Friday, January 18, 2008

Re-employment bonuses should be in the stimulus package

As the chorus for providing an economic stimulus grows louder, several plans are recommending an extension of basic Unemployment Insurance (UI) benefits beyond the current six months of coverage. There are good reasons for these plans. Most importantly, they are targeted toward people who are actually hurt by an economic slowdown--those who are involuntarily unemployed. The benefits are politically attractive because they only go to people with work histories and who continue to try to find employment. The benefits are somewhat calibrated with the magnitude of any slowdown; more benefits would be paid (there would be a stronger stimulus) the greater the extent of unemployment. Finally, they are skewed toward low-income households, so the money is likely to be spent rather than saved, again providing for a larger stimulus.

More generous or extended UI benefits, however, also have a serious drawback, which is that they reduce people's incentives to quickly find work. The benefits allow unemployed people to be choosier in accepting their next job, leading to longer unemployment spells and a slower overall recovery.

Given that unemployment appears to be headed up and that jobless spells are likely to grow longer, extending UI benefits to either nine months or a year seems both compassionate and reasonable. However, policymakers should consider an additional change to the UI system to mitigate the employment disincentives and that is to offer re-employment bonuses.

The way that a re-employment bonus would work is that a job seeker would receive a bonus payment if she accepted a job before her UI eligibility ran out and if she held that job for some period of time (that is, stayed off the UI rolls). The bonuses could be structured like exploding job offers in high-powered law and finance firms so that the amount of the bonus declined with the period of unemployment. For instance, the bonus could be half the value of someone's remaining and unused UI benefits. All or part of the bonus payment would be withheld until after the worker had worked a certain period.

The logic behind the re-employment bonuses is straightforward: they provide incentives to go back to work instead of staying out of work and provide those incentives earlier in an unemployment spell rather than later.

There is good evidence that re-employment bonuses not only shorten unemployment spells but also save the government money. With funding from the U.S. Department of Labor, the state of Washington experimented with (randomly assigned) different re-employment bonus amounts for unemployed workers there in 1988. An analysis of the Washington experiment found that it reduced both the length of unemployment spells and the overall amount of compensation. Bonus experiments conducted in Pennsylvania and Illinois also showed that unemployment spells could be trimmed.

Given the many existing strains on the federal budget, the stimulus package should be as effective as possible. Creating cost-effective incentives for out-of-work people to get back on their feet as quickly as possible should be an element in the current proposals.


Yellow Dog For President said...

Well Dave, it's not everyday that I agree with you but this is one of the brightest ideas I've read in quite some time.

Thanks Ms Yellow Dog

Bubba said...

The process of unemployment compensation management in NC is hopelessly mired in bureaucratic mumbo jumbo and Catch 22 style logic.

For example, if a worker drawing UI accepts a new position that is not scheduled to start for several weeks, that worker is penalized for being honest when filing the weekly claim.

One of the questions asked in the weekly claim is "Did you seek work this week?"

If you are waiting for your new job to start, and this is one of the eeks in limbo since you accepted the new position, and you answer "No" to theat claim question, your claim will ultimately be denied, because the bureaucratic mindset that allows no deviation from standards can't be reasoned with.

This happened to a neighbor's daughter, who jumped through all the hoops, diligently pursued (and got) a good position. Her reward was the loss of two weeks of UI benefits, and a spell of some five weeks where she had no money coming in.

Great incentive to be honest, isn't it?

Dave Ribar said...


I'm sorry that two weeks of your friend's claims fell through the cracks. However, as someone whose research focuses on eligibility issues for government programs, I'm not that surprised.

Unemployment benefits are only supposed to go to people who are "actively seeking work." NC requires claimants to have on hand evidence that they checked out at least two jobs each week; the state also requires claimants to report all job offers immediately. Like almost all means-tested government programs, the onus is on the claimant to continually show that she is eligible.

There are two types of mistakes that can be made in determining eligibility: letting a genuinely ineligible person actually qualify for a program and finding a genuinely eligible person to be ineligible. Largely at the insistence of conservatives (maybe not you but certainly others), means-tested program focus on minimizing the first kind of mistake and give less attention to the other. In either case, proving eligibility places a large burden on potential claimants. Also, people complain about the "administrative costs" of programs like these, but cost-cutting can lead to problems like these.

Note that these types of problems are not unique to governments. They occur almost anytime someone has to prove that they qualify for a benefit. Good examples are private insurers and product rebates.