Street Smart Economics | The current unemployment system is punitive, inefficient and ineffective. It also favors businesses over workers.
With the Federal Reserve pushing up interest rates, we appear headed for a new recession. Sadly, our unemployment insurance system remains broken: too few unemployed individuals receive benefits and the benefits are far too low. As a result, the next recession, when it comes, will again bring unnecessary suffering to millions of American workers and their families, including many Oregonians.
It doesn’t have to be this way. Federal action during the pandemic crisis shows the government can dramatically improve the unemployment system. The problem is many business and political leaders are content with the system as it is now. That means it is up to us to start agitating for reform, and the sooner, the better.
Lessons from the pandemic crisis
The U.S. economy fell into a sharp pandemic-driven economic downturn beginning March 2020. Some 22 million jobs disappeared during March and April, raising fears of a major economic collapse.And yet that didn’t happen.
One of the primary reasons was the federal government acted fast, pumping some $5 trillion into the economy during 2020-2021. Thanks to that spending, the COVID-19 recession was the shortest on record. In fact, according to the U.S. Census Bureau, the Supplemental Poverty Rate, which adjusts income to include the value of government benefits, actually fell from 11.8% in 2019 to 9.1% in 2020 — the lowest rate on record.
Key to this achievement were three federally financed programs that, by design, strengthened the country’s unemployment insurance system:
The Pandemic Unemployment Assistance (PUA) program extended unemployment benefits to workers normally ineligible for unemployment benefits. These include workers who do not earn enough wages or work sufficient hours to become eligible for regular benefits, new entrants into the labor force, self-employed workers and independent contractors.
The Federal Pandemic Unemployment Compensation (FPUC) program increased weekly benefits to the unemployed, first by $600 and then later by $300.
The Pandemic Emergency Unemployment Compensation (PEUC) program provided extra weeks of benefits to people who had exhausted their regular state benefits but remained unemployed.
Of course, other federal initiatives also helped. Noteworthy were the Child Tax Credit expansion and the reduction, or in some cases elimination, of premiums for Affordable Care Act marketplace enrollees. But the PUA, FPUC and PEUC were game-changers. More than one out of every four workers relied on unemployment benefits at some point during 2020. The Center on Budget and Policy Priorities estimates these pandemic programs helped 5 million people stay out of poverty in 2020 and 6 million in 2021. Sadly, these three programs were made time-limited, and their time has run out.
Flawed at birth
The 1935 Social Security Act established our unemployment insurance system. It was not the system desired by most working people. Rather than a progressively funded, comprehensive national unemployment insurance system paying benefits comparable with worker wages, the act established a federal-state cooperative system giving states wide latitude in determining standards.
States were free to decide whether to enact their own plans and, if so, to determine eligibility conditions, the waiting period to receive benefits, benefit amounts and the duration of benefits. It was not until 1937 that programs were established in every state and the then-territories of Alaska and Hawaii. And it was not until 1938 most began paying benefits.
While the unemployment insurance system has been improved in several ways over the years, including by broadening coverage and boosting benefits, its basic structure remains largely intact. States still finance their own programs and decide, within broad federal guidelines, how to treat their unemployed workers.
A mean-spirited system
We have a mean-spirited system, a fact made crystal clear by how pandemic-era federal initiatives dramatically changed outcomes. A decent unemployment insurance system should, above all, provide financial support to those suffering from unemployment. However, our existing system serves a remarkably small percentage of those experiencing unemployment.
The unemployment insurance recipiency rate — the Department of Labor’s measure of the share of unemployed workers drawing unemployment benefits — steadily declined from a high of 54% in 1952 to a low of 26% in 2013 before rising to 28% in 2019.
And then came 2020, when, thanks to the PUA and PEUC, the recipiency rate soared to 78%. However, because these federal initiatives did nothing to require states to modify their own programs, the initiatives ended, and recipiency rates rapidly declined. They are now back to 27%.
While such low recipiency rates are enough to label our system broken, it’s not its only failing. The income replacement rate of unemployment benefits is also unacceptably low. As The Century Foundation reports: In the first quarter of 2022, the average weekly unemployment insurance payment only replaced 39% of the average wage earned by those receiving benefits. During the pandemic, it was as high as 79%.
We have nothing to brag about in Oregon. The state’s mid-2022 recipient rate was only 30%. The replacement rate was 44%. All numbers are middle of the pack and far from adequate.
What gives?
There are several reasons why we have such a mean-spirited unemployment insurance system. One of the most important reasons is many business leaders like it because they believe it gives them the upper hand over their workers. That is why in May 2021, governors from 19 states, citing the need to restore a sound business environment, announced they were ending all federal pandemic unemployment benefits for their respective unemployed workers months before the programs were scheduled for termination.
Most business leaders also prefer minimizing unemployment benefits because doing so lowers their tax bill. Firm payroll taxes determined by the value of taxable worker earnings and the tax rate fund unemployment benefits. States are free to set both within broad federal guidelines, and most try to keep them as low as possible to satisfy business.
One consequence of this policy is states generally have limited funds to compensate their unemployed workers. If the funds prove inadequate because of a serious recession, states can borrow money from the federal government to cover their obligations. But states must repay the loans with interest, which requires borrowing states to do what they don’t want to do — raise payroll taxes.
Determined to keep taxes low and avoid federal borrowing, many states simply shorted weeks of covered eligibility, tightened eligibility standards and reduced benefit amounts. The system becomes more punitive and less costly — satisfying business interests on both counts. For example, North Carolina slashed its benefit period from 26 weeks to 12 weeks in 2013 and tightened its eligibility standards. As a result, the state’s recipiency rate fell from 40% at the end of 2009 to just 10.9% in mid-2022.
Unfortunately, there is not much we can do to end recessions, given the nature of our economic system. But there are things we can do to reduce their cost to working people.
Drawing on the experience of pandemic-era policies, we should replace our state-centered unemployment insurance system with a progressively funded national system with broad eligibility standards that pays benefits maintaining adequate living standards for an appropriate period. In other words, the kind of system workers demanded back in the 1930s.
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