3. Policy options

Since the Great Recession, many US states have contracted their Unemployment Insurance benefits in terms of duration and benefit levels because of increasing funding pressure. As a result, the percentage of jobseekers receiving UI has fallen, raising concerns about the ability of the UI system to cope with future recessions (Wandner, 2018[1]). During the COVID-19 crisis, the UI system provided unprecedented levels of support, both in terms of recipient numbers and aggregate payments, supporting labour market groups it had not served before. But the crisis also highlighted weaknesses of the system that had to be adjusted quickly to the surge in recipient numbers, leading to backlogs and irregularities in the processing of payments in some states (Dube, 2021[2]). Building on the analysis in chapters and current reform efforts and experiences in other OECD countries, this chapter presents four reform proposals: an extension to the changing and potentially growing group of self-employed workers, particularly independent contractors, a softening of the involuntary unemployment requirement as a condition of UI receipt, the harmonisation of benefit entitlements upwards across states, both in terms of payment levels and durations, and the introduction of an unemployment assistance benefit for job-ready jobseekers without a recent history of employment.

In the United States, jobseekers with a history of self-employment account for only 2% of all unemployment in a non-pandemic labour market (see section 2.4). Indeed, the incidence of self-employment is comparatively low in the United States (7% of total employment in 2021, compared to 16% across the OECD on average). Self-employment in the United States has also been on a slow decline since the 1990s according to data from household surveys (OECD, 2023[3]).

There are nonetheless concerns that the number of independent contractors or freelancers, including those whose work is mediated by online platforms (so-called platform or gig-workers), is rising (e.g. (Abraham et al., 2021[4])). According to administrative data, the number of independent contractors hired by firms as a share of all paid employment indeed increased from about 10 to 11% between 2014 and 2018. Most of this rise is attributable to online platforms (Garin, Jackson and Koustas, 2022[5]).

Many countries had been exploring how to shore up access to out-of-work benefits for self-employed and other non-standard workers already before the COVID-19 crisis. The pandemic made the need for equal access to out-of-work support for all labour market groups even more apparent. In 2021, 23 of 36 OECD countries with available information provided some access to unemployment benefits for self-employed workers, although support was often voluntary, or not as generous as for wage or salaried employees (see Figure 1.4).1

One argument against unemployment protection for the self-employed is that running a business does – and should – imply risk, because self-employed workers control the success of their businesses in ways that employees do not. Providing them with unemployment insurance can therefore be prone to significant moral hazard (see section 1.3 for a discussion of the complications arising when providing contributory benefits to self-employed workers).

However, not all self-employed activity is equally entrepreneurial. Independent contractors often operate without significant business capital and rely on one or very few clients. This can generate a relationship of dependence akin to an employment relationship, but without protections such as minimum wages, the right to collective bargaining, employer-provided benefits, or social protection. Moreover, moral hazard can also be a challenge for dependent employees. Careful policy design and complementary measures can mitigate moral hazard, e.g. making benefit receipt conditional on active job search and other activation measures, including training (OECD, 2019[6]). In practice, countries are using two key strategies to limit moral hazard (see Table 3.1):

  • Establishing that unemployment is genuine: With no employer to confirm layoff, it is difficult to establish whether a loss of income is caused by a (prior) lack of effort, or external circumstances leading to business failure. In 19 of 23 countries with some unemployment benefit provision for self-employed workers, termination of the self-employment activity was a condition for benefit receipt. In five countries, bankruptcy of the business is a precondition for access to unemployment benefits, precluding benefit receipt in the event of a slow-down. Sweden furthermore limits unemployment benefit receipt to one claim period every five years, to prevent recurring claims. The new unemployment benefit for independent contractors in Italy does not require complete cessation of activities, but benefits can be claimed only once every three years, and recipients must participate in professional training courses related to their industry (see Box 3.1)

  • Monitoring active job search and related employment efforts: efforts to re-establish a business are more difficult to monitor than the search for wage or salaried employment. Therefore, almost all countries with available information require self-employed workers to seek and accept wage or salaried employment. Indeed, Denmark recently introduced a “job-search period” of six months, during which previously self-employed benefit recipients may not start or join a business.2 By contrast, in the Netherlands, municipalities assess the viability of the business and advise on any improvement or closure. There are currently no job-search requirements at all for previously self-employed workers in Greece.

One pragmatic way to circumvent moral hazard problems would be to insure self-employed workers only for income losses following larger economic shocks (in their sector, or in the economy as a whole), as opposed to idiosyncratic ones (Franzini and Raitano, 2020[7]). This would limit moral hazard (although seasonality needs careful consideration), and provide protection in future crises, along with links to activation, training and employment support services. Such a partial insurance also lowers contribution burdens relative to wage or salaried workers. This can be an advantage since self-employed workers typically cannot share contribution burdens with employers (section 1.3), although Korea has recently introduced contribution mandates for clients of some independent contractors, and for platforms placing “gig” workers. (OECD, 2023[8]).

