ppi - modernizing unemployment insurance (2002)

8/3/2019 PPI - Modernizing Unemployment Insurance (2002)

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Policy Report February 2002

Modernizing Unemployment Insurance for

the New Economy and the New Social Policy

By Robert D. Atkinson

The recession has fueled calls inCongress to extend and expandunemployment insurance (UI) benefits.

While UI expansion is needed in the shortrun, the program is also in need of morefundamental and permanent reform. It mustbe transformed from an industrial eraprogram to one that is better suited for theNew Economy.

Unemployment insurance is afederallymanaged, state-run program.Employers pay a tax on each worker basedon the overall unemployment rate, the level

of state benefits, and their “experiencerating,” which is based on the magnitude ofprior claims made by their workers. Whenworkers lose jobs through no fault of theirown, they are eligible to collect benefits for amaximum of 26 weeks, provided they haveearned a certain minimum amount andworked a minimum number of weeks in theprior year.

When Congress created the UI system in

1935, the goal was to give income support tofull-time workers between when they werelaid off and called back to work on theirsame jobs. The program was seen as helpingpredominantly manufacturing, unionizedworkers in permanent, full-time jobs whowere familiar with unemploymentinsurance. All states were required to have a

program and most states had similarprograms in terms of benefit levels andqualifications. Finally, the program was

designed to boost the purchasing power oflaid-off workers in economic downturns inorder to provide a counter-cyclical boost tothe economy.

Almost 60 years later, the New Economyhas changed all of these conditions. Today,most workers are never called back to theirprevious jobs. In 1970, about 38 percent of job losers were on temporary layoff; by 1995,fewer than 25 percent were. Moreover, in a

labor market being transformed bytechnology and trade, many unemployedworkers need to upgrade their skills to getcomparable or better jobs. Most jobs are inthe non-unionized service sector wherefewer workers are familiar with how the UIsystem works. Moreover, approximately 30percent of Americans work part-time orhave other non-traditional workarrangements. A large share of the growing

number of contingent and part-time workers(this includes many workers who formerlycollected welfare) will not qualify for UIbecause they do not earn enough, they workpart time, or are new to the labor force. Aswe move into a world where everyone isexpected to work, we need to uphold ourbargain with those who left welfare for work



Progressive Policy Institute www.ppionline.org

so that they do not fall back onto publicassistance simply because they, like so manyother workers, earn little, work part time, orchange jobs often.

Finally, over time states have made theprogram more restrictive. While federal lawmandates states to have a UI system, it doesnot prevent them from having only a onesystem. Competitive pressures haveincreased for states to have “good businessclimates,” leading many to cut benefits andrestrict eligibility. And an increasingpercentage of the unemployed live in stateswith lower than the national average ofrecipiency.

As the nation's principal safety net for

helping those who lose their jobs, theunemployment insurance system has laggedbehind these changes. While approximatelyhalf of all unemployed workers received UIbenefits in the 1950s, today approximatelyone-third do. As a result, UI now plays adiminished counter-cyclical role in helpingto moderate recessions. Even so, withoutany UI, recessions would be an estimated 17percent deeper.1 And in a more competitive,

global, and technology-driven economy, aweakened UI system reduces the safety netfor workers, making them less likely tosupport the New Economy. If we are to askAmericans to embrace the New Economy,we need to give them the support and toolsneeded to do so.

It is not just a matter of more generousbenefits and eased eligibility, as advocatedby many liberals who would like to see the

United States move more into the directionof a European-like welfare stateunemployment system. In their goal to becompassionate, many continental Europeannations have gone too far, providingextremely generous benefits for long periodsof time. Not surprisingly, since thesenations are essentially paying workers not to

work and distributing purchasing powerfrom those who work to those who do not,unemployment rates remain chronicallyhigh. And as workers’ skills become obsoletefrom rapid technological change, theEuropean system has the added detriment ofkeeping workers out of the labor market solong that their skills get even more obsolete,creating high levels of “structural”unemployment.

While some liberals dream of aEuropean-style welfare state, conservativeshave focused on keeping benefits low to cutgovernment-imposed costs on business. Theresult is a bare-bones system that limitsqualifications, duration, and benefits to the

bare minimum, and is not only unfair toworkers, but does little to help Americanscope with and accept an increasingly volatileNew Economy labor market. Moreover, itlimits the role of UI as a counter-cyclicalstabilizer.

