UI BENEFITS STUDY 

Trends in the Structure of the Labor Market and Unemployment: 

Implications for U.S. Unemployment Insurance

September 2008 

Prepared by: 

Gary Burtless 

The Brookings Institution 

Submitted to: Submitted by: 

U.S. Department of Labor IMPAQ International 

Employment & Training Administration 10420 Little Patuxent Parkway 

200 Constitution Avenue, NW Columbia, MD 21044 

Washington, DC 20210 

This paper was prepared under Contract No. DOLJO41A000031 between the U.S. Department of Labor 

and IMPAQ International, LLC. I am grateful for the excellent research assistance of Sarah Anders and 

the comments and suggestions of Jacob Benus of IMPAQ and an anonymous reviewer at the U.S. 

Department of Labor. All errors are the responsibility of the author. The views expressed in this paper 

are those of the authors and should not be ascribed to the U.S. Department of Labor, IMPAQ 

International, LLC., or the Brookings Institution. 
 

 

TABLE OF CONTENTS 

Page 

EXECUTIVE SUMMARY ............................................................................................................. i

TRENDS IN THE STRUCTURE OF THE LABOR MARKET AND UNEMPLOYMENT: 

IMPLICATIONS FOR U.S. UNEMPLOYMENT INSURANCE................................................. 1

I. Composition of the Labor Force......................................................................................... 2

Gender and household living arrangements. ............................................................... 2 

Workforce aging.......................................................................................................... 9 

Skills, educational attainment, and wage differentials.............................................. 11 

Race, ethnicity, and immigrant status of the workforce............................................ 20

Geographical distribution of employment................................................................. 24

II. Employers and the Nature of the Employment Contract.................................................. 35 

Shifts in industrial employment. ............................................................................... 35 

Temporary versus permanent layoff unemployment................................................. 39 

Decline in unions....................................................................................................... 40 

Nonstandard and contingent work............................................................................. 43 

Outsourcing and the evolution of corporate governance........................................... 44

Earnings losses upon reemployment. ........................................................................ 47

III. Trends in the Business Cycle............................................................................................ 49

IV. Trends in the Nature and Costs of Unemployment........................................................... 51 

The duration of unemployment. ................................................................................ 51 

Credit constraints and sources of income for the unemployed. ................................ 54 

Fringe benefits........................................................................................................... 57

V. The Current Effectiveness of UI....................................................................................... 60 

Countercyclical effects. ............................................................................................. 61 

The decline in UI coverage. ...................................................................................... 63 

Longer unemployment durations............................................................................... 66

VI. Implications for Changes in UI......................................................................................... 69

Increase protection for long spells of unemployment. .............................................. 70 

Reduce protection for short spells of unemployment................................................ 71 

Partially protect workers against the risk of losing health insurance........................ 72 

Time-limited earnings insurance benefits. ................................................................ 73

Appendix....................................................................................................................................... 77 

Endnotes........................................................................................................................................ 78 
Implications for U.S. Unemployment Insurance September 2008

EXECUTIVE SUMMARY 

The American Unemployment Insurance (UI) system has been in place since its establishment as 

part of the Social Security Act of 1935. While the labor market and the nature of unemployment 

have changed dramatically over the decades, the UI system has remained largely unchanged. Since 

its inception, the UI system has served the U.S. economy well by performing two crucial 

functions: providing workers with essential income protection when they are temporarily 

unemployed as a result of a layoff and helping unemployed workers maintain their consumption 

during recessions, thereby giving the national economy an important stimulus in periods when 

overall unemployment is high or rising. 

Any proposed modification of the UI system must take into consideration three competing 

objectives: 

 Provide adequate income to eligible claimants; 

 Control total program costs; and 

 Minimize the adverse incentive effects of the UI program on workers’ job search 

behavior. 

Conflicts among these three objectives are inevitable. Changes in the system that improve the 

protection available to laid-off workers will often increase program costs or worsen the adverse 

incentives created by the system. 

The paper contains six sections. The first five sections address the major trends in the labor 

force and the U.S. economy affecting the UI system over the last seven decades. The last section 

identifies potential directions for change in UI that might make it more effective in the new 

environment. 

1. Changes in the Composition of the Labor Force 

Shifts over time in the composition of the labor force affect both the need for UI and the take-up 

of UI benefits. Married couple households are now more likely to have two working spouses 

than was the case in the earlier post-war period. Families with two earners can smooth 

consumption in the face of a layoff more easily than households with only a single breadwinner. 

On the other hand, changing living arrangements have reduced the percentage of adult 

Americans who are members of traditional married-couple families. Households headed by a 

single adult are less likely to have a second earner who can help support a family when the main 

breadwinner loses his or her job. 

Older workforce. Since the early 1980s the American workforce has grown older as the 

proportion of both employed and unemployed workers under age 25 has declined. There has 

been a rise in the fraction of the workforce between the ages of 25 and 54. These trends tended 

to reduce the overall unemployment rate after the early 1980s. The aging of the baby boom 

generation has also increased the proportion of the workforce that is in late middle age and is 

nearing the standard retirement age. This rise in the fraction of older workers and unemployed is 

likely to continue for the next two decades. Older workers on average take longer to find new 

jobs after they are laid-off. 
Implications for U.S. Unemployment Insurance ii September 2008 

More educated workforce. The educational attainment and skills of the working-age population 

improved steadily over most of the post-war period, but the gains in educational attainment have 

slowed sharply in recent years, especially among men. Compared with the less educated, 

workers with more schooling are less likely to be unemployed and tend to have shorter spells of 

unemployment. 

More racially and ethnically diverse workforce. The labor force has become more racially and 

ethnically diverse. A disproportionate share of labor force growth has been concentrated in 

traditionally disadvantaged populations with above-average unemployment rates. An important 

compositional change has been the rapid growth of the Hispanic workforce, which includes 

many immigrants. Additionally, a sizeable share of recent immigrants is not authorized to live or 

work in the United States; many of these work outside the UI-covered sector. The growing size 

of the illegal immigrant workforce may limit or even reduce the number of UI-covered jobs in 

some sectors such as construction and household services. However, if illegal immigrants work 

in UI-covered jobs but do not apply for UI benefits when they are laid-off, the tax contribution 

made on their behalf will reduce the average UI tax needed for legal residents. 

Shift in geographic distribution. The geographical distribution of the population has changed, 

with workforce growth concentrated disproportionately in states where UI tax burdens and UI 

coverage rates are low. This geographical shift has reduced the average UI tax burden by about 

10 percent, when this burden is measured as the ratio of regular UI benefit payments to total 

wages in the UI-covered sector. 

2. Industrial Shifts and Changes in the Employment Contract 

Shifts in employment across industries have reduced the importance of traditionally high-paying 

industries such as mining, manufacturing, and public utilities and increased the employment 

share of retail trade and services. Partly as a result of these shifts, temporary layoff 

unemployment has become less important and permanent layoffs are now relatively more 

common. 

Union representation has declined. It is now less common for employers to negotiate formally 

with their workers about wages and the terms of employee separations. The decline in union 

density has had ambiguous effects on the demand and need for UI benefits. 

Other changes in the employment contract have been influenced by the evolution of corporate 

governance. Leveraged buyouts and hostile takeovers are innovations that have made senior 

managers more sensitive to shareholders’ interest in reducing corporate costs, including labor 

costs. The crucial issue from the perspective of the UI system is the impact of new corporate 

practices on company separation and hiring policies. Many observers believe that modern 

companies show less loyalty to their line employees and are more likely to dismiss them to 

obtain better financial results. 

3. Trends in the Business Cycle 

Since the early 1980s the U.S. economy has experienced remarkably stable growth relative to the 

earlier post-war period. The average economic expansion since 1983 has lasted nearly twice as 

long as expansions in the earlier post-war period, and recent recessions have been slightly 
Implications for U.S. Unemployment Insurance iii September 2008 

shorter. Increases in the unemployment rate from business cycle peak to recessionary trough 

have also been smaller than in earlier post-war recessions. 

Several explanations have been advanced to explain the greater stability of the economy. One 

explanation is that financial market deregulation and innovations in consumer finance have 

relaxed borrowing constraints that once limited businesses’ and consumers’ ability to spend in 

recessions. If serious recessions now occur less frequently, state UI programs will not have to 

deal as often with a sharp rise in state UI rolls. They will have longer periods of low or declining 

unemployment in which they can build up their trust fund reserves. With more years between 

recessions, there will be less reason for states to replenish their reserves quickly, giving them 

greater flexibility in adjusting their tax schedules when reserves run low. 

4. Trends in the Nature and Cost of Unemployment 

A number of changes in the nature of employment and in the wider economy have affected the 

challenges workers face when they are laid-off from a job. Some have made it easier for workers 

to smooth consumption when their earnings drop as a result of a layoff, but others have increased 

the cost of joblessness, making it more costly for laid-off workers to suffer long spells without a 

job. A notable trend in U.S. unemployment is the increasing length of average unemployment 

spells. At a given level of the overall unemployment rate, today’s unemployed have been jobless 

for longer, and are more likely to exhaust UI benefits after they file a claim for benefits. 

The financial resources of the unemployed and their ability to smooth consumption in the face of 

job loss have improved over time. The wealth and borrowing capacity of many of the 

unemployed have increased as wage levels and the percentage of unemployed in dual income 

households have increased. These trends allow workers with relatively short spells of 

unemployment to maintain their consumption more easily than was possible in earlier decades. 

Compared with workers in the 1950s and 1960s, today’s workers can self-insure more easily 

against the risk of brief unemployment spells. 

One of the most important challenges facing laid-off workers is the loss of crucial fringe 

benefits, such as health insurance and employer payments into a pension plan. Employer 

contributions for these two fringe benefits represented only 3.3 percent of wages in the 1950s 

and just 9.2 percent of wages as recently as the 1970s. In 2006, employers made contributions to 

employee health and pension plans that were equal to 15 percent of money wages. As a result, 

the risk of losing health insurance is much more important today than it was a quarter century 

ago, because the cost of adequate health insurance outside of an employer-sponsored plan has 

risen steeply in comparison to median wages. 

5. The Current Effectiveness of UI 

In the period since 1980, the UI system has provided less countercyclical stimulus to the 

economy and lower income protection to job losers. Compared with the period before 1980, the 

amount of countercyclical stimulus provided by the program has fallen by one-fifth or more. 

That is, when the unemployment rate rises, the proportional rise in UI spending is now smaller 

by one-fifth than was the case in the earlier post-war period. 
Implications for U.S. Unemployment Insurance iv September 2008 

In an accounting sense, the falloff in both the countercyclical stimulus and income protection is 

traceable to two factors. First, a smaller percentage of the unemployed who lost their last jobs is 

collecting UI benefits. Second, because the income tax treatment of UI benefits has changed, the 

after-tax value of a UI check has fallen for most recipients. While the pretax replacement rate 

has remained virtually unchanged for the past five decades, since 1978, UI recipients have been 

required to pay income taxes on some or all of the UI benefits they receive, lowering the aftertax value of filing a UI claim. 

6. Changes in UI to Make it More Effective in the New Economy 

The last section of the paper identifies several potential directions for changes to the UI system 

that might make it more effective in the new environment. Each of the identified potential 

changes requires close analysis before any clear recommendation could be offered. Four 

potential changes are considered in this paper: 

1. To address the problem of lengthening unemployment spells, policymakers might 

consider providing a longer period of regular UI benefit duration or altering the trigger 

mechanism for Extended Benefits so that workers receive automatic extensions in benefit 

duration when the unemployment rate is high or rising. 

2. To address the increased costs to the UI system associated with longer UI benefit 

duration, policymakers might also want to consider increasing the duration of the waiting 

period between the layoff date and the first week in which laid-off workers are eligible to 

draw a UI benefit. 

3. To partially protect workers against the risk of losing employer-provided health insurance 

when they are laid-off, the UI system might be extended to provide compensation that 

subsidizes the purchase of COBRA health insurance coverage for UI-eligible laid-off 

workers who had health insurance on their lost jobs. 

4. To encourage long-tenure, laid-off workers to look more energetically for new jobs, the 

current UI protection might be extended to provide reemployed workers with timelimited earnings insurance benefits. 

While each of these potential changes to the UI system may have desirable outcomes, 

changes to the UI system can also have unintended consequences. Such changes should, 

therefore, not be implemented without a comprehensive understanding of their full benefits and 

costs. This comprehensive understanding of costs and benefits can only be achieved through 

careful analysis. 
Implications for U.S. Unemployment Insurance September 2008

TRENDS IN THE STRUCTURE OF THE LABOR MARKET AND 

UNEMPLOYMENT: IMPLICATIONS FOR U.S. 

UNEMPLOYMENT INSURANCE 

This paper analyzes critical trends in U.S. demography, labor market institutions, and the economy 

from the perspective of the optimal design and effective administration of unemployment insurance 

(UI). In particular, it provides an assessment of the implications of recent labor market 

developments for the operations of the existing UI system and for the optimal design of a UI system 

that offers workers good and cost-effective protection against the earnings loss that follows 

involuntary unemployment. 

The United States offers valuable insurance to workers who lose their jobs as a result of a 

temporary or permanent layoff – unemployment compensation. The federal-state UI system was 

established in the Great Depression as part of the Social Security Act. It assumed its present-day 

form and scale shortly after World War II. The system serves two crucial functions. First, it 

provides workers with essential income protection when they are temporarily unemployed as a 

result of a layoff. Second, by helping unemployed workers maintain their consumption during 

recessions, it gives the national economy an important stimulus in periods when overall 

unemployment is high or rising. 

Workers who lose their jobs through no fault of their own can collect UI benefits if they file 

claims and meet their state’s monetary and non-monetary eligibility requirements. In order to 

become and remain eligible for benefits, workers must have an adequate work history, be ready 

and able to accept a suitable job, and search actively for work. Benefits are financed out of state 

trust funds which in turn are funded with payroll taxes imposed on employers. In most states, 

the maximum duration of regular benefits is limited to 26 weeks, and benefits replace 30 to 50 

percent of lost wages up to a maximum weekly amount. Among states there are wide variations 

in benefit levels and maximum amounts, as well as in eligibility and work test requirements. 

States must now identify individuals at risk of exhausting UI benefits, and workers who face a 

high risk of benefit exhaustion are required to register for and receive additional services to help 

them find new jobs. 
Implications for U.S. Unemployment Insurance 2 September 2008 

The paper contains six sections. The first describes changes in the American labor force and 

considers how these changes have affected the need for and take-up of UI benefits. The second 

considers changes in the character of demand for U.S. workers and the nature of employment 

that is insured by the UI system. The third section analyzes changes in U.S. business cycle 

dynamics and considers how these changes have affected the cyclical pattern of unemployment 

and demand for UI benefits. The next section describes changes in the nature of unemployment 

and characteristics of the unemployed. It assesses the economic losses that workers experience 

when they are laid-off and describes how changes in the legal and institutional environment have 

affected the size of these losses. The fifth section presents summary statistics on UI 

effectiveness. How well does the UI system perform in insuring workers against short-term 

earnings loss? How much does UI spending increase when unemployment rises? The final 

section evaluates the implications of the analysis for changes in UI that might make it more 

effective in the new environment. 

I. Composition of the Labor Force 

New work patterns among women, shifts in household living arrangements, and changing 

demography have dramatically affected the American workforce and the composition of the 

unemployed. The working population is now older, more female, and more racially and 

ethnically diverse than it was in the first decades after World War II. It is also more educated 

and highly skilled. Many of these changes affect both the need for UI and the take-up of UI 

benefits. 

Gender and household living arrangements. The principal goal of UI is to replace part of the 

earnings that are lost as a result of involuntary job loss. Workers who share their earned incomes 

with other potential earners can partly duplicate this insurance function through income sharing 

within the family. If a husband and wife share earnings equally, then the earnings lost when one 

spouse is laid-off may be partially offset through increased earnings by the other spouse. Even if 

the spouse who remains employed cannot earn higher wages, the loss of one spouse’s earnings 

will not result in complete cessation of the family’s earned income. Families with two earners 

can partially smooth consumption in the face of the shock of losing one earner’s income. 
Implications for U.S. Unemployment Insurance 3 September 2008 

Workers who live alone or with non-working family members do not enjoy this kind of income 

protection. 

Changes in women’s work patterns have increased the proportion of American adults who obtain 

de facto insurance through earnings sharing within the family. Married couple households are 

now more likely to have two working spouses than was the case in the earlier post-war period 

(see Figure 1). Among married couples where there is at least one working spouse, more than 

two-thirds of the families now have both a working husband and a working wife. In the mid1960s more than half of these families had only a single earner, almost always the husband. In 

the early post-war period, when only one-fifth of married women were in the labor force, the 

fraction of married couples with two earners was much lower. The increase in the proportion of 

dual-income, married couples has reduced the percentage of couples who rely solely on one 

spouse’s earnings. When spouses in dual-income families lose their jobs, they are usually better 

able to support themselves without UI benefits than adults who are the sole breadwinners in their 

families. U.S. Bureau of Labor Statistics (BLS) analysis of unemployment experience in 

married-couple families shows that when a member of such a family becomes unemployed there 

is a high probability that at least one other family member, usually the spouse, will still be 

employed. In 2006, for example, 82 percent of married-couple families with at least one 

unemployed family member reported that another family member was employed.1 This 

percentage was clearly much lower shortly after World War II when only one-in-five married 

women were in the workforce. 

The growing importance of dual-earner households is inextricably linked to the rising importance 

of paid work in the lives of American women. In 1948, women accounted for a little more than a 

quarter of the employed population ages 25 and older. A half century later, this fraction had 

risen to almost half (see Figure 2 and first column in Table 1). Women now account for more 

than half the workers under the age of 20. At higher ages the participation rates of women are 

lower than those of men the same age, but the gap between the two sexes has narrowed over 

time. The proportional rise in labor force participation has been steeper among married women 

than among never-married women and women who are separated, divorced, or widowed (see 

Figure 3). This pattern suggests that women can now expect to contribute substantially to their 
Implications for U.S. Unemployment Insurance 4 September 2008 

 Source: BLS (2005), Women in the Labor Force: A Databook , Table 23.

Figure 1. Source of Earnings in Married-Couple Families Where at Least One Spouse 

Works, 1967-2003

Percent of population

0

10

20

30

40

50

60

70

80

1965 1970 1975 1980 1985 1990 1995 2000 2005

Husband and wife both work

Husband only (Not wife)

Wife only (Not husband)

 Source: U.S. Bureau of Labor Statistics.

Figure 2. Percent of Employed Population that Is Female, 1948-2006

Percent

20

25

30

35

40

45

50

55

1945 1955 1965 1975 1985 1995 2005

16-19

20-24

25-54

55+

Age groups:
Implications for U.S. Unemployment Insurance 5 September 2008 

Table 1. Age and Sex Composition of the Labor Force Age 16 

and Older, 1950-2006 

Percent in age group 

Year 

Percent 

female 16-19 20-24 25-54 55-64 65 and older 

 

Civilian labor force

1950 29.6 6.8 11.7 64.3 12.3 4.9 

1960 33.4 7.0 9.6 65.4 13.5 4.6 

1970 38.1 8.8 12.8 60.9 13.6 3.9 

 

1980 42.5 8.8 14.9 62.3 11.2 2.9 

1990 45.2 6.2 11.7 70.2 9.2 2.7 

2000 46.5 5.8 10.0 71.1 10.1 3.0 

 

2006 46.3 4.8 10.0 68.4 13.2 3.6 

Unemployed workers

1950 31.9 15.6 17.1 52.0 11.2 4.2 

1960 35.5 18.5 15.1 52.9 10.3 3.2 

1970 45.3 27.0 21.2 41.8 7.5 2.5 

 

1980 44.1 21.9 24.0 47.7 5.2 1.2 

1990 44.6 17.2 18.4 57.4 5.5 1.5 

2000 47.7 19.0 18.0 54.5 6.2 2.3 

 

2006 46.4 16.0 17.6 55.6 8.5 2.3 

 

 

 Source: U.S. Bureau of Labor Statistics. 
Implications for U.S. Unemployment Insurance 6 September 2008 

Figure 3. Labor Force Participation Rate of Women by Marital Status, 

1947-2005

 Source: Statistical Abstract of the United States, 2007 (Table 584 and supplementary historical tables). 

