Partial Benefit Schedules in Unemployment Insurance: Their Effect on Work Incentive

If the earnings of otherwise qualified workers fall below certain specified levels, these workers are paid unemployment insurance benefits, although in smaller amounts than when they are fully unemployed. State-to-state variation in these partial benefit schedules is studied here for the differential effects on work behavior. The hypothesis is a rational, economic one-that workers adjust their part-time work to serve their interests under these schedules. Data from Wisconsin confirm this view, at least under conditions where a small increment in earnings brings a sudden drop in income from benefits and earnings combined. The policy implication is that minimizing work disincentive, as well as the criteria of simplicity and administrative convenience, should figure in the construction of partial benefit schedules. In particular, the schedules should be rewritten to avoid a sudden drop in the worker's income during his transition from full unemployment to full employment. The schedules should allow higher earnings than at present so as to permit gradual reduction in benefits as earnings increase and to keep rising income correlated with greater effort.