The country’s unemployment insurance program, designed during the Great Depression, aimed to prevent unemployed workers and their families from falling in income that could put them in poverty or force them to liquidate their assets to pay for food, rent and other needs.
Its objectives included allowing unemployed people to wait for productive employment to materialize, rather than the first one to emerge, and providing stability to the economy in recessions, mitigating the expected drop in consumption when millions of workers lost their jobs.
Congressional dispute last month over whether to extend emergency unemployment payments that were on the verge of expiring – potentially driving 12 million people into some form of misery, according to the Century Foundation, a liberal political research group – it was a reminder that the system as designed is not up to its task.
Unemployment insurance is controlled and financed by the states, within vague federal guidelines. But Washington has repeatedly been called upon to provide additional relief, including emergency patches for unemployment insurance after the arrival of the Great Recession in 2008. In fact, he has intervened in response to all the recessions since the 1950s.
Although a federal barrier may make sense in times of economic turmoil, the repeated recourse to the Capitol highlights the shortcomings of a chronically underfunded patchwork system that has not kept pace with changes in the workplace and puts the unemployed at the mercy of national politics.
While the rising unemployment caused by the pandemic may offer an opening to revise the program – an opportunity strengthened by the Democrats’ takeover of the White House and the Senate – any momentum for change must outweigh the powerful incentives that compete to further reduce the program.
The system provides incentives for states to reduce coverage.
In 2019, only 27% of unemployed workers received any benefits, a share that has been decreasing for the past 20 years. Benefits have also declined, to less than a third of previous wages, on average, about eight percentage points less than in the 1940s.
The immediate reason is money. But the problem is complicated by the program’s architecture: reluctant to raise employer taxes, many states have resorted to cuts in benefits.
Consider the wage base against which unemployment taxes are levied. There is a floor established by the federal government. But it has remained stagnant at $ 7,000 per worker since the 1970s. In Florida, Tennessee and Arizona, employers need to pay taxes on just that minimum and face tax rates that can reach a hundredth of a cent per dollar.
As their tax base failed to keep up with inflation or workers’ incomes, these states reduced benefits, reduced weekly payments or increased obstacles to qualifying, making it harder for workers on low or irregular incomes to collect anything.
In Arizona, almost 70% of unemployment insurance claims are denied. Only 15% of the unemployed receive anything from the state. Many don’t even sign up. Tennessee rejects nearly six out of 10 applications.
In Florida, only one in ten unemployed workers receives any benefits. The state is remarkably stingy: no more than $ 275 a week, almost a third of the maximum benefit in Washington state. And benefits end quickly, after just 12 weeks, depending on the state’s overall unemployment rate.
“The iceberg under the surface involves financing,” said Till von Wachter, professor of economics at the University of California, Los Angeles. “The difficulty to reform is that it is a federal-state partnership.”
The states that compete to be the most business-friendly, with the lowest taxes, will naturally allow their unemployment systems to become underfunded, said Robert Moffitt, professor of economics at Johns Hopkins University. The result is hardly ideal.
“The program was created to have tremendous variation between states,” he said. “It doesn’t make sense. It creates huge inequalities.”
The program has not kept pace with changes in the way people work.
Even states with more generous unemployment systems leave many people out. In New Jersey, where the coverage rate is the highest in the country, less than 60% of unemployed workers received benefits in 2019.
For low-income workers, the program may be useless. Mr. von Wachter notes that a program designed to provide a maximum of half the lost wages of unemployed workers leaves low-income workers in trouble. Still, in many states it doesn’t matter, because the minimum income requirements to qualify for benefits drive low-income workers out of the system.
Gaps in the largest social insurance program for Americans of working age have become increasingly problematic as economic and demographic changes have transformed both the profile of the workforce and the nature of work.
Deindustrialization and job growth in low-paid services have been accompanied by a persistent increase in the duration of unemployment since the 1970s. This has been driven, in part, by the decline in temporary unemployment – leave and other short-term arrangements – and the corresponding increase in permanent displacement, forcing the unemployed to find jobs that require new skills.
The system was designed in 1935 for an industrial economy in which heads of households – usually men – supported a family with reasonably paid work that would last until retirement. It has proven to be unsuitable for a job market where most women of working age are also employed, often in part-time and poorly paid jobs, which are insufficient to qualify for benefits. Certain new types of work, such as concert work, are not within the design of the unemployment system.
Although workers are often required to acquire skills or certifications to find a new job, unemployment insurance programs offer little training or assistance for readmission. And the prospect of losing unemployment insurance as soon as they earn a penny discourages workers from looking for a temporary job while waiting for something better.
There may be a time to reconsider the structure of the safety net.
Perhaps there is a positive side to the current crisis: the glaring shortcomings of the regular unemployment system can encourage states and the federal government to make far-reaching changes.
Economists have been proposing changes for decades. One is to reform the “extended benefits” program created in 1970 to provide additional weeks of payments in times of high unemployment, the kind of automatic stabilization feature that could eliminate the need for Congress to repeatedly consider extraordinary measures.
This program did not work as advertised. The triggers for putting extended benefits into practice – mainly due to the share of workers claiming benefits in a state – are too slow to provide quick assistance when the economy declines. Benefits may expire too early to cover workers during the long recessions that have become part of the economic landscape. More critically, the fact that states must pay for half of the extended benefits is a powerful incentive for them to raise obstacles to qualification.
Some who have studied the system suggest that the federal government can fully afford the extended benefits. Other proposals include increasing the wage base and indexing it to wage growth; establish a federal benefit floor and a minimum duration; and making it easier for low-income and part-time workers to qualify for benefits. Ideas include allowing workers to retain some benefits, even after finding a job or going into training, and offering assistance to workers who quit because their spouse has moved on career grounds. Some experts even called for the federalization of the program, a politically cumbersome survey that would provoke distrust in many states in federal power.
Senator Ron Wyden of Oregon, the Democrat who will lead the Finance Committee, is pushing for President Biden to seek a review of unemployment benefits in this regard. Mr. Wyden called for “increased basic benefits so that unemployed workers can cover the essentials” and “ensuring that all unemployed workers can receive a benefit, regardless of their work history”.
Although Biden was not committed to the improvements proposed by the senator, he advocated ways to automatically adjust the duration and amount of benefits, depending on economic and health conditions, preventing Congress from blocking or delaying relief.
It will not be easy, however, to get states to build a broader and uniformly generous program.
Moffitt of Johns Hopkins notes that Congress may be reluctant to extend automatic stabilizers simply because it likes to maintain control over spending. If the federal government is going to bear the costs of emergency insurance, members of Congress will want to have their say.
Those looking for a silver lining can consider the latest recession. The Obama administration offered billions of dollars in incentives for states to make their programs more generous, to open them more widely to part-time workers and those with low or unstable incomes, to extend benefits to people in training programs and grant additional benefits to unemployed workers with dependents.
Many states went in the opposite direction. With unemployment insurance funds exhausted, states have contracted debt to maintain regular payments for an avalanche of displaced workers. In early 2011, they owed the Treasury about $ 42 billion. Instead of raising taxes to pay back loans, many states, especially in the South and Midwest, have reduced benefits.
Today, unemployment funds in 19 states face an aggregate $ 47 billion debt to the federal government. Stephen Wandner, an unemployment insurance specialist at the National Academy of Social Insurance, expects many states to make further cuts in benefits. “All of these issues will be tackled in state legislatures,” he said.
A more generous unemployment insurance system may require circumventing state incentives. This will require substantial political effort.
Graphical data sources: Stephen Wandner of the National Academy of Social Insurance and Christopher O’Leary of WE Upjohn Institute for Employment Research.