[http://www.census.gov/compendia/statab/tables/07s0584.xls and 

http://www.census.gov/statab/hist/02HS0030.xls]

Percent of population

20

30

40

50

60

70

1945 1955 1965 1975 1985 1995 2005

Never married

Married, spouse present

Separated, divorced, or widowed

families’ incomes, even when they are married to a working breadwinner who can help support 

them. In 2003 working wives earned 35 percent of their families’ total incomes. In one-third of 

married-couple families with a working wife, the wife earned more than her husband.2

In the 1970s and 1980s, when the rise in female participation was particularly rapid, many 

unemployed women were trying to enter the full-time workforce for the first time or were 

reentering the labor force after a long absence. Since many of these women had no recent 

employment in a UI-covered job, they were jobseekers who were ineligible for UI benefits. 

After the late 1980s, women’s work experience became more similar to that of men the same 

age. It is now less common for women to reenter the labor force after a lengthy spell without 

any insured employment. A 35-year-old woman who is unemployed is nowadays more likely to 

have recently worked in a UI-covered job and to be eligible for UI. Figure 4 shows career 

employment patterns among successive cohorts of American women. The estimates are based 

on Social Security earnings records that have been matched to Census interview records from the 
Implications for U.S. Unemployment Insurance 7 September 2008 

Figure 4. Career Pattern of Employment among U.S. Women, by BirthYear Cohort, 1951-2001

 Source: Author's tabulations of 1990-1993 Survey of Income and Program Participation files matched to 1951-2001 

Social Security earnings records.

Percent of women who have Social-Security-covered earnings

0%

20%

40%

60%

80%

20 25 30 35 40 45 50 55 60 65

Age

1926-30 1931-35 1941-45 1951-55 1961-65

Birth cohort --

Survey of Income and Program Participation (SIPP). The 1951-2001 earnings records of women 

born between 1926 and 1965 have been tabulated to show the percentage of women in each 

birth-year cohort who reported Social-Security-covered earnings at successive ages. The line at 

the bottom shows employment rates for the cohort born between 1926 and 1930. Note that at 

age 30, less than one-third of these women earned income in Social-Security-covered jobs. 

When this birth cohort attained age 50, only 51 percent of women had covered earnings. The top 

line in the chart shows career employment patterns for women born between 1961 and 1965. 

The line ends at age 40, which is the oldest age observed when the Social Security earnings data 

end. At age 40, almost 80 percent of this birth cohort had Social-Security-covered earnings, a 

higher rate of employment than the peak employment rate of cohorts born earlier. The recent 

high rate of women’s employment in Social-Security-covered jobs clearly signals that a large 

fraction of these women have accumulated insurance coverage under the UI program. 
Implications for U.S. Unemployment Insurance 8 September 2008 

The rise in female participation has been especially striking among married women who are 

rearing children, including very young children (see Figure 5). In 2005, 68 percent of married 

mothers with children under 18 were labor force participants. Among married mothers with a 

child less than age six, 60 percent were employed or looking for work. In 1950, only 15 percent 

of married women with children under 18 were in the workforce. Many married mothers with 

very young children work on a part-time rather than a full-time schedule. While the loss of a 

secondary earner’s wages after layoff is harmful to family finances, it is usually less harmful 

than the loss of income when a family’s sole breadwinner is laid-off. 

 Note: Population is age 16 and older.

 Source: Statistical Abstract of the United States, 2007 (Table 585) and author's tabulations of unpublished 

BLS data.

Figure 5. Labor Force Participation Rate of Married Women, Spouse 

Present, by Age and Presence of Own Children, 1950-2005

Percent of population

0

10

20

30

40

50

60

70

80

1950 1960 1970 1980 1990 2000

With children under 18 

With children under 6

No children under 18 

The changing work patterns of married women have increased the proportion of married-couple 

families with multiple breadwinners. At the same time, however, changing living arrangements 

have reduced the proportion of American adults who are members of traditional married-couple 

families. At the end of World War II almost 80 percent of U.S. households were headed by a 

husband-wife couple. By 2006, that percentage had fallen to slightly more than 50 percent of 

households. Seventeen percent of households were families headed by an unmarried man or 
Implications for U.S. Unemployment Insurance 9 September 2008 

woman, and 32 percent were non-family households, that is, adults living alone or with one or 

more unrelated persons.3 People in these kinds of living arrangements often do not have the 

income-sharing possibilities open to workers in married-couple families. When a household 

includes only one adult member, the household’s earned income can fall to zero after the 

breadwinner loses his or her job. BLS tabulations show, for example, that among households 

maintained by an unmarried woman, when the earner becomes unemployed, more than half of 

the affected households have no other earner.4 An increasing share of working-age Americans 

live in nontraditional households, without a current spouse. For many adults in these 

circumstances, UI benefits provide a crucial source of support when a breadwinner loses a job. 

Workforce aging. Swings in fertility and immigration, increases in the school-leaving age, and 

changes in retirement behavior have produced notable, though gradual, shifts in the age 

distribution of both the workforce and the unemployed (see Table 1). Low birth rates in the 

1930s and early 1940s produced comparatively slow labor force growth in the 1950s and early 

1960s. The fraction of the workforce under age 25 shrank, while the age distribution of the 

unemployed remained roughly constant. The entry of the large baby boom generation into the 

working-age population between the mid-1960s and early 1980s accelerated the growth of the 

workforce and lowered the average age of labor force participants. Since teenagers and young 

adults have much higher unemployment rates than people ages 25 and older, this development 

also pushed up the jobless rate and significantly reduced the average age of the unemployed. By 

the late 1970s, almost half the unemployed were younger than age 25. 

Unemployment is common among the young because many of them hold jobs for brief periods, 

often only a few weeks or months. Many teenagers and workers in their early 20s are combining 

work with school, so their job holding patterns are strongly affected by school or college 

schedules. Students may cease to work when a semester begins or when the demands of 

schooling grow too heavy to combine paid employment with school attendance. Young people 

who have completed their schooling often move rapidly from one job to the next as they look for 

work that suits their preferences and aspirations. Many will hold several jobs before finding a 

position that lasts three or more years. As workers grow older, this kind of turnover declines and 

unemployment becomes less frequent.5

 Most unemployment spells of the young are not insured 

by the UI system.6

 Between 2001 and 2006 almost one-third of unemployed workers were 
Implications for U.S. Unemployment Insurance 10 September 2008 

between the ages of 16 and 24, but during the same period less than one-tenth of UI claimants 

were ages 24 or younger. Unemployed workers under age 25 are grossly underrepresented on 

the UI rolls. Teenagers who are looking for their first job and young adults seeking work after 

many months in school do not have enough coverage under the UI system to qualify for benefits. 

Workers who leave a job voluntarily, either because they want to return to school or because 

they are dissatisfied with working conditions and pay, are not entitled to claim a UI check. Even 

workers who are dismissed from a job may be ineligible if they have not accumulated enough 

work experience to meet a state’s UI qualifying requirements. 

After the early 1980s the American workforce grew older, and the proportion of unemployed 

workers under age 25 fell back to levels last seen in the 1950s. There was an increase in the 

fraction of the workforce and unemployed between the ages of 25 and 54. Compared to the 

young, prime-age workers who are laid-off are more likely to have recent work experience that 

qualifies them for UI benefits, and they are more likely to have family responsibilities that make 

it necessary to replace earnings lost when a layoff occurs. 

The aging of the baby boom generation has also increased the proportion of the workforce that is 

in late middle age and is nearing or past the standard retirement age. The fraction of the 

unemployed who are ages 55 or older increased from 7.1 percent in the early 1980s to 10.8 

percent in 2006. In view of the age structure of today’s population, the fraction of aged and 

near-aged workers among the unemployed is likely to continue rising for the next couple of 

decades. This trend will be reinforced by the recent tendency of workers past age 62 to gradually 

increase their age of full exit from the labor force. In the first four decades after World War II, 

workers with full careers chose to leave the workforce at earlier and earlier ages. This led to a 

decline in the percentage of labor force participants past the age of 62. Beginning in the mid1980s the long-term trend toward earlier retirement came to an end and began to reverse. Labor 

force participation rates of men and women in their 60s are now rising, and this trend is likely to 

continue as Social Security and employer-sponsored pensions provide weaker incentives to claim 

early pensions and stronger incentives for pension recipients to keep working.7

 

When older workers are laid-off they face different problems than the young. Before being laidoff they were likely to earn higher wages than workers near the beginning of their careers. Older 
Implications for U.S. Unemployment Insurance 11 September 2008 

unemployed workers are also more likely to have savings to fall back on. A minority may be 

eligible for an employer-sponsored pension. Asset holdings and pensions allow many older 

workers to smooth their consumption after job loss, even without claiming UI benefits. Many 

newly jobless older workers recently held a job that provided fringe benefits. Some of these 

benefits are particularly valuable to people nearing the end of a career. Health insurance is 

especially valued by older workers who are not yet eligible for Medicare and do not have access 

to health insurance through a former employer’s plan or some other family member’s plan. The 

UI program does not insure unemployed workers against the loss of these benefits, which may 

make it more urgent that these workers find a new job that provides such benefits. Finally, older 

workers experience longer average spells of unemployment after they become unemployed. In 

2007 the average length of unemployment spells in progress was 21.9 weeks for unemployed 

workers between the ages of 55 and 64 versus just 12.9 weeks for jobless workers between the 

ages of 16 and 24.8 Compared with the young, older unemployed workers spend more time 

looking for work either because they are choosier about the jobs they will accept or because 

employers discriminate against them when filling job vacancies. Older unemployed workers are 

also more likely to receive UI benefits when they are laid-off and to receive benefits longer. 

Skills, educational attainment, and wage differentials. The working-age population has 

accumulated increasing education over the post-war era (see Figure 6). The percentage of 

Americans ages 25 and older that completed four years of high school increased from 33 percent 

in 1947 to 86 percent in 2006. The proportion with four or more years of post-secondary 

schooling increased from 5 percent to 28 percent of the population. Gains in educational 

attainment have recently slowed, especially among working-age Americans under age 55. 

Census Bureau surveys indicate that the high school completion rate in the population between 

the ages of 25 and 34 has changed little since the early 1980s, while the high school completion 

rate in the population ages 35-54 has risen little since the early 1990s. After the early 1980s 

almost all the gain in the college completion rate has been concentrated among prime-age 

women (see Figure 7). Among men between the ages of 25 and 34 the rate of college 

completion in 2006 was virtually unchanged from its level in the late 1970s. 
Implications for U.S. Unemployment Insurance 12 September 2008 

 Source: U.S. Census Bureau.

Figure 6. Educational Attainment of the Population 25 and 

Older, 1947-2006

Percent of population 25 and older

0

10

20

30

40

50

60

70

80

90

1940 1950 1960 1970 1980 1990 2000 2010

Completed high school

Completed 4 years college
Implications for U.S. Unemployment Insurance 13 September 2008 

Figure 7. College Completion Rates by Age and Gender, 1940-2006

 Source: U.S. Census Bureau.

Percent Who Have Completed College

25-34 year-olds

0

5

10

15

20

25

30

35

1940 1950 1960 1970 1980 1990 2000

Men

Women

Percent Who Have Completed College

35-54 year-olds

0

5

10

15

20

25

30

35

1940 1950 1960 1970 1980 1990 2000

Men

Women
Implications for U.S. Unemployment Insurance 14 September 2008 

The continuing slow rise in high school and college completion rates shown in Figure 6 results 

mainly from the fact that younger working-age Americans have higher levels of school 

attainment than people past the age of 60. If educational attainment among working-age 

Americans is to continue growing in the future, teenagers and young adults will have to stay in 

school longer than they currently do. 

Long-term gains in the educational qualifications of the nation’s workforce contributed 

substantially to the rise in average productivity and real earnings of U.S. workers. In the first 

four decades after World War II, economists estimate that increases in average educational 

attainment explain 11 percent to 20 percent of the overall increase in worker output per hour.9

 

Greater investments in education allow workers to perform more complicated and intellectually 

demanding tasks, help them acquire training for a broader variety of occupations, and contribute 

to innovation in production processes and the development of new goods and services. 

Compared to workers who have less education, workers with greater school attainment are less 

likely to be unemployed and more likely to earn high wages. Since the late 1970s the earnings 

premium for better educational credentials has increased noticeably. In the late 1970s the 

average hourly wage received by a college graduate was 43 percent higher than that received by 

a high school graduate. By 2005 college graduates’ pay was 75 percent above the average wage 

received by high school graduates (see Figure 8). 

The growing pay premium for better educational credentials is one of several trends that have 

pushed up overall earnings inequality in the United States. Figure 9 shows relative changes in 

the pure price of U.S. labor, which can be measured using the hourly gross wage received by 

wage and salary employees. The chart displays relative pay trends separately for men, in the top 

panel, and women, in the bottom panel. It covers the period from 1973, when this kind of wage 

data was first collected by the BLS, up through 2005. Both panels show three indicators of 

relative pay. The top line in each panel shows the ratio of hourly pay earned by a worker at the 

95th wage percentile and a worker earning the median wage. This ratio is usually referred to as 

the 95-50 wage ratio. The lower two lines show the 90-50 and the 50-10 wage ratios. The figure 

provides clear evidence of widening U.S. pay disparities among both men and women over 

almost the entire period since 1979. There was a distinctive break in one of the trends, however. 

Whereas the relative earnings differences between middle-rank and top U.S. earners has 
Implications for U.S. Unemployment Insurance 15 September 2008 

Figure 8. Trends in Relative Hourly Earnings of U.S. Workers by 

Educational Attainment, 1973-2005

 Source: Economic Policy Institute (2007), http://www.epi.org/datazone/06/datazone_2006-full.xls .

Hourly earnings 

(Percent of high school graduates' average wage)

100

120

140

160

180

200

220

240

1972 1976 1980 1984 1988 1992 1996 2000 2004

Advanced degree

College degree

Some college

Hourly earnings 

(Percent of high school graduates' average wage)

70

75

80

85

90

95

1972 1976 1980 1984 1988 1992 1996 2000 2004

High school dropout
Implications for U.S. Unemployment Insurance 16 September 2008 

 a/ The figure shows trends in the ratio of wages at the 95th and 50th percentiles, at the 50th and 10th 

percentiles, and at the 90th and 50th percentiles of the hourly earnings distribution.

 Source: Economic Policy Institute tabulations of hourly earnings data from the monthly Current Population 

Survey files (http://www.epi.org/content.cfm/datazone_dznational).

Figure 9. Trends in Relative Hourly Earnings of U.S. Workers, 1973-2005 

a/

Ratio of earnings at selected points in distribution: Men

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

1972 1976 1980 1984 1988 1992 1996 2000 2004

95/50

50/10

90/50

Ratio of earnings at selected points in distribution: Women

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

1972 1976 1980 1984 1988 1992 1996 2000 2004

95/50

50/10

90/50
Implications for U.S. Unemployment Insurance 17 September 2008 

continued to grow over the entire period, the gap between low- and middle-rank earners widened 

until about 1986-1988 but then shrank or stabilized after the late 1980s. Evidently, the factors 

that pushed down the relative wages of poorly paid workers in the 1980s became less important 

after 1988. By 2005 the relative wage difference between poorly paid and average-wage U.S. 

workers was approximately the same as it had been in the early 1970s. 

Many economists interpret the wage inequality trends in Figures 8 and 9 to mean that the 

demand for workers with high skills has grown faster than the relative supply of such workers. 

The growing wage premium for advanced diplomas clearly supports this hypothesis. The 

increase in wage disparities among workers who have the same educational qualifications and 

job tenures is also consistent with the hypothesis if we believe that employers are increasing the 

wage premiums they offer to their most skilled workers within each educational attainment class. 

College degree holders whose skills do not keep up with the skill demands in their occupation 

have paid an increasingly heavy penalty over time. When measured relative to the earnings 

received by the best paid members of their profession, their pay has fallen significantly since the 

late 1970s. 

The long-term improvement in workers’ average educational attainments should have improved 

the outlook for unemployment if skill demands remained unchanged. Workers who are better 

educated are qualified to hold a broader range of jobs in a wider range of occupations than 

workers who have less schooling. It is easier for the better educated to find work when they are 

laid-off. In fact, between 1992 and 2007 workers with a college diploma or a post-college 

degree had an average unemployment rate that was more than one-third below the overall 

unemployment rate. In contrast, the unemployment rate of workers who had not completed high 

school was about twice the rate for the workforce as a whole.10 

In spite of the improved educational credentials of the working population and the unemployed, 

however, average unemployment durations have not fallen over time. On the contrary, holding 

constant the level of unemployment, the average duration of unemployment spells in progress is 

now longer than it was in the early post-war decades when the educational attainment of the 

workforce was lower. Even though unemployed workers who have good education credentials 

may be qualified to fill a wide range of jobs, many are probably unwilling to accept large pay 
Implications for U.S. Unemployment Insurance 18 September 2008 

cuts or a big loss of fringe benefits in order to become reemployed. Many workers with 

advanced degrees receive considerable formal and informal training after leaving school. They 

develop expertise in a particular job or narrow occupational category, and they may be 

generously remunerated for this expertise. When they are laid-off there are both private and 

social advantages to help them find new jobs in which their expertise will be used and rewarded. 

In an economy that has two job vacancies and two unemployed workers, aggregate output will be 

higher if workers find and fill the job vacancies that best matches their qualifications. By 

subsidizing job search for up to 26 weeks, standard UI benefits can perform this function about 

as well for highly educated workers as for the less skilled. 

Increases in educational attainment have improved the general skills of the workforce, but they 

have also encouraged employers to develop specialized jobs that exploit the higher skills of their 

workers. These specialized jobs often require sizeable investments in formal and informal 

training.11 Part of the cost of investment is borne by employers, but part is borne by workers 

themselves, usually in the form of lower wages while they are learning new skills. When 

workers are laid-off, it may not make sense for them to forfeit this investment by finding work in 

an occupation where their training has no value. 

Workers typically accumulate job-specific skills during lengthy spells of employment with a 

single employer. Long employment spells with an employer can signal the economic importance 

of specific skills picked up on the job. Strikingly, however, average job tenures have declined 

since the early 1980s for many middle-aged workers. The BLS has obtained consistent survey 

information about workers’ job tenure since 1983 (Table 2). In the years since then, male job 

tenures have fallen at all ages while the median tenure of women workers has risen modestly, 

except in the oldest age category where it has also declined. Given the trend in women’s job 

market experience, described above, it is not surprising that men’s and women’s job tenure 

patterns look more similar in 2006 than was the case two decades ago. Women are nowadays 

more likely to remain steadily in the workforce than was the case before 1983. What is 

surprising is that male and female tenure patterns have converged mainly because average male 

tenure has declined rather than because female tenure has increased. Between 1983 and 2006 the 
Implications for U.S. Unemployment Insurance 19 September 2008 

Table 2. Median Years of Tenure with Current Employer for Employed Wage 

and Salary Workers by Age and Sex, Selected Years, 1983-2006 

 

 

January January January February February January 

Age and sex 1983 1987 1991 1996 2000 2006 

 

Both sexes 

16 years and over 3.5 3.4 3.6 3.8 3.5 4.0

25 years and over 5.0 5.0 4.8 5.0 4.7 4.9

 

Men 

16 years and over 4.1 4.0 4.1 4.0 3.8 4.1

25 years and over 5.9 5.7 5.4 5.3 4.9 5.0

 

25 to 34 years 3.2 3.1 3.1 3.0 2.7 2.9

35 to 44 years 7.3 7.0 6.5 6.1 5.3 5.1

45 to 54 years 12.8 11.8 11.2 10.1 9.5 8.1

55 to 64 years 15.3 14.5 13.4 10.5 10.2 9.5

 

Women 

16 years and over 3.1 3.0 3.2 3.5 3.3 3.9

25 years and over 4.2 4.3 4.3 4.7 4.4 4.8

 

25 to 34 years 2.8 2.6 2.7 2.7 2.5 2.8

35 to 44 years 4.1 4.4 4.5 4.8 4.3 4.6

45 to 54 years 6.3 6.8 6.7 7.0 7.3 6.7

55 to 64 years 9.8 9.7 9.9 10.0 9.9 9.2

 

 Sources: U.S. BLS (1997), "Employee Tenure in the Mid-1990s," New release USDL 97-25 

[ftp://ftp.bls.gov/pub/news.release/History/tenure.013097.news] and BLS (2006), "Employee Tenure 

in 2006" News release USDL 06-1563 [ftp://ftp.bls.gov/pub/news.release/History 

/tenure.09082006.news] 

median tenure of wage-earning men between the ages of 45 and 54 fell 4.7 years (37 percent), 

and the median tenure of men between the ages of 55 and 64 fell 5.8 years (38 percent). 

