Economic Report of the President

defined broadly to include individuals who have become unemployedas a result of plant closures, laid-off workers who are unlikely toreturn to their previous industry or occupation, and individuals experiencinglong-term unemployment in occupations with limited employmentopportunities. Matching grants are provided to States onthe basis of their unemployment conditions. Title III authorizesStates to establish a wide variety of employment and training activities,including job search assistance, job training, relocation assistance,and employment counseling. Individuals receiving Title III assistancemay also receive unemployment compensation, if they areeligible.The Administration in its 1984 budget has introduced two new approachesto the problem of reducing long-term unemployment. First,it has proposed that Federal unemployment laws be amended topermit States to use a portion of the unemployment insurance taxesthey collect to support retraining and job search assistance for theirunemployed workers. Second, the Administration has proposed thatthe Federal Supplemental Compensation program be replaced whenit expires with a new temporary program that provides incentives forwork as well as compensation for long-term unemployment. As an alternativeto added weeks of unemployment compensation, this programwould give recipients the option of receiving assistance in securingwork through a system of tax credits to employers. This willgive employers a significant incentive to hire the long-term unemployed.THE EFFECTS OF UNEMPLOYMENT COMPENSATIONFor more than 40 years, unemployment compensation has givenvaluable support to millions of unemployed workers and has providedan important source of security to millions more who are employed.Along with these beneficial consequences, however, the presentstructure of the unemployment insurance system has altered theincentives faced by employers in hiring and firing decisions and theincentives of unemployed workers to accept new employment opportunities.As a result, unemployment compensation seems to have increasedthe incidence and duration of unemployment.The current system of unemployment compensation produces twodistinct but related adverse incentive effects. First, for those who areunemployed it reduces the cost of unemployment, providing an incentivefor longer durations of unemployment. Second, currentmethods of financing unemployment insurance increase the incidenceof unemployment by increasing the size of seasonal and cyclical flucuationsin unemployment and by making temporary jobs morecommon.47