UNEMPLOYMENT COMPENSATION: ADVERSE INCENTIVES AND DISTRIBUTIONAL ANOMALIES

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Abstract
The current system of unemployment compensation entails very strong adverse incentives. For a wide variety of "representative" unemployed workers, unemployment benefits replace more than 60 per cent of lost net income. In the more generous states, the replacement rate is over 80 per cent for men and over 100 per cent for women. Most of the $5 billion in benefits go to middle and upper income families. This anomaly in the distribution of benefits is exacerbated by the fact that unemployment compensation benefits are not subject to tax.