Modernizing Unemployment Insurance for a 21st Century Economy

Published September 9, 2008

During a time of economic uncertainty, the prospect of unemployment is on the minds of many workers.

Established by the Social Security Act of 1935, the nation’s unemployment insurance system is one of the most costly federal programs. The original intent of unemployment insurance was to “pay out benefits to workers who lose their jobs and are seeking re-employment.” (, 1995) Some critics argue the program in its current form is both counter-productive and out-of-date. (, 1995)

Funded by state and federal taxes on employee wages, unemployment insurance is designed to provide a “financial safety net for laid-off workers.” Some argue the structure of the system itself is flawed, encouraging employers to lay off employees and discouraging workers from seeking new jobs until their benefits are nearly exhausted. (, 2005)

This form of insurance is both problematic and unfair for many workers. Part-time workers and those who shift jobs frequently receive no benefits despite their tax contribution, and workers who never need to use the unemployment safety net pay into a system for benefits they will never receive. Waste and fraud also plague the system; in some states nearly “20 percent of benefit payments are the result of error or fraud.” (, 2005)

Of the available alternatives to unemployment insurance, privatization through the use of individual unemployment accounts (IUA) may be the best option for employers and employees alike. IUAs are a “mandatory and portable individual trust to which the employer and employee contributed.” (, 2004) “IUAs shift control and responsibility for unemployment coverage from the employer and the state government to the employer and the employee.” (, 2004)

According to research done by the National Center for Policy Analysis of a similar program launched in Chile, IUAs provide workers with greater flexibility to invest and save for periods of unemployment and move their resources to best fit their own needs and “maximize the use of the country’s financial and educational institutions to enhance employment security.” (, 2005)

The IUA system provides incentives to minimize unemployment. By moving away from a use-it-or-lose it system, workers would not forgo benefits when they find a job quickly, because they own the portable unemployment account and take that money with them for possible future use. Employers would be discouraged from seasonal hiring by removing artificial subsidies, leading to more steady, year-round employment.

The following articles address some of these concerns and examine unemployment insurance from a free-market perspective.

Unemployment Insurance in a Free Society
This policy study, written by William Conerly of the National Center for Policy Analysis, examines the current unemployment insurance system and offers alternatives for reform, proposing a new system based on individually owned, portable personal employment accounts.

Unemployment Insurance: Trends and Issues
The Tax Foundation examines the historical development and long-term trends of unemployment insurance in the United States up until the early 1980s.

NCPA Privatization Issues: Private Market for Unemployment Insurance
This policy review, published by the National Center for Policy Analysis, examines some of the flaws with the current federal unemployment insurance program and suggests an alternative solution, the privatization of unemployment insurance.

Unemployment Compensation: None of the Government’s Business
In this article published by the Future of Freedom Foundation, Dave Honigman and George Leef ask if the government’s efforts in providing unemployment insurance are effective … or even necessary. The authors emphasize personal responsibility over government intervention in regards to preparing for unemployment.

Individual Unemployment Accounts
This article, written by Lawrence Brunner and Stephen M. Colarelli and published in Independent Review, examines individual unemployment accounts, one of the more popular alternatives currently being considered for government unemployment insurance programs.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at and PolicyBot, Heartland’s free online research database.

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