The current COVID-19 crisis, which to date has suspended more than 10 million jobs across the country, has revealed a structural weakness in the so-called social safety net. This has to do with the state-run unemployment compensation system.
In Ohio, as in many states, unemployment compensation is handled by a state-run monopoly. Employers and employees pay into the state fund. If you lose your job, you file a claim with the Ohio Department of Job and Family Services, and they will pay you your benefit. Maybe.
Under normal circumstances, you would have a one-week waiting period for which no benefits can be earned, and you would be required to prove that you are seeking work while receiving these benefits. Fortunately for those idled by the current crisis, the state has waived both of these requirements. While there have been delays reported by many people trying to file, some Ohioans have already begun to receive payments.
This system works if you’re a regular employee of a regular corporation, large or small. But what if you’re not? What if you’re self-employed? What if you run a sole proprietor business? What if you’re a gig worker? And since this is directed to a mainly Libertarian audience, I can include this one: what if you make your living at work that we’ll refer to as ‘not sanctioned under law?’ If any of these apply to you, you are not covered by the state unemployment system. And this is a fundamental, structural problem with the unemployment system.
It doesn’t have to be this way.
Let’s start with this basic realization: Unemployment compensation doesn’t have to be run by the state. And you as an employer or employee might be better off if it isn’t. There are some states now in which unemployment insurance is provided by private companies, but even in these states, it is highly regulated to the point that there is very little wiggle room in the program.
So let’s open it up. As a Libertarian purist, you might want to have the government out of it completely. This would be nice, but we know this isn’t going to happen. So let’s start out with this basic rule: employees and employers, between them, would still be required to spend a given amount, based on a percentage of the employee’s wages, on unemployment insurance. If we loosen it up and allow competition between companies offering the coverage, it’s a safe bet that it would cost less than the state coverage we have now. Let’s leave everything else up to the employee and the market.
State unemployment only pays a portion of the wages the unemployed worker used to make. Maybe you’re OK with, say, 80% coverage. You’re not working, so maybe your costs are reduced and you can get by with less. But maybe you expect to have significant costs associated with looking for a new job, like travel or new wardrobe. If so, you’d probably rather that your unemployment coverage pay you every dollar you’re losing. No problem! If you’re willing to pay a bit more for your coverage, you can get last dollar protection, just as you can pay a little more for the insurance on your new car and be covered for the full replacement cost of your new car, not just the depreciated value. Same with the waiting period. If you’re thrifty and have a few weeks worth of expenses socked away in savings, maybe you’d prefer a two-week, or even a four-week waiting period. If you do, your premiums will be less, probably quite a lot less. Or pay more, and get coverage from day one of unemployment. Maybe your choices cost more than you and your employer are currently paying, so you pay a little more out of your pocket. Or maybe it costs a little less, and you pocket the difference.
Getting the government out of the business also frees insurers to cover people who aren’t covered now. That Uber or Lyft driver, who’s now finding that business is way off because people are staying home and not going to work, to parties, or staying out late on weekends in bars, could buy unemployment coverage as well. She might be able to purchase a policy that would cover her for partial loss of income, not just for complete unemployment. The owner of the small family restaurant might buy a policy that would protect him against business failure as well as the kind of income loss caused by calamities like our current one. Or instead, he might buy catastrophic coverage that would cost very little.
It vexes my Libertarian heart, but we might allow government continued involvement, in setting minimum contribution levels and protecting against fraud, abuse, and insolvency. Even that need not be a given; private watchdog agencies or industry associations could do the job instead, perhaps even better. Who do you trust more, the Consumer Products Safety Commission (a government body) or Underwriters Laboratories? But at least temporarily, let’s leave government this limited role, until the consumer learns to take more responsibility for him- or herself.
Would insurance companies be interested in getting into these markets? Would they be willing to offer coverage as flexible as what I’m suggesting? I’m betting that, so long as the regulations under which they’d be operating were sufficiently loose, the answer would be, “Yes.”
In its purest form, insurance will write a policy to protect you against anything, so long as the price is right. Remember three years ago, when a Cleveland home improvement company refunded $1.7 million in payments for windows and doors after the Cleveland Indians won 15 straight games? They were overjoyed to do it – because they’d bought an insurance policy against it happening. And the insurance company probably wasn’t too unhappy, either, because against that one long shot that they did have to pay off, there were balanced dozens of similar policies on which they didn’t. This is the insurance business at its most basic. Study the situation, assess the risks, calculate the monetary exposure, and set the premiums. And sell the policies.
A truly wide open unemployment insurance market – separated from the heavy hand of the state – would better serve everybody. And probably cost less.