Workers’ average tenure in jobs depends on their willingness to remain in the job as well as 

employers’ job separation policies. If workers’ desire to hold on to jobs has remained roughly 

unchanged, the fall in average job tenure reflects an increased willingness or need on the part of 

employers to discharge their workers before they accumulate long tenure on the job. The 

evidence in Table 2 is consistent with the view that permanent job separation is now more 

common for long-tenure workers than it was before the 1983 tenure survey. 
Implications for U.S. Unemployment Insurance 20 September 2008 

Race, ethnicity, and immigrant status of the workforce. The working-age population has 

become ethnically and racially more diverse over the past five decades (see Figure 10). The 

percentage of the labor force that is nonwhite has increased from 11 percent in 1960 to 18 

percent in 2006. Labor force participants who are Hispanic comprised 14 percent of the 

workforce in 2006. (Hispanics may be of any race or no self-identified race at all.) In 1973, the 

first year Hispanic ethnicity was tabulated, only 4 percent of the labor force was Hispanic. 

 * Hispanics may be of any race.

 Source: U.S. Bureau of Labor Statistics.

Figure 10. Race and Hispanic Ethnicity of the Labor Force Age 

16 and Older, 1954-2006

Percent of labor force

70%

74%

78%

82%

86%

90%

1950 1960 1970 1980 1990 2000 2010

4%

8%

12%

16%

20%

24%

White (left axis)

African American (right axis)

Hispanic * (right axis)

90%

12%

86%

82%

 8%

 4%

Percent of labor force

The racial and ethnic composition of the unemployed population has followed these same trends. 

The percentage of the unemployed that is African American has edged up gradually over the 

post-war period and is now slightly higher than 20 percent. The fraction of the unemployed 

which is Hispanic increased even more sharply, rising from 6 percent to 15 percent between 

1973 and 2006. These two minorities have historically faced a higher rate of unemployment than 

non-Hispanic whites and Asian Americans. Since the early 1970s the African American 

unemployment rate has been about twice the rate of the labor force as a whole, and the Hispanic 

rate has been about half, again higher the national unemployment rate. The employment 
Implications for U.S. Unemployment Insurance 21 September 2008 

problems in these communities are due partly to employer discrimination and partly to low 

average levels of educational attainment. So long as these barriers remain in place, the rising 

importance of African Americans and Hispanics in the labor force will contribute toward higher 

overall rates of joblessness. Interestingly, however, the unemployment rates of both groups have 

tended to move toward the overall unemployment rate in recent years. The trend is relatively 

modest in the case of African Americans, but the recent rapid convergence of the Hispanic 

unemployment rate toward the average rate has been striking. Between 1973 and 1999 the 

Hispanic unemployment rate was on average one-half above the overall unemployment rate. In 

2000-2006 it was only a little more than one-quarter above the overall rate, and in 2006 it was 

less than one-eighth higher than the national unemployment rate. 

The diversity of the population has increased in part because birth rates differ across racial and 

ethnic groups. A more important reason for the rising number of nonwhite and Hispanic labor 

force participants is the rising number and changing character of immigrants into the United 

States. In the 1960s, the country granted legal permanent resident status to 320,000 immigrants 

per year. About half of legally admitted immigrants came from Canada or Europe. Since 2000 

about 1,000,000 new entrants a year have been granted permanent resident status, and over 80 

percent of legally admitted permanent residents originate outside of Canada and Europe, mainly 

from Latin America.12 The surge in immigration after the 1960s increased the share of the 

foreign-born in the working-age population (see Figure 11). Low rates of immigration between 

the 1930s and the 1960s had gradually reduced the fraction of foreign born to less than five 

percent of the working-age population by 1970. Rising immigration after 1970 reversed that 

trend. The foreign-born population now represents almost 15 percent of the population between 

the ages of 15 and 64, three times the proportion in 1970. According to the Census Bureau 

estimates based on the 2004 American Community Survey, 14.5 percent of labor force 

participants are foreign born, and another 6.7 percent are the children of immigrants.13 By 

implication, more than one worker out of every five is currently either an immigrant to the 

United States or the child of an immigrant. 
Implications for U.S. Unemployment Insurance 22 September 2008 

Figure 11. Percent of the U.S. Population Age 15 to 64 that Is Foreign 

Born, 1950-2004

 Source: U.S. Census Bureau decennial census data, International Data Base, and March 2004 CPS.

Percent foreign born

5.6

4.7

6.5

9.5

13.6

14.7

7.5

0

2

4

6

8

10

12

14

16

1950 1960 1970 1980 1990 2000

Even if all immigrant workers in the United States were legal residents, their immigrant status 

would present challenges to the UI system. Many recent immigrants do not speak English well, 

making it difficult for them to learn how to apply and remain eligible for benefits when they are 

laid-off. A more serious challenge is the entry of immigrant workers who do not have the legal 

right to live or work in the United States. The Census Bureau’s estimate of the immigrant 

population probably includes many immigrants who are illegal residents. An unknown number 

of unauthorized immigrants are not counted in the Census statistics, however. The Department 

of Homeland Security estimates there were 11.6 illegal immigrants in the United States in 2006, 

an increase of 2.1 million over the estimated total in 2000. More than half are immigrants from 

Mexico, and a large percentage are from Central and South America.14 Hispanic immigrants 

comprise an overwhelming share of the illegal immigrants currently residing in the United 

States, and their presence helps to explain the rapid growth of Hispanics in the workforce. 

A large but unknown percentage of illegal immigrants is employed. Some, though not all, of 

these workers are employed in Social-Security- and UI-covered jobs. Their employers pay 
Implications for U.S. Unemployment Insurance 23 September 2008 

Social Security and UI tax contributions based on their wages. If illegal immigrants are laid-off 

from UI-covered jobs it is not clear what fraction of newly unemployed workers applies for UI 

benefits. It is likely to be a smaller percentage than the proportion of legal residents which files 

UI claims. Assuming that most laid-off illegal immigrants refrain from claiming UI benefits, 

even when they have accumulated enough earnings credits to claim benefits, the UI system 

receives a windfall from tax collections on behalf of illegal immigrant workers. The tax 

contributions based on these workers’ wages finance UI benefits for laid-off workers who are 

legal residents of the United States. 

If illegal immigrants work mainly in jobs that are uncovered by UI, their presence poses a 

different kind of challenge to the UI system. Many unauthorized immigrants who work in 

uncovered jobs perform work that is also performed in the UI-covered sector. Immigrants who 

work informally in construction, home maintenance, and gardening, for example, are producing 

goods and services that are also produced by formal-sector firms that employ workers covered by 

the UI system. To the extent that informal-sector workers and contractors gain market share at 

the expense of formal-sector employers, more work will be performed by employees who are not 

covered by UI and less will be performed by UI-covered workers. If the cost advantage enjoyed 

by producers in the informal sector is large, employers in the formal sector will be tempted to 

reduce costs by contracting labor services from informal-sector producers, that is, from firms or 

individuals employing unauthorized immigrants. The UI tax base will shrink as a percentage of 

total wages. More ominously, UI-covered employees and employers will be placed at a 

competitive disadvantage relative to workers and employers outside the system. 

This challenge to UI-covered employment is not entirely new. Before 1956, UI coverage only 

extended to employers in industry and commerce with eight or more workers. Smaller 

employers were not covered by the program and did not have to contribute UI taxes on behalf of 

their workers. Depending on the level of the UI tax, the difference in mandatory UI coverage 

gave a cost advantage to smaller firms. Of course, the UI program provides valuable benefits to 

workers who are concerned about the risk of involuntary unemployment. Workers who value UI 

protection might accept a somewhat lower wage from a UI-covered employer compared with an 

employer that is outside the system. However, the situation of unlawful immigrants is not quite 

the same as that of workers deciding between employment in the covered and uncovered sectors 
Implications for U.S. Unemployment Insurance 24 September 2008 

before 1956. If laid-off illegal immigrants do not claim UI benefits even when they work in UIcovered jobs, the theoretical advantages of UI protection are irrelevant. Unauthorized 

immigrants will choose the employment option that provides the best combination of wages, 

working conditions, and protection from discovery by law enforcement agents. The immigrant’s 

expected UI benefits are the same under either option—zero. The best choice will often be a job 

outside the UI-covered sector. Since we do not have reliable estimates of the number of active 

workers who are unauthorized immigrants or the percentage of these immigrants who hold jobs 

outside the UI-covered sector, it is not easy to assess the current impact of illegal immigration on 

the UI system. 

Geographical distribution of employment. Internal immigration, the settlement patterns of 

immigrants from outside the United States, and differential birth rates across the 50 states have 

significantly changed the geographic distribution of the U.S. workforce during the past 60 years. 

In 1950, 56 percent of the nation’s population lived in the Northeast and Midwest, and 44 

percent lived in the South and West. By 2000, 58 percent lived in the South and West, and just 

42 percent lived in the Northeast and Midwest. If the nation had a single UI system that offered 

uniform benefits and applied identical eligibility requirements across the states, the geographical 

shift in the population would have little significance. However, benefit levels, eligibility rules, 

and filing requirements are determined separately by each state, with federal requirements 

applying mainly to employer coverage and to the timeliness and accuracy of state benefit 

determinations. State-level employment security agencies are responsible for determining 

eligibility, for calculating and paying weekly benefits, for providing employment services to the 

unemployed, and for ensuring that UI claimants make good faith efforts to find work. Although 

the procedures states follow are broadly similar, the differences are important enough to produce 

sizeable differences in UI application and denial rates. State legislatures make laws setting 

payment levels and eligibility standards for benefits. There is enough variation in payment 

levels and eligibility standards so that the generosity of the UI program differs considerably 

across states. Most UI benefits are financed out of state UI payroll taxes, and these, too, vary 

across states. 

Analysts have used a variety of ways to measure the benefit generosity and tax burden of the UI 

program.15 One straightforward measure of benefit generosity is total UI payments divided by 
Implications for U.S. Unemployment Insurance 25 September 2008 

total wages earned in jobs covered by the program. This measure captures two aspects of 

program generosity, the replacement rate (that is, the ratio of average weekly benefits to average 

weekly wages) and the probability of collecting benefits in the event of unemployment. A 

measure of the tax burden imposed by the system is the total contributions collected from 

covered employers and workers divided by total wages. These measures would yield identical 

ratios if tax collections were exactly the same as total benefit payments every year. This is rarely 

the case, however, because tax collections usually fall short of benefit payments when 

unemployment is high and exceed benefit payments when unemployment is low (see Figure 12). 

In a particular year, benefits may be high in relation to wages in covered employment because 

the local unemployment rate is high rather than because the state program is generous. In years 

of low unemployment the benefit ratio will be low because few workers are unemployed and 

collecting UI. Averaging across years of high and low unemployment, however, the benefit ratio 

and the tax collection ratio provide approximate indicators of the program’s generosity and the 

average tax burden imposed on employers. 

Figure 12. UI Benefit Payments and Tax Collections under Regular State 

Programs as a Percent of UI-Covered Earnings, 1947-2006

 Source: Author's tabulations of data reported in U.S. Department of Labor (2007), Unemployment Insurance 

Financial Data Handbook (http://www.workforcesecurity.doleta.gov/unemploy/hb394.asp).

Percent of covered earnings

0.0

0.5

1.0

1.5

2.0

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

UI tax collections / Covered earnings

UI benefit payments / Covered earnings
Implications for U.S. Unemployment Insurance 26 September 2008 

State UI programs show persistence in offering relatively generous or less generous benefits over 

time. This is reflected in the consistency of their benefit ratios and tax collection ratios over a 

number of decades. One way to see this is to average each state’s benefit and tax collection 

ratios over successive decades and then determine the correlation of states’ rankings in different 

decades. Table 3 displays the results of this exercise for the period from 1950 to 2006. The 57-

year period is divided into five decades and a final seven-year period that covers 2000-2007. In 

each period the arithmetic average of a state’s UI benefit ratio is calculated. The top panel in 

Table 3 shows the correlation matrix of states’ average UI benefit ratios across the six periods. 

For example, the correlation of the state average benefit ratios during the 1950s and their average 

benefit ratios in the 1960s is 0.762. If there were no persistence in states’ benefit generosity, this 

ratio would be close to zero. The correlation of average benefit ratios in the 1950s with average 

benefit ratios since 2000 is 0.686, indicating strong persistence in state benefit generosity. Not 

surprisingly, there is a similar persistence in the burden of state UI tax collections, shown in the 

bottom panel of Table 3. These results imply that the benefit generosity and tax burdens 

imposed by the state-federal UI system can be significantly affected by the distribution of U.S. 

employment and unemployment across states. If states in the South and West have less 

burdensome programs than states in the Northeast and Midwest, the system will offer less 

generous and less expensive protection in recent years than it did in the early post-war period. 
Implications for U.S. Unemployment Insurance 27 September 2008 

Table 3. Persistence of State-level UI Benefits and Tax Collections over 

Successive Decades, 1950-2006 

 

Correlation matrix of state UI benefit ratios 1/

1950-59 1960-69 1970-79 1980-89 1990-99 2000-06 1950-2006 

1950-59 1.000 

1960-69 0.762 1.000 

1970-79 0.701 0.755 1.000 

1980-89 0.600 0.626 0.512 1.000 

1990-99 0.757 0.738 0.883 0.675 1.000 

2000-06 0.686 0.632 0.773 0.756 0.871 1.000 

 

1950-2006 0.875 0.866 0.886 0.788 0.937 0.882 1.000 

 

Correlation matrix of state UI collection ratios 2/ 

1950-59 1960-69 1970-79 1980-89 1990-99 2000-06 1950-2006 

1950-59 1.000 

1960-69 0.797 1.000 

1970-79 0.748 0.853 1.000 

1980-89 0.511 0.683 0.693 1.000 

1990-99 0.629 0.766 0.809 0.832 1.000 

2000-06 0.589 0.726 0.795 0.831 0.884 1.000 

 

1950-2006 0.811 0.915 0.922 0.857 0.918 0.891 1.000 

 

 1/ The benefit ratio is UI benefit payments under regular state programs divided by total wages paid 

in UI-covered employment. It excludes benefits and wages for "reimbursable" covered employment. 

 2/ The collection ratio is UI tax collections, including those from covered employers and covered 

workers, for regular state programs divided by total wages paid in covered employment. It excludes 

collections and wages for "reimbursable" covered employment. 

 Source: Author's tabulations of data reported in U.S. Department of Labor (2007), Unemployment 

Insurance Financial Data Handbook (http://www.workforcesecurity.doleta.gov/unemploy/hb394.asp). 
Implications for U.S. Unemployment Insurance 28 September 2008 

To see whether the geographical distribution of covered employment has affected average 

program generosity, the nationwide benefit-to-total-wage ratio is calculated under the 

assumption that each state’s benefit ratio had remained constant over the 57 years between 1950 

and 2006. One way to implement this idea is to calculate the 57-year average benefit-to-total 

wage ratio for each state, and then assume this average level of generosity remains unchanged 

over the full period.16 Any change in the predicted nationwide benefit-to-total-wage ratio must 

be due to changes in the distribution of UI-covered workers across more generous and less 

generous states. 

The top panel in Figure 13 shows the results of the exercise just described. The line showing 

substantial year-to-year variability indicates the actual evolution of UI benefit payments relative 

to total covered earnings in the national UI program. The other line shows the predicted 

evolution of this ratio if state benefit-to-total-wage ratios remained unchanged while the 

distribution of UI-covered workers across states evolved in the way indicated in UI 

administrative statistics. Over the 57-year period, the prediction shows a drop in the national 

benefit-to-total-wage ratio of 0.085 percentage points, or about nine percent. If the assumptions 

of this exercise are valid, the redistribution of the U.S. workforce toward states with less 

generous UI programs has reduced the expected ratio of benefit payments to total covered 

earnings by roughly nine percent. The estimated effect may seem small when compared with the 

annual fluctuations in the actual ratio of benefit payments to total wages. However, it represents 

about one-quarter of the long-term decline in the observed ratio of benefit payments to total 

wages.17 The lower panel of Figure 13 shows the results of performing the same exercise in an 

analysis of the long-term change in the ratio of UI contributions to total earnings in UI-covered 

jobs. Over the 57-year period, we see a drop in the national contributions-to-total-wage ratio of 

0.104 percentage points, or 10 percent. The predicted effect of the shifting geographical 

distribution of the employed population explains about one-quarter of the long-term decline in 

the contributions-to-total-wage ratio. 

The implication of this analysis for UI program effectiveness is straightforward. The movement 

of workers away from high-generosity states and into low-generosity states has reduced the 

nationwide cost of UI benefits relative to total wage payments. The system is now less 

burdensome on employers than it was in the early post-war period, and it probably provides less 
Implications for U.S. Unemployment Insurance 29 September 2008 

Figure 13. UI Benefit Payments and Tax Collections under Regular State Programs as a 

Percent of UI-Covered Earnings, 1947-2006

 Source: Author's tabulations of data reported in U.S. Department of Labor (2007), Unemployment Insurance Financial 

Data Handbook (http://www.workforcesecurity.doleta.gov/unemploy/hb394.asp).

UI benefits as percent of covered earnings

0.50

0.75

1.00

1.25

1.50

1.75

2.00

1950 1960 1970 1980 1990 2000

Actual

Holding constant state benefits

UI contributions as percent of covered earnings

0.40

0.60

0.80

1.00

1.20

1.40

1950 1960 1970 1980 1990 2000

Actual

Holding constant state contributions
Implications for U.S. Unemployment Insurance 30 September 2008 

income protection for workers who lose their jobs. The reduction in the cost of the system may 

be due to either a lower benefit replacement rate for workers who receive UI benefits or a lower 

probability that workers will receive UI benefits when they become unemployed. 

Administrative data can be used to measure the long-term trend in UI benefit replacement rates. 

Administrative data combined with BLS statistics on the geographical distribution of the 

workforce can then be used to determine the impact of population movements on the average 

replacement rate. The standard measure of the replacement rate is the average weekly benefit 

payment divided by the average weekly wage in UI-covered employment. At the national level 

there have been cyclical fluctuations in the UI replacement rate but virtually no long-term trend 

in the average rate over the period since the 1950s (see top panel of Figure 15). The replacement 

rate has remained within a narrow range around 35 percent. Moreover, the geographical 

redistribution of UI-covered workers across states has had very little effect on the nationwide 

replacement rate. Changes in the geographical distribution of the workforce have affected the 

long-term trend in UI costs mainly through their effects on the probability that workers will 

receive UI benefits when they are unemployed. 

To examine the impact of shifts in the geographical distribution, the UI replacement rates and 

coverage rates in the 50 states and District of Columbia for selected years between 1977 and 

2005 were calculated. The replacement rate was calculated in two ways. The first measure is 

the ratio of the average weekly UI benefit to the average weekly wage in covered employment. 

Both the numerator and denominator in this estimate are derived from U.S. DOL Employment 

and Training Administration (ETA) estimates. The second measure of the replacement rate 

divides the ETA estimate of the weekly UI benefit by the median weekly earnings of wage and 

salary workers as estimated in the March Current Population Survey files.18 Since the median 

wage in a state is lower than the average wage, the replacement rate estimated using the second 

procedure is 8.4 percentage points higher than the estimate based on the first procedure. 

