Unemployment Insurance--Inequities and Work Disincentives in the Current System

HRD-79-79: Published: Aug 28, 1979. Publicly Released: Aug 28, 1979.

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Enacted as a federal-state program under the Social Security Act in 1935, unemployment insurance was established to provide a temporary income to unemployed workers and to help stabilize the economy by maintaining the purchasing power of laid-off workers. About 8 million people received $9.7 billion in compensation during 1978. Normally, states pay 26 weeks of compensation, but during periods of high unemployment they pay an additional 13 weeks. Weekly compensation in most states is half of a recipient's average weekly gross wage before becoming unemployed, up to a maximum limit.

In interviews with 3,000 persons receiving unemployment compensation, GAO found that compensation, either alone or combined with other income, replaced an average 64 percent of the recipient's net income before unemployment; about 7 percent replaced over 100 percent. Persons who replaced over 75 percent of their net before unemployment collected compensation over 2 weeks longer than those who replaced 75 percent or less; were more apt to exhaust compensation; were most likely to have quit their most recent jobs; and generally held jobs similar to ones listed by the Employment Service. About 30 percent of these persons stated they had only a limited financial need to work. Factors limiting the financial incentive to work are: (1) increased taxes on workers' income; (2) supplementation of unemployment compensation by retirement income; (3) reduced expenses during unemployment; and (4) unequal computation of unemployment benefits.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: It is recommended that Congress consider the following as possible solutions to the inequities and disincentives in the program: including unemployment compensation in taxable income; reducing unemployment compensation by retirement income; and establishing a uniform methodology for determining compensation.

    Agency Affected:

 

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