Unemployment insurance is stuck in 1935
Innovations such as CHATGPT threaten to radically transform America’s labor market, forcing everyone from lawyers to newspaper columnists to contemplate workplace irrelevance and perhaps even marking a peak in white-collar employment.
To mitigate the fallout, policymakers will have to be no less innovative in refashioning the country’s system of unemployment insurance.
In a sense, the system is welldesigned — for stabilizing employment back in 1935. Having seen unemployment rates as high as 25% during the Great Depression, government officials figured they couldn’t afford to give money to everyone without a job. Instead, they tried to discourage layoffs by levying an “experience-rated” payroll tax: The more workers an employer let go, the higher the tax on its remaining staff. This also limited benefits, because only workers covered by the tax could receive them, and only for a limited time. Since a few states had unemployment programs predating the federal creation, the whole system was kept as state-run.
It’s not 1935 anymore. So unemployment insurance needs a new organizing principle. Let’s start with what’s top of mind: making the threat of automation less scary.
Like many technological breakthroughs that came before it, automation greatly reduces demand for a specific skill, sometimes to the point that the market for that skill disappears altogether. It’s career loss, not job loss. Some may be able to parlay their experience into a different profession, but success is very sensitive to economic conditions. Starting over when the unemployment rate is below 4% is very different than when it’s above 8%.
Worse, switching careers can require education and mobility at a moment when many people can afford neither. Going back to school entails both forgoing earnings and paying tuition. And to the extent that automation affects industries concentrated on certain geographic locations, workers might need to move to where the jobs still are — also an expensive endeavor.
Meanwhile, automation won’t be the only driver of layoffs. People will still be losing jobs for all kinds of reasons, from store closings to regular recessions.
How to handle all this? Triage and flexibility.
Imagine a tiered system of unemployment insurance. Initially, benefits are generous and easy to get, but don’t last long. This first tier is aimed at the churn, the people who quickly find new employment. Beyond it, workers must keep reapplying, and gradually receive less money and more employment counseling. The same applies to those who have multiple, separate spells of unemployment over a longer period (say, three times in two years).
The tiers enable the system to direct the time and resources necessary for employment counseling — which has proved very effective at getting people re-employed — to those who need it most. They also provide flexibility. Their duration and generosity, for example, might vary with the unemployment rate. People might be allowed to keep lowtier benefits while enrolled in training, starting a business or working part time. Or workers could convert a stream of payments into a lump sum to cover tuition or relocation costs.
The overarching goal would be to preserve human capital, the accumulated skill and experience of U.S. workers. It’s a valuable national asset in a world where technology is shifting under our feet. Not every job loss should end with a retreat into the low-wage service sector.
Such a system would benefit everyone, including employees, employers, independent contractors and their contractees. Hence, everyone would need to pay into it, and there should be no variation in taxes or benefits across state lines.
Automation isn’t the only threat workers face. Recessions, banking crises, pandemics, executive mismanagement, downsizing, offshoring and outsourcing can all render them jobless, through no fault of their own. With the right safety net in place, none need be quite so scary for them, their families or their communities.