As a result, we need a Third Wayapproach to unemployment insurancereform that not only gives workers the rightincentives to remain at work and get back to

work, but also provides them with adequatebenefits when they lose their jobs. We need asystem that recognizes that all employeeswho lose their jobs through no fault of theirown should be eligible for UI, even if theyare new to the labor market or making lowwages. We need a system that serves as atrampoline, not just a safety net, by helpingworkers upgrade their skills while collectingbenefits in an ever-changing economy. We

need a system that recognizes theadvantages of state-administered programsbut provides a federal floor under which allstates operate. Bringing the nation’sunemployment system into the NewEconomy by crafting such a Third Wayapproach will not only help workers in amore turbulent labor market, it will reduce

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the duration and depth of economicdownturns.

It is incumbent upon Congress and thestates to act now to modernize UI to meetthe realities of the New Economy. Policymakers should take five steps:

• Expand eligibility to include all low-wage and part-time workers who losetheir jobs through no fault of their own.

• Set a limit on the race to thebottom the practice by states of cutting UI taxes to become more“competitive” by raising the FederalUnemployment Insurance Tax and thewage base it is assessed on.

• Make UI a trampoline, not just a safetynet, by making it easier for workerscollecting UI to enroll in training.

• Require states to hold employersresponsible for the costs they impose onthe system through layoffs.

• Strengthen UI’s anti-recession function

by lowering the threshold that triggersextended benefits.

Step One: Make it Easier for All Workers Who Lose Their JobsThrough No Fault of Their Own toQualify for UI.

Although UI rules vary from state tostate, states typically exclude people who do

not fit the traditional notion of a laid-offworker. Workers coming off welfare, andlow-wage and non-traditional workers ingeneral, face a number of barriers. First,states set a minimum threshold on earningsin a base period, which is typically definedas the first four of the last five full quarters aworker is employed. But low-wage workers

are almost twice as likely to have workedfewer than 35 weeks prior to unemploymentthan higher-wage workers. In some states,part-time and/or low-wage workers maynot earn enough. For example, a worker inFlorida must earn $3,400 in the base periodto be eligible, meaning a person earningminimum wage at a half-time job must haveworked for 33 weeks.

Most base period requirements alsoeliminate workers who have recentlyreentered the work force and have gotten getlaid off, or result in those workers gettingbenefits for a significantly shorter duration.For example, in New Mexico claims arebased on wages earned in at least two-

quarters of the prior 12-month period.While intended to give states time to gatheremployment records in the pre-Internet era,such base period requirements should nolonger be an excuse for keeping deservingworkers off of UI.

Some have objected to letting theseworkers with so-called “weak attachments tothe labor market” from collecting UI, evenwhen they are legitimately laid off, claiming

that UI must be “earned” based onsubstantial employment. But this confusesUI with a benefit like Social Security, whichindeed must be earned. If a person beginswork at an organization and through nofault of her own gets laid off shortlythereafter, there is no justification for notproviding UI to her, while at the same timeproviding it to a worker who had workedthere 3 years. Both were working in good

faith and both got laid off through no faultof their own. Likewise, it’s not fair that ahigh-wage earner who is laid off can qualifyby meeting minimum earning requirementsafter working only 4 months, but a low-wage earner in the same position cannotqualify. In short, the notion that workersshould not be able to collect UI unless they

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have significant attachment to the labormarket is a vestige of the old economy.

Finally, in order to be eligible for UIbenefits, workers must be looking for andwilling to take full-time work. Yet manyworkers, including many former welfareworkers, can only work part-time. Theresult is that part-time workers who are laidoff are one-third less likely to receive UI.Like they do for full-time employees, theemployers of part-time workers payunemployment-insurance taxes on theirwages and salaries, but in most states part-time workers do not receive the benefits ofthose taxes when they are unemployed. It isfair that full-time workers who are laid-off

who are not willing to go back to work full-time should not be able to collect benefits.However, it is not fair that workers who areworking part-time and are laid off throughno fault of their own should be required tochange the circumstances of their work livesby going back to work full time in order toqualify for UI benefits.

As a result of all of these restrictions,only about 20 percent of unemployed

welfare workers will collect UI benefitsunder the current rules.2 Some welfareadvocates propose that we should loosenrestrictive policies governing welfare inorder to help those who have left welfare forwork and who have lost their jobs in therecession. But this is at least a second-bestsolution. The best solution is to reformunemployment insurance so that those whohave left welfare for work get the same

benefits as all other workers who lose their jobs through no fault of their own.As a result, states should:

Let workers who are available only towork part-time qualify for UI if theywere laid off from a part-time job. Anumber of states have considered such

legislation, and Minnesota recentlypassed legislation allowing this.

Institute alternative base periodrequirements. At least a dozen stateshave alternative base periods that letworkers qualify on the basis of theirearnings in the most recent quarter ifthey are otherwise ineligible under thestandard base period system. Doing thiswould enable 400,000 more individualsto be eligible for coverage.

