Some researchers and policymakers have reasonably worried that generous UI could discourage serious job search and raise workers’ wage demands unrealistically (an instance of what economists call “moral hazard”), thereby slowing the overall labor market recovery. To be clear, most labor economists do not share the worry that unemployment is increased much by UI. But if we take concerns about moral hazard seriously, while also wanting to aid workers who lose their jobs and need some temporary assistance, what might we do?
An idea put forward in 1979 by economists Shavell and Weiss could be helpful. Currently, UI benefits are paid out as a constant dollar amount every week, right up until the moment at which they expire. This makes sense in a world where the unemployed have no control over their likelihood of finding new employment. However, to the extent that the unemployed can affect this probability, perhaps by increasing the intensity of their job search or lowering their wage requirement, Shavell and Weiss suggest a different approach. Unemployment insurance benefits would be paid at a relatively high level immediately after the initial claim, and then gradually fall each subsequent week until they are eventually discontinued (or the worker finds new employment).
Crucially, the gradual decline in payments over time gives recipients some extra motivation to look seriously for work and take available offers. The incentive to “run out the clock,” waiting for UI to expire, is substantially diminished because recipients’ payments are front-loaded. Given what economists have learned about the corrosive impact of extended unemployment spells, this could be a boon for workers and the labor market alike. As an added benefit, receiving more UI upfront would aid workers who need to make expensive long-distance moves in search of new jobs.
Chosen excerpts by Job Market Monitor. Read the whole story at To improve unemployment insurance, it’s time to revisit an old idea | Brookings Institution