1. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 27 Unemployment Insurance, Disability Insurance, and Workers’ Compensation 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 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.

2. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 2 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation 14.1 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 3 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation Institutional Features of Unemployment Insurance

4. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 4 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 5 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation Institutional Features of Workers’ Compensation The benefits for different types of injuries differ greatly across this sample of states. The last column shows the benefits (from 2003) over 10 weeks for a temporary total injury that leaves the worker unable to work.

6. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 6 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 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. 14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation Institutional Features of Workers’ Compensation

7. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 7 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation Comparison of the Features of UI, DI, and WC  TABLE 14-2

8. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 8 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation The Duration of Social Insurance Benefits around the World APPLICATION   FIGURE 14-2 

9. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 9 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 10 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N Moral Hazard Effects of Social Insurance Programs 14.3 Moral Hazard Effects of Unemployment Insurance  FIGURE 14-3

11. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 11 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N job match quality The marginal product associated with the match of a particular worker with a particular job. Moral Hazard Effects of Social Insurance Programs 14.3 Moral Hazard Effects of Unemployment Insurance Normative Implications of Longer Durations

12. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 12 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N Moral Hazard Effects of Social Insurance Programs 14.3 MORAL HAZARD EFFECTS OF UNEMPLOYMENT INSURANCE M P I R I C A L E V I D E N C E E  FIGURE 14-4

13. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 13 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N Moral Hazard Effects of Social Insurance Programs 14.3 Evidence for Moral Hazard in DI  FIGURE 14-5

14. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 14 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N Moral Hazard Effects of Social Insurance Programs 14.3 Evidence for Moral Hazard in WC There is much evidence that points to a major moral hazard effect of the WC program. Krueger’s (1990-1991) studies 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 15 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N M P I R I C A L E V I D E N C E E Moral Hazard Effects of Social Insurance Programs 14.3 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 16 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N M P I R I C A L E V I D E N C E E Moral Hazard Effects of Social Insurance Programs 14.3 KRUEGER’S STUDY OF WORKERS’ COMPENSATION

17. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 17 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 14.4 The Costs and Benefits of Social Insurance to Firms The Effects of Partial Experience Rating in UI on Layoffs

18. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 18 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 19 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 20 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N The “Cash Cow” of Partial Experience Rating APPLICATION  14.4 The Costs and Benefits of Social Insurance to Firms 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 21 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N Workers’ Compensation and Firms 14.4 The Costs and Benefits of Social Insurance to 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 22 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 23 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 24 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N Reforming UI APPLICATION  14.5 Implications for Program Reform 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. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 25 of 27 C H A P T E R 1 4 ■ U N E M P L O Y M E N T I N S U R A N C E, D I S A B I L I T Y I N S U R A N C E, A N D W O R K E R S ‘ C O M P E N S A T I O N 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.