1. Unemployment Insurance, Disability Insurance, and Workers’ Compensation
Chapter 14
Unemployment insurance, workers’ compensation, and disability insurance are three of the largest social insurance programs in the United States, and they share many common features.
14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation
14.2 Consumption-Smoothing Benefits of Social Insurance Programs
14.3 Moral Hazard Effects of Social Insurance Programs
14.4 The Costs and Benefits of Social Insurance to Firms
14.5 Implications for Program Reform
14.6 Conclusion

2. 14 . 1
Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation
Institutional Features of Unemployment Insurance
unemployment insurance A federally mandated, state-run program in which payroll taxes are used to pay benefits to workers laid off by companies.
partially experience-rated The tax that finances the UI program rises as firms have more layoffs, but not on a one-for-one basis.

3. 14 . 1
Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation
Institutional Features of Unemployment Insurance

4. 14 . 1
Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation
Institutional Features of Disability Insurance
disability insurance A federal program in which a portion of the Social Security payroll tax is used to pay benefits to workers who have suffered a medical impairment that leaves them unable to work.
Institutional Features of Workers’ Compensation
workers’ compensation State-mandated insurance, which firms generally buy from
private insurers, that pays for medical costs and lost wages associated with an on-the-job
injury.

5. 14 . 1
Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation
Institutional Features of Workers’ Compensation

6. 14 . 1
Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation
Institutional Features of Workers’ Compensation
no-fault insurance When there is a qualifying injury, the workers’ compensation benefits are paid out by the insurer regardless of whether the injury was the worker’s or the firm’s fault.

7. 14 . 1
Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation
Comparison of the Features of UI, DI, and WC

8. 
A P P L I C A T I O N
The Duration of Social Insurance Benefits Around the World

9. Consumption-Smoothing Benefits of Social Insurance Programs
14 . 2
Consumption-Smoothing Benefits of Social Insurance Programs
There is relatively little evidence on the consumption-smoothing implications of these programs.
The most direct study is that of Gruber (1997), who found that individuals are not fully insured by other sources against the income loss of unemployment, that their consumption falls significantly when they lose their jobs, and that higher levels of UI do lessen the negative effects of this fall.

10. Moral Hazard Effects of Social Insurance Programs
14 . 3
Moral Hazard Effects of Social Insurance Programs
Moral Hazard Effects of Unemployment Insurance

11. Moral Hazard Effects of Social Insurance Programs
14 . 3
Moral Hazard Effects of Social Insurance Programs
Normative Implications of Longer Durations
job match quality The marginal product associated with the match of a particular worker with a particular job.

12. MORAL HAZARD EFFECTS OF UNEMPLOYMENT INSURANCE
E M P I R I C A L E V I D E N C E
MORAL HAZARD EFFECTS OF UNEMPLOYMENT INSURANCE

13. Moral Hazard Effects of Social Insurance Programs
14 . 3
Moral Hazard Effects of Social Insurance Programs
Evidence for Moral Hazard in DI

14. Moral Hazard Effects of Social Insurance Programs
14 . 3
Moral Hazard Effects of Social Insurance Programs
Evidence for Moral Hazard in WC
There is much evidence that points to a major moral hazard effect of the WC program.
Krueger’s (1990) study found:
Every 10% increase in benefits generosity led to a 7% rise in the rate of reported injury.
Each 10% rise in benefits led to durations that were 17% longer!
The response of injury durations to benefits increases is much stronger for hard-to-verify injuries than for easier-to-verify injuries.
On Mondays there is a large rise in sprains and strains relative to lacerations.
This suggests that many of the reported injuries on Mondays may actually arise from injuries incurred over the weekend, and then claimed on Monday in order to qualify for WC.

15. MORAL HAZARD EFFECTS OF DI
E M P I R I C A L E V I D E N C E
MORAL HAZARD EFFECTS OF DI
Because DI is a national program, there are few good quasi-experiments for assessing the impact of the program changes on outcomes within the United States.
Gruber (2000) studied Canada’s DI system, which is similar to that in the United States with one major exception: the province of Quebec has a DI program that is different from the one in the rest of Canada.
In January 1987, the rest of Canada increased its benefits to equal those in Quebec, raising the replacement rate for the typical disabled worker from 25% to 33%.
This research found that there was a decline in the labor force participation rates of older men in the rest of Canada that corresponded to the timing of the benefits increase.
While this response was large, it remained modest relative to the enormous 36% increase in benefits, so that the implied elasticity of labor supply with respect to benefits was only about 0.3.

