Unemployment Insurance: Strengthening the Relationship Between Theory and Policy.

Ever since the U.S. federal-state system of unemployment insurance was founded in the 1930s, it has provided partial, temporary replacement of wages to eligible workers who lose jobs “through no fault of their own†(as determined by state-level regulations). Unemployment insurance is one of the largest social insurance programs in the United States, with benefits paid totaling about $34 billion in 2004. Economic theory can help us understand the challenges this complex program is likely to face over the next few years. The authors summarize the salient characteristics of the unemployment insurance program and then examine the theoretical and econometric research. In addition, they address key policy issues that the unemployment insurance system is likely to face in upcoming years and ways policymakers may be able to use economic analysis to adjust the program so that it remains effective in addressing the needs of unemployed workers.