An early role of trade unions was to provide unemployment insurance for members. Majority of British unions in 1908 provided unemployment insurance for members for 6 months or more. These union provided unemployment benefits were about 30% of the take-home pay of the time.
British unions had extremely tough safeguards against moral hazard. The Amalgamated Engineers forced each applicant to make his claim at the next meeting of his branch.
- If the members present, some of whom were his fellow workmen, determined that he was not eligible for benefits, he forfeited the benefits and was “liable to such other punishment as the branch may consider the case deserves.”
- A worker deemed eligible for benefits had to “sign … the ‘vacant-book’ of his branch once every day between certain hours” to collect relief.
- The branch secretary would direct an unemployed member to any local firm in need of labour. A member who refused a job offer, or who did not apply for a job when informed of a vacancy by the branch secretary, would forfeit his unemployment benefit unless he could show sufficient cause for his action at the next branch meeting. This is a common theme among mutual aid societies. They use local knowledge to root out shirking.
Mutual aid societies were formed by people with a common denominator such as the same occupation or ethnic, geographic, or religious background and later, on union membership. This appears to be an attempt to both profit from advantageous selection and to deal with moral hazard by personal knowledge of new members or signs of other forms of good character such as religious fervour. Building societies and credit unions arose out of these mutual aid societies. There were burial societies, factory societies, which make provision for its employees for accident, sickness or burial, and fraternal societies that provided for widows and old-age pensions.
In 1908 Britain, 1 ½ million trade unionists were eligible for unemployment insurance through their union; four million British also belonged to the sickness societies which predated the union movement. Trade unions were superior to mutual aid societies as providers of unemployment insurance because of their greater ability to monitor the eligibility and job search of members through local branches. Few mutual aid and friendly societies provided unemployment insurance.
Friendly societies did not fail; in the UK for example, they were displaced by the National Insurance Acts of 1911 and 1948. When national insurance was first introduced in Britain, people could file claims either with the government bureaucracy or with their friendly society.
The unemployment benefits paid by national insurance were small. Most unions continued to provide insurance benefits throughout the interwar period. It was not until the post-war development of the welfare state that most unions ended their unemployment insurance policies. The 1948 Act created a government monopoly. At the time of the 1911 National Insurance Act, 9 million people were covered by voluntary insurance societies. These provided for widows and burial expenses and medical care. Some provided help in times of distress and grants to travel to new jobs.