Unemployment Benefits in Retreat Mode

Looked at historically or seen in an international context, U.S. unemployment benefits are meager.

Through the decades since the U.S. unemployment insurance system took shape in 1935 as part of the New Deal, benefit payments have retreated in relative terms. The average weekly benefit of $10.94 in 1938 represented 43 percent of the average weekly wage at the time.

The corresponding number for 2007 was 34 percent—and it has been 35 percent or less since 2004. If the 2007 ratio had been 43 percent instead of 34 percent, the average weekly benefit would have jumped from $288 to $364.

Benefits generally are based on a percentage of an individual’s earnings during a recent 52-week period—up to a limit set by states. They can be paid for a maximum of 26 weeks in most states. Additional weeks of benefits may be available during times of high unemployment. In November, President George W. Bush signed an extension of unemployment benefits.

The U.S. has been one of the least-generous developed countries for unemployment benefits, according to a 2007 report from the Organization for Economic Co-operation and Development. The research group found that Nordic countries provide levels of unemployment benefits that typically are above 70 percent of average after-tax earnings. The report found the comparable “index of generosity” in the U.S., Greece, Turkey and Italy is below 30 percent.

Germany and France were slightly above 60 percent, while Japan and Canada were close to the organization’s average of 55 percent.

Big unemployment checks raise the specter of discouraging work and increasing taxes. But the case of Denmark suggests it can make economic sense to offer hefty unemployment benefits when combined with limits on that aid, serious efforts to return people to work and the ability of businesses to hire and fire with ease.

In recent years, Denmark’s “flexicurity” system—flexibility for businesses along with security for workers—helped fuel strong growth even as it underpinned an egalitarian society. The Danish economy grew faster than the economies of both the U.S. and Europe as a whole during the three-year period from 2005 to 2007.

Denmark’s system also has the backing of a major industry association, the Confederation of Danish Industry. “The Danish example shows that labour market flexibility and job security are not contradicting terms but go hand in hand,” the confederation says on its Web site. “Companies can adapt to changes while employees retain a feeling of security.”