Just under one in six US jobseekers is not entitled to UI because they are considered to have quit voluntarily. Among workers under the age of 30, one in five jobseekers is not covered for this reason (section 2.4.3). While other countries also restrict access in the case of voluntary quits, only 11 out of 33 OECD countries with available information disqualify jobseekers outright. Others reduce or delay payments.3

All US states have “good cause” exceptions to voluntary quits, although regulations vary, and many limit exceptions to those connected to the employer or workplace, e.g. sexual or other harassment or illness caused by or related to work. Common “good personal cause” exceptions that confer UI entitlement include domestic violence (42 states in 2021) and obligations to care for sick family members (32 states), as well as relocation to follow a spouse, or leaving a job for another offer of employment, but then having this offer fall through (US Department of Labor, 2021[9]). During the great recession, many states expanded their good-cause provisions, particularly to allow quits to care for ill family members, domestic violence, and relocation with a spouse (Cogdon and Vroman, 2022[10]). Using SIPP data from 1996 to 2013, (Callan and Linder, 2015[11]) estimate that introducing these good causes in all states would expand UI eligibility by about 3 percentage points and would particularly benefit women. They also note that jobseekers who quit their job because of one of these reasons were both comparatively well-attached to the labour market before leaving their job and have low re-employment probabilities after four months of unemployment, making them good candidates for job-search assistance and other activation measures.

Entitlement rules and benefit durations are decided at the state level. The generosity of UI payments varies widely, with southern states in particular offering comparatively modest benefits. The average worker in the “most generous” US states (such as Pennsylvania, Wyoming, or Minnesota) is entitled to benefits amounting to about 45% of the average wage, similar to the average across OECD countries. In some southern states, including Arizona and Louisiana, average-wage workers becoming unemployed receive less than 30% of their previous earnings (section 2.3.4). Very low benefit payments cannot offer meaningful income smoothing for recipients, can limit their ability to devote the time necessary for finding suitable employment, and can put jobseekers and their families at risk of poverty. They may also not suffice to stabilise aggregate consumption during downturns – targeting transfers to UI recipients is particularly effective as they channel a higher share of additional funds back into the economy through spending (see (Ganong et al., 2022[12]) on evidence on the marginal propensity to consume from pandemic UI top-ups vs. stimulus checks).

Because African Americans are more likely than other ethnic groups to live in southern states with less generous UI systems, their income security and ability to make ends meet following job loss is particularly impacted by cross-state disparities in UI generosity. This is compounded by the fact that on average, African Americans own less in liquid assets than Latino or non-Latino white households: 55% of black households say that they do not have sufficient savings to cushion negative income shocks, compared to 38% of white households, a consequence of the well-documented wealth gap between African American and non-Latino white households (Ganong et al., 2020[13]). Thus, African American households have a lower capacity to smooth income shocks with private savings, implying a higher value of income insurance through UI benefits (Kolsrud et al., 2018[14]).

Higher benefit levels can also increase the take-up of transfer programmes (section 2.4.1). In the United States, take-up seems to be a significant driver of racial differences in UI receipt rates (Kuka and Stuart (2020[15]; 2021[16])). Hence, raising benefit entitlements in the South to levels comparable to the rest of the country would not only increase benefit payments for existing recipients, but could also strengthen coverage. More accessible benefits, in turn, would connect more jobseekers to employment services such as job-search assistance, training and other activation measures that are tied to benefit receipt, and which tend to be especially effective in facilitating re-employment when labour demand is strong and unemployment low (OECD, 2023[17]).

Benefit durations also vary across states, and in the past, cuts in state-level maximum receipt duration below 25 weeks have been associated with a fall in UI coverage (Wentworth, 2017[18]). In 2021, maximum durations for workers with “long” employment records were shorter than seven months across the United States, and shorter than six months in six states and the District of Columbia, although there is a federal Extended Benefits programme that prolongs maximum receipt durations in periods of high unemployment (US Department of Labor, 2021[9]). These durations are short relative to other parts of the OECD: across 33 countries operating contribution-based unemployment benefits, the maximum benefit duration for workers with “long” employment histories is 17 months on average (section 2.3.5) and only one country (Hungary) has shorter duration limits than the United States.

Longer maximum durations can enable jobseekers to spend more time looking for suitable employment, and thus increase the quality of the employer-employee match. But they can also decrease the incentive to search for a job, thus prolonging the duration of unemployment. Overly long unemployment durations can, in turn, lower the chances of finding a new job, as employers may interpret long jobless periods as a signal for low skills or motivation (Kroft, Lange and Notowidigdo, 2013[19]). See Box 3.2 on recent empirical evidence on the effects of UI durations.

