By virtually every economic measure, most people in the U.S. today are better off than most were in 1935. That year marked a pinnacle of legislative activity in response to the Great Depression. These enactments represented a new era of economic and domestic social policy in the U.S. The most fundamental change was the role of the federal government in stabilizing the economy and promoting individual economic security.
The latter change—the promotion of individual economic security—was a recognition of new forms of risk that many faced. Economic insecurity is the risk that an individual cannot maintain adequate income in the face of a shock. The time period leading up to the Great Depression saw more individuals’ primary source of income come from the labor market. Selling labor presents numerous risks—the risk of not being able to find work at all, work at sufficient wages, or work in safe environments. By working for an employer, like a manufacturer, workers were exposed to economic risks that were different from the risks facing a rancher or small farmer. Critically, labor market risks stem not solely from individual behavior but also from larger changes in the economy outside of an individual’s control, such as the strength of certain industrial sectors.
The New Deal programs cemented a dual responsibility. The government’s responsibility was to reduce overall risk through stabilizing the macroeconomy, reduce labor market risk through regulation, and provide support to individuals who were not able to work. These benefits took two forms: 1) insurance benefits to workers who were out of work, either because they could not find a job (Unemployment Insurance) or could no longer work (Old Age Insurance); and 2) cash benefits to individuals who were not expected to work. At the time, this group was mothers with young children, and the program was titled Aid to Families with Dependent Children. The individual’s responsibility was personal—to seek work if they were able and to be productive at work. In those two responsibilities lies a difficult balance in adequately insuring and reducing risk to the individual while not disincentivizing the individual from seeking labor income.
The tension between risk and incentive is accompanied by the challenge of an ever-changing economy. Economic risks in general, and economic risk to labor income in particular, persist and evolve over time. The U.S. has transitioned from an exporting production economy with a broad manufacturing base to a globally integrated service economy. Alongside that transition, the average unemployment duration has increased significantly. From 1948 to 1982, the average unemployment spell in a given year ranged from 7.9 to 15.8 weeks. Average unemployment stints have exceeded 15.8 weeks in twenty-six of the thirty-eight years since then, peaking at 39.4 weeks in 2011 and 2012.
Another more recent trend has taken place in U.S. labor force participation (LFP) rates, which have consistently declined since peaking in 1997 and 1998. Even prior to the pandemic, the share of the population aged 25–54 years old in the labor force was 83.1 percent, 1.4 percentage points less than a peak in LFP in the late 1990s.
The Study Panel was convened to explore a portfolio of policy options aimed at producing assured income. First, we explain in some detail the fundamental problem the policies seek to address—economic insecurity.