Wisconsin and Illinois provide an interesting case study to examine how different levels of inequality between states impact the generosity of unemployment benefits. Wisconsin has a lower Gini coefficient, indicating less inequality, and is found to have more generous unemployment policies across several measures. These include higher employer tax rates, higher wage replacement rates though lower caps, and higher spending per capita on unemployment benefits. The lower unemployment rates in Wisconsin also suggest its policies may have been more effective at stimulating the economy during recessions. Allowing states to determine their own policies can result in inefficient variations and less support for redistribution in more unequal states where it may be needed most.

1. Inequality and Unemployment Benefits Generosity: A Comparative Analysis Between
Wisconsin and Illinois
By Emily Brixey
Unemployment is one of the most important types of welfare in keeping people on their
feet; this is especially true during a recessionary period. Unemployment payments enable
individuals who have lost their employment to maintain a steady, though not necessarily
generous, form of income. The goal of unemployment is to provide economic relief to workers
who are temporarily laid off; allowing them time to pursue a different line of work. This means
that the workers are available when work does open up, decreasing the cost of labor for
employers. In the United States, states have significantly more control over the unemployment
policy than the federal government (Wandner and Stengle 1997). Allowing states to have more
control results in several issues that become particularly problematic during a recessionary
period. For example, states are required to maintain a balanced budget. When recessions occur
government revenue decreases, reducing their available funds for unemployment benefits.
Theoretically, the general economic condition of a state can greatly impact the type of benefits
that they are willing and able to provide to the unemployed.
The drawbacks to allowing states to create their own welfare policies far outweigh the
advantages. The goal of decentralization is to give states the authority try out different policies so
that they can tailor plans that are best suited for their citizens (Howard 1998). The problem is
that while you might expect that over time states would imitate the plans of more successful
states, in reality we have continued to see a huge variation. This can be explained in part because
states aren’t familiar with each other’s practices and instead they end up spending huge sums on
administrative costs because the plans get to be so complex and under researched (Howard
1998). This policy also gives room for policy makers to make bias decisions by allowing them to
select groups they decide are undeserving of welfare. In a study performed by Soss, Fording, and
Schram, they found that first order devolution lead to racist policies which required stricter
requirements on heavily populated African American areas to maintain eligibility for welfare
programs (2011). Soss, Fording, and Schram were able to find very strong evidence that the
population of minorities and the strictness of welfare policies were correlated. They explain that
as welfare policy becomes more decentralized, it is more likely to distinguish between the
deserving and the not deserving poor (Soss, Fording, and Schram 2011). Just as African
Americans were viewed as the undeserving of TANF and other welfare programs examined by
Soss, Fording, and Schram, it is possible that lower wage workers will be viewed as undeserving
of unemployment insurance. With an increased level of inequality, we would expect to see the
low income workers be viewed as even more undeserving, and would expect to see the
generosity of unemployment benefits decrease.
The distribution of wealth within a state is one of the key economic indicators which
allows for an understanding of the economic environment. Welfare theorist Huber Stephens
summed up the welfare state as “a struggle of distribution, and thus the organizational power of
those standing to benefit from redistribution, the working and lower middle classes is crucial”
(Moene and Wallerstein 2003). Moene and Wallerstein concluded that inequality is more
strongly related to spending on unemployment insurance than spending on any of the other
welfare policies that they examined (Moene and Wallerstein 2003). The strong correlation gives
justification to examine this relationship in greater detail. The relationship is particularly
interested and problematic during a time period where a recession has hit and unemployment
rates are at highs. Under these circumstances, not only is there more likely to be a larger gap in

2. the distribution of wealth since people with low income jobs are more likely to lose their jobs,
but unemployment policy is especially important when unemployment rates are high. The data
used in this project was collected from a recessionary period in the United States. To examine
this correlation two states will be compared; Wisconsin and Illinois. These states have been
chosen because they have the same important control factors but differing levels of distribution
of wealth. The states have the same medium income level, 50,000-59,999 (U.S Census Bureau,
US Department of Commerce 2012). This control is important because it means that the states
have similar funds available per capita. Both Wisconsin and Illinois voted for President Obama
in the 2012 election (2012 Presidential Election). This is important because conservatives parties
in government tend to spend lower amounts on welfare (Moene and Wallerstein 2003). While
not a perfect indicator, it does show that during the time that the data being examines was
collected, both states were leaning Democratic. The population in Illinois in 2010 was
12,830,632 while Wisconsin’s was 5,686,986 (US Census Bureau, Population Division 2011).