However, the correlation between the two estimates is 0.9, and the results of the analysis are 

virtually indistinguishable using both estimates of the replacement rate. The remainder of the 

discussion focuses on the results based on ETA’s estimate of the replacement rate. The UI 

coverage rate is estimated using a combination of historical state-level data from ETA’s 

Unemployment Insurance Financial Data Handbook and state unemployment data published by 
Implications for U.S. Unemployment Insurance 31 September 2008 

the BLS. The numerator of the UI coverage rate is the average number of UI recipients receiving 

compensation per week over the course of a year. The denominator is the average number of 

unemployed persons in a state as estimated by the BLS. Thus, the UI coverage rate is an 

estimate of the percentage of unemployed workers in a state who are actually receiving UI 

benefits in a typical week. 

For each state, estimates of the states’ replacement rates and UI coverage rates for 1977-79, 

1987-89, 1998-2000, and 2004-05 were derived. These were years of moderate or declining 

unemployment, usually near the peak of a business cycle. In these years UI coverage rates are 

generally below the rates observed in recessions. The distribution of state UI coverage rates is 

displayed in Figure 14.19 The eleven-year unweighted average coverage rate for all 50 states and 

the District of Columbia is 30.6 percent. There is a wide variance around this mean. In the three 

states with the lowest coverage rates, South Dakota, Florida, and Colorado, only 17 percent of 

the unemployed received UI benefits in the eleven selected years between 1977 and 2005. In the 

state with the highest coverage rate, Alaska, almost two-thirds of unemployed workers received 

UI benefits. Interestingly, there is very little correlation between states’ UI coverage rates and 

their replacement rates. On average in the eleven selected years the correlation was -0.11, but 

this average reflects some variation in the relationship in different periods. In 1977-79 the 

correlation between state replacement rates and UI coverage rates was -0.17; in 1987-89 it was 

+0.04; in 1998-2000 it was -0.07; and in 2004-05 it was -0.03. 
Implications for U.S. Unemployment Insurance 32 September 2008 

 Source: Author's tabulations of data reported in U.S. Department of Labor (2007), Unemployment Insurance Financial 

Data Handbook (http://www.workforcesecurity.doleta.gov/unemploy/hb394.asp); and state unemployment data from the 

U.S. BLS.

Figure 14. Average UI Coverage Rates in 50 States and the District of Columbia, 

1977-2005

Number of states with coverage rate in the indicated range

10

6

12

11

3

4 4

1

0

2

4

6

8

10

12

14

15 to

19.99

20 to

24.99

25 to

29.99

30 to

34.99

35 to

39.99

40 to

44.99

45 to

49.99

50 or

higher

UI coverage rate

(% of unemployed receiving UI in the state)

If the covered workforce moved from states like Alaska to states like South Dakota, Florida, or 

Colorado, the nationwide UI coverage rate could fall noticeably. Similarly, if the workforce 

moved from Iowa and North Dakota, which have relatively high benefit replacement rates, to 

Arizona and California, which have comparatively low replacement rates, the national 

replacement rate could decline. To determine the potential size of these effects, each state’s UI 

coverage rate and benefit replacement rate were assumed to remain unchanged over the 1956-

2006 period at the average levels estimated in eleven years 1977-79, 1987-89, 1998-2000, and 

2004-05. The impact of geographical shifts can then be estimated by varying the weights applied 

to each state’s coverage or replacement rate to reflect the state’s changing weight in the U.S. 

employment total in successive years between 1956 and 2006. The top panel of Figure 15 shows 

results for the benefit replacement rate, while the lower figure in the table shows results for the 

UI coverage rate. One line in each figure shows the actual evolution of the national-level 

replacement rate or UI coverage rate, while the other line shows estimates adjusted so that only 
Implications for U.S. Unemployment Insurance 33 September 2008 

the geographical distribution of nonfarm payroll employment varies over time. The shift in the 

working population toward states with low replacement rates tended to push down the national 

replacement rate, but the effect was very small – 0.6 percentage points, or 1.6 percent of the 

average replacement rate over the 1956-2006 period (see top panel of Figure 15). The impact of 

geographical shifts on the UI coverage rate was considerably larger – 2.4 percentage points of 

the unemployed population, or 7.1 percent of the average UI coverage rate over the 1956-2006 

period (bottom panel of Figure 15). This drop in the UI coverage rate represents roughly onequarter of the trend decline in the national UI coverage rate since 1956. 

Thus, the shift of the working population toward states with low UI coverage rates seems to be a 

major factor behind the declining cost of UI benefits when benefit costs are measured as a 

percentage of total wages earned by workers in UI-covered jobs. There is little evidence that the 

population is moving to states that have lower UI replacement rates. 
Implications for U.S. Unemployment Insurance 34 September 2008 

Figure 15. UI Coverage and Replacement Rates, Actual and Predicted, 1956-2006

 Source: Author's tabulations of data reported in U.S. Department of Labor (2007), Unemployment Insurance Financial 

Data Handbook (http://www.workforcesecurity.doleta.gov/unemploy/hb394.asp); and state unemployment data from the 

U.S. BLS.

Percent of unemployed workers collecting UI

20

25

30

35

40

45

50

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Actual U.S. coverage rate

Predicted coverage rate holding state coverage rates constant

Average weekly UI benefit as % of average 

weekly wage in covered employment

30

31

32

33

34

35

36

37

38

39

40

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Actual U.S.replacement rate

Predicted replacement rate holding state replacement rates constant
Implications for U.S. Unemployment Insurance 35 September 2008 

II. Employers and the Nature of the Employment Contract 

If the composition of the workforce has changed since the early post-war era, the character and 

expectations of employers have undergone major change as well. Shifts in employment across 

industries have reduced the importance of traditionally high paying industries like mining, 

manufacturing, and public utilities and increased the employment share of retail trade and 

services. Partly as a result of these shifts, temporary layoff unemployment has become less 

important and permanent layoffs are now relatively more common. Union representation has 

also declined. It is now less common for employers to negotiate formally with their workers 

about wages and the terms of employee separations. Several of these trends have increased the 

likelihood that workers who suffer a layoff will spend longer periods in unemployment looking 

for their next job. 

Shifts in industrial employment. In the early 1950s employment in goods-producing industries 

accounted for 40 percent of all wage and salary employment and almost half of wage and salary 

workers in the private sector (see Table 4). Employment in the traditionally high-paying 

industries of mining, construction, manufacturing, transportation and public utilities, and 

wholesale trade accounted for 58 percent of private employment. Over the next 50 years the 

employment share of goods-producing industries fell by approximately half, and the employment 

share of the traditionally-high paying industries fell nearly as fast. By 2000 wage and salary 

employment in mining, construction, manufacturing, transportation and public utilities, and 

wholesale trade represented only 35 percent of U.S. private employment. During the same 

period retail trade and services became much more important sources of employment. The 

growth of these two historically low-paying industrial groups is almost a mirror image of the 

decline of traditionally high-paying industries. As a fraction of private sector employment, 

employment in retail trade and services increased from 32 percent in 1950 to 57 percent in 2000. 

One index of the quality of employment in an industry is the average wage paid to a full-time 

equivalent worker in the industry. The national income and product account (NIPA) tables 

provide information on the full-time equivalent wages paid by the major industries. The data can 

be used to calculate relative wages in each industry. These estimates are displayed in the bottom 
Implications for U.S. Unemployment Insurance 36 September 2008 

panel of Table 4. Although the industrial wage structure has varied over time, most industries 

have consistently offered either above-average or below-average wages throughout the post-war 

period. To approximate the impact of shifting employment shares on the trend in wages, one 

must hold relative industrial wages constant and determine how much the average wage would 

have changed given the shift in the percentage of the workforce employed in each industry. 

Figure 16 shows the results of these calculations based on NIPA estimates of wage and salary 

employment and full-time equivalent earnings by industry.20 Two sets of estimates are displayed 

in the chart. The first is based on the assumption that the industrial wage structure remained 

constant at the structure observed at the beginning of the period, in the years between 1948 and 

1950. The second is based on the assumption that the industrial wage structure remained 

constant at the average structure observed over the full period from 1948 to 2000. Both 

assumptions yield almost identical conclusions about the impact of employment shifts across 

industries on the level of U.S. wages. The overall wage level in 2000 was about 51⁄2 percent 

lower than would have been the case if employment shares in each industry had remained fixed 

after 1948. The implied decline in relative wages was gradual and erratic between the late 1940s 

and late 1960s, but since 1970 it has been relatively rapid and constant. 

This result should not be over-interpreted. Employment shares and relative wages changed 

because productivity growth proceeded at a different pace in each industry. Final demand for the 

goods and services produced in different industries also changed over time, affecting the demand 

for workers in different industries. If employment shares in each industry had remained 

unchanged, it would have been difficult or impossible to accommodate these productivity trends 

and shifts in final demand. The value of output would have been lower, and average wages 

would have risen more slowly. 

Nonetheless, the relative wage paid in each industry offers a straightforward indicator of the 

quality of jobs in the industry. The fact that relative wages in an industry have consistently 

remained above average offers a crude indication that jobs in the industry are more attractive 

than jobs elsewhere in the economy. Over the past half century employment shares in better 

paying industries have shrunk while the employment shares of worse paying industries have 

grown. This trend makes it harder for workers in shrinking industries to find jobs of equal or 

higher pay when they are laid-off. Some low-pay industries have grown smaller, of course. 
Implications for U.S. Unemployment Insurance 37 

Table 4. Employment Shares and Relative Wages in Major U.S. Industries, 1950-2000 

Year 

Agriculture, 

forestry, 

fishing Mining 

Construction Manu- facturing 

Transportation, 

public 

utilities 

Wholesale 

trade 

Retail 

trade 

Finance, 

insurance, 

real estate Services 

Percent of all full- and part-time employees in industry 

1950 4.8 1.8 4.7 29.1 7.8 5.1 12.8 3.6 13.7 

1960 3.3 1.1 4.7 26.7 6.4 5.1 13.2 4.2 15.6 

1970 1.9 0.8 4.6 24.4 5.7 5.1 14.2 4.6 17.3 

1980 1.9 1.1 4.6 20.8 5.3 5.4 15.7 5.5 20.2 

1990 1.6 0.6 4.5 16.3 4.9 5.3 17.1 5.8 25.4 

2000 1.7 0.4 5.0 13.4 5.1 5.1 17.2 5.6 30.1 

Average wage and salary accruals per full-time equivalent worker 

(Average for all employees = 100) 

1950 50 114 111 110 117 125 89 108 73 1960 42 119 119 115 121 119 81 102 76 1970 54 122 127 108 121 119 76 101 83 1980 54 149 118 114 135 119 69 101 85 1990 61 145 106 114 126 120 61 122 94 2000 58 152 98 118 122 126 57 156 94 

 Note: Calculations in the table are based on the 1972 Standard Industrial Classification.

Source: Author's tabulations of U.S. Department of Commerce, Bureau of Economic Analysis, data from the National Incom

Accounts tables. http://www.bea.gov/bea/dn/nipaweb/index.asp (Downloaded August 26, 2007) 
Implications for U.S. Unemployment Insurance 38 September 2008 

Figure 16. Impact of Shifts in Industry Employment on Average 

Full-time Equivalent Wages, 1948-2000

 Source: Author's calculations using U.S. Department of Commerce, Bureau of Economic Analysis, national 

income and product accounts data on wage and salary employment and full-time equivalent earnings by industry. 

Calculations are based on the 1972 Standard Industrial Classification.

1948-1950 = 100

94

95

96

97

98

99

100

101

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

With constant wage structure (1948-2000)

With constant wage structure (1948-1950)

Between 1950 and 2000, full-time employees in agriculture, forestry, and fishing earned between 

42 percent and 61 percent of the full-time pay of an average employee. Wage and salary 

employment in agricultural industries sank, falling from 4.8 percent to 1.7 percent of total 

employment between 1950 and 2000. This decline forced some workers once employed in 

agriculture to find jobs outside the agricultural sector. Their search may have been made easier 

by the fact that other industries typically pay higher wages than those in agriculture. The reverse 

is true when workers in shrinking high-wage industries are forced to find work in expanding but 

low-wage industries. Not only must these workers forfeit any investments they may have made 

acquiring job-specific skills in their old jobs, they must also accept a less generous pay scale in 

an industry that pays below-average wages. It would not be surprising if the development led to 

an increase in the duration of job search. 
Implications for U.S. Unemployment Insurance 39 September 2008 

Temporary versus permanent layoff unemployment. The shift of wage and salary employment 

out of mining and manufacturing has contributed to a decline in layoff unemployment. The BLS 

defines a person on temporary layoff as one who has been given a definite date for returning to 

work or who expects to return to work within six months. Temporary layoffs are relatively 

common in manufacturing, especially durable manufacturing, where cyclical swings in product 

demand can induce employers to temporarily reduce their payrolls to accommodate lower 

demand. Most workers put on temporary layoff can expect to be recalled to their jobs when 

product demand returns to normal. Manufacturing employment now represents a much smaller 

share of total employment, and one result is that temporary layoff unemployment has become 

relatively less common. 

Figure 17 shows the proportion of unemployed job losers who are on temporary layoff. The 

percentage typically rises in a recession, and then falls in the subsequent recovery as laid-off 

workers are recalled to their old jobs. Underlying this cyclical pattern is a long-term trend 

toward less temporary layoff unemployment. The trend is indicated by the straight broken line. 

Between the mid-1960s and 2006 the fraction of job losers who are out of work because of a 

temporary layoff has fallen about 6 percentage points or one-fifth. Other job losers entered 

unemployment because they were permanently dismissed from their jobs or because they held a 

temporary job which came to an end. 

The increasing share of job losers who permanently lost their previous jobs poses two kinds of 

challenges for the UI system. First, permanent job losers unlike workers on temporary layoff 

may require extensive job search help from the employment service. Workers with a reasonable 

expectation of being recalled to an old job receive weekly UI checks but do not need help in 

finding another job. Second, permanent job losers often spend more time on the UI rolls than 

workers who expect to be recalled to their old jobs. This is one explanation for the long-term 

rise in UI benefit duration and the increase in the average duration of unemployment spells. 
Implications for U.S. Unemployment Insurance 40 September 2008 

 Source: Bureau of Labor Statistics.

Figure 17. Unemployed Workers on Temporary Layoff as a Percent of Job 

Losers, 1967-2006

Percent of all job losers

20

24

28

32

36

40

1965 1970 1975 1980 1985 1990 1995 2000 2005

Decline in unions. In the 1950s the BLS estimated that union membership represented about 

one-third of employment in private nonagricultural establishments. Although union membership 

continued to increase, it grew more slowly than private sector employment. By the early 1970s, 

union membership had dropped to about one-quarter of employment in private nonagricultural 

establishments.21 These estimates of union membership rely on unions’ own figures. Since 1973 

union membership has been estimated using household survey responses obtained in the Current 

Population Survey. The survey shows a continued decline in the fraction of the private wage and 

salary workers who are union members (see Figure 18). In 2006, only 7.4 percent of private 

sector workers said they were members of unions, and just 8.1 percent said they were covered by 

a union contract. Part of the decline in union density is explained by changes in the industrial 

attachment of American workers. Private industries in which unions were traditionally 

important, such as manufacturing, transportation, and public utilities, employ a smaller 

percentage of the workforce than they did in the 1950s. However, union density has fallen 
Implications for U.S. Unemployment Insurance 41 September 2008 

 Source: Bureau of Labor Statistics; and Barry T. Hirsch and David A. Macpherson 

(http://www.trinity.edu/bhirsch/unionstats/All%20Wage%20and%20Salary%20Workers.xls).

Figure 18. Wage and Salary Workers Affiliated with Unions, 1973-

2006

Percent of private wage and salary workforce

0

5

10

15

20

25

30

35

40

1972 1976 1980 1984 1988 1992 1996 2000 2004

Members of unions

Covered by union contract

Covered by union contract, manufacturing

steadily in those industries where it was once high. Between 1979 and 2006, the percentage of 

the manufacturing workforce covered by a union contract fell from 38 percent to 121⁄2 percent. 

 

Unions historically played an intermediary role not only between workers and their employers 

but also between laid-off union members and the UI system. Union representatives provided 

information to laid-off workers about their rights under the UI system and helped acquaint them 

with the procedures needed to file a successful claim. A smaller percentage of laid-off workers 

now receive this kind of guidance. One result may be that the educational role once filled by 

unions must now be filled by employees of the UI system, adding modestly to the cost of 

administering the system. A more important effect may be a reduction in the percentage of laidoff workers who file a successful UI claim. Not all laid-off workers who are eligible for UI 

benefits file a claim.22 Some whose claims are initially denied may not know how to make a 

successful appeal. Union representatives, many of whom have lengthy experience dealing with 

the UI system, once acted as advisors and advocates, helping inexperienced workers file UI 
Implications for U.S. Unemployment Insurance 42 September 2008 

claims and assisting workers whose UI claims were denied. Fewer unemployed workers now 

receive this kind of help. 

The decline in union membership has led to a sharp fall in union influence over wages, fringe 

benefits, job dismissals, and other conditions of employment. Unions have traditionally 

negotiated for (and won) better wages and fringe benefits for their members, achieving the 

biggest gains on behalf of workers with comparatively modest skills.23 Unions had less impact 

on the relative wages of better educated and more highly skilled workers. Even for these 

workers, however, union-negotiated pay scales usually made wage increases more predictable. 

For both skilled and unskilled workers, unions fought for better job security, seeking the 

strongest protections for the most senior workers. By establishing formal grievance procedures 

to challenge dismissals and other disciplinary actions, unions reduced managers’ discretion to 

fire or reassign workers and to reduce an individual worker’s pay. 

The gradual disappearance of unions from the private workplace has meant that private-sector 

workers have less collective control over the terms and conditions of their employment. Their 

influence over pay and fringe benefits depends on individual negotiation with a manager and a 

worker’s willingness to leave an employer who offers poor pay and working conditions. 

Declining union influence over wage determination is part of the explanation for the growth in 

earnings inequality documented in Figures 8 and 9. Workers with limited skill have little 

bargaining power as individuals. With no union to negotiate on their behalf, workers with 

below-average skills have less influence over their pay, and consequently they have seen their 

relative wages decline. 

This trend has ambiguous effects on the demand and need for UI benefits. On the one hand, the 

decline in union influence over the terms of employment may have contributed to the rise in 

permanent layoff as opposed to temporary layoff unemployment as well as to a decline in job 

security. These effects increase the burdens on the UI system by increasing the number of 

permanently dismissed workers who must be served. On the other hand, by reducing the 

percentage of the workforce earning union-negotiated wages, the decline in unions has reduced 

the percentage of laid-off workers who received a union pay premium. Since workers in 

nonunion establishments do not receive the union pay premium, their reservation wage when 
Implications for U.S. Unemployment Insurance 43 September 2008 

they are laid-off will be lower than it would have been if they had worked in a unionized firm.24 

With a lower reservation wage, they may find an acceptable job more easily and suffer shorter 

spells of unemployment. 

Nonstandard and contingent work. The UI system covers nearly all wage and salary 

employment in the United States. The House Ways and Means Committee estimates that UI 

programs covered 99.7 percent of wage and salary jobs in 2001.25 It is widely believed that 

standard wage and salary jobs have become less common in recent decades. According to this 

view, a growing percentage of the labor force is working for larger firms as consultants or selfemployed contractors, is employed in wage and salary jobs for temporary help agencies, or is 

working for ordinary firms but as temporary or contingent workers. In fact, there is little 

evidence that nonstandard employment is making major inroads on the standard employment 

contract. Wage and salary workers comprise about 93 percent of the employed labor force in 

private nonagricultural establishments. This percentage is about four points higher than it was in 

1960 and one point higher than it was in 1980. The percentage of private sector nonagricultural 

workers who are wage and salary employees has been essentially flat since the early 1990s. 

Thus, there is no evidence that self employment has become more common relative to wage and 

salary employment over the past several decades. 

Payroll statistics on the temporary help industry indicate it has grown rapidly since the 1970s. 

Between March 1990 and March 2007 the industry added about 1.45 million workers, more than 

doubling in size. In spite of this rapid growth, workers in the industry represent only about 2.3 

percent of nonagricultural private employees, up from 1.3 percent of private sector employees in 

1990 and less than 0.5 percent of private employees in the late 1970s. Although employment in 

temporary help agencies is comparatively novel, it is still wage and salary employment. 

