Unemployment Accounts: A Saving Opportunity

After multiple extensions by Congress, many unemployed workers now can receive unemployment benefits for nearly two years. These extensions may bring some individuals a sigh of relief, but they are a cause for concern for the larger economy. A recent JPMorgan Chase study claims that unemployment insurance extensions actually have raised unemployment by 1.5 percentage points. Dr. Robert Barro, a Harvard professor, recently claimed that the extensions have raised unemployment as much as 2.7 percentage points.

Is there a better way to go? An economic study recently published by Cascade Policy Institute suggests that nearly all Oregonians would benefit if policymakers and legislators harnessed basic knowledge from the insurance industry and applied it to our unemployment insurance system.

First, we might consider changing the name, since unemployment insurance is not really insurance. Real insurance creates a contract between the insured and the insurer, giving those who pay premiums a contractual right to a maximum payout under certain circumstances. Unemployment insurance does not. As a government program, the circumstances under which an individual can make a claim, and the size of payouts, can and do change with the political winds.

For many years those political winds were somewhat steady, even during deep recessions. The current recession, however, has inspired Congress to extend benefits much further, making workers in many states eligible for up to 99 weeks, twice as long as ever before.

Even if it were insurance, the “moral hazard” problem that accompanies unemployment insurance is so great that no insurance company would design a program on this model. “Moral hazard” describes what happens when individuals take bigger risks than they would without insurance. The degree of moral hazard will vary depending on the type of risk. For example, most people are careful to avoid injuries, regardless of whether or not they have health insurance. However, some may be willing to take greater risks because they know they are protected by insurance.

Likewise, unemployment insurance has been proven to change people’s behavior. On average, unemployed workers who receive benefits take more than twice as long to find work than those who are not covered; and larger benefits lead to longer terms of unemployment.

Unemployment insurance, like any other tax or wage cut, also can damage worker productivity. Though paid directly by the employer, unemployment insurance ultimately comes out of most workers’ paychecks, according to economists. And as your basic labor economics textbook will explain, lower pay can increase duty shirking for some workers, while higher pay promotes harder work.

Employers also change their behavior when their employees are covered by unemployment insurance. Although state tax codes adjust a firm’s payroll tax according to how many of its workers file claims for benefits, the rates are imperfect and have been shown to enable companies in some industries to lay off workers systematically. These companies use unemployment insurance as a wage subsidy, which ultimately allows them either to pay their workers less or to engage in cyclical labor practices (hiring and firing seasonally). Studies’ results have varied, but economists’ overwhelming conclusion is that unemployment insurance increases layoffs.

Of course, the current recession is deeper than most; and times have changed since many of these studies were conducted, causing some to doubt their relevance. However, the underlying truth has not changed: Individuals are significantly driven by incentives. This basic truth, and supporting economic literature, helped inspire Chile to adopt a system of unemployment accounts, which better imitate private insurance, minimizing moral hazard problems through better incentives.

Private insurance helps guard against moral hazard by requiring large deductibles or copayments. Likewise, Chile’s program requires unemployed workers to draw from their own regulated savings accounts (unemployment accounts), which workers and their employers fund while employed. These unemployment accounts are paired with a government fund, similar to our unemployment insurance program, to provide a safety net for workers with too little in their unemployment accounts.

Workers with a sufficient balance can draw limited sums from their personal accounts regardless of why they are unemployed. However, they can only draw from the government fund if they were laid off. They can use the entire balance of their account, as they wish, once they retire.

In a recent research report conducted for Cascade Policy Institute, economists Stéphane Pallage and Christian Zimmermann conclude that at least 97% of Oregonians would benefit from following Chile’s lead and adopting unemployment accounts.

Oregon’s adoption of unemployment accounts would not stop Congress from spending billions to support the unemployed. However, it would improve some of the nasty side effects of our current unemployment insurance system while providing a better safety net and opportunities to save for retirement.


Christina Martin is Director of the Asset Ownership Project at Cascade Policy Institute, Oregon’s free market public policy research organization.

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  • valley p

    While we are at it we should abolish the minimum wage, child labor laws, and make indentured servitude legal again. Plus kill off Social security, Medicare, and Food stamps. I mean, these are all moral hazards aren’t they? Shouldn’t people be free to starve?

    • Steve Plunk

      Reductio ad absurdum. Reducing the argument to the absurd. In short it means the person can’t argue reasonably and rationally so they extend the opponents thesis to absurd extremes. The Left can’t enough of this misleading technique.

  • Rupert in Springfield

    The recent extension of unemployment insurance benefits is yet another example of Obamanomics doing 180 degrees of what is needed.

