You could be forgiven for believing that we have unemployment insurance in the United States. After all, there is a state administered and federally mandated program with that name. But, it is a misnomer.
What we have instead is a program that provides temporary, partial financial assistance to laid off workers who are actively looking for new positions and haven't found one yet.
Lots of unemployed people don't qualify for unemployment benefits. They expire after six months in ordinary times, and after two years even in the worst hit areas during the current recession. They don't apply to people who are fired for cause, or quit. The don't apply to people who have just finished school, or are homemakers re-entering the workforce, or retirees looking for work because they investment portfolios have underperformed. They don't cover people who used to be self-employed and have seen their business dry up to the point where it makes no profits. They aren't big enough to pay for COBRA health insurance payments, maintain rent or mortgage payments, maintain car payments, and maintain some semblence of normalcy in paying for food, clothing and other necessities at levels incurred before losing a job.
Unemployed workers without an emergency fund or credit cards with available balances are plunged into financial catastrophy in a month or so. Even unemployed workers who set aside three to six months of savings as an emergency fund are hard pressed to make it a year before running out of money. Unemployed workers who had counted on home equity and credit cards as their cushion in times of economic hardship discover that you can't get a home equity loan without an income, that home values tend to decline in recessions, that home equity has to be reduced by costs of sale including realtor commissions, that its is hard to rent an apartment without an income to put on the application, that rising credit card balances have caused credit card companies to shrink their credit lines, and that the fact that your car is worth a certain amount in the Blue Book doesn't mean that you can sell it for that in a month or two.
Unemployed workers can raid retirement accounts and education savings for their children, but the can pay taxes and penalties if they do. And, those savings are often meager for the less skilled and less educated workers who are mostly likely to be unemployed for prolonged periods.
There is no doubt that this encourages people to seek work. But, the American unemployment system is so punitive that the intense financial stresses that system imposes on workers may actually undermine the incentives to find work that financial hardship flowing from unemployment create for workers.
Looking for a new job is about as close as wage and salary workers get to strategic planning. It determines where people live, how they identify themselves, and their standard of living. But, you won't find many people who think that people make their best strategic decision making in a time of crisis with basic resources disappearing by the day.
The reality acknowledged by almost all economists, is that full employment almost never happens, and certainly doesn't happen in recessions. When the ranks of the unemployed are largest it is because the economy does not have jobs for the unemployed, no matter how dire their incentives to find them. There is nothing in economic theory suggests that the rolls of the unemployed operate on a first in, first out (FIFO) basis. Instead, if anything, the evidence seems to indicate that unemployment operates on a LIFO basis (last in, first out). The longer someone is unemployed, the harder it is for them to find a job - in part as a matter of selection (the least attractive candidates are first fired and last hired), but partially out of a stigma of unemployment that causes employers to assume that the long time unemployed are less hireable regardless of the reality.
Unemployment produces all manner of economically inefficient behaviors. It pushes people to take jobs that are inferior to those they could secure if they worked a little longer to look, producing long term reductions of standard of living. Unemployment itself is a huge waste -- tens of millions of people who are ready, able and willing to work could carry out all sorts of economically worthwhile goods and servies but are instead unproductive because they lack direction.
Unemployment leads to more subtle economic problems as well. It makes compassionate employers reluctant to fire marginal workers or lay off workers when it would make the company more efficient to do so. Unemployed workers who default on their debts impose costs on the financial institutions who lent money to them. Unemployed workers consume less, suppressing demand. When unemployed workers skip health insurance and health care, they may fail to treat short term health problems with long term disabling consequences. Their children may miss opportunities to have academic success that leads to harms their financial futures. It makes people who have jobs risk averse preventing them from risking efforts to get better jobs that would make them more economically productive.
Unemployment undermines families. There is pretty strong circumstantial evidence that unemployment is a key driving force behind many poor, single parent families. A father without a job is not infrequently jettisoned because he can't currently contribute economically and makes it harder to get government assistance for the rest of the family or to support it on the mother's income alone. There is also strong circumstantial evidence that unemployment is a major root cause of child abuse and neglect.
Unemployment also creates political barriers to economic restructuring that could make the economy as a whole stronger. It encourages the political system to try to hold on to jobs that don't make economic sense, while discouraging immigration and other economic reforms that could make the economy stronger.
Unemployment benefits while meager, are still especially generous now, as a result of a political response to the recession. But, for the less educated, less skilled and African-American men, for example, unemployment rates are perpetually at Great Depression levels, something that undermines support for our economic system for large shares of the population (who alas, too often, don't vote or can't vote).
Unemployment creates the same contigon of economic malaise that threatens the economy as a whole, writ small, that a failing bank does, writ large. It undermines a whole web of economic actors who deal with that person's family.
A better solution to dealing with unemployment would take a great deal of pressure off a host of other stressed pieces of our economic system. It might cost tens of billions of dollars more, but it would reduce costs elsewhere. Perhaps we need a "jobs first" approach to unemployment that while costly will reduce even more public and private costs elsewhere, just as a "housing first" approach to homelessness reduces the overall public cost of dealing with the needs of the homeless.