Temporary help companies have the same responsibilities toward their employees as other 

companies, including the obligation to withhold income and payroll taxes and to make 

contributions to the UI program. Temporary help agency employees who are dismissed from 

their jobs are eligible to receive UI benefits if they meet the earnings and other qualifying 

requirements for eligibility. 
Implications for U.S. Unemployment Insurance 44 September 2008 

It is harder to obtain evidence on the prevalence of new kinds of employment contracts among 

workers who are not employees of temporary help agencies. The BLS has conducted periodic 

household surveys asking about alternative work arrangements since 1995, with the most recent 

survey conducted in 2005. It contains little evidence that alternative work arrangements, 

including contingent work, temporary work, or independent contract work, have become more 

common over the past decade. In fact, several kinds of nonstandard work arrangements, 

including temporary jobs, are now less common than they were in 1995.26

Outsourcing and the evolution of corporate governance. In many large businesses changes in 

corporate governance have altered the traditional relationship between shareholders and 

company executives and between senior managers and line employees. As recently as the 1970s 

many scholars and senior executives believed that stockholders exerted only limited influence 

over corporate managers. According to a popular theory taught in business schools, stockholders 

were too numerous and poorly organized to exercise effective control over company 

management or to remove underperforming managers. As a result, mediocre corporate 

executives could survive as long as they kept their companies out of bankruptcy. By the middle 

of the 1980s it was clear that this view was seriously incomplete. Innovations such as leveraged 

buyouts and hostile takeovers made it possible for a small number of well-organized 

shareholders and outside investors to take control of a public company and dramatically change 

its direction – for example, by modifying historical pay patterns in the company, trimming fringe 

benefits, selling off unprofitable divisions, and outsourcing the production of important company 

inputs. 

This kind of innovation can clearly affect personnel practices and pay norms inside a firm. 

Under personnel policies that were standard in the 1960s and 1970s, managers were slow to 

change traditional pay patterns in their firm and reluctant to slash company payrolls. If 

maintenance staff historically received the same pay as workers on the assembly line, or if semiskilled workers traditionally earned exactly one-half the wage paid to their supervisors, orthodox 

managers were reluctant to tamper with the historical pay ratios. So long as the company 

remained out of bankruptcy, traditional pay patterns could be maintained. This kind of personnel 

policy could not survive once managers recognized that they could be removed by organized 

shareholders or outside investors who were determined to minimize costs. When maintenance 
Implications for U.S. Unemployment Insurance 45 September 2008 

workers can be hired at a lower wage than the one paid to assembly line workers, or when 

routine office tasks can be contracted out to other companies that offer lower wages, these 

options will be chosen over traditional corporate policies by managers who are determined to 

minimize costs. Leveraged buyouts and hostile takeovers can lead to the removal of senior 

company managers who fail to take these cost-minimizing steps. Obviously, new corporate 

practices can also lead to bigger pay disparities within the firm and a slimmer corporate payroll. 

The number of corporate employees will fall when work formerly done inside the firm is 

purchased from outside producers or when unprofitable divisions of the company are spun off, 

sold, or closed down. 

These changes in corporate practice can yield financial gains for shareholders and outside 

investors, but they also bring major disruption for managers and line workers who were 

comfortable with the traditional corporate policies. Some workers and managers may be 

dismissed, and others may find themselves employed by a new, smaller, and less profitable 

company that has been spun off as a result of corporate realignment. 

The crucial issue from the perspective of the UI system is the impact of new corporate practices 

on company separation and hiring policies. Many observers believe that modern companies 

show less loyalty to their line employees and are more likely to dismiss them to obtain better 

financial results, even when a firm is profitable and faces no immediate risk of bankruptcy.27 

This conjecture is not easy to test with existing data. Do large businesses fire more of their longservice workers today than they did in the past? Close observers of corporate practice may have 

their suspicions, but there is little hard evidence. 

Recent evidence on the size distribution of firms does not support the idea that new corporate 

personnel practices have made it less likely that Americans will work for large firms. The Small 

Business Administration (SBA), using data supplied by the Census Bureau, tabulates the size 

distribution of firms and the reasons for change in firm employment size. These data show that 

49 percent of private-sector wage and salary workers are employed by companies with 500 or 

more employees. This percentage is somewhat higher than the comparable figure in the late 

1980s, when 46 percent of workers were employed in large firms. SBA analysts distinguish 

among four sources of change in firm-level employment: The creation of new firms, the death of 
Implications for U.S. Unemployment Insurance 46 September 2008 

old firms, the expansion of old firms, and the contraction of old firms.28 The data allow us to see 

the relative importance of these sources of growth and contraction for small firms (with fewer 

than 20 employees), middle-size firms (with 20 to 499 employees), and large firms (with 500 or 

more employees). Not surprisingly, the creation of new firms generates a much larger 

proportional effect on employment in small and medium-sized companies than it does on the 

number of workers employed in firms with 500 or more employees. Similarly, the destruction of 

old firms also produces a bigger proportional drop in employment in small and medium-sized 

firms than it does in large firms. 

Interestingly, however, the impact of employment contractions in existing firms is 

proportionately bigger for large firms than for medium-sized firms. Firms with between 20 and 

499 employees at the start of a year which survived to the beginning of the next year but shrank 

in size had payroll reductions that averaged about 3.8 million workers per year between 1989 and 

2004.29 This was equal to 11.5 percent of start-of-year employment in all firms employing 20 to 

499 workers. Over the same period, contracting firms with more than 500 employees at the start 

of a year reduced the size of their payrolls by an average of 6.3 million workers a year. This 

represents 12.7 percent of the start-of-year employment in large firms. The year-to-year impact 

of firm contractions on employment in large, medium-size, and small firms is displayed in Figure 

19. The chart clearly shows that big companies that shrink their payrolls have a larger 

proportional effect on employment than small and medium-size firms that reduce their payrolls. 

The chart does not, however, show the impact of firm deaths on employment. As noted above, 

the disappearance of firms causes proportionately larger employment losses in the case of small 

and medium-size firms than it does for large firms. The chart also does not show whether the 

proportional difference in firm layoff policy between large, medium, and small firms is any 

different in the past decade and a half than it was in the period before 1980. The estimates do 

suggest, however, that employment losses in surviving large firms are sizeable, are larger than 

those in surviving small and medium-size firms, and on average have been larger since 1998 than 

they were in 1989-1997, a period that also included a recession. 
Implications for U.S. Unemployment Insurance 47 September 2008 

Figure 19. Percent Drop in Employment among Contracting Firms by 

Firm-Size Class, 1989-2003

 Source: Author's calculations based on Small Business Administration (2007), 

http://www.sba.gov/advo/research/data_uspdf.xls.

Drop in employment as percent of 

start-of-year employment in firm-size class

7

9

11

13

15

17

19

1988 1992 1996 2000 2004

Large firms

Medium-size firms

Small firms

Earnings losses upon reemployment. The original goal of UI was to offer short-term insurance 

to workers to protect them against the loss of earnings that occurs during a spell of 

unemployment that follows a layoff. It does not insure workers for the loss of income that 

occurs after a worker becomes reemployed in a job offering lower wages or poorer fringe 

benefits than the job that was lost. Evidence on these losses suggests that they are sizeable.30 

Louis Jacobsen and his colleagues found that when experienced workers are displaced from 

long-tenure jobs, their eventual earnings losses, including earnings lost while unemployed, can 

amount to as much as one-quarter of previous pay.31 Most of the losses occur after workers 

become reemployed, and they are a result of the drop in weekly earnings on the postdisplacement job. Younger workers, workers with less job tenure, and workers in low-wage 

industries are less likely to experience big weekly wage losses, mainly because their predisplacement wages do not have as far to fall. On the other hand, displaced workers who earn 

average or above-average pay and formerly worked in high-pay industries often suffer bigger 

economic loss as a result of earning a smaller weekly paycheck than they do as a result of 

experiencing unemployment for weeks or months after they were displaced. 
Implications for U.S. Unemployment Insurance 48 September 2008 

One source of information about workers’ experiences after suffering permanent job loss is the 

BLS’ Displaced Worker Survey, a periodic supplement to the Current Population Survey that has 

been administered every other year since 1984. Henry Farber recently analyzed responses from 

all the surveys to estimate the economic losses that workers experience after suffering permanent 

job loss.32 He found that the rate of job displacement is strongly cyclical, with sharply higher 

displacement rates during and immediately after recessions and lower rates during the later 

stages of an economic expansion. The reported displacement rate was nearly as high in the early 

1990s and in 1999-2003 as it was in the recession of the early 1980s, when the peak 

unemployment rate was considerably higher. To measure earnings losses suffered by 

reemployed workers, Farber examined the pre- and post-displacement weekly earnings of 

displaced, full-time workers who became reemployed in full-time jobs. Note that this calculation 

excludes the earnings losses of workers forced to accept part-time positions. It also ignores the 

earnings loss experienced while workers were jobless, which presumably was partly replaced by 

UI benefits. Farber’s tabulations show that reemployed workers who lost their jobs during and 

immediately after a recession suffered the biggest drop in weekly earnings. Their average losses 

ranged between 11 percent and 14 percent of workers’ pre-displacement wage. Workers who 

lost jobs toward the end of an economic expansion suffered considerably smaller percentage 

losses in weekly pay. Bear in mind that Farber’s estimates show the average wage losses 

suffered by displaced workers. Some reemployed workers suffer much bigger percentage cuts in 

pay, while others enjoy gains in weekly earnings. For workers who suffer the biggest drops in 

pay, the UI system provides no income protection except in the weeks immediately following 

their layoff when they were out of work. 
Implications for U.S. Unemployment Insurance 49 September 2008 

III. Trends in the Business Cycle 

There have been ten recessions and nine completed economic recoveries since World War II. 

From the low point in the unemployment rate (near the peak of an economic expansion) to the 

high point in the unemployment rate (in the following recession), the quarterly unemployment 

rate has increased 2.9 percentage points in an average recession. The post-war unemployment 

rate has shown very little long-term trend, so on average the jobless rate has fallen by the same 

percentage amount during economic expansions as it has risen in recessions. Economic 

expansions have lasted longer since the early 1980s than they did in earlier post-war period. In 

the 445 months between October 1945 and November 1982, the U.S. experienced eight full 

business cycles, with an average cycle lasting 56 months. The expansion phase of the typical 

cycle lasted 45 months and the recession phase lasted 11 months. In the 298 months since 

November 1982 there have been two completed business cycles and one not-yet-complete 

economic expansion. The two completed expansions lasted an average of 106 months, and the 

two recessions each lasted 8 months.33 The average economic expansion since 1983 has lasted 

nearly twice as long as recessions in the earlier post-war period, and the recent recessions have 

been slightly shorter. Recent increases in the unemployment rate from business cycle peak to 

recessionary trough have also been smaller than in earlier post-war recessions. 

Not only has the economy suffered less frequent recessions since the early 1980s, it has also 

experienced more stable economic growth. James Stock and Mark Watson estimate that the 

variance in the quarterly growth of U.S. GDP declined about 40 percent in years after 1983 

compared with the period from 1960-1983.34 

A variety of theories have been advanced to explain the “great moderation” in U.S. business 

cycle dynamics. Many observers believe the most plausible explanation is that U.S. monetary 

policy has become more effective. According to this view, the Federal Reserve is now more 

skilled in its management of short term interest rates and more consistent in its control over 

inflationary expectations.35 Three other explanations have also been offered. The first is that 

industrial shifts in the U.S. economy have reduced the employment and output of sectors that 

show the greatest cyclical variability. As we have seen, manufacturing employment has shrunk 

and employment in the cyclically less sensitive services industries has increased. Stock and 
Implications for U.S. Unemployment Insurance 50 September 2008 

Watson (2003) point out, however, that these sectoral shifts had only minor effects on the 

expected cyclical variation of the overall economy. The reductions in economy-wide variability 

are traceable to declining variability of output within most sectors, including sectors, like home 

construction, which historically had large cyclical variation. 

Another explanation for the “great moderation” is that businesses have applied new information 

technology in order to improve inventory management. One reason for past drops in output is 

that producers made poor forecasts of future demand. When confronted with bulging inventories 

in their own factories, in wholesalers’ warehouses, or in retail stores, producers slashed output 

and cut payrolls. With better and timelier management of inventories, these kinds of 

interruptions of normal production have become less common. There is reason to be skeptical of 

this theory. At the level of the firm, managers do not seem to be less liable to make large errors 

in inventory accumulation than they were in the past.36 

One last hypothesis is that financial market deregulation and innovations in consumer finance 

have relaxed borrowing constraints that once limited businesses’ and consumers’ ability to spend 

in recessions. As a result of financial market innovations, such as home equity loans, credit is 

now easier for homeowners and credit card holders to obtain, even when they are unemployed. 

Financial market deregulation has permitted banks and other institutions to attract deposits and 

lend funds without reference to a legal maximum on the interest rate they can pay to depositors 

or charge to borrowers. Compared with workers and small businesses in the 1960s and 1970s, 

today’s workers and businesses can more easily borrow funds, even when their immediate 

financial prospects are poor. Relaxed borrowing constraints mean that consumers and businesses 

can more easily smooth their spending in the face of shocks to their income. 

From the point of view of the UI system, the explanation for the “great moderation” of U.S. 

business cycles may not matter. If serious recessions now occur less frequently, state UI 

programs will not have to deal as often with a sharp rise in state UI rolls. They will have longer 

periods of low or declining unemployment in which they can build up their trust fund reserves. 

With more years between recessions, there will be less reason for states to replenish their 

reserves quickly, giving them greater flexibility in adjusting their tax schedules when reserves 

run low. It is unknown, however, whether the greater stability of U.S. growth is a dependable 
Implications for U.S. Unemployment Insurance 51 September 2008 

feature of the new economy. Stable growth and lengthy economic expansions may have been 

fortuitous byproducts of a temporarily benign environment. If they are permanent features of the 

new economic landscape, one policy goal of the UI system may be less critical today than it was 

in the past. As noted in the introduction, a central objective of the program is to help stabilize 

the economy by supporting consumption when mass joblessness reduces the incomes of millions 

of worker households. If other changes in the economic environment have doubled the length of 

an average expansion and reduced the average severity of recessions, the countercyclical 

function once performed by the UI system is now less important to the wider economy. By 

implication, the humanitarian and efficiency goals of the program are now relatively more 

important. 

IV. Trends in the Nature and Costs of Unemployment 

The composition of the nation’s unemployed has shifted over time in line with changes in the 

composition of the labor force more generally. Like the working population, the unemployed are 

now older, more female, and more racially and ethnically diverse than was the case in earlier 

post-war decades. Like the working-age population in general, the unemployed are now more 

educated and highly skilled. A number of changes in the nature of employment and in the wider 

economy have affected the challenges workers face when they are laid-off from a job. Some 

have made it easier for workers’ smooth consumption when their earnings drop as a result of a 

layoff, but others have increased the cost of joblessness, making it more costly for laid-off 

workers to suffer long spells without a job. 

The duration of unemployment. A notable trend in U.S. unemployment is the increasing length 

of average unemployment spells. The increase has occurred for workers entering unemployment 

as a result of job loss as well as for other reasons.37 At a given level of the overall 

unemployment rate, today’s unemployed have been jobless for a longer period and are more 

likely to exhaust UI benefits after they file a claim for benefits. BLS statistics show a clear and 

steady increase in the proportion of jobless workers who have been unemployed for six months 

or longer (see Figure 20). Although the average duration of unemployment spells in progress 
Implications for U.S. Unemployment Insurance 52 September 2008 

Figure 20. Indicators of Long-term U.S. Unemployment, 1960-2006

 Source: Author's tabulations of BLS data from http://data.bls.gov (downloaded 6-Aug-2007).

unemployed

0

10

20

30

40

50

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

0

4

8

12

16

Average duration of 20

unemployment spells in progress

Percent of all 

Percent of all unemployed who have

been jobless 27 or more weeks

Weeks of unemployment

20

12

16

20

0

10

increases in every recession and declines (with a lag) after the job market starts to improve, 

unemployment spells have tended to grow longer in successive business cycles. Average spell 

duration has increased 1.33 weeks each decade since 1960. Compared with unemployed workers 

45 years ago, the unemployed today have been jobless an additional six weeks. The growth in 

the duration of unemployment spells has increased the percentage of unemployed who are in 

spells of six months or more. The increase is about 8.2 percentage points over the past 45 years. 

This evidence, based on household interview responses collected in the CPS, is consistent with 

administrative data from the UI system itself. Administrative records show that the percentage 

of UI claims that end with benefit exhaustion—usually after 26 weeks of eligibility for regular 

unemployment benefits—has increased significantly since the 1960s and 1970s (see top line in 

Figure 21). 
Implications for U.S. Unemployment Insurance 53 September 2008 

Figure 21. Unemployment Insurance Benefit Exhaustion and the Adult 

Male Unemployment Rate, 1960-2006

 Source: Adult male unemployment rate estimates from http://data.bls.gov and UI benefit exhaustion data from 

http://workforcesecurity.doleta.gov/ unemploy/finance.asp (downloaded 7-Aug-2007).

Percent of UI claimants exhausting benefits

0

5

10

15

20

25

30

35

40

45

50

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Calendar Year

0

2

4

6

8

10

12

14

16

18

20

% exhausting regular UI benefits (left axis)

Adult male unemployment rate (right axis)

Percent of labor force

Both survey findings and administrative data thus agree in showing an increase in unemployment 

spells that last six months or more. Virtually none of the unemployed who have been jobless 

longer than six months qualify for regular UI benefits. They are only eligible for benefits if an 

extended or emergency compensation program is in effect and if, earlier in their unemployment 

spells, they qualified for benefits under the regular UI program. Why are unemployment spells 

longer today than they were in the past? One reason is the declining importance of temporary 

layoff unemployment noted in Section II. Industries, such as steel and autos, that historically 

placed workers on temporary (and hence short-term) unemployment now have fewer employees 

and account for a smaller percentage of unemployment than they did in the past. Many 

companies are nowadays more inclined to discharge workers permanently rather than 

temporarily. Whatever the causes for the long-term rise in unemployment durations, the increase 

in average durations means that one cost to workers of becoming unemployed has grown larger. 

On average it now takes unemployed workers longer to find their next jobs. 
Implications for U.S. Unemployment Insurance 54 September 2008 

Credit constraints and sources of income for the unemployed. The financial resources of the 

unemployed and their ability to smooth consumption in the face of job loss have probably 

improved over time. The wealth and borrowing capacity of many of the unemployed have 

increased as wage levels and the percentage of unemployed in dual income households have 

increased. Because of financial market innovations, credit is now easier for homeowners and 

credit card holders to obtain when they are jobless. These trends allow workers with relatively 

short spells of unemployment to maintain their consumption more easily than was possible in 

early post-war decades. Compared with workers in the 1950s and 1960s, today’s workers can 

self-insure more easily against the risk of brief unemployment spells. 

A shift in the employer-sponsored pension system has also made more resources available to 

laid-off workers if they were enrolled in a company pension plan. Before the mid-1980s most 

employer-sponsored pensions were defined-benefit (DB) plans. Employers contributed to these 

plans on behalf of their covered employees, and the plan guaranteed workers a retirement benefit 

that depended on their wages and years of service in the plan. Because of the way pension 

credits were earned in these plans, it was impractical or impossible for workers to make 

withdrawals from the plan if they were laid-off before reaching the pensionable age. (If they 

were vested in the pension, they could begin to collect benefits under the plan when they reached 

the pensionable age.) In 1980, workers enrolled in a DB plan and in no other kind of plan 

accounted for 60 percent of all workers enrolled in an employer-sponsored plan. By 2004 this 

percentage fell to just 11 percent of workers in employer-sponsored plans.38 At the same time, 

the fraction of workers enrolled in a defined-contribution (DC) plan, often a 401(k) plan, soared. 

