Introduction

The recession has fueled calls in Congress to extend and expand unemployment insurance (UI) benefits. While UI expansion is needed in the short run, the program is also in need of more fundamental and permanent reform. It must be transformed from an industrial era program to one that is better suited for the New Economy.

Unemployment insurance is a federally managed, state-run program. Employers pay a tax on each worker based on the overall unemployment rate, the level of state benefits, and their "experience rating," which is based on the magnitude of prior claims made by their workers. When workers lose jobs through no fault of their own, they are eligible to collect benefits for a maximum of 26 weeks, provided they have earned a certain minimum amount and worked a minimum number of weeks in the prior year.

When Congress created the UI system in 1935, the goal was to give income support to full-time workers between when they were laid off and called back to work on their same jobs. The program was seen as helping predominantly manufacturing, unionized workers in permanent, full-time jobs who were familiar with unemployment insurance. All states were required to have a program and most states had similar programs in terms of benefit levels and qualifications. Finally, the program was designed to boost the purchasing power of laid-off workers in economic downturns in order to provide a counter-cyclical boost to the economy.

Almost 60 years later, the New Economy has changed all of these conditions. Today, most workers are never called back to their previous jobs. In 1970, about 38 percent of job losers were on temporary layoff; by 1995, fewer than 25 percent were. Moreover, in a labor market being transformed by technology and trade, many unemployed workers need to upgrade their skills to get comparable or better jobs. Most jobs are in the non-unionized service sector where fewer workers are familiar with how the UI system works. Moreover, approximately 30 percent of Americans work part-time or have other non-traditional work arrangements. A large share of the growing number of contingent and part-time workers (this includes many workers who formerly collected welfare) will not qualify for UI because they do not earn enough, they work part time, or are new to the labor force. As we move into a world where everyone is expected to work, we need to uphold our bargain with those who left welfare for work so that they do not fall back onto public assistance simply because they, like so many other workers, earn little, work part time, or change jobs often.

Finally, over time states have made the program more restrictive. While federal law mandates states to have a UI system, it does not prevent them from having only a one system. Competitive pressures have increased for states to have "good business climates," leading many to cut benefits and restrict eligibility. And an increasing percentage of the unemployed live in states with lower than the national average of recipiency.

As the nation's principal safety net for helping those who lose their jobs, the unemployment insurance system has lagged behind these changes. While approximately half of all unemployed workers received UI benefits in the 1950s, today approximately one-third do. As a result, UI now plays a diminished counter-cyclical role in helping to moderate recessions. Even so, without any UI, recessions would be an estimated 17 percent deeper. And in a more competitive, global, and technology-driven economy, a weakened UI system reduces the safety net for workers, making them less likely to support the New Economy. If we are to ask Americans to embrace the New Economy, we need to give them the support and tools needed to do so.

It is not just a matter of more generous benefits and eased eligibility, as advocated by many liberals who would like to see the United States move more into the direction of a European-like welfare state unemployment system. In their goal to be compassionate, many continental European nations have gone too far, providing extremely generous benefits for long periods of time. Not surprisingly, since these nations are essentially paying workers not to work and distributing purchasing power from those who work to those who do not, unemployment rates remain chronically high. And as workers' skills become obsolete from rapid technological change, the European system has the added detriment of keeping workers out of the labor market so long that their skills get even more obsolete, creating high levels of "structural" unemployment.

While some liberals dream of a European-style welfare state, conservatives have focused on keeping benefits low to cut government-imposed costs on business. The result is a bare-bones system that limits qualifications, duration, and benefits to the bare minimum, and is not only unfair to workers, but does little to help Americans cope with and accept an increasingly volatile New Economy labor market. Moreover, it limits the role of UI as a counter-cyclical stabilizer.

As a result, we need a Third Way approach to unemployment insurance reform that not only gives workers the right incentives to remain at work and get back to work, but also provides them with adequate benefits when they lose their jobs. We need a system that recognizes that all employees who lose their jobs through no fault of their own should be eligible for UI, even if they are new to the labor market or making low wages. We need a system that serves as a trampoline, not just a safety net, by helping workers upgrade their skills while collecting benefits in an ever-changing economy. We need a system that recognizes the advantages of state-administered programs but provides a federal floor under which all states operate. Bringing the nation's unemployment system into the New Economy by crafting such a Third Way approach will not only help workers in a more turbulent labor market, it will reduce the duration and depth of economic downturns.

It is incumbent upon Congress and the states to act now to modernize UI to meet the realities of the New Economy. Policy makers should take five steps:

• Expand eligibility to include all low-wage and part-time workers who lose their jobs through no fault of their own.
• Set a limit on the race to the bottom -- the practice by states of cutting UI taxes to become more "competitive" -- by raising the Federal Unemployment Insurance Tax and the wage base it is assessed on.
• Make UI a trampoline, not just a safety net, by making it easier for workers collecting UI to enroll in training.
• Require states to hold employers responsible for the costs they impose on the system through layoffs.
• Strengthen UI's anti-recession function by lowering the threshold that triggers extended benefits.

Blueprint Keyword: Extra Workforce

Robert D. Atkinson is vice president of the Progressive Policy Institute and director of PPI's Technology & New Economy Project.