Association for Public Policy Analysis & Management

The federal-state system of unemployment insurance (UI) in the United States was established by the Social Security Act of 1935 during the Great Depression.  Under the program, states provide temporary partial wage replacement to involuntarily unemployed workers with significant labor force attachment.  The federal government induced states to establish adequate UI programs through: 1) a uniform federal tax imposed on employer payrolls, with a 90 percent credit granted to employers in states operating approved UI programs, and 2) grants to states to administer their programs.  The existing federal-state UI system is a delicate balance of power that is largely self-regulated by a built-in incentive structure.  The system has evolved over 80 years into a collection of state programs adapted to regional economic and cultural contexts, with each state following a common thread of purpose.  The federal partner has used the tax credit lever, administrative grants, and other incentives to nudge state action in meeting steadily increasing program standards. 

            This paper reviews state practices concerning employer coverage, applicant eligibility, benefit generosity, and benefit financing, with the aim of revealing lessons for a possible European unemployment benefit system (EUBS).  The evolution of federal conformity regulations is described, with particular attention to program incentives influencing the behavior of applicants, employers, and program administrators. We will identify areas of risk for individual and institutional moral hazard in a multi-tiered UI system, and will give examples of monitoring methods and incentives offered to ameliorate risks.  

            While the U.S. system offers many positive lessons for an EUBS, several shortcomings can be seen in the U.S. system.  These also provide guidance for an emerging multi-tiered system in the EU.  We describe guidelines for benefit access, adequacy, and financing that promote social coherency and minimize adverse incentives.  We review elements of performance measurement and random audit; incentives for broadening access and forward funding of benefits; and procedures for centralized grants and loans to states in times of crisis.  Taken together these can be seen as features essential to a sustainable EUBS.