By 2004, 61 percent of pension plan enrollees were enrolled in a DC plan and in no other kind of 

pension. An additional 28 percent of pension-covered workers were enrolled in both a DC and a 

DB plan. In contrast to DB plans, most DC plans make it easy for workers to take withdrawals 

from their accounts after a layoff occurs. If the worker is younger than 591⁄2, there is generally a 

tax penalty on withdrawals, but workers can still gain access to their pension savings if they need 

to support consumption during a long spell of joblessness. About half of 21-64 year-old wage 

and salary workers (and 57 percent of the full-time workforce) is enrolled in an employersponsored pension.39 For workers who are enrolled in a DC plan and are dismissed from their 

jobs, pension plan savings offers a source of financing for consumption during a layoff. 
Implications for U.S. Unemployment Insurance 55 September 2008 

Partly counterbalancing the trend toward DC pension plans is the erosion of severance pay as an 

employee benefit offered by employers. On the whole, the availability of severance pay has 

declined since the early 1980s, with the biggest declines occurring in the service sector. Based 

on information gathered in BLS surveys, it appears that overall coverage by a severance pay 

package has declined about 5 percentage points, falling from 31 percent to 26 percent of the 

wage and salary workforce covered by the survey.40

Other changes in household structure or in the availability of income transfers may have affected 

the ability of workers to smooth consumption when their earnings are interrupted by 

unemployment. As noted in Section I, a larger percentage of married couples now have two 

earners, reducing their dependence on a single worker’s wages. Working in the opposite 

direction is the decline in marriage. Fewer households contain a husband-wife couple, and more 

are headed by an adult who is separated, divorced, never married, or widowed. Workers in these 

households may have only limited ability to smooth income after job loss. 

Wage earners in low-income households may qualify for food stamps and cash public assistance 

if they become unemployed and meet the asset and income eligibility tests for these programs. 

Food stamps are equivalent to a negative income tax in which benefit payments are distributed as 

food coupons. If a family has no other source of income, the coupon allotment is calculated to 

provide the family with enough coupons to purchase an economical diet. As a family’s income 

from other sources rises, its allotment is reduced. Only a small percentage of households 

collecting food stamp benefits are simultaneously receiving UI benefits. In 2005, just 204,000 

out of the 10.8 million households received food stamps while collecting UI.41 However, an 

unknown percentage of recipients may have collected and exhausted UI benefits before receiving 

food stamps. For most classes of beneficiaries, food stamps can be received as long as the 

family meets the income test for the program. However, the welfare reform law passed in 1996 

placed limits on the duration of eligibility for some working-age childless couples and 

individuals. In particular, childless couples and single adults between 18 and 49 who are 

unemployed cannot receive food stamps for more than 3 out of every 36 months. This limit on 

benefits became effective in 1997. It reduces the income options available to some unemployed 

workers who exhaust their UI benefits. 
Implications for U.S. Unemployment Insurance 56 September 2008 

The 1996 welfare reform law also placed tighter restrictions on eligibility for cash public 

assistance benefits, severely limiting the ability of nonworking adults to collect cash assistance 

for an indefinite period. The restrictions on cash assistance payments reduced the ability of 

working-age adults, even those with children, to receive no-strings-attached cash benefits for an 

extended period. Able-bodied adults in recipient households were pushed to find jobs or 

participate in work-preparation activities if they wanted to continue receiving benefits. 

The reforms in the food stamp and cash assistance programs are relevant to the UI program for 

two reasons. First, they reduced the income-tested transfer payments available to low-income 

working-age adults, including those whose low income is due to involuntary unemployment. 

When these workers are laid-off and exhaust their UI benefits, they are offered less income 

protection under means-tested programs than was available before 1996. Second, the reforms 

pushed many low-income parents who would otherwise have been outside the labor market into 

the workforce. As a result, the employment rate of never-married mothers rose sharply in the 

1990s. Many of the single mothers who entered the labor force had few skills, and most faced 

problems finding and holding a job because of child care commitments. If these hard-to-employ 

workers hold UI-covered jobs long enough, they become eligible for UI benefits. In many cases, 

however, their employment experiences are erratic. Some do not accumulate enough UI 

earnings credits to qualify for UI. 

While the reforms in means-tested programs have restricted unemployed workers’ access to 

some benefits, more generous eligibility rules for disability programs have increased the 

percentage of workers who can collect a disability pension and withdraw from the labor force. 

Between 1984 and 2004 the percentage of working-age men who received Social Security 

Disability Insurance (SSDI) benefits climbed from 3.0 percent to 4.3 percent, and the percentage 

of working-age women claiming benefits increased from 1.4 percent to 3.5 percent. The increase 

in the disability rate is not solely due to population aging, because increases in benefit claiming 

are also evident in younger age groups.42 There are two main explanations for this increase. The 

criteria used to determine disability status have been liberalized, especially for applicants who 

have disabling conditions with low rates of mortality. Second, the growth in earnings inequality 

has reduced the relative earnings of low-wage workers. These workers have historically had the 

highest disability rates. As their wages have declined, the wage replacement rate they receive 
Implications for U.S. Unemployment Insurance 57 September 2008 

under the SSDI program has increased, making it more attractive for them to apply for benefits. 

If their market wages had remained high and if it were easy to find a job, many would have 

chosen to continue working, even with a disabling condition. When workers are accepted into 

the SSDI program they are not allowed to earn more than a modest amount of wages. Few SSDI 

recipients have any earnings at all. The expansion of the SSDI rolls has removed a substantial 

number of hard-to-employ workers from the labor force. By doing so it has probably reduced 

modestly the number of UI claimants and the unemployment rate. 

Fringe benefits. The UI system replaces part of the money wages that workers lose when they 

are laid-off. It does not insure workers against the loss of health insurance or other fringe 

benefits that are linked to the lost job. Fringe benefits represent valuable additions to money 

wages, and their cost to employers has risen substantially over time (see Figure 22). Employer 

contributions for health and retirement plans, excluding mandatory social insurance, were equal 

to 15 percent of workers’ money wages in 2006. Payments for these fringe benefits were only 

3.3 percent of wages in the 1950s and 9.2 percent of wages as recently as the 1970s. For 

purposes of comparison, employer contributions for state and federal UI programs have averaged 

0.7 percent of money wages since 1991. The burden of UI contributions has actually declined 

over time. Between 1950 and 1990, employers’ contributions for UI averaged 1.0 percent of 

their money wage payments. 

The loss of fringe benefits is particularly important for workers who depend on their employers 

for health insurance. Insurance purchased outside an employer’s health plan is so costly that few 

unemployed workers can afford it. Unlike governments in other industrialized countries, the 

U.S. government does not provide, or require employers to provide, health insurance to workers 

or their dependents. In 2004, nearly 46 million Americans—more than one in seven—were not 

covered by a public or private health insurance plan during the year.43 Most of the uninsured 

were workers and workers’ dependents, though many of the unemployed were also uninsured, 

and a large fraction of the unemployed lost their health coverage when they lost their most recent 

jobs. Uninsured Americans usually have some access to low-cost or free emergency medical 

care through public hospitals, charity care in private hospitals, or public health clinics. The lack 

of health insurance coverage nonetheless severely constrains Americans’ choice of doctors and 

hospitals and discourages them from receiving beneficial care. 
Implications for U.S. Unemployment Insurance 58 September 2008 

Figure 22. Employer Contributions for Employer-Sponsored Pension and 

Health Plans and Federal and State UI Programs, 1950-2006

 Source: Author's tabulations of U.S. Department of Commerce, Bureau of Economic Analysis, data from the 

National Income and Product Accounts tables. http://www.bea.gov/bea/dn/nipaweb/index.asp (Downloaded 

Percent of money wages

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1950 1960 1970 1980 1990 2000

Pension and profit sharing plans

Employer-sponsored health plans

Federal and state UI programs

Laid-off workers can now continue receiving health insurance under their former employer’s 

plan under some circumstances. Under provisions of the 1986 Consolidated Omnibus Budget 

Reconciliation Act (COBRA), employers with more than 20 employees who maintain a health 

plan for their workers are obliged to offer continuation of coverage to laid-off workers who were 

not terminated as a result of gross misconduct. Employers must offer continued coverage for at 

least 18 months after the worker’s termination, although they may charge laid-off workers up to 

102 percent of the full cost of providing benefits.44 Since most employers who offer health 

insurance generously subsidize their employees’ purchase of insurance, the cost to laid-off 

employees of continuing their coverage is ordinarily much higher than the cost they faced while 

an employee. Many unemployed workers cannot afford to pay the required premiums. They and 

any family dependents covered by the employer plan often lose their insurance coverage not long 

after a layoff occurs. 

The BLS Displaced Worker Survey can be used to examine the loss of health insurance benefits 

connected with a job. About three-quarters of long-tenure workers who reported becoming 
Implications for U.S. Unemployment Insurance 59 September 2008 

displaced between 1999 and 2000 were covered by an employer-sponsored health plan in their 

pre-displacement jobs.45 One-fifth of these workers lost health insurance coverage following 

their displacement. Among workers who were reemployed by the date of the Displaced Worker 

Survey, nearly 85 percent retained health insurance coverage. About a quarter of the onceinsured displaced workers had not found a new job, however, and a large proportion of these 

workers were not covered by a public or private health insurance plan. Among displaced 

workers who were still jobless and actively seeking work, fewer than half were covered by an 

insurance plan. 

Health insurance is not only a problem for the unemployed, many of whom lose insurance 

coverage when they lose their jobs. It is also a problem for people who are steadily employed. 

Though statistics on health insurance coverage are subject to measurement error, the Census 

Bureau’s annual survey on coverage shows a trend toward lower private insurance coverage 

among working-age adults under age 55 (see Figure 23). Declines in coverage rates occurred 

primarily in 1990-1992 and after 2000 when the job market was weak. Between 1987 and 2006 

coverage under private health plans, mainly provided by employers, declined 2 percentage points 

to 8 percentage points depending on the age group. Only among adults between 55 and 64 did 

coverage under employer health plans increase. Low-wage workers who head families 

containing children may qualify for publicly subsidized health insurance or free insurance for 

their children. Workers with higher incomes may need to find an employer offering good health 

insurance if they want to obtain reliable coverage for their families. Many middle-class families 

cannot afford to purchase a private health insurance plan without the contributions of an 

employer. A Kaiser Foundation survey in 2005 found that the combined employee and employer 

premium for a family health plan was nearly $10,900, annually. Of this amount, one-quarter of 

the total premium is usually paid by the employee and three-quarters by the employer.46 For 

purposes of comparison, the average annual wage earnings of Americans who have any earnings 

at all was $36,950 in 2005. The combined premium for a family insurance plan is thus almost 30 

percent of the average U.S. wage. 

Since health insurance is expensive to purchase without an employer’s help and since most 

working-age families obtain their insurance through an employer, the steeply rising cost of 

insurance has increased the price of job loss for many middle class workers. If a breadwinner’s 
Implications for U.S. Unemployment Insurance 60 September 2008 

employer offers the only affordable source of insurance available to a family, then the loss of the 

breadwinner’s job will effectively result in the loss of the family’s health coverage. The loss of 

Figure 23. Percent of Working-Age Adults Insured under Private Health 

Insurance Plans by Age Group, 1987-2006

 Source: U.S. Census Bureau, Housing and Household Economic Statistics Division, 

http://www.census.gov/hhes/www/hlthins/historic/hlthin05/hihistt7.html and 

http://www.census.gov/prod/2007pubs/p60-233.pdf (downloaded 5-Sep-2007).

Percent in age group covered by employer health plan

55

60

65

70

75

80

1986 1990 1994 1998 2002 2006

45 - 54

35 - 44

55 - 64

25 - 34

Age group --

coverage was less important when physician and hospital bills were lower, as they were up to the 

1970s. The loss of coverage is much more important when even routine hospitalizations can cost 

several thousand dollars. Of course, workers who qualify for generously subsidized public 

insurance or who would qualify for such insurance if they were laid-off do not face this problem. 

The availability of publicly subsidized insurance may have reduced the economic loss these 

workers sustain when they are laid-off. 

V. The Current Effectiveness of UI 

The UI system remains a vital part of the nation’s social safety net, but its importance has 

diminished somewhat over the post-war period, both as a source of protection against income 

loss during unemployment and as a counter-cyclical stimulus when the unemployment rate rises. 
Implications for U.S. Unemployment Insurance 61 September 2008 

Countercyclical effects. Figure 24 shows the relationship between the unemployment rate, on 

the one hand, and spending on all unemployment compensation benefits, on the other. Spending 

on unemployment benefits is measured as the ratio of state and federal outlays on all types of 

unemployment compensation compared to total wage disbursements in the public and private 

sectors. The chart shows the strong cyclical sensitivity of UI spending. Outlays on all 

unemployment compensation programs more than doubled between fiscal years 1969 and 1971 

and then fell almost 30 percent in the next two years. Spending nearly tripled between 1974 and 

1976 and then fell about two-thirds by 1979. Note, however, that the surge in unemployment 

spending has been smaller in more recent recessions. 

Figure 24. Relation of Unemployment Rate and Spending on 

Unemployment Compensation, Fiscal Years 1960-2006

 Source: Author's tabulations based on unemployment estimates from http://data.bls.gov, unemployment insurance outlays 

from U.S. OMB, Budget of the United States Government, Fiscal Year 2008, Historical Tables, downloaded 30-Aug-2007, 

and data on U.S. wage and salary income from U.S. Department of Commerce NIPA estimates.

Percent of labor force

0

1

2

3

4

5

6

7

8

9

10

11

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Fiscal Year

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Unemployment rate

UI as % of wages (right axis)

Percent of total wages
Implications for U.S. Unemployment Insurance 62 September 2008 

The falloff in countercyclical stimulus provided by UI can be roughly approximated by 

regressing the ratio of UI benefit payments over wages on the unemployment rate: 

(1) UI_ = -0.600 + 0.293•UR – 0.059•[UR• (D1980-2006)], Corrected R2 = 0.825; 

 Wage (0.107) (0.020) (0.009) 

(2) UI_ = -0.372 + 0.338•URM – 0.115•[URM• (D1980-2006)], Corrected R2

 = 0.858; 

 Wage (0.082) (0.020) (0.010) 

where UI/Wage = Ratio of UI benefit payments to total wage bill; 

 UR = Average annual unemployment rate, population 16 and older; 

 URM = Average annual unemployment rate, males 20 and older; and 

 D1980-2006 = Dummy variable equal to 1 for years 1980-2006, 0 otherwise. 

 

Equation 1 above regresses the UI benefit / wage ratio on the civilian unemployment rate for the 

population 16 and older. Equation 2 uses the civilian unemployment rate of men age 20 and 

older. This indicator of labor market slack is sometimes preferred to the total unemployment rate 

because it is less affected by the shifting age composition of the labor force and the long-term 

rise in the female labor force participation rate, which was heavily concentrated in the period 

between the mid-1960s and the mid-1990s.47 Both equations are estimated using 47 annual 

observations between 1960 and 2006. The dummy variable, D1980-2006, is interacted with the 

indicators of labor market slack to determine whether there was a change in the relationship 

between UI benefit payments and the unemployment rate in years after 1979. The results of both 

equations suggest there was a change and that it was large. Before 1980 a 1-percentage-point 

rise in the unemployment rate of men and women age 16 and older was associated with a 0.293-

percentage-point rise in the ratio of UI benefit payments to aggregate wages. In 1980 and later 

years, the same increase in the unemployment rate was associated with a rise in the UI payment / 

total wage ratio of only 0.233 percentage points. This decline represents a 20 percent drop in the 

counter-cyclical effect of UI benefit payments. If we use the unemployment rate of men age 20 

and older as our measure of labor market slack, the falloff in countercyclical effectiveness is 

even bigger, a drop of about one-third. 

The decline in unemployment protection is greater than implied by Figure 24. UI spending in 

the figure is measured as the flow of gross benefits in relation to the money wages earned by 
Implications for U.S. Unemployment Insurance 63 September 2008 

U.S. workers. The calculation ignores the changing tax status of unemployment compensation. 

Before 1979 unemployment benefits were treated as tax-free income in the federal income tax 

code. Starting in 1979, however, some or all benefits became taxable for middle- and highincome households. In 1987 all compensation payments were made taxable as ordinary income. 

An analysis by the House Ways and Means Committee in 1998 showed that the federal income 

tax on compensation nets the Treasury tax revenues that offset about 18 percent of the cost of 

benefit payments.48 Since most states with income tax systems followed the lead of the federal 

government in defining taxable income, unemployment compensation also became taxable in 

state tax systems, further reducing the net value of UI payments. The inclusion of UI benefits in 

the income tax base would not have affected income replacement rates if state legislators had 

increased weekly benefit amounts by roughly 20 percent when benefits first became taxable. 

They did not do this, however. The average weekly benefit amount is about 35 percent of the 

average gross wage in covered employment, and this ratio has remained essentially unchanged 

for the past 45 years. The after-tax value of UI payments has fallen, however, as a greater share 

of benefits has become taxable. Money wages have also declined in relation to total worker 

compensation. As noted in Section IV, health and retirement benefits became an increasingly 

important part of most employers’ pay package. In the 1960s money wages represented 91 

percent of total worker compensation. By 2006 money wages accounted for just 81 percent of 

compensation.49 By implication, UI benefits now represent a smaller percentage of lost worker 

compensation than they did in the past. 

The decline in UI coverage. The most important reason for the falloff in UI payments as a 

percentage of total earnings lost in a recession is that a smaller percentage of the unemployed is 

now collecting a UI check. Figure 25 shows the percentage of unemployment weeks that were 

compensated under all UI programs, including the regular and Extended Benefits programs and 

all supplemental and emergency programs. The lower line, which provides estimates for the full 

1960-2006 period, measures compensated weeks in relation to an estimate of the total weeks that 

U.S. workers spent in involuntary unemployment. In the 20-year period through 1979, the 

percentage of unemployment weeks compensated was 39 percent, on average. In the 27-year 
Implications for U.S. Unemployment Insurance 64 September 2008 

Figure 25. Weeks of Unemployment Compensated by U.S. 

Unemployment Insurance, 1960-2006

 Source: Author's tabulations based on unemployment estimates from http://data.bls.gov, UI finance data from 

http://workforcesecurity.doleta.gov/unemploy/finance.asp, downloaded 6-Aug-2007, and data on federal supplemental 

UI claims in Economic Indicators (various issues).

Percent of unemployed weeks compensated by all UI programs

0

20

40

60

80

100

120

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Calendar year

Denominator:

Estimated weeks of

job-loss unemployment

period starting in 1980, it was less than 35 percent on average, a decline in insurance coverage of 

about one-eighth of the unemployed. 

Many unemployed workers are supposed to be ineligible for benefits, of course. New entrants 

and most reentrants to the workforce are ineligible because they have not accumulated recent 

work experience in a UI-covered job. Unemployed workers who quit their most recent jobs are 

also ineligible or may be eligible only after a lengthy waiting period. The unemployed who are 

most likely to collect benefits are job losers, workers who were permanently or temporarily laidoff from their last job or who held a temporary job that came to an end. The top line in Figure 

25, which covers the period from 1967-2006, measures compensated weeks in relation to the 

estimated number of weeks of unemployment experienced by job losers. This measure shows a 

more dramatic decline in UI coverage after 1979. Between 1967 and 1979, on average slightly 

more than 90 percent of job losers’ unemployment weeks were compensated under the UI 

system. Since 1980, on average less than 70 percent of job losers’ unemployment weeks have 
Implications for U.S. Unemployment Insurance 65 September 2008 

been compensated, a drop in coverage of about one-quarter. This estimated decline lies in 

between the two estimates obtained in equations 1 and 2 above. Even if we disregard the 

exceptional coverage rates in 1975-1977, there was an 18-percent fall-off in UI coverage starting 

around 1980. 

A number of analysts have examined the reasons behind the decline in UI coverage of the 

unemployed.50 Several changes in the composition of the unemployed have contributed to lower 

UI coverage ratios. As documented in Section I, a larger percentage of the U.S. workforce now 

resides in states where UI coverage rates have been low for several decades. A smaller 

percentage lives in states with high coverage rates. Over the past five decades, this factor 

accounts for roughly a quarter in the trend decline in UI coverage under regular state programs. 