    There isn’t much debate on extending unemployment insurance to absurdly long time periods leading to higher unemployment. Even Larry Summers agreed with that position, at least up until he was in the White house.

    We are currently being told that we are coming out of the recession. Although the American public might not be as sanguine on that fact as the White House, it is the line from the administration. If that is true, the last thing you want to do in a recovery is extend unemployment to almost two years.

    All that does is lessen incentive to get out into the job market for those on unemployment. This is part of the reason why even though we had the deepest recession in peoples lifetime, the recovery has been equally historic in its weakness. So much so that in a lot of sectors, we aren’t in recovery. Guess what, unemployment is one of those sectors – quelle suprise Obama!

    Of course, those who would prefer a political football than to actually get the economy going will insist that being opposed to unemployment extensions means I hate unemployed people.

    I guess it would also mean I hate insurance as well as extensions, an unemployed woman with profuse extensions who had insurance being my ultimate dread.

    • valley p

      “We are currently being told that we are coming out of the recession.”

      You are not “being told that.” You are being told “reality.” Statistically the recession ended in June of 2009. What we are coming out of is the deep hole that recession dug in the national economy. That takes a bit of time.

      “If that is true, the last thing you want to do in a recovery is extend unemployment to almost two years.”

      The last thing we should do? When we still have 10 people for each available job, what do you say to the other 9? Keep looking? Beg? Hit up your in-laws? Dumpster dive? You also thought the last thing we should do is bail out the auto companies, which would have resulted in another million or 2 unemployed and the loss of the largest manufacturing industry in the US. You also think tax subsidies for alternative energy are the last thing we should do, even though more than a million new jobs have been created in that industry in the last few years. You also think the stimulus was the last thing we should do, even though according to the CBO the recession would still be going on and unemployment would be 2-4 points higher without it. You also thought that TARP was the last thing we should do, even though without it we probably would have hit 20% unemployment.

      So lets just say your record on all the last things we should do is not very good and leave it at that.

      “This is part of the reason why even though we had the deepest recession in peoples lifetime, the recovery has been equally historic in its weakness.”

      No, it isn’t. In the 1930s there was no unemployment insurance and it took way longer for recovery. The reason this is taking long is is that we had a financial system meltdown that resulted in a big chunk of the economy and people’s wealth disappearing, and with an economy 75% determined by consumer spending, we now lack able and willing consumers. Taking more money away from those who don’t have enough already is hardly going to help.

      “Of course, those who would prefer a political football than to actually get the economy going will insist that being opposed to unemployment extensions means I hate unemployed people. ”

      Not hate them Rupert. You are indifferent to them. And you lack econ 101. You maybe napped through the lecture on counter cyclical public spending. Its not your fault.

      • Rupert in Springfield

        >You also think tax subsidies for alternative energy are the last thing we should do, even though more than a million new jobs have been created in that industry in the last few years.

        Creating a job is not taking money from taxpayers to pay people to do something. That’s wealth transfer, not creating jobs. See Karl Marx.

        >You also think the stimulus was the last thing we should do

        Ok – first of all you who taught you to write a sentence like that?

        Second idiot – I never said any such thing.

        Got it idiot?

        Again idiot – please just accept you are ignorant on economic matters. No economist said that the stimulus’s delayed spending was an asset. I said its delayed spending would produce anemic results. I restated my position just last week and you still get it wrong.

        I was right, because I looked at the damn thing. You were wrong because you liked it simply because a Democrat had done it.

        The fact that you have to invent something I never said establishes you not as knowledgeable, but as what you are, an idiot who can never learn, not even from your own mistakes.

        Again – please stay out of economic discussions – you prove yourself a boob with nonsense like this every time.

  • Bob Clark

    If the extra unemployment compensation is financed through additional taxes on those employed, there is no real macro economic stimulus. You are just moving money from one shell to another. But there is a detrimental effect from extending unemployment because some those eligible will be slower to offer their labor for economic gain, depriving the economy an opportunity to expand production.

    Another limit to Keynsian economic (counter cyclical spending) policy is it helps if government debt level is not growing rapidly. Increasing public debt weighs on the investment outlook for all economic actors such that they shift to saving any extra stimulus monies handed out by the government. This has plaqued the Japanese economy for two decades now, where huge government debt has lowered the trust of consumers in the domestic economy and consumers have put stimulus monies into bank accounts yielding next to nothing.

    Cutting taxes or keeping them stable in the present case is still much more efficient at stimulating real economic growth as it allows workers and businesses a higher margin on increasing their output. The Kennedy tax cuts and the Laffer curve used by the Reagan administration show historically the stimulating effect of just keeping tax rates stable to declining.

