.

An ideal unemployment-insurance plan, if it could be realized, would be one that reduced the hardships of unemployment without increasing or prolonging unemployment itself. But there is a strong presumption that our present system tends to increase unemployment in three main ways:

1—It weakens the incentive of many workers to get a new job as soon as possible. The overwhelming majority of American workers, of course, prefer work to unemployment and charity. The number of outright shirkers or chiselers is probably negligible. But there is a less negligible number of people whose incentive to get a new job is or will be reduced as their unemployment benefits are increased or prolonged.

A U.S. Department of Labor pamphlet suggests that the weekly unemployment-benefit payment should be “at least 50 percent of weekly wages,” and that for low-wage earners it ought to be “70 percent or more.” Suppose a textile worker has been earning $60 for a 40-hour week, is laid off, and gets $42 a week, or 70 percent, as unemployment benefit. Even if he could get his old full-time job back at $60 before the expiration of his benefits, he may ask himself: “Why should I work for only $18 a week?” And if he could get the same hourly wage for a 27-hour week, he is asked to work, as he sees it, for less than nothing.

2—The present unemployment-insurance systems put a direct penalty on earning money by work. In most states a man is disqualified from unemployment benefits if he earns more than $5 or $6 a week during the period. This foolish deterrent could be removed by the simple device of reducing his benefits by, say, 50 cents for every $1 of outside earnings. In this way he could always increase his income by at least half the net amount he earned from casual work. At no point would he be out of pocket for taking such work. The states might treat “supplementary unemployment benefits” in the same way. To make (as 40 states now do) no deduction whatever for them, discriminates in favor of members of strong unions and subsidizes increased unemployment in such unions.

3—The most important way in which unemployment insurance increases unemployment is indirect. It subsidizes the unemployment created by excessive wage rates and relieves the pressure on powerful unions to bring wage rates down to the level at which full employment could be restored. It may be gravely doubted, in short, whether unemployment insurance, as it exists at present, is a “built-in stabilizer.”