This information is important to remember when comparing spending in terms of dollars; we
would expect to see Illinois spending over twice as much in order to compensate for its larger
population. Most importantly for this comparison, the states have two different equality levels.
The Gini coefficient in Wisconsin is .44 while in Illinois it is in a range of .471 or more (U.S
Census Bureau, US Department of Commerce 2012). Based on theory, we would assume that
Wisconsin would have more generous unemployment insurance policies. Using Wisconsin and
Illinois for comparison, states with different Gini coefficients, it can be demonstrated that
inequality levels do impact the generosity levels of unemployment insurance when varying types
of generosity are examined. It is also shown that the devolution of power from a federal level to
a state level results in less efficient policies.
There has been quite a bit of research that examines the effect of inequality on welfare
spending, but little has looked specifically at the United States. Moene and Wallerstein found
that greater levels of inequality reduced the demand for welfare spending (2003). This occurs in
part because as income rises, demand for insurance decreases (Rehm 2011). This is because
individuals with higher income levels feel that they are able to provide their own insurance. In
the case of unemployment, we see that the income effect demonstrates the price effect, resulting
in a decline for support in benefits and inequality increases (Moene and Wallerstein 2003). This
means that places that have the highest levels of inequality are where welfare and generous
unemployment would be the most useful for redistributive purposes, but we see the opposite.
Additionally, the demand for unemployment insurance increases as the number of low wage
workers increase because they face a higher risk of job loss (Moene and Wallerstein 2003).
However, the insider vs. outsider benefits can prevent low wage workers from receiving more
generous unemployment benefits (Rehm 2011). The workers who receive low wages and are the
most likely to lose their job, are the least likely to have more generous unemployment benefits as
part of their employee work packages. Without generous unemployment benefits through
government policies, these individuals face even greater hardship when they lose their jobs.
Unemployment risk and low income levels are correlated (Rehm 2011). Unfortunately, the
places with high levels of inequality that would most greatly benefit from the redistribution
provided by unemployment insurance, are the least likely to have generous policies. Areas with
greater inequality are less likely to have generous unemployment policies because generosity is a
function of both unemployment risk and income (Rehm 2011). Citizens make decisions about
whether or not they think they will gain from higher unemployment taxes (Rehm 2011). In
places where inequality is higher, those who make more are less likely to benefit from the social

3. insurance and more likely to view it as a redistributive policy, and therefore not support the more
generous benefits.
There are reasons to believe that the distribution of wealth may not have an effect on
generosity, or might even have a positive effect, but it is unlikely that these would occur in the
United States. Moene and Wallerstein argue that greater inequality results in a higher support for
redistributive policies because people with low income have more to gain from voting (Moene et
al 2003). But in the United States, we see a lower voter turnout rate for individuals with lower
incomes. Citizens with political clout are typically at the lower end of the unemployment risk,
and unemployment risk is higher for low income earners (Rehm 2011). This means that the
individuals who are voting are significantly less likely to support generous unemployment and
that areas with greater inequality will see larger voter turnout from these individuals. Another
argument as to why distribution of wealth will not affect generosity of unemployment insurance
is because electoral candidates are responsive to the needs of people on welfare; otherwise the
incumbent will be punished (Moene and Wallerstein 2003). However, this is only true if the area
is democratic. But as previously discussed, voter turnout rate in the United States is lower for
low income individuals who are more likely to be on welfare. Inequality affects poverty because
income inequality reduces political support for important categories of social-insurance spending
(Moene and Wallerstein 2003).