    • valley p

      “If the extra unemployment compensation is financed through additional taxes on those employed, there is no real macro economic stimulus. ”

      But it isn’t. It is being financed by debt, just like our 2 wars and everything else in government EXCEPT SSI and Medicare, which have dedicated taxes sufficient to pay for them and then some.

      “But there is a detrimental effect from extending unemployment because some those eligible will be slower to offer their labor for economic gain, depriving the economy an opportunity to expand production.”

      Who cares? If there are 10 people for every job it does not matter if a few of them opt out of applying for a rare Costco opening. The reason unemployment is as high as it is is not because people want to collect unemployment. Its because they got laid off and there are not enough available jobs. Period. If unemployment insurance caused unemployment then we would have a perpetual rate of 10% unemployed. We don’t. Its because most people prefer to have something useful to do.

      Look Bob…expanding production is not the issue. Expanding demand is the issue. Do the latter and companies will do the former. Its not the other way around and never has been.

      Corporations are awash in capital right now. They are not expanding because there is not enough demand for their products. There is not enough demand because too many people are out of work or worried that they might be. Until demand for durable goods increases there is no need to hire more people, so we are caught in a classic deflationary vortex.

      “Cutting taxes or keeping them stable in the present case is still much more efficient at stimulating real economic growth”

      No it is not. Cut taxes on wealthy people and they will just add to their stock portfolios. They won’t increase consumption. Cut taxes on the upper middle and they too will just save the money, as I have done and you probably did. Running deficits to in effect increase private savings is a total loser of an economic policy. Any economist will tell you that.

      • Rupert in Springfield

        >But it isn’t. It is being financed by debt,

        Excuse me idiot?

        My unemployment insurance rate from the state doubled this month. I havn’t fired myself.

        The states are running deficits and just jacking everyone’s unemployment insurance rates for the hell of it?

        Are you such a boob you have no idea how unemployment insurance is paid for? Are you truly that much of a nincompoop?

        >Who cares?

        Those paying unemployment insurance taxes care you utter idiot.

        If you pay unemployment insurance, your rates got raised the first of the year, at least in Oregon

        That’s who cares you asinine boob.

        >No it is not. Cut taxes on wealthy people and they will just add to their stock portfolios.

        Wait a second idiot.

        That would result in rising stock prices.

        And idiot – you constantly cite the rising Dow as a sign of recovery.

        Are you now claiming a rising Dow is irrelevant to the economy you complete fool?

        No – you aren’t. You simply didn’t think and did a pop off.

        What nonsense.

        >Running deficits to in effect increase private savings is a total loser of an economic policy. Any economist will tell you that.

        Wait a second idiot.

        I thought you just said the rich would invest in their stock portfolios.

        Now you are claiming that every economist would tell us that if the rich started buying stocks, increasing valuation thats a total loser of an economic policy?

        This is such utter boobishness its amazing.

        Please – idiot – just dont comment on economic discussions. Learn from your own foolishness.

        • valley p

          “Are you such a boob you have no idea how unemployment insurance is paid for?”

          No, but I am a boob to think you occasionally know what you are talking about. Unemployment “insurance” covers up to 26 weeks. The extensions are funded outside the program. The Feds are funding the extensions with deficit financing, just like they are funding everything else. A big chunk of the stimulus funded extended unemployment. You forget that your party held up further extensions by fillibustering. If it was already paid for Rupert, what were they fillibustering?

          “That would result in rising stock prices. ”

          Fools rush in. So you think the government borrows money, hands it to rich people, they buy stocks and the stocks go up in value, and everything is hunky dory? That’s it? That’s the magic formula? But wait…many of them also buy bonds. Government bonds. Debt. Zero sum.

          “And idiot – you constantly cite the rising Dow as a sign of recovery.”

          Well duh.

          “Now you are claiming that every economist would tell us that if the rich started buying stocks, increasing valuation thats a total loser of an economic policy?”

          If the rich buy stocks with borrowed government money, then the increased valuation is about the same value as rising house prices were. A dead end of value. Funny money. Yes, any economist would agree.

          And you really need to work on your name calling.

  • Why Not?

    I will say it again, legal citizens deserve to be employed if they want a job. The federal agenda of alowing illeagal citizens to work here should stop. Using E-verify and cutting off letting companies write off employeies wages without a valid ss number would make most non citizens self deport with no cost. The rest would be easy pickens for the weak ICE agents. When country is hurting we should protect our intrests.

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