Policy Alternatives

U.S. unemployment is a complex issue and becomes even more so when

matched with the fragmented landscape of federal policies currently in place. Part
of what makes policy discussions concerning joblessness so complex is that the
issue is intrinsically grounded in both economics and social welfare, and the
question has long been debated: how big a hand the government should have in
either of those areas? As the current financial crisis painfully illustrates,
policymakers, economists, and the general population still struggle with reaching a
consensus. But addressing this question is fundamental when examining policy
alternatives, as they are typically divided on whether the governments most useful
role is to create policies that support the markets ideal of limitless job creation, or if
its role is to intervene and supplement where the free market fails to live up to its
theoretical potential of full employment.
Current Policy: Federal Unemployment Insurance
Many current U.S. Federal unemployment policies actually have their roots in
New Deal legislation. The biggest of these is the Federal Unemployment Insurance
program, created as part of the Social Security Act in 1935. According to the U.S.
Department of Labor, the program is designed to help cushion the impact of
economic downturns and brings economic stability to communities, states, and the
nation by providing temporary income support for laid off workers (Dept. of Labor
2004). The FUI program is run by the Federal government, but the program is
administered and benefits are distributed by individual states. Funding for this
program comes through the Federal Unemployment Tax Act (FUTA), where
employers are required to pay unemployment taxes, if they payroll annual wages

totaling more than $1,500. Length and eligibility requirements for benefits are
determined by individual states, but the maximum length is 6 months. 1
The relatively short length of the program is its main point of criticism. Many
researchers and policy analysts question whether or not the FUI program
adequately addresses the current needs of U.S. workers when the number of longterm unemployed, displaced, and professional-level workers is steadily increasing
(Bureau of Labor Statistics 2007). Some analysts estimate that it takes an average
of one to two years for an unemployed professional to a replacement position
commensurate with the one they lost (Butcher & Hallock 2004). In addition, some
researchers argue that current FUTA requirements actually incentivize mass layoffs
for larger employers by capping the amount contributed through payroll
taxes(Brunner & Colarelli 2004). Many part-time, low-wage, or temporary workers
are not eligible for unemployment benefits, even though they are nearly twice as
likely to be unemployed (Economic Policy Institute 2005).
Another Federal policy worth noting is Trade Adjustment Assistance, which
primarily provides qualified workers those displaced by stronger competition from
imports with funds for re-training. The relatively small program is designed to be
a supplement for traditional FUI, but is grossly underused as only about 1 in 4
qualified workers petitioning for assistance (Financial Services Forum 2007).
Current Federal policies, such a TAA and FUI, remain largely unchanged since
their inception and suffer from underuse, abuse, and being mismatched with
changing economic policies. Research points to a number of alternative policies,
which range from expanding the current federal benefits program to changing trade

President Bush recently signed H.R. 2642, the Supplemental Appropriations Act, 2008 on
June 30, 2008 which allows for the extension of unemployment benefits for an additional 13
weeks. Individual states set eligibility requirements.

and tax incentives for businesses to discourage mass layoffs. The following section
will briefly examine a few of these alternatives.
Alternative: Expand & Extend Federal Benefits Program
One possible means to address these inadequacies is to expand the current
FUI program. A study by the Financial Services Forum recommends dramatically
increasing the amount and length of unemployment benefits to include health
insurance, money for training and education, and the opportunity to extend benefits
for up to 2 years (Financial Services Forum 2007). Also known as the Adjustment
Assistance Program, this expansion would target the workers displaced by
globalization and free trade agreements. By extending the length of benefits of 2
years, it also targets long-term unemployment.
The overall cost associated with such a program adjustment would be close
to $22 billion annually. The accompanying graphic Illustrates the proposed funding
and cost breakdown further:

This particular alternative attempts to form a more extensive, cohesive policy from
some of the existing disparate pieces while also updating the focus to reflect the
current realities of U.S. unemployment. Yet, the cost is substantial. FUTA taxes
collected annually average around $7 billion, while current TAA spending is under
$1 billion (Dept. of Labor 2008). The price tag carries a $2 billion increase on
Federal taxes alone (the remaining $20 billion is distributed across individual state-

level taxes). This cost represents expansions greatest barrier to implementation,

particularly if higher taxation is proposed during such a steep economic downturn
currently facing U.S. taxpayers. Can small business and wager-earners afford the
increased taxes? Tax rate adjustments which place a larger burden on big business
and high earners could make such a plan more affordable/appealing, but may also,
as such policies historically have, merely prompt new tax evasion and avoidance
issues (Shlaes 2007). A review or concurrent discussion of existing tax policy and
loopholes may be necessary while seriously considering this expansion.
Its important to note that many policy alternatives focused on expanding
adjustment and other benefit assistance are proposed in conjunction with allaying
fears associated with modern free trade agreements (Financial Services Forum
2007). These agreements provide economic benefits for the U.S. but also cause
domestic job loss as well. Many proponents of free trade see protectionism as the
single greatest threat to U.S. economic growth, therefore expanded benefits to
encourage free trade will ultimately bring more jobs and growth in the long-term
(Wall Street Journal 7/30/08). This further underscores the symbiotic relationship
between economic and unemployment policies and how this relationship must be
considered when examining the political, social, and economic implications (or
motivations) of a particular policy response.
Alternative: Privatize Unemployment Benefits
Another policy alternative is to privatize the existing unemployment
insurance system. Under this system every individual would have a mandatory and
portable Individual Unemployment Account (IUA), similar to 401k or 403(b)
retirement account, both the employer and employee contribute. Each employer
could be required to contribute between 0-9 percent of a workers wage to the

account, while the employee could be required to contribute about 3 percent.

