Monday, August 15, 2011

Unemployment Insurance

Mike Konczal has a post examining Romney’s idea to establish personal unemployment insurance accounts, rather than universal unemployment insurance. This debate gets into the general difference between “liberal” and “neo-liberal” approaches to the welfare state - in which the liberal approach would have the government directly provision goods, and the neo-liberals prefer to set up market structures to handle insurance (with subsidies thrown in for the truly poor). I’m generally in favor of the neo-liberal option; but Mike has had a number of good posts outlining some powerful critiques.

In this case, Mike outlines some research by Raj Chetty showing that unemployment insurance (when given in the form of a lump grant) actually increases the duration that people take to find a job. This makes sense if you think that the unemployed might need more time to find a perfect fit. So the “moral hazard” aspects of unemployment insurance might not be a huge worry; as long as people are avoiding immediate employment with the aim of finding better employment.

I’m fan of Chetty’s research in general, and this study is pretty clever. But it's worth noting other studies have found different effects. For instance, this study by Krueger found that search intensity increases as unemployment benefits decrease; and search intensity increases as benefits are about to run out. That suggests that some sort of moral hazard aspect to unemployment uninsurance isn’t crazy. Chetty’s paper didn’t show that people who waited longer got better jobs — so we don’t know what the value of waiting for a better job is; or whether people really did wait longer with a lump-sum benefit for better jobs.

We also have the advantage of looking at an actual program of unemployment insurance accounts — Chile — which is in general a good advantage of a neo-liberal approach to the Welfare State (balanced budget with flexibility for the business cycle, private accounts for pensions, etc.). This article from VoxEU suggests that an unemployment insurance savings account raises job-finding rates.

Chile’s program combines regular contributions (“split” between employers and employees), along with a common fund partially funded by the government. Upon unemployment, people first draw down their own private account. The key picture is this:

People eligible for the Solidarity fund (ie, drawing down unemployment benefits they didn't pay for) find jobs at much slower rates initially. Meanwhile, among those with personal accounts -- the amount of funding didn't affect the rate at which people found jobs (suggesting that the liquidity effects Chetty focuses on weren't a huge factor, at least here).

There's not an immediate takeaway from this. The authors of that piece emphasize the ability for personal unemployment accounts in diminishing moral hazard and increasing employment. Contrary to that, it's possible that delaying employment led to better labor market outcomes - though we just don't have data on that. Also, you probably want to figure unemployment itself as a bad, and count shorter unemployment durations as a good thing.

Overall, I’d say that Chetty’s research — though interesting — isn’t the last word. His job duration is interesting, but evidence from search intensity suggests that there may be *some* moral hazard here (the Chetty paper had some role for that too). We still don’t know (or at least I don’t know) what the improvement in job quality is for people who take longer to find work. The evidence on an actual personal unemployment plan seems at least somewhat positive.

I do see one important benefit a shift to personal unemployment accounts would get us — it would depoliticize the unemployment insurance issue. Right now, we rely on Congress to go ahead an authorize additional duration for unemployment insurance every time we have a recession. Given that we lack a consensus on how much the government should actually spend or tax, this discussion gets wrapped up in that broader debate, and so you end up with some hostility to what should be a routine automatic stabilizer. If instead unemployment insurance was all handled by personal accounts, one imagines that this debate would go about differently. People would just have access to unemployment insurance and Congress would complain about other things. Seems like a pretty good tradeoff to me.

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