16. KRUEGER’S STUDY OF WORKERS’ COMPENSATION
E M P I R I C A L E V I D E N C E
KRUEGER’S STUDY OF WORKERS’ COMPENSATION

17. The Costs and Benefits of Social Insurance to Firms
14 . 4
The Costs and Benefits of Social Insurance to Firms
The Effects of Partial Experience Rating in UI on Layoffs

18. The Costs and Benefits of Social Insurance to Firms
14 . 4
The Costs and Benefits of Social Insurance to Firms
The Effects of Partial Experience Rating in UI on Layoffs
Partial Experience Rating Subsidizes Layoffs
From the worker’s perspective, a temporary layoff is some time off at a partial wage—a partially paid vacation.
From the firm’s perspective, the attractiveness of a temporary layoff depends on the extent of experience rating.
If there is no experience rating, the firm pays nothing when a worker is temporarily laid off.
Evidence on Effect of Partial Experience Rating on Layoffs
Studies suggest that partial experience rating alone can account for 21–33% of all temporary layoffs in the United States.

19. The Costs and Benefits of Social Insurance to Firms
14 . 4
The Costs and Benefits of Social Insurance to Firms
The “Benefits” of Partial Experience Rating
Having a fully experience-rated system would “hit firms while they are down”: just when firms have laid off the most workers, their taxes would increase the most.
By having partial experience rating, UI programs systematically subsidize high-layoff firms.

20. A P P L I C A T I O N  The “Cash Cow” of Partial Experience Rating
In Canada, workers traditionally had to work only 10 weeks to qualify for 42 weeks of UI with a replacement rate of 60%.
You and four friends are considering buying a fishing boat, with each of you working 10 weeks out of the year, for a total of 50 weeks.
Given the structure of the Canadian UI system, each of you would report earning $800 per week for the 10 weeks worked and then report being laid off.
You would each receive $20,160 of UI during the rest of the year (60% of the $800 per week reported earnings, for 42 weeks).
So the total UI benefits income across all five recipients is $20,160 × 5 = $100,800.
UI is not simply a system of insurance against true unemployment risk in Canada, but also a large government transfer to inefficient firms and their laid-off workers.

21. The Costs and Benefits of Social Insurance to Firms
14 . 4
The Costs and Benefits of Social Insurance to Firms
Workers’ Compensation and Firms
With WC, firms and workers can get together to increase “injuries” if the insurance is less than fully experience-rated.
Firms have less incentive to invest in safety when there is no-fault insurance for injuries.

22. Implications for Program Reform
14 . 5
Implications for Program Reform
Benefits Generosity
Facts suggest that benefits should be highest for DI and lowest for WC, with UI in the middle.
However, WC has the most generous benefits of all of these programs.
Targeting
Efficiency could be improved if UI benefits could be targeted toward those who have been permanently laid off.
In principle, it would be possible to arrange these programs so that higher benefits were paid to people with less ambiguous disabilities or injuries.

23. Implications for Program Reform
14 . 5
Implications for Program Reform
Experience Rating
Fuller experience rating would do more to put inefficient firms out of business than to hurt firms that are fundamentally sound but having a downturn.
Worker Self-Insurance?
The government could replace payroll taxes and mandated WC insurance with individual “social insurance savings accounts,” to which workers would contribute some fixed amount.

24. A P P L I C A T I O N  Reforming UI
A system of worker self-insurance for UI would be similar to a privatized Social Security system, and it has many of the same advantages and disadvantages.
By making unemployed or injured workers pay for their income support out of their own savings accounts, the program would minimize moral hazard.
A UI payroll tax of 4% invested in such accounts could cover the costs of unemployment spells for virtually all workers.
An alternative approach combines partial UI self-insurance with a new two-part mechanism: reemployment earnings insurance.
Self-insurance for unemployment: workers who lose their jobs could either draw funds from a voluntary savings account to which they had contributed while working, or take loans from the government which are to be paid back out of future labor earnings.
Wage insurance: workers would receive a transfer from the government equal to 25% of the difference between their old hourly wage and their new hourly wage. Partial replacement ensures that workers will still try to find a high-wage new job.
The net result of this two-part unemployment and wage insurance program would be a system that has lower moral hazard, yet redistributes to both low-wage workers and to workers suffering a large wage loss.

25. 14 . 6
Conclusion
Individuals clearly value the consumption smoothing provided by social insurance programs.
In each case there are significant moral hazard costs associated with the provision of the insurance.
Empirical analyses of all three programs can be used to inform policy makers’ decisions as program reforms move forward.