A larger percentage of workers (and the unemployed) now consists of women, and women have 

historically had lower rates of UI participation than men, although this gap has almost certainly 

narrowed as men and women’s job market experience has grown more similar. Part-time 

employment is also more common than was the case before 1980. The qualifying conditions for 

UI require workers to have a minimum level of earnings to become entitled to benefits, so laidoff part-time workers are less likely to receive benefits than workers laid-off from full-time jobs. 

These qualification requirements also reduce the percentage of low-income single mothers who 

collect UI after they become unemployed, since many of these mothers have short employment 

spells when they are laid-off. Finally, as unionization rates have fallen, the unemployed are less 

likely to receive help from a labor union in learning about unemployment benefits or how to 

apply for them. 

Other trends should have increased the percentage of unemployed workers, and especially job 

losers, who collect UI benefits, however. Both the workforce and the unemployed population 

contain a smaller percentage of young workers. For reasons discussed earlier, these workers are 

less likely to be eligible for UI when they become unemployed. In spite of the relative decline in 

this population, coverage rates under regular state UI programs were lower after 1980 than they 

were in earlier decades. Some analysts who have examined the data agree that a great deal of the 

decline in coverage after 1980 stems from a decline in benefit application rates among 

unemployed job losers who appear to meet the monetary and non-monetary qualifying 
Implications for U.S. Unemployment Insurance 66 September 2008 

requirements for UI.51 Some of this decline might be traceable to the taxation of UI benefits, 

which reduced the after-tax value of a UI benefit check. 

Longer unemployment durations. One obvious reason for the lower UI coverage of job losers is 

the increasing average duration of unemployment spells. Few of the unemployed who have been 

out of work for longer than six months qualify for regular state UI benefits. Under current law 

they are only offered UI if an extended or emergency UI program is in effect. Since the early 

1960s, the increase in the fraction of unemployed who have been jobless for six months or longer 

should have reduced the fraction of unemployed receiving benefits by about eight percent. This 

calculation presumes that the unemployment rate is near average, so the only UI benefits 

available to workers come from the regular 26-week program. 

When the state or national unemployment rate is high, jobless workers are supposed to qualify 

automatically for UI payments beyond the usual 26-week eligibility period. The state-federal 

Extended Benefits program provides an additional 13 weeks of compensation payments for 

workers in states where the unemployment rate is higher than a threshold (or trigger) rate. Half 

the cost is paid out of a federal government unemployment trust fund and half is paid by states in 

which the program triggers on. In the past two decades the program has rarely, if ever, triggered 

on in most states, even when the national unemployment rate is high. For example, in June 2003 

when the U.S. civilian unemployment reached a peak after the 2001 recession, Extended Benefits 

were available in only three out of 50 states – Alaska, Oregon, and Washington. While the local 

unemployment rate was exceptionally high in those states, it exceeded 6.7 percent in six other 

states, including California, Michigan, and Texas. Michigan’s Extended Benefits program 

triggered on (for five months) beginning in August 2003, but Extended Benefits become 

available in a total of only six states during and immediately after the 2001 recession – Alaska, 

Idaho, Michigan, North Carolina, Oregon, and Washington. Extended Benefits were last 

available in California in July 1983. California’s unemployment rate has been eight percent or 

higher in 45 of the 276 months since July 1983, and it was seven percent or higher in 98 months. 

In none of those months were California’s unemployed eligible for compensation under its 

Extended Benefits program. 
Implications for U.S. Unemployment Insurance 67 September 2008 

A key factor that has reduced the effectiveness of the Extended Benefits program is the trigger 

mechanism used to determine whether a state offers Extended Benefits to workers who exhaust 

regular UI benefits. The trigger mechanism was modified in 1981 to increase the insured 

unemployment rate (IUR) needed to trigger on a state’s Extended Benefit program. At the same 

time, the 1981 law also eliminated the national-level IUR trigger that triggered on the Extended 

Benefits program in all 50 states. These changes clearly reduced the likelihood that the Extended 

Benefits program would trigger on in a given state. At the same time, the decline in the fraction 

of unemployed job losers collecting UI benefits also reduced the IUR in relationship to the 

civilian unemployment rate (also known as the “total unemployment rate” or TUR). Starting in 

1993 Congress authorized states to adopt an alternative trigger rate for the Extended Benefits 

program based on the TUR instead of the IUR. As of April 2008, however, only 11 of the 50 

states had elected to use this alternative trigger rate. The economic rationale for most states’ 

choice is obvious. States must pay for one-half the cost of Extended Benefits out of their own UI 

trust fund account. When the national unemployment rate is high, Congress usually authorizes 

spending for special or emergency UI benefits beyond the 26 weeks of benefits available under 

regular state UI programs. The special or emergency benefits are wholly financed out of federal 

funds. Under these circumstances, it is fiscally advantageous for states to rely on federally 

financed emergency UI benefits rather than partly state-financed Extended Benefits when the 

local or national unemployment rate is high. This choice means that UI benefits that last longer 

than regular state UI benefits will only be offered if Congress enacts a special or emergency 

program. There is nothing “automatic” about the extra protection and counter-cyclical stimulus 

provided by extended UI benefits. 

On both economic and humanitarian grounds it makes sense to provide longer-duration benefits 

to laid-off workers when the unemployment rate is high. Since unemployed workers usually 

need more time to find work in weak job markets, there is a compelling equity argument for 

offering insurance over longer spells of job search. In addition, the countercyclical effectiveness 

of unemployment compensation is reduced when a large percentage of laid-off workers are 

dropped from the rolls as a result of benefit exhaustion. For obvious reasons, workers are more 

likely to exhaust their regular unemployment benefits when the jobless rate is high (see Figure 

21). If no extensions of unemployment compensation were available, the percentage of 
Implications for U.S. Unemployment Insurance 68 September 2008 

unemployed who collect benefits would shrink as the length of a recession extends beyond the 

maximum eligibility period. 

The logic of benefit extensions in recessions is apparent to most policymakers and voters. In 

every recession since the late 1950s, Congress has enacted a federally-funded extension of 

unemployment benefits in addition to whatever extension might be available under the federalstate Extended Benefits program. The extension in 1975-1977 was particularly generous, 

providing unemployment claimants who exhausted both regular and extended UI benefits with 

up to 26 additional weeks of compensation (for a total benefit duration that could last up to 65 

weeks). The special benefit extensions in 1982-1985, 1991-1994, and 2002-2004 were less 

generous but still provided extra federally-financed benefits that could extend a worker’s total 

eligibility period by up to six months. Special programs to extend the duration of unemployment 

benefits have been in effect during all or parts of 14 out of the 32 years since 1975. Depending 

on a worker’s state of residence and the details of the federal supplemental program in effect, a 

worker might qualify for 6 to 39 weeks of additional unemployment compensation beyond the 26 

weeks available under the regular state insurance program. 
Implications for U.S. Unemployment Insurance 69 September 2008 

VI. Implications for Changes in UI 

This paper highlights the major changes in the labor market and in unemployment that affect the 

insurance value of UI for workers experiencing unemployment and influence the countercyclical 

effects of the program within the broader economy. 

 At a given level of overall joblessness, unemployment durations have increased. In light 

of the fixed and stable limit on the duration of potential UI eligibility, this trend has 

reduced the percentage of an average unemployment spell that is covered by UI. 

 Rising wealth, innovations in credit and financial markets, and increases in employee 

coverage under defined contribution (DC) pension plans have increased many workers’ 

capacity to smooth consumption in the face of earnings loss that accompanies a layoff. 

Compared with laid-off workers in early post-war decades, laid-off workers today are in a 

better position to self-insure against short-term loss of earnings. 

 The geographical shift of workers from states with comparatively high UI coverage rates 

to states with lower coverage rates has reduced the percentage of newly laid-off workers 

who receive benefits under the program. 

 In addition to the geographical shift in employment and unemployment, other factors 

appear to have reduced the probability that newly laid-off workers will claim a UI 

benefit. 

 Changes in corporate layoff policy and the industrial mix have reduced the percentage of 

laid-off workers who are on temporary layoff and increased the percentage who are 

permanently laid-off. This development has contributed to the upward trend in 

unemployment durations. 

 The average weekly UI payment has remained fixed relative to the average weekly wage 

paid in employment covered by UI. This probably implies that workers who receive UI 

checks are receiving gross replacement for lost earnings that is similar to what workers 

received in the past. Effective income protection has declined, however, for two reasons: 

` Benefit checks are now taxed as ordinary income. Before 1979 they were not taxed 

under the income tax; between 1979 and 1986 part of benefits were exempt from 

taxes. Tax reform has in effect reduced the net replacement value of UI benefits. 

` The money wages paid to workers represent a shrinking share of the weekly 

compensation they receive. A growing percentage of compensation is provided in the 

form of employer contributions to health and other benefit plans. The UI program 

does not insure workers against the loss of these benefits, even though coverage under 

a health insurance plan may be necessary to maintain workers’ consumption during a 

layoff. It is difficult if not impossible for workers to self-insure against the loss of 

health insurance. 

 UI does not insure workers against the loss of wages or benefits that occurs after they are 

reemployed. For experienced workers and workers laid-off in high-wage industries, 

these losses often dwarf the losses they will sustain as a result of being temporarily out of 

work. The growth in earnings inequality means that workers earning good wages may 
Implications for U.S. Unemployment Insurance 70 September 2008 

nowadays face a bigger percentage loss of earnings if they are forced to obtain 

employment in a low-pay industry or occupation. 

This summary suggests several potential directions for change in UI that might make it more 

effective in the new environment. The effects of each potential change in the system would 

require close analysis before a clear recommendation can be offered. 

Increase protection for long spells of unemployment. One possible step is to increase the 

protection available to laid-off workers who suffer long spells of unemployment. This might be 

accomplished in two different ways—first, by increasing the maximum duration of regular UI 

benefits and, second, by changing the conditions under which Extended Benefits are triggered 

when the unemployment rate is high. The first change, if seriously considered, could be 

relatively straightforward. A crucial question, which could be the topic of formal investigation, is 

the number of additional weeks that would be permitted for workers who are eligible for the 

maximum duration of potential benefits. It is important to use caution in raising this maximum, 

for there is abundant evidence that a longer maximum will induce some workers to increase the 

amount of time they spend in unproductive search for a new job. Some workers will spend 

longer before accepting a new job, but their new job will not be any better than the one they 

would have found with less search. 

The second change – a modification in the trigger mechanism for Extended Benefits – is less 

straightforward. Congress has authorized extra or emergency benefit extensions in every 

recession since the late 1950s. It is probably undesirable to rely mainly on emergency legislation 

to increase UI benefit durations in recessions, because the legislative calendar and unrelated 

political disagreements can delay Congressional action when the unemployment rate is rising. 

One possible revision in the Extended Benefits program would be to alter the triggering 

mechanism to authorize payment of Extended Benefits in smaller increments than 13 extra 

weeks of eligibility. For example, states with moderately high unemployment rates or UI 

exhaustion rates could be authorized to offer four extra weeks of benefits; states with somewhat 

higher unemployment or exhaustion rates could be authorized to provide eight extra weeks of 

benefits; and so on up to a maximum authorization of 13 extra weeks of benefit payments. 

Congress still retains the legislative authority to appropriate funds for emergency provision of 
Implications for U.S. Unemployment Insurance 71 September 2008 

extra UI payments, but by changing the triggering mechanism for Extended Benefits, extensions 

in the benefit eligibility period would automatically occur at an earlier stage in future recessions. 

Reduce protection for short spells of unemployment. Since most workers now have access to 

savings or credit that allows them to smooth consumption in the face of short-term earnings loss, 

it might make sense to reduce UI’s insurance protection against short spells of involuntary 

unemployment. The increased importance of long unemployment spells might suggest to some 

analysts that regular UI should be reoriented to reduce insurance protection for short 

unemployment spells and improve the protection available for workers who suffer more than 26 

weeks of unemployment. This could be accomplished without incurring additional UI program 

costs if workers faced a longer waiting period for benefits but were allowed to collect regular UI 

for a greater number of total weeks. An economic argument for this change is that it is more 

difficult for workers to self-insure against earnings loss that extends to three, six, or nine months 

while it is relatively easy for them to self-insure or obtain credit to cover consumption when 

earnings are interrupted for four weeks or less. 

Young workers and workers earning low pay have less capacity to self-insure or to obtain credit 

when they are laid-off, and this is true even when they only experience short unemployment 

spells. If voters and policymakers believe protection should be offered in these cases, one way to 

provide such protection is to require employers to offer severance pay that is linked to workers’ 

wages and months of service with the firm. For example, if the waiting period for UI were 

increased so that laid-off workers could not collect UI payments for their first four weeks after a 

layoff, employers might be obliged to provide one day of severance pay for each month of 

service up to a mandatory minimum amount of 10 days of severance pay. Under this mandate, 

workers who are involuntarily discharged after 8 months on the job would receive 8 days of pay 

calculated at their daily rate of pay during their 8 months of service. While an employers’ 

obligation to provide severance pay would not eliminate UI protection or employers’ obligation 

to contribute to the UI system, it could offset the loss of short-term UI benefits if policymakers 

choose to increase the number of waiting weeks after an initial UI claim is filed. Severance pay 

can help young workers and poorly paid workers maintain their consumption in the first few 

weeks after a layoff. Severance pay might also turn out to be preferable to UI benefits both in 

terms of work incentives and administrative cost. Workers who receive lump-sum severance 
Implications for U.S. Unemployment Insurance 72 September 2008 

payments do not face the adverse reemployment incentives faced by a recipient of standard UI 

benefits. It may be less costly for employers to administer a severance pay system as part of 

their regular compensation system than it is for the UI system to pay short duration benefits to 

laid-off workers who are reemployed after only a short spell of joblessness. 

Partially protect workers against the risk of losing health insurance. A growing problem for 

unemployed workers is the cost of obtaining adequate medical care or health insurance if they 

lose insurance coverage when they lose their jobs. Employer contributions for employee health 

plans are now equal to nine percent of the money wages paid to workers.52 Many small 

employers do not offer health benefits, of course; other employers offer very inexpensive plans 

that are not terribly generous. However, for a breadwinner who is the sole family member 

covered by a generous employer health plan, the employer contribution to a standard health 

insurance plan may represent one-quarter or more of total compensation. It is difficult or 

impossible to self-insure against the loss of the employer’s contribution to this plan. The UI 

system makes no provision for such insurance. Workers receiving health coverage on their jobs 

can purchase group insurance coverage from their former employers if they are laid-off, but they 

must find enough money to cover both the employer and employee premium contribution. 

Moreover, they must do this out of a smaller money income than they received while employed. 

It surely makes sense to remedy the problem posed by the loss of health insurance coverage 

through a fundamental change in the nation’s health insurance system. Until that is done, 

however, laid-off workers who collect UI benefits will face the problem of paying for medical 

care or insurance while they are unemployed. A narrow solution to the problem could be based 

on the underlying logic of the UI system itself. UI benefits under the present system are financed 

by taxing employers in proportion to their taxable wage bill, with penalty rates imposed on 

employers with layoff policies that create high costs for the system. In principle, the nation 

could apply similar logic to the problem of providing continued health insurance coverage to UIinsured laid-off workers. Employers that offer health insurance coverage to their workers might 

be required to contribute to an unemployment fund that subsidizes the purchase of COBRA 

health insurance coverage for laid-off workers. The new protection to UI-covered laid-off 

workers might be financed with a tax that is imposed on employer contributions to employee 

health plans. Employers which do not offer health plans would make no contributions; 
Implications for U.S. Unemployment Insurance 73 September 2008 

employers offering expensive or generous plans would make relatively large contributions. As 

in the current UI program, employers’ contribution rates might be experienced rated, so that 

firms with layoff policies that contribute heavily to program costs would face higher contribution 

rates than firms which only rarely lay off their workers. The benefit to be offered to UI-covered 

laid-off workers would be simple: A monthly subsidy payment that covers a portion of the cost 

of continued COBRA health coverage. 

The suggested extension of UI coverage hardly represents an ideal approach to providing health 

insurance to the nation’s working-age population. It is a stop-gap measure to extend insurance 

coverage to workers who lose their health coverage when they are laid-off from their jobs. Since 

health coverage is an increasingly valued—and increasingly expensive—component of workers’ 

compensation, the failure of the U.S. safety net to insure unemployed workers against its loss 

represents a growing hole in the protection offered by the current UI program. 

Time-limited earnings insurance benefits. The discussion up to this point has focused on the 

insurance protection historically provided by the nation’s UI system—insurance against the 

temporary loss of wages or compensation resulting from a layoff. While this kind of insurance is 

an essential component of overall income protection, we should also recognize that it creates 

adverse incentives for recipients. Since the UI payment replaces a percentage of the earnings 

workers lose as a result of unemployment, it reduces the pressure on them to accept another job. 

This is advantageous both to the worker and the wider economy when it improves a worker’s 

capacity to reject bad job offers and find better ones. By improving the quality of matches 

between workers and job openings, UI improves the average productivity of the workforce. This 

function of UI is especially important for workers with extensive skills and experience, for this 

expertise would go to waste if these workers accepted jobs where their skills have little use. UI 

also creates important incentive problems, however. It allows workers to postpone serious 

search for a new job, and it encourages some of the unemployed to reject good job offers even 

when they are unlikely to obtain better ones. In these cases, taxpayers are obliged to finance 

additional UI payments to subsidize jobless workers who are not productively engaged in finding 

a new job. 
Implications for U.S. Unemployment Insurance 74 September 2008 

Partial solutions to these incentive problems are to limit UI benefits to a carefully restricted 

population, offer insurance payments that replace two-thirds or less of a worker’s lost earnings, 

require workers to show evidence of purposeful job search, and restrict benefits to a limited 

period of time after a layoff. Whether the balance of these program features in the U.S. system 

produces an optimal tradeoff between good income protection and sound incentives is an open 

question. Clearly, the United States has struck a different balance between income protection 

and job-finding incentives compared with the balance struck in most other rich countries. By 

providing smaller and shorter-lasting benefits, our system encourages unemployed workers to 

find jobs quickly. The incentives in our system seem tolerably effective. Even though longduration unemployment has become more common in the United States, it is still much less 

common than it is in countries offering more generous income protection to the unemployed. 

Is there a way to make job-finding incentives more effective while simultaneously providing 

better insurance to laid-off workers? For workers who face big cuts in pay when they find new 

jobs, one option worth considering is time-limited earnings insurance.53 Financed in the same 

way as traditional UI benefits, earnings insurance would provide displaced workers with monthly 

or quarterly earnings supplements to compensate them for a fixed percentage of the wage losses 

they suffer as a result of displacement. If the program insured workers for 50 percent of their 

earnings loss, for example, a displaced worker whose previous wage was $4,000 a month would 

receive a monthly check of $500 if forced to accept a new job that pays only $3,000 a month. 

The percentage of earnings-loss replacement could be the same for all eligible workers or it 

could vary depending on a worker’s age and previous job tenure. In order to target benefits on 

displaced workers who have the greatest likelihood of suffering large post-displacement wage 

losses, eligibility should be restricted to only a fraction of UI-eligible workers, namely, laid-off 

workers who are displaced by an employer who has employed the worker for some minimum 

period, such as three years. There might be a good case on equity grounds for providing better 

insurance to older workers. As noted earlier, older workers usually find it harder than younger 

ones to obtain a new job. Evidence suggests they are also more likely to be forced to accept a 

large and permanent cut in their weekly pay.54 However, eligibility for earnings insurance 

should only be available to workers who have minimum job tenure (say, two or three years) with 

their current employers. There is little economic or equity justification for providing earnings 
Implications for U.S. Unemployment Insurance 75 September 2008 

insurance payments to employees who suffer displacement after working only briefly for an 

employer. 

The total amount of compensation provided in any year to a worker should be capped at a ceiling 

amount, say, $10,000. This would avoid situations in which highly compensated workers 

receive extraordinary insurance payments. Highly paid workers can be presumed to have more 

savings than workers earning average- or below-average wages. Explicit provision should 

probably also be made for displaced full- or part-time workers who are reemployed in a part-time 

position. The purpose of earnings insurance is to encourage speedier job finding and to 

compensate workers for part of the wage loss they suffer as a result of job displacement. The 

goal is not to subsidize the reduction in a worker’s weekly hours of employment. A 

straightforward limitation would be to require subsidized workers to show they hold a full-time 

job, say, a job where workers are employed at least 32 hours a week. 

