STREET SMART ECONOMICS | It is hard to celebrate a system that covers fewer than 30% of America’s jobless
Our unemployment insurance system has failed us. With tens of millions of workers struggling just to pay rent and buy food, Congress was forced to pass two emergency spending bills providing one-time stimulus payments, special weekly unemployment insurance payments, and temporary unemployment benefits to those not covered by the system. And, because of their short-term nature, President Joe Biden pushed through a third.
The system’s shortcomings have been obvious for some time, but little effort has been made to improve it. In fact, those shortcomings were baked into the system at its start and not by accident. While working to ensure that people are able to survive the pandemic, we must also start the long process of transforming the existing system. The history of struggle surrounding its origins offer some useful guideposts.
Performance
Our unemployment insurance system was designed during the Great Depression. It was supposed to shield workers and their families from the punishing costs of unemployment, thereby also helping to promote both political and economic stability. Unfortunately, that system has largely failed to do its job.
For example, the share of unemployed receiving benefits has steadily declined from 43% in 1980 down to 27% in 2019. It is hard to celebrate a system that covers fewer than 30% of those struggling with unemployment. The share of wages covered by benefits has likewise been falling. Benefits now replace less than one-third of prior wages, some eight percentage points below the level in the 1940s.
A faulty system
Although every state has an unemployment insurance system, they all operate independently. Each state separately generates the funds it needs to provide unemployment benefits and is largely free to set the conditions under which an unemployed worker is eligible to receive benefits, the waiting period before benefits will be paid, the length of time benefits will be paid, the benefit amount and requirements to continue receiving benefits.
Payroll taxes paid by firms generate the funds used to pay unemployment insurance benefits. The size of the taxes to be paid depends on the value of employee earnings that is made taxable (the base wage) and the tax rate. States are free to set the base wage as they want, subject to a federally mandated floor of $7,000 established in the 1970s. States are also free to set the tax rate as they want. Not surprisingly, the average state insurance tax rate has been trending down since the 1950s.
While a low base wage and tax rate might help business, it also means that states have less money in their trust funds to support the unemployed. Therefore, when times are bad and unemployment claims rise, many states are unable to meet their required obligations and forced to seek federal assistance. In fact, as a recent New York Times article notes, Washington “has intervened in response to every recession since the 1950s.”
However, federal borrowing is no simple fix since the states must pay back the money with interest. That is why many have sought to reduce worker access to the system by periodically raising eligibility standards, reducing benefits, and shortening the time of coverage. Thus, in 2019, only 11% of the unemployed received benefits in Florida. It was 14% in Arizona, and a still low 34% in Oregon.
Adding to the system’s structural shortcomings, growing numbers of workers, including the many being reclassified as independent contractors, are not even covered by it.
By design, not by mistake
Our current unemployment insurance system dates back to the 1930s. While President Franklin D. Roosevelt gets credit for establishing it as part of the New Deal, the fact is he deliberately sidelined a far stronger program that would have put working people today in a far more secure position.
The Communist Party began pushing an unemployment and social insurance bill as early as the summer of 1930 and worked hard to promote it the following years. Finally, in February 1934, the Communist Party-authored “Workers Unemployment and Social Insurance Bill” was introduced into Congress by Representative Ernest Lundeen of the Farmer-Labor Party.
In broad brush, the bill mandated the payment of unemployment insurance to all unemployed workers and farmers equal to average local full-time wages, with a guaranteed minimum and a stipend for each dependent. Those forced into part-time employment would receive the difference between their earnings and the average local full-time wage. All benefits were to be financed by unappropriated funds in the Treasury and taxes on inheritances, gifts, and high-income individuals and corporations.
The bill enjoyed strong support among workers and was soon endorsed by five international unions, 35 central labor bodies and more than 3,000 local unions. And when Congress refused to act, Lundeen reintroduced it in January 1935. It became the first social insurance plan to be recommended by a congressional committee. However, it was voted down in the full House of Representatives.
Roosevelt strongly opposed the Lundeen bill and it was to provide a counter that he pushed for an alternative. Roosevelt got his wish. His bill, known as the Social Security Act, was signed into law on August 14, 1935.
The Social Security Act was a complex piece of legislation. It established what we now call Social Security as well as our current unemployment insurance system. Rather than a progressively funded, comprehensive national system of unemployment insurance that paid benefits commensurate with worker wages, the act established an unemployment insurance system that gave states wide latitude in determining standards.
The act levied a uniform national payroll tax on covered employers, defined as those employers with eight or more employees for at least 20 weeks, not including government employers and employers in agriculture. Only workers employed by a covered employer could receive benefits.
The act left it to the states to decide whether to enact their own plans, and if so, to determine eligibility conditions, the waiting period to receive benefits, benefit amounts, minimum and maximum benefit levels, duration of benefits, disqualifications and other administrative matters. It was not until 1937 that programs were established in every state as well as the then-territories of Alaska and Hawaii. And it was not until 1938 that most began paying benefits. Ten state’s laws called for employee contributions as well as employer contributions; three still do today.
The unemployment insurance system has been improved over the years, including by broadening coverage and boosting benefits. However, its basic structure remains largely intact, a structure that is overly complex, with a patchwork set of state eligibility requirements and miserly benefits. And we are paying the cost today.
This history makes clear that nothing will be given to us. We need and deserve a better unemployment insurance system. And to get it, we are going to have to fight for it, and not be distracted by the temporary, although badly needed, band-aids Congress is willing to provide. The principles shaping the original 1934 Workers Unemployment and Social Insurance Bill can provide a useful starting point for current efforts.
Martin Hart-Landsberg is a professor emeritus of economics at Lewis & Clark College. Street Smart Economics is a periodic series written for Street Roots by professors emeriti in economics.
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