How Insured Are Workers Against Unemployment? Unemployment Insurance and the Distribution of Liquid Wealth

Introduction

During times of rising unemployment or labor market deterioration, unemployment insurance (UI) is a main component of the employment safety net available to US workers. The share of UI recipients in the labor force is highly countercyclical, rising in recessions and falling in macroeconomic expansions (Chodorow-Reich and Coglianese, 2019). UI works, then, as an automatic stabilizer of economic activity, providing benefit payments that serve as a financial cushion for eligible unemployed workers and replacing a fraction of their past earnings for a determined period, usually measured in weeks.

Key components of UI design are its eligibility requirements. UI recipiency rates-that is, the rates of UI-eligible applicants who apply and subsequently receive UI benefits-are typically low for eligible workers, leaving them in a potentially vulnerable position during economic downturns (Forsythe and Yang, 2021). Furthermore, unemployed workers tend not to have enough liquid wealth to financially self-insure against jobless spells (Birinci, 2020), and workers who are ineligible for UI are more likely to be in poverty than are UI-eligible workers (Michaud 2023; Horwich, 2023). With low UI recipiency rates and lower levels of liquidity and asset resources for rainy days, many workers may be financially vulnerable when facing the burden of unemployment.

In this Economic Commentary, we analyze the relationship between UI recipiency and economic insurance among the unemployed with a focus on unemployed workers' wealth distribution. We do so in three parts: (i) a short discussion of the aggregate data on UI recipients, (ii) details of the eligibility criteria for UI and a review of recent economic literature on the impact of such requirements on UI recipiency, and (iii) an empirical analysis to assess the financial vulnerability of workers to unemployment spells by documenting the distribution of income and net liquid wealth-assets that are readily available, akin to cash, minus any short-term debt-of workers who experienced unemployment.

In our empirical analysis, we focus our attention on the differences between recipients and nonrecipients of UI among workers who have been through an unemployment spell at some point in the previous year. We use recent data from the Survey of Income and Program Participation (SIPP) to construct a sample that approximates the pool of unemployed workers who could be eligible for UI recipiency.¹We then analyze how personal net liquid wealth is distributed depending on the recipiency status of UI along our sample's income distribution. We find that at the bottom half of the income distribution, UI recipients tend to have more wealth than nonrecipients, putting nonrecipients in a particularly vulnerable position during jobless spells. Our findings suggest that the reach of UI recipiency may be missing some of the most vulnerable workers when it comes to assisting them in insuring against the ramifications of unemployment.

Unemployment and Insurance

To understand the overall efficacy of UI in insuring workers, we start by looking at the time series of aggregate data on unemployment and UI recipients. In Figure 1, we show the unemployment rate (UR) and continuing claims as a fraction of the labor force, also known as the "insured unemployed." The comparison between the UR and continuing claims allows us to gauge the overall reach of UI by pinning down the proportion of currently insured workers, with regular benefits, relative to the pool of unemployed workers.

In Figure 1, we observe that the unemployment rate has recently been at a historically low level in the United States after a pronounced jump in April 2020 at the start of the pandemic. Despite low unemployment, the gap between the pool of unemployed workers and those who receive UI remains largely unchanged.²On average and at an aggregate level, approximately 35 percent of workers were insured from 1989 through 2012 (Auray et al., 2019), and less than 30 percent of unemployed workers were insured by UI from 2010 to 2020.