Increasing the maximum receipt duration to 26 weeks in states that currently provide shorter durations is unlikely to significantly delay re-employment, given that job-search does take time. Any negative employment effects of increasing the duration is likely to be balanced by the insurance value to jobseekers, especially given the modest value and/or limited reach of other income safety nets for low-income households (see section 1.2).

A large share of US jobseekers either have been out of work for long periods, or they enter unemployment not after losing a job, but after leaving education, caring for a household member or recovering from illness (section 2.4.3). These jobseekers are difficult to reach for contribution-based unemployment insurance programmes that are primarily designed to provide consumption smoothing after sudden job separations.

Means-tested benefits, including SNAP, TANF and state-level General Assistance programmes are currently not well equipped to support the incomes of these jobseekers: the nutritional support programme SNAP, the main income support programme for able-bodied adults, is not sufficient to alleviate poverty risks among low-income job seekers, and the main family benefit TANF is time-limited, and coverage is low (see section 1.2 and Box 1.1). As a result, fewer than half of low-income working-age adults who have been out-of-work for at least six months receive any income support benefits at all, compared to 80% and more in Belgium, France, or Hungary, and about 70% in Australia and the United Kingdom (see section 1.4). With the limited reach of UI and the lack of robust and accessible safety-net supports, almost half of all jobseekers in the United States live in relative poverty. This share reaches over 60% among African American jobseekers, who are more likely to be long-term jobless (section 2.4).

Several OECD countries including Germany, Finland, Ireland and the United Kingdom operate means-tested unemployment assistance programmes that are open to low-income jobseekers without a (recent) employment history (see Box 3.3 and Box 3.4 on the unemployment assistance programmes in the United Kingdom and in Germany).

An unemployment assistance programme for fit-for-work jobseekers could provide targeted income support while ensuring that job-ready recipients are available and actively looking for work. Both SNAP and TANF are subject to strict activation requirements, but they are last-resort benefits for a very diverse group of poor households, including those that are not job ready. If requirements are too demanding, and insufficiently adjusted to claimant circumstances, they may depress take-up as vulnerable recipients find it difficult to comply. For instance, (Gray et al., 2023[20]) look at the effect of the re-introduction of work requirements (80 hours of work, job training or approved community service per month) for able-bodied SNAP recipients without dependents in Virginia. They show that, for those subject to work requirements, SNAP receipt declined by over half, but that there was no significant increase in paid employment. Homeless recipients were particularly likely to exit the programme. An income targeted programme for ready-to-work jobseekers could be well placed to tailor activation measures to the circumstances of jobseekers, while reducing burdens on other safety-net transfers.

For jobseekers who are job-ready, active labour market measures such as job-search monitoring and support as well as training can directly increase the chance of re-employment. They are particularly effective in tight labour markets. For instance, (Chan et al., 2023[21]) show that introducing job-search requirements (a minimum number of job applications per week, typically ten a fortnight) for female partners of unemployment assistance recipients in Australia decreased their benefit receipt rate by about half. Most of the programme exits were into employment.

Monetary work incentives as measured by the Participation Tax Rate (PTR) – the share of earnings that are “taxed away” by the combined effects of benefit withdrawals, income taxes and social security contributions – are comparatively strong in the United States, particularly for jobseekers not entitled to unemployment benefits (see Figure 3.1, the companion paper to this report, (Pearsall, Pacifico and Magalini, forthcoming[22]) gives a comprehensive assessment of work incentives in the United States in a comparative, international perspective). Across the OECD on average, jobseekers living alone have about 45% of their earnings “taxed away” when taking up a low-paid job, and for jobseekers with children this rate reaches 60%. In the United States, PTRs are much lower, at 10 to 30% in California, Michigan and Texas. This is partly because benefit entitlements for low-income jobseekers are more modest than in other OECD countries, in particular for families with children (see section 1.2). In addition, federal and state income tax credits are effective at enhancing work incentives in the United States, notably for families with children. Given the robust in-work tax credits in the United States, there appears to be space for introducing an unemployment assistance benefit without muting work incentives for beneficiaries.


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← 1. Countries without accessible out-of-work support sometimes had to develop new programmes quickly without being able to carefully consider their design and implementation, leading to both gaps in emergency protection and overpayments (OECD, 2022[41]). Unlike insurance-based unemployment benefits, emergency support measures are not balanced by contributions, perpetuating the existing differences in labour costs between employment forms (OECD, 2019[6]).

← 2. There is an exception for cases of bankruptcy.

← 3. https://oe.cd/ActivationStrictness

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