Lower minimum earning requirementsand allow workers to qualify based onthe number of hours worked. States

with high earning requirements shouldlower them so that low-wage earners donot have to work as long to qualify.Likewise, low-wage workers should alsobe able to qualify based on number ofhours worked. Oregon recently passedlegislation allowing workers to beeligible for UI benefits if they haveworked more than 500 hours, regardlessof how much they have earned.

Washington also passed a similar lawrequiring 680 hours of work, while alsoaccommodating those who qualifyunder the alternative base period.

Require companies to report wage dataelectronically on the Internet. Onereason most states base UI claims on theprior four-out-of-five quarters is that ittakes them so long to process workerearnings information from companies.A large share of companies still reportwage data by sending in paper forms.In an Internet era, states should be ableto access this information the same day acompany files it. If states made it easyto file online and required it, they couldautomatically base eligibility on the last

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Studies have found that without suchstate competition total UI tax rates (and byextension, benefits) would be as much as 58percent higher.5 Some changes states havemade, such as tightening up the restrictionson workers who voluntarily quit, made

sense. UI was not generally designed to paybenefits to workers who quit of their ownvolition. But other changes were madesolely to cut UI taxes paid by business.

full quarter worked.

Allow workers to qualify if they are notavailable to work evenings orweekends because of child careresponsibilities. Many workers coming

off of welfare cannot work evenings orweekends because they must take careof their children. Yet, 10 states willdeclare a worker ineligible for UI if theyare not available for work on eveningsor weekends because of lack ofchildcare.3 Six states will deny workersbenefits if they cannot get to work onevenings or weekends because publictransportation is not available. As long

as these workers were working dayshifts when they got laid off, and havecompelling reasons that make it difficultfor them to work alternative shifts, theyshould be eligible.4

Step Two: Set a Limit on the Raceto the Bottom

As competition to attract business hasheated up, efforts by states to cut UI taxes on

employers, and hence benefits, in the nameof a good "business climate" have grown.State legislatures face considerable politicalpressures every year from businesses andbusiness organizations to cut UI taxes.Business points to lower tax rates in otherstates and warn that without a tax cut, theirstate will lose the race to attract and growmore jobs. Moreover, many stateunemployment insurance agencies actively

work to limit claims. For example,Oklahoma’s UI Web site urges employers toappeal decisions by the state whereby aworker was granted benefits. It givesemployers the answer to “How can anemployer reduce benefit charges?” Notsurprisingly, UI taxes in Oklahoma areamong the lowest in the nation.

Many states seek competitive advantageby having the lowest benefits and taxes. Forexample, an unemployed worker inMississippi averages only $146 a week,compared to a Hawaiian worker whoreceives $269. The minimum weekly benefit

a worker gets is only $10 in Oklahoma,compared to $94 in Oregon. Maximumbenefits range from $190 in Alabama to $715in Massachusetts. In many states, largeshares of workers receive considerably lessthan half their earnings. For example,because the maximum weekly benefit inArizona is only 38 percent of the averageweekly wage, most laid-off workers theresuffer large income drops. Many states also

control costs by keeping eligibility rulesstrict. Only 18 percent of unemployedworkers in New Mexico received UI in 1995,compared to 72 percent in Rhode Island.From 1987 to 1996, UI recipiency varied from19 percent of the unemployed in SouthDakota to 55 percent in Alaska.

Even when looking just at the rate ofcoverage of workers who lose their jobs (asopposed to those who quit or are newentrants to the workforce), the rate ofcoverage varies from 105 percent in thePacific region (Alaska, California, Hawaii,Oregon, Washington) to only 64 percent inthe West South Central region (Arkansas,Louisiana, Oklahoma, Texas).6 While someof this variance was a result of differenteconomic conditions, the lion’s share was

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due to differences in the tightness orlooseness of state policy. As a result, as moreAmericans have moved south and west tostates with more stringent restrictions andlower UI recipiency rates, an increasingpercentage of the unemployed live in stateswith lower than national average ofrecipiency and lower benefit levels. Onestudy attributes approximately 50 percent ofthe decline in national recipiency rates to theinternal migration of Americans to stateswith more stringent restrictions.7