A crucial element of earnings insurance is that the income supplements would not be payable 

until a worker becomes reemployed, and supplements would cease within a specified period after 

displacement occurs (say, after eighteen months). Workers who find new jobs early in their 

eligibility period would be eligible for larger total payments than workers who delayed accepting 

a new job. This provides workers with an incentive to search purposefully for a new job and to 

accept a job quickly. It also encourages workers to face the consequences of permanent job loss 

immediately after displacement occurs. By encouraging workers to accept this fact right away, 

earnings insurance could induce workers to take constructive action to become reemployed as 

soon as possible. 

Earnings insurance is not by itself a solution for displaced workers’ problems, nor would it solve 

the problem of income replacement during periods when workers are jobless, a problem that is 

addressed with traditional UI. Although wage insurance can help improve incentives for workers 

who earn average and above-average wages before they were laid-off, a different approach is 

needed to help displaced workers who earned low wages. For displaced workers who earned 

average or above-average wages, earnings insurance holds promise of encouraging unemployed 

workers to look energetically for jobs. The sizeable incentive for early job finding may cause 

some workers to accept jobs they would have rejected in the absence of the earnings supplement. 
Implications for U.S. Unemployment Insurance 76 September 2008 

One potential argument in favor of this policy is that it might boost the job-finding success and net 

incomes of participating workers without causing a reduction in their own self-support. In comparison with longer or more generous UI benefits, earnings insurance offers a strong incentive for 

beneficiaries to find work, has positive effects on the earned incomes of people who participate, and 

provides humane compensation to a group that suffers major hardship as a result of economic 

change. 
Implications for U.S. Unemployment Insurance 77 September 2008 

Appendix 

Appendix Table 1. Average UI Coverage Rates in 50 States and the 

District of Columbia, Selected Years, 1977-2005 

Number of states with coverage rate in indicated range 

UI coverage rate (%) a/ 1977-1979 1987-1999 1998-2000 2004-2005 

 

15 to 19.99 7 11 9 5 

20 to 24.99 9 16 9 9 

 

25 to 29.99 6 5 7 13 

30 to 34.99 14 8 10 12 

 

35 to 39.99 7 4 5 3 

40 to 44.99 5 4 3 1 

 

45 to 49.99 1 0 4 6 

50 or higher 2 3 4 2 

 

 a/ Percent of unemployed workers in state who collect UI benefits. 

 Source: Author's tabulations of data reported in U.S. Department of Labor (2007), Unemployment 

Insurance Financial Data Handbook (www.workforcesecurity.doleta.gov/unemploy/hb394.asp); and 

state unemployment data from the U.S. BLS. 
Implications for U.S. Unemployment Insurance 78 September 2008 

Endnotes 

1

 U.S. Bureau of Labor Statistics (2007), “Employment Characteristics of Families,” News 

Release USDL 07-0673 (May 9, 2007), Table 3. 

2

 U.S. Bureau of Labor Statistics (2005), Women in the Labor Force: A Databook, Report 

985, Tables 24 and 25.

3

 U.S. Census Bureau (2007), http://www.census.gov/population/socdemo/hh-fam/hh1.xls 

(downloaded Aug. 15, 2007). 

4

 In 2006, 53 percent of households maintained by an unmarried women where someone 

was unemployed had no employed household members. U.S. Bureau of Labor Statistics (2007), 

“Employment Characteristics of Families,” News Release USDL 07-0673 (May 9, 2007), Table 

3. Previous news releases show that this percentage has varied relatively little since 1992. 

5

 Julie A. Yates (2005), “The transition from school to work: education and work 

experiences,” Monthly Labor Review 128(2) (February), 21-32. 

6

 U.S. General Accountability Office (2005), Unemployment Insurance: Information on 

Benefit Receipt (March), (Washington, DC: GAO) 

7

 Gary Burtless and Joseph F. Quinn (2001), “Retirement Trends and Policies to Encourage 

Work among Older Americans,” in P.P. Budetti, R.V. Burkhauser, J.M. Gregory, and H.A. Hunt, 

eds., Ensuring Health and Income Security for an Aging Workforce (Kalamazoo, MI: Upjohn). 

8

 U.S. Bureau of Labor Statistics, http://www.bls.gov/cps/cpsaat31.pdf (accessed April 14, 

2008). 

9

 Edward F. Denison (1979), Accounting for Slower Economic Growth: The United States 

in the 1970s (Washington, DC: The Brookings Institution); Dale W. Jorgenson (1984), “The 

Contribution of Education to U.S. Economic Growth, 1948-73,” in E. Dean, ed., Education and 

Economic Productivity (Cambridge, MA: Ballinger); U.S. Bureau of Labor Statistics (1993), 

Labor Composition and U.S. Productivity Growth, 1948-90, Bulletin 2426 (Washington, DC: 

U.S. Government Printing Office); and. Paul T. Decker, Jennifer King Rice, Mary T. Moore, and 

Mary R. Rollefson (1997), Education and the Economy: An Indicators Report, NCES 97-269 

(Washington, DC: U.S. Department of Education, National Center for Education Statistics). 

10 The favorable unemployment situation of highly educated versus less educated U.S. 

workers has been analyzed extensively. See Jacob Mincer (1989), “Human Capital and the 

Labor Market: A Review of Current Research” Educational Researcher 18(4) (May), pp. 27-34, 

esp. p. 29. 

11 The increased specialization and training requirements of U.S. jobs are documented in 

successive editions of U.S. Department of Labor, Occupational Outlook Handbook (various 

years), combined with BLS estimates and projections of employment growth by occupation 

sorted by their educational training requirements. See, for example, George Silvestri and John 

Lukasiewicz (1991), “Occupational Employment Projections, 1990-2005,” Monthly Labor 

Review 114(11) (November), 65-94; and Arlene Dohm and Lynn Shniper (2007), “Occupational 

Employment Projections to 2016,” Monthly Labor Review 130(11) (November), 86-125. 
Implications for U.S. Unemployment Insurance 79 September 2008 

12 U.S. Department of Homeland Security (2007), 2006 Yearbook of Immigration Statistics

(Washington: U.S. GPO), see http://www.dhs.gov/xlibrary/assets/statistics/yearbook/2006/table02.xls

(accessed September 1, 2007). 

13 U.S. Bureau of the Census, http://www.census.gov/population/socdemo/foreign/ppl176/tab05-7.xls (downloaded Aug. 15, 2007). 

14 Michael Hoefer, Nancy Rytina, and Christopher Canpbell (2007), “Estimates of the 

Unauthorized Immigrant Population Residing in the United States: January 2006,” (Washington, 

DC: Department of Homeland Security). 

15 Christopher J. O’Leary, Robert Tannenwald, Wei-Jang Huang, and Pei Zhu (2000), 

“Alternative Measures of State UI Systems,” Paper prepared for the Society of Government 

Economists, January 2006. (Kalamazoo, MI: Upjohn). 

16 An alternative approach is to calculate the average state benefit-to-total-wage ratio for 

years near the beginning of the period, say, 1950-1959, and then determine the impact of shifts in 

the geographical distribution of UI-covered workers. However, the results of this alternative 

procedure are very similar to the ones described below. 

17 To derive an estimate of the long-term trend in the national benefit-to-total-wage ratio, I 

regressed observed values of that variable on a simple time trend. The estimated coefficient on 

the time trend is -0.0069, implying that the expected benefit-to-total-wage ratio fell 0.38 

percentage points between 1950 and 2006. The geographical redistribution of workers in UIcovered employment accounts for 0.107 of this decline. 

18 To calculate median weekly earnings in a particular state, I first estimated each wage and 

salary worker’s average weekly earnings by dividing reported annual wage and salary income in 

a calendar year by the respondent’s reported weeks of work. In order to reduce the sampling 

variability of these estimates, I combined information on reported wages for two or three 

successive years, as explained in the main text. 

19 The distribution of state UI coverage rates in each of four periods – 1977-79, 1987-89, 

1998-2000, and 2004-05 – is displayed in Appendix Table 1. 

20 The tabulations end in 2000 because of the shift from the SIC industrial classification to 

the NAICS industrial classification after that year. 

21 Statistical Abstract of the United States 1959, Table 301, and Statistical Abstract of the 

United States 1977, Table 679. 

22 Wayne Vroman (1991), The Decline in Unemployment Insurance Claims Activity in the 

1980s, Unemployment Insurance Occasional Paper 91–21, (Washington, DC: U.S. Department 

of Labor); and Stephen A Wandner and Andrew Stettner (2000), “Why Are Many Jobless 

Workers Not Applying for Benefits?” Monthly Labor Review (June), pp. 21-32. 

23 See Richard B. Freeman and James L. Medoff (1984), What Do Unions Do? (New York: 

Basic Books); and H. Gregg Lewis (1986), “Union Relative Wage Effects,” in Orley C. 

Ashenfelter and Richard Layard, eds., Handbook of Labor Economics, volume 2 (Amsterdam: 

North Holland), pp. 1139-81. 
Implications for U.S. Unemployment Insurance 80 September 2008 

24 For evidence on the relation between reservation wages and the duration of 

unemployment spells, see Martin Feldstein and James Poterba (1984), “Unemployment 

Insurance and Reservation Wages,” Journal of Public Economics 23(1/2), pp. 141-67; and 

George R. Neumann (1997), “Search Models and Duration Data”, in H. Pesaran and P. Schmidt, 

Handbook of Applied Econometrics, Vol II: Microeconomics (Oxford, UK: Blackwell 

Publishers), pp. 300-351. In general, unemployed workers’ reported reservation wages are 

positively correlated with the wage they earned on their most recent job. Higher wages on the 

worker’s most recent job are strongly associated with a higher reported reservation wage. Labor 

economists theorize that a higher initial reservation wage is associated with a longer 

unemployment spell, other things equal, since workers searching for a job are less likely to be 

offered a job that meets their minimum wage requirements. If unionized workers receive a 25-

percent wage premium above the wage earned by workers with identical skills who are not 

covered by a union contract, when they are laid off they may set a reservation wage that is high 

in relation to their skills, reducing the likelihood they will be offered an acceptable job in the 

initial weeks after their layoff. 

25 U.S. House of Representatives, Committee on Ways and Means (2004), 2004 Green 

Book: Background Material and Data on the Programs within the Jurisdiction of the Committee 

on Ways and Means (Washington: U.S. GPO), p. 4-2. 

26 U.S. Bureau of Labor Statistics (2005), “Contingent and Alternative Employment 

Arrangements,” News Release USDL 05-1433 (July 27, 2005). 

27 Paul M. Hirsch (1987), Pack Your Own Parachute: How to Survive Mergers, Takeovers, 

and Other Corporate Disasters (Reading, MA: Addison-Wesley); J.C. Coffee, Jr., L. 

Lowenstein, and Susan Rose Ackerman, eds., Knights, Raiders and Targets: The Impact of the 

Hostile Takeover (New York: Oxford University Press); and Calvin Morrill (1991), “Conflict 

Management, Honor, and Organizational Change,” The American Journal of Sociology 97(3) 

(Novovember), pp. 585-621. 

28 See U.S. Small Business Administration, http://www.sba.gov/advo/research/

data.html#diff and http://www.sba.gov/advo/research/dyn_b_d8904.pdf. 

29 The firms may have dismissed or lost more than 3.8 million workers in an average year. 

This is simply an estimate of the difference in the companies’ total payrolls between the start and 

end of the year. 

30 Louis Jacobsen, Robert LaLonde, and Daniel Sullivan (1993a), “Earnings Losses of 

Displaced Workers,” American Economic Review 83(4) (September), pp. 685-709; and 1993b; 

Jacobsen, LaLonde, and Sullivan (1993b), The Costs of Worker Dislocation (Kalamazoo, MI: 

Upjohn Institute); Ryan Helwig (2004), “Worker Displacement in 1999–2000.” Monthly Labor 

Review, vol. 127 (June), pp. 54-68; and Henry S. Farber (2005), “What Do We Know about Job 

Loss in the United States? Evidence from the Displaced Workers Survey, 1984-2004,” Working 

Paper 498 (Princeton, NJ: Industrial Relations Section, Princeton University). 

31 Louis S. Jacobson, Robert J. LaLonde and Daniel G. Sullivan (1993), “Earnings Losses of 

Displaced Workers,” The American Economic Review 83(4) (September), pp. 685-709. 

32 Farber (2005), “What Do We Know about Job Loss in the United States?” op cit. 
Implications for U.S. Unemployment Insurance 81 September 2008 

33 The estimates are based on National Bureau of Economic Research (NBER) dating of 

economic recessions and expansions. See NBER (2007), http://www.nber.org/cycles.html. 

Unemployment changes are measured using quarterly estimates of the civilian unemployment 

rate, seasonally adjusted, for the population age 16 and older. 

34 James H. Stock and Mark W. Watson (2003), “Has the Business Cycle Changed? 

Evidence and Explanations,” in Federal Reserve Bank of Kansas City, Monetary Policy and 

Uncertainty: Adapting to a Changing Economy (Kansas City, MO: Federal Reserve Bank of 

Kansas City) ), pp. 9–56. See also Jean-Philippe Cotis and Jonathan Coppel (2005), “Business 

Cycle Dynamics in OECD Countries: Evidence, Causes and Policy Implications,” in Christopher 

Kent and David Norman, eds., The Changing Nature of the Business Cycle (Sydney: Reserve 

Bank of Australia). 

35 Romer, Christina D., and David H. Romer (2002), “The Evolution of Economic 

Understanding and Postwar Stabilization Policy,” Rethinking Stabilization Policy (Kansas City, 

MO: Federal Reserve Bank of Kansas City), pp. 11–78. Stock and Watson (2003) conclude, 

however, that improvements in the conduct of monetary explain only a small part of the decline 

in quarter-to-quarter and year-to-year variance in GDP growth. 

36 See Stock and Watson (2003), op cit. 

37 See Robert G. Valletta (2005), “Rising Unemployment Duration in the United States: 

Causes and Consequences,” preliminary draft working paper (San Francisco, CA: Federal 

Reserve Bank of San Francisco). 

38 Alicia H. Munnell and Pamela Perun (2006), “An Update on Private Pensions.” CRR 

Policy in Brief No. 50 (Chestnut Hill, MA: Center for Retirement Research at Boston College), 

Figure 9. 

39 Employee Benefit Research Institute (2007), “Retirement Trends in the United States 

Over the Past Quarter-Century,” Facts from EBRI (June) (Washington, DC: Employee Benefit 

Research Institute) http://www.ebri.org/pdf/publications/facts/0607fact.pdf . 

40 John Bishow and Donald O. Parsons (2004), “Trends in Severance Pay Coverage in the 

United States, 1980-2001,” Unpublished economics department working paper (Washington: 

George Washington University), esp. pp. 20-21. 

41 Allison Barret (2006), Characteristics of Food Stamp Households: Fiscal Year 2005, 

FSP-06-CHAR (Alexandria, VA: U.S. Department of Agriculture, Food and Nutrition Service), 

Table A-6. 

42 David H. Autor and Mark G. Duggan (2006), “The Growth in the Social Security 

Disability Rolls: A Fiscal Crisis Unfolding,” Journal of Economic Perspectives, 20(3) 

(Summer), pp. 71-96. 

43 Carmen DeNavas-Walt, Benadette D. Proctor, and Cheryl Hill Lee (2005), Income, 

Poverty, and Health Insurance Coverage in the United States: 2004, Current Population 

Reports, P-60-229 (Washington, D.C.: U.S. GPO), p. 16. 

44 Small employers are not obliged to offer continued (unsubsidized) coverage to their laidoff employees. The requirement only applies to employers with 20 or more workers. 
Implications for U.S. Unemployment Insurance 82 September 2008 

45 Helwig (2004), “Worker Displacement in 1999–2000.” p. 61. Helwig’s analysis refers to 

“...persons who had 3 or more years of tenure on a job they had lost or left between January 

1999 and December 2000 because their plant or company closed or moved, there was 

insufficient work for them to do, or their positions or shifts were abolished.” 

46 Kaiser Family Foundation (2005), Employer Health Benefits: 2005 Annual Survey

(Washington, D.C.: Henry J. Kaiser Family Foundation). In 2005 an average health plan 

covering a single employee required combined employee and employer contributions of $4,000 a 

year. Fifteen percent of the premium was typically paid by employees. 

47 Note that the unemployment rate of men 20 and older is generally lower than that of the 

general population age 16 and older. However, because teenagers are a smaller percentage of the 

workforce and unemployed and because women’s unemployment experience is now much closer 

to that of men, the male unemployment rate is now closer to that of the general population. 

48 U.S. House of Representatives, Committee on Ways and Means (1998), The 1998 Green 

Book: Background Material and Data on Programs within the Jurisdiction of the Committee on 

Ways and Means (Washington, D.C.: U.S. GPO), Table 4-4. 

49 These estimates reflect the ratio of “wage and salary disbursements” to “compensation of 

employees” as reported by the Bureau of Economic Analysis in Table 2.1 of the National Income 

and Product Accounts (http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y, 

accessed September 5, 2007). 

50 See Gary Burtless (1983), “Why Is Insured Unemployment So Low?” Brookings Papers 

on Economic Activity (Spring), pp. 225-249; Walter Corson and Walter Nicholson (1988), An 

Examination of Declining UI Claims During the 1980s. Unemployment Insurance Occasional 

Paper 88–3 (Washington, D.C.: U.S. Department of Labor); Rebecca Blank and David Card 

(1991), “Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?” 

Quarterly Journal of Economics 106, pp. 1157-1189; Wayne Vroman (1991), The Decline in 

Unemployment Insurance Claims Activities in the 1980s. Unemployment Insurance Occasional 

Paper 91–2 (Washington, D.C.: U.S. Department of Labor); and Wandner and Stettner (2000), 

“Why Are Many Jobless Workers Not Applying for Benefits?” op cit. 

51 Gary Burtless and Daniel H. Saks (1984), The Decline in Insured Unemployment, Brookings 

Economic Discussion Paper (Washington: The Brookings Institution). Burtless (1983) regressed 

monthly initial UI claims on the monthly BLS estimate of the number job losers unemployed 

five or fewer weeks. His estimates suggest that the ratio of initial claims to new job losers fell 16 

percent after 1980 compared with the average rate during the period from 1968 through 1979. 

See Burtless (1983), “Why Is Insured Unemployment So Low?”, op cit., pp. 236-37. 

52 This estimate is the ratio of employer health insurance payments (less contributions for 

Medicare) as reported in Table 7.8 of the National Income and Product Accounts to “wage and 

salary disbursements” as reported in Table 2.1 of the National Income and Product Accounts 

(http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y, accessed September 5, 

2007). 

53 So far as I know, the idea of earnings insurance was first proposed in Alice M. Rivlin, ed. 

(1984), Economic Choices 1984 (Washington: The Brookings Institution), p. 150. It has been 

elaborated and defended in a variety of papers and volumes: Martin N. Baily, Gary Burtless, and 
Implications for U.S. Unemployment Insurance 83 September 2008 

Robert E. Litan (1993), Growth with Equity: Economic Policymaking for the Next Century 

(Washington: The Brookings Institution), pp. 194-97; Gary Burtless, Robert Z. Lawrence, 

Robert E. Litan, and Robert J. Shapiro (1998), Globaphobia: Confronting Fears about Open 

Trade (Washington: The Brookings Institution), pp. 143-49; and Kim Kaivanto (2007), “Traderelated Job Loss, Wage Insurance and Externalities: An Ex Ante Efficiency Rationale for Wage 

Insurance,” The World Economy 30 (6) (June), pp. 962–971. 

54 The relationship between a worker’s age and the size of post-displacement wage loss 

arises because older worker have typically accumulated more tenure on their jobs than workers 

who are younger. There is a well-documented relationship between the percentage reduction in a 

displaced worker’s wage loss and the length of the worker’s tenure in the lost job. See Charles 

L. Schultze (1999), “Downsized and Out? Job Security and American Workers,” The Brookings 

Review (Fall), pp. 9-13, especially Table 1.