The Long Term Unemployed Need Long Term HelpGary S. Becker
The present U. S. unemployment insurance system fails to protect workers against the risk of long-term joblessness.
The segment of the unemployed without jobs for longer than 26 weeks has more than doubled since the late 1960s. This explosion in long-term unemployment helps explain why so many of the unemployed now do not qualify for benefits. In 1988, over one-fourth of those unemployed had been without work for more than half a year.
Under present laws, benefits begin one week after a worker becomes unemployed. Eligible unemployed people then receive payments for up to 26 weeks, usually collecting a little less than half of what they had been earning. But benefits then cease unless the number of insured unemployed in the state is higher than about 5% of total employment. That's not likely, and only a few states have extended benefits during the present mild recession, since the national unemployment rate has so far remained under 7%.
Many people who are unemployed for short periods of time manage to scrape by without undue hardship by drawing down savings, borrowing from relatives and friends, or delaying mortgage payments and other bills. Those who are seasonally unemployed or on temporary layoffs often are expecting to return to their old jobs.
Common sense suggests that the long-term unemployed are less able to cope because they exhaust their savings and their credit with others. They don't have the means to pay for basic needs, let alone anything else.
TAX HIKE OPPOSITION. Clearly, the present system is not doing what it should do: protect the unemployed who need it most. A step in the right direction would be to lengthen the period of eligibility from 26 weeks to perhaps a year. Those unemployed for much longer than that are unlikely to find regular jobs again, and they should be helped in other ways, such as through the welfare system.
Unemployment compensation is presently financed from a trust fund in each state built up by a payroll tax on the first $7,000 of wages earned in the state. Some members of Congress are calling for higher tax rates or large increases in the wage base beyond $7,000 to finance an extension of the eligibility period beyond 26 weeks. But there is also much opposition in the Senate and House to higher taxes on payrolls.
The present system, however, could generate the revenue needed to cover the long-term unemployed without imposing new taxes, if some of the short-term unemployed were made ineligible for benefits. Since those out of work for only a few weeks usually cope fairly well, the money would be better spent on those in greater need of assistance.
If the waiting period to receive benefits were extended to five weeks from the present one, the tax revenue released would be sufficient to allow an increase in coverage to a full year from the present half year. If the unemployed were not eligible before six to eight weeks, the trust would have sufficient funds to bring into the system some others who are not eligible. The fraction of the unemployed who collect benefits is now much lower than the 60% who were covered during recessionary times in the early 1970s. Many of those not eligible now are low-skilled workers who have been unemployed for several months and have trouble making ends meet.
WHERE TO START. The fact that eligibility begins after just one week tends to encourage abuse of the system. Some companies more readily lay off workers who will be recalled in a few weeks because they know the trust fund is there to bear the burden. Seasonal employment is also lent a bogus attractiveness because the system covers regular spells of unemployment. These abuses of the system would be greatly curtailed if eligibility for benefits did not begin until after several weeks of unemployment. Although extending benefits to a full year would encourage some of the long-term unemployed to stop looking for work, the vast majority want to find jobs soon to prevent further erosion of their skills.
Other government safety-net programs are also too generous early on, but not generous enough at later, much more difficult stages of adversity. The welfare system should have a longer waiting period before a family becomes eligible, providing instead greater benefits to the long-term poor who have few prospects of improving their circumstances. The aim of Social Security and medicare is to protect the elderly against long-term illnesses and other serious risks of old age. In contrast, we give too much to the well-off elderly and to those with short-term illnesses, and we are too stingy with the sick and poor.
Tax and budgetary pressures are forcing a reexamination of all government programs in the search for more effective policies. A good start can be made with the unemployment-compensation system by removing the short-term unemployed from coverage and extending assistance to those out of work for a long time. An unemployment insurance fund should mitigate the economic hardships of workers who are facing the prospect of protracted, even permanent, privation through no fault of their own.