Absent federal intervention, many stateswill continue to seek to reduce UI benefitsand taxes below levels that are equitable andreasonable. There only are two ways to fix

this. Congress could set minimum levels ofbenefits and qualification requirements.However, while this has the merit of settinga national floor, doing it right would requirethe Department of Labor to imposecomplicated and bureaucratic rules. Aneasier solution would be for the federalgovernment simply to set a national floor,increasing the UI taxes that employers payto the federal government and remit this

money back to state UI trust funds.Currently, under the Federal UnemploymentTax Act (FUTA), employers are required topay a 6.2 percent tax on the first $7,000 ofeach employee’s annual pay. As long astheir state has an unemployment insuranceprogram that meets federal guidelines (all 50states do), then the employer receives anoffset credit on 5.4 percent of the tax, makingtheir effective tax rate 0.8 percent (5.4

percent plus 0.8 percent equal to 6.2percent). Theses funds go to pay forprogram administration and extendedbenefits. States add their own taxes on topof this. Raising this tax 0.3 percent (inactuality, reducing the offset tax credit from5.4 percent to 5.1 percent) would raise manystates’ minimum tax rates, thereby reducing

the pressure on them to keep benefits andeligibility low.

Some might argue that raising UI taxes amodest amount in approximately 20 stateswould be bad for the economy. There aretwo components to this argument. First,some argue that certain firms would hirefewer workers. After all, their costs wouldgo up. But this is unlikely since the costincrease as a percentage of wages in statesseeing an increase is likely to be very small,approximately half of 1 percent. Moreover,since most firms in the states facing highertaxes would see their taxes go up (by a smallamount), the effect would be felt equally.And since the key factor determining hiring

is demand for a firm’s products and services,firms would be unlikely to change theirhiring practices. Even if it were to lead somefirms with higher increases to curtail somehiring, monetary policy set by the FederalReserve Board would completelyoverwhelm any such micro-level firmdecisions. In the face of temporary, one-time,higher national unemployment rates, theFederal Reserve would cut interest rates

bringing unemployment rates back to theiroriginal level. In short, the job lossarguments against modest increases in UItaxes are red herrings designed to defeat anysuch proposals.

In fact, in contrast to the arguments ofopponents, such a national floor wouldactually increase employment. This is truebecause it would reduce regional disparitiesin unemployment and economic

performance, allowing the national economyto operate closer to full employment.Because more UI benefits are paid duringeconomic downturns, the unemploymentsystem has the benefit of smoothing out thebusiness cycle, minimizing the loss ofpurchasing power when workers are out ofwork. However, because the lion’s share of

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UI taxes are paid by businesses to states,states must raise UI taxes whenunemployment rates go up in their state. Ifone state’s economy is doing poorly, its UIcosts go up, requiring it to raise taxes. Thisin turn marginally reduces thecompetitiveness of companies in the state,slowing the state’s economy even more, butraising the relative competitiveness ofcompanies in other states, spurring theirgrowth. The result is that the UI system hasthe unfortunate side effect of exacerbatingregional economic differences.

At any time unemployment is not evenlyspread throughout the nation, some stateshave higher rates and others have lower

rates. Because of these differences theFederal Reserve Bank is more constrainedthan they would otherwise be in loweringinterest rates to stimulate full employment.If all states had 5 percent unemployment, theFed might lower interest rates to raiseemployment with no inflationary effects.However, if the national rate were 5 percentbut half the states had a 7 percent rate andthe other half had a 3 percent rate, lowering

interest rates to boost demand would causeinflationary pressures in the states with thelower unemployment rates. Increasing theFUTA tax and nationally distributing it tostates based on their unemployment rateswould have a regional counter-cyclical effectby raising demand modestly in highunemployment states and lowering itmodestly in low unemployment states,allowing the overall economy to be run

closer to full employment. Therefore,Congress should:

Raise the minimum wage base on whichUI taxes are levied from $7,000 to$11,000 and index it to inflation. Thirty-two states assess UI taxes on a wage basebelow $11,000, with 11 at the federal

minimum of $7,000. If an employer in astate with the taxable wage base of $7,000hires two low-wage workers collectivelyearning $14,000, he pays taxes on all$14,000. In contrast, if he hires oneworker for $14,000, he pays taxes on onlythe first $7,000. Raising the taxable wagebase results in a more efficient and faircollection of UI taxes by reducing thedisproportionate employer tax burden onthe wages of low-wage workers. Thenational floor on the taxable wage basehasn’t been increased since 1983, in spiteof the fact that the consumer price indexhas increased over 70 percent. Raisingthe wage base on which taxes are levied

can be revenue neutral in most states, ifthe 32 states with a taxable wage basebelow $11,000 reduce their tax ratesaccordingly.

Increase the effective federalunemployment insurance tax rate from0.8 percent to 1.1 percent and remit thefunds to states based on their rate ofunemployment. (As discussed above,

this would be done by reducing theFUTA tax credit from 5.4 percent to 5.1percent.) Increasing the federal tax wouldcreate a national floor for UI