The first type of generosity that will be examined is the ways in which taxes are
collected. More generous unemployment tax plans collect a larger percentage of unemployment
taxes from the employer than from the employees. Corporations typically pay a tax rate closely
related to its propensity to lay off workers (Tannenwald, O’Leary and Huang 1999). This makes
higher tax rates more justifiable because they are laying-off more workers which will negatively
impact the economy and they must pay for the additional unemployment benefits being paid to
those workers. States must keep their budgets balanced, making the amount they chose to tax and
the benefits they chose to give very important decisions. When reserves are low, States use taxes
to replenish them rather than giving more generous benefits (Tannenwald, O’Leary and Huang
1999). This policy makes sense to allow states to maintain a balanced budget, but if a recession
occurs and if states choose to begin replenishing reserves too early, this can cause too much
strain on the economy and potentially begin another recessionary period. But on the other side,
high company taxes can discourage businesses from forming in that area (Tannenwald, O’Leary
and Huang 1999). As predicted, Wisconsin has more generous tax policies. The tax rate for
unemployment insurance on taxable wages is slightly lower in Wisconsin at 4.26% than in
Illinois where the rate is 4.40% (U.S Department of Labor, Office of Unemployment Insurance
2011). For every one dollar of wages an employee pays, a Wisconsin employer pays $1.38, but
in Illinois the employer pays only $1.16 (U.S Department of Labor, Office of Unemployment
Insurance 2011). The differences may be explained through budgetary issues. Illinois has a
slightly more balanced tax rate and financing rate, financing rate of 6.49 and a tax rate of 4.4,
compared to Wisconsin where the financing rate is 6.63 and the tax rate is 4.26 (U.S Department
of Labor, Office of Unemployment Insurance 2011). Although there is a slight probability that
the difference in generosity may be attributed to budget constraints in Illinois, this does not
refute the hypothesis that unemployment benefits would be more efficient if they were
determined on a national level rather than a state level. This aspect of unemployment is evidence
that devolution has negatively impacted the generosity and effectiveness of unemployment
insurance.

4. The reserve ratio and the benefits ratio are ways in which employers’ record of layoffs is
evaluated. A benefits ratio evaluates this experience based off of the benefits charged during a
specific period while reserve ratio is measured on a gradual time frame (Tannenwald, O’Leary
and Huang 1999). This means that the benefits ratio acts more quickly to increase the taxes on a
business during a recessionary period, which could be used to argue that it allows for more funds
to be collected and given to those who are unemployed, making this method more generous for
employees. Wisconsin uses the reserve ratio while Illinois uses the benefits ratio (U.S
Department of Labor, Office of Unemployment Insurance 2011). While it may appear that the
reserve ratio is less effective than the benefits ratio in collecting taxes when unemployment is
high and the revenue is needed the most, the reserve ratio is arguable a better policy. The gradual
changes that occur with the reserve ratio are actually better policy because it helps to reduce the
impact of a recessionary shock, rather than add to it. It appears that through the policy chosen by
Wisconsin is significantly more effective.
The replacement rate of wages is another measurement of generosity, determining how
much of an individual’s previous income they are able to receive from unemployment insurance.
The process here can be slightly complicated due to caps on payments. Typically, states that rank
higher in their generosity towards low-wage workers replace a higher percentage of wages but
cap benefits at a relatively low level (Tannenwald, O’Leary and Huang 1999). This policy is
catered towards low income individuals, and it is also more affordable for the state because it
benefits those who need it the most by redistributing unemployment income to those who are
less likely to have savings or additional severance packages. Once again, we see that Wisconsin
is more generous than Illinois in terms of redistribution. Replacement rates were higher in
Wisconsin in years 2007-2011 (U.S Department of Labor, Employment and Training
Administration 2013). While they were more generous in terms of replacement rates, they also
had lower caps. In Illinois the cap on unemployment insurance payments an individual could
receive was $418 (Illinois Department of Employment Security 2013). The cap for those same
individuals in Wisconsin was $370 (State of Wisconsin Department of Workforce Development
2014). An important note is that the recipiency rate is only the total unemployed receiving
unemployment benefits, but does not take into account those who are ineligible (Wandern et al
1997). Those who receive unemployment are generally individuals who were involuntarily
unemployed and continue to seek work (Wandern et al 1997). Wisconsin and Illinois have very
similar unemployment eligibility policies which do adhere to the values described by Wandern et
al (Wisconsin Department of Workforce Development and Illinois Department of Employment
Security). Since the states have very similar policies, this will not affect the evaluation of
generosity of unemployment insurance benefits.