Privatizing unemployment benefits could penalize employers for layoffs by
increasing their required contribution proportionally, while proponents also argue
that it would increase employment stability and employee morale during layoffs
(Brunner & Colarelli 2004). Since an IUA would be portable from job to job, it offers
workers greater flexibility and potential for accumulated benefits over time through
managed investment; it could also act as a supplemental retirement account. Many
proponents also argue that IUAs would increase motivation for the unemployed to
find work since they would be drawing from personal wealth instead of
government funds, though it is notably hard to prove/disprove a theory based on
supposing a level of personal motivation (Brunner & Colaretti 2004).
Many of the same criticisms leveled at the privatizing unemployment
insurance are similar to those of the proposed privatization of Social Security.
Proponents of privatizing government benefits FUI and SSI argue that the
traditional benefits offer pitifully low returns. Opponents of privatization counter
that these programs are insurance as well as income programs and long-term
benefits outweigh what the stock market can offer (Waller 2001). Privatization is
also seen as disfavoring low-income workers - who are typically less familiar with
investing - and small businesses that may lack the resources/staff for managing the
complexities of IUAs instead of a straightforward FUTA tax (Waller 2001).
Costs associated with a complete restructuring of the FUI system could
include many factors. Federal government may experience the decreased burden
of administering the benefits program, but this may also lead to lost government
jobs and lost tax revenue for job service programs funded through FUTA revenue. A
move away from any federally funded unemployment initiatives may carry a cost

for those facing long-term unemployment or job displacement as it eliminates

additional resources such as TAA. And, as previously mentioned, privatization may
also increase costs for businesses provide greater contributions to IUA, depending
on a federal requirement, or acquiring the personnel/skills to manage the accounts.
The most dominant argument for this particular policy is it removes the
burden of contributing to a collective unemployment pot which many individual
workers at all wage levels never draw from during their careers. At the same
time, implementation may face a number of roadblocks given the current public
crisis of confidence in investment and the stock market in general. Despite the
higher earnings potential and the possibility of government funds running dry [as
with Social Security], the appearance of stability in public FUI may be more
appealing than the volatility of market returns associated with IUAs.
Alternative: New Deal-Style Work Program
A final policy alternative to consider is a more expansive New Deal-style
program. A modern policy inspired by the New Deal would not be a complete
resurrection, as many parts are still with us in the form of the largely unchanged
1935 Social Security Act, but rather an expansion of the federal unemployment
initiatives. The most widely considered/supported expansion is creation of Green
Jobs Corps, similar to the Civilian Conservation Corps (CCC) or Works Progress
Administration (WPA), but which would focus projects devoted to sustainability and
clean energy.
The creation of a modern federal work program would revisit the central
question of Roosevelts wide-reaching policies: Does extensive government
employment harmfully curb private industry growth? In her book, The Forgotten
Man, economist Amity Shlaes argues that although Roosevelts New Deal offered

positive returns in some ways, in many respects it actually slowed the economic
recovery from the recession initiated in the late 1920s. Employment reached as
high as 25%, taking more than a decade to melt back to a still quite steep 15% in
1940. But, it wasnt until after the New Deal, WWII and the accompanying
production boom were over that unemployment returned to pre-crash levels (Shlaes
2007). The slow recovery during New Deal programming is an oft-overlooked
reality. Also to consider is the fundamental differences between the scope and
demographics of Depression employment. The recession of the 1990s, 2001, and
our current financial crisis as of yet did not produce anything close to the
unemployment levels of the New Deal era. Additionally, the CCC and WPA almost
exclusively served men many younger and consisted of manual, physical labor
constructed public works and parks, while todays unemployed consists of a growing
percentage of women and older, disabled citizens as well as professional, white
collar workers. Would a similar program be capable of addressing the divergent
needs of a far more diverse jobless population?
Supporters point out that a Green Jobs Corps would provide training, new
skills, and jump-start the necessary process of greening our country solar
panels, clean energy, public transportation (McKibben 2008). While this may
address the needs of a portion of the jobless population, it would likely fail to
address it on a comprehensive scale. Additionally, a jobs program focused on a few
industries construction specifically would likely draw resistance from labor unions
and existing skilled workers who would be competing for jobs in times of high
unemployment. Roosevelts New Deal programs, such as the electric producer and
Tennessee Valley Authority, are criticized for taking over where private industry
could have grown and created new jobs itself (Shlaes 2007).

Since a federal jobs program would replace unemployment or other welfare

benefits for participants, would the programs be funded through the same FUTA
funds as traditional unemployment benefits, or would new taxation steams
explored? One option maybe for a Job Corps to co-exist alongside the current FUI
program, but this would likely require a substantial increase in tax funding, as
previously stated. Another consideration is the transition from a Job Corps
position back to the private industry workforce will there be job placement for all
workers? Or will participants have an opportunity to look for work while still
receiving benefits/working in the corps? There a numerous considerations that
make a government jobs program a complicated and complex policy option to
address joblessness.