Saturday, April 25, 2009

Unemployment Insurance

As a New Liberal Democrat I want to propose an improvement to Unemployment Insurance and explain the rationale behind it.

Insurance is a mechanism for transferring risk from those who don't want it to those that do. This means that as individuals we don't want to bear the risk of losing our jobs and consequently our income streams. We transfer that risk to a third party who can profit by aggregating or pooling many individual risks and making a small profit. This is a win-win situation and the reason all types of insurance exist.

Unfortunately unemployment insurance has a few flaws. First, because you get benefits for a specific period of time (say six months), there is little incentive to find new work quickly. In fact, it has been shown empirically that the length of unemployment after a job loss is positively correlated with the duration of unemployment benefits. The second problem is that unemployment insurance isn't paid directly by those who benefit from it. Instead the government forces employers to pay for it. This is a fallacy of course because the reality is that employees are paid that much less than they would be paid because of the hidden cost of their employment. Once again this creates a perverse incentive.

What I propose is this: Have employees directly pay for their unemployment insurance so that it is visible how much they are paying every month. Secondly, Let's have a sliding scale for benefits received for an unemployed person. This means that if you find work sooner than your benefits expire you don't lose the income stream you would have received had you stayed unemployed.

Unemployment is a bad thing for everyone. Our goal is to create a safety net which catches you when you fall but doesn't accidentally keep you down. This means altering incentives to motivate everyone to get off the ground as quickly as possible.


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