There are a few miscellaneous items involved in determining generosity of
unemployment that should be considered as well. First is the number of weeks that an individual
receives compensation. In this case, Illinois is more generous, providing workers with 73 weeks
of unemployment insurance while Wisconsin only offers 54 (Center on Budget and Policy
Priorities 2013). Illinois is one of only two states that provide such long unemployment benefits.
It is important to remember that this only measures unemployed workers who actually collect
benefits (Wandner and Stengle 1997). The duration may be more generous, but as discussed
previously, the benefit amount itself is not. It is arguable whether shorter and more generous
forms of unemployment insurance are better or worse than longer and less generous policies.
Another form of generosity to consider is spending per capita rate. Spending levels tend to be
lower in countries that are more unequal (Moene and Wallerstein 2003). As predicted by theory,

5. Wisconsin is significantly more generous. Wisconsin spends $7534 per capita while Illinois only
spends $3827 (Kaiser Family Foundation 2010).
The effectiveness of some of the unemployment policies discussed, such as benefits ratio
and reserve ratio, are contested. One way to examine the effectiveness of policies is to look at the
unemployment rates. The unemployment rate has no statistically significant effect on
unemployment benefit generosity (Rehm 2001). However, the unemployment rate can be used as
an indicator of policy success. The goal of unemployment is to provide laid off workers with
income until more jobs become available so that they can enter the job market. The rates of
unemployment in Wisconsin and Illinois differ by about 1 percent up until 2006 where they are
in the same percentage, but from 2008-2012 we see about a 2 percent difference, Wisconsin
having a lower unemployment rate than Illinois (U.S Bureau of Labor Statistics 2014). This
demonstrates that the policies chosen by the Wisconsin government might have done a better job
to stimulate the economy, partially through its unemployment policies. There are many different
factors not examined that could contribute to the differing levels of unemployment that are not
discussed in this paper, but the rate can still be a useful piece of the puzzle.
Devolution from a federal to a state level can resort in inefficient policies, especially
when examining the impact of differing inequality levels. Devolution may be a good way for
states to experiment and find the best policy, but often there are a few states with policies that
work, and many with policies that are less than perfect. For example, many states don’t
effectively force firms to internalize the social cost generated by unemployment because they are
not fully billed for the resulting drain on the State’s Unemployment Insurance trust fund reserves
(Tannenwald, O’Leary and Huang 1999). Social-insurance policies are more effective when the
pool of participants is larger because it allows for greater alleviation of risk. In states where
inequality is highest and citizens could benefit most from redistributive unemployment policies,
these states are the least likely to have them. The United States is one country and should work
towards bettering the lives of all citizens through the most efficient ways possible, and one of
these ways is through unemployment insurance. Overall, the idea of unemployment insurance is
not really a generous one. Unemployment insurance provides “temporary income support to
experienced unemployed workers who are unemployed through no fault of their own” (Wandner
and Stengle 1997). This means individuals who are self-employed, paid under the table, or have
to leave a job for other reasons do not qualify. It is highly unlikely that payments will be targeted
to alleviate poverty. This type of methodological change has to come from altruism rather than
the poor helping themselves by voting for more generous unemployment insurance policies
(Moene and Wallerstein 2003). While unemployment insurance as it is today is not generous, it
has the potential to be both generous and to help redistribute wealth. There may be many factors
other than inequality that affect unemployment benefits, but the evidence of this study did not
provide evidence to reject the hypothesis that inequality and generosity of unemployment
benefits were correlated. We saw in almost all forms of generosity examined that Wisconsin,
with a more equal distribution of wealth, was more generous. Moving unemployment insurance
policy decisions to be a part of federal government decisions could result in more generous
outcomes and more efficient policies by both helping to alleviate the bias of low income workers
being undeserving and implementing the most effective policies that we have seen work today.

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