Rethinking unemployment insurance in response to the crisis

May 08, 2020

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The COVID-19 pandemic is speeding up changes in supply chains and the demand for certain products and services. Some sectors of the economy will shrink, requiring workers to move into other types of jobs. Chicago Booth’s Randall S. Kroszner says it may be time to rethink how unemployment works in order to better help the unemployed transition to new positions.

Video Transcript

A key challenge that policy makers are going to face is moving from short-term support—which was very, very important initially—to thinking about a restructured economy: thinking about how the transportation sector is going to be much smaller, thinking about fewer people going to shopping malls. There are a number of trends that were already out there—for example, fewer people going to brick-and-mortar stores, going to shopping malls. This is going to drive that trend.

In terms of supply chains, there was a move away from having so many supply chains based in China, not only because of the trade disputes, but also because it’s been developing and is no longer the cheap place to do the manufacturing. There are a lot of other places in Asia—in Vietnam, Malaysia, etc.—where a lot of manufacturing was moving anyway. But the combination of these policy changes and challenges, and the disruptions that have come from some of these health issues and the consequences of policy changes from there, are going to drive these trends to move even more rapidly.

Policy makers need to understand that they can’t simply build a bridge back to where we were before, but have to try to look at going forward.

What that means is, don’t try to freeze in place all of the payments and wages that we had from before. A number of those jobs will eventually not be there. A number of those jobs will have to change. There will have to be some transition.

So what that means is thinking about providing unemployment not just for preserving the jobs that are there, but for thinking about people going into a transition.

For example, a proposal that my colleagues and I put forward when I was working in the White House after 9/11 was to change the way unemployment works, change it into something called a personal reemployment account.

Rather than having unemployment be based on where you are—that is, you get it from the state and then it comes out as a monthly payment over a certain number of months—what you could do is you could try to make that a larger lump sum forward, to allow people to move if they need to, allow people to do retraining if they need to, allow people to pay for childcare or other things like that. So it gives them much, much more flexibility.

Also, one of the challenges that’s associated with the unemployment system now is that it gives people an incentive to stay unemployed longer. If you look at the people getting jobs after unemployment, it tends to be a very high incidence of people moving out of unemployment back to jobs in the first few weeks, and then again toward the end of the time that unemployment is available. And so there are incentives there to stretch out the time that you could be unemployed. This is going to be even more true with unemployment benefits being so high, at least in the short run.

Rather than give that incentive for people to wait, if you look at, for example, the present discounted value of what you expect to give as payments, or what you expect over a three-month or six-month horizon, give that up front into a personal reemployment account.

That’s going to give a lot more flexibility for people to do the things they need to do to make the transition to new parts of the country, new parts of the economy. And I think that’s something, thinking in those kinds of terms, to provide support for households that are facing unemployment.

But thinking about it as something that helps to speed transitions, rather than have the unintended consequences, sometimes slowing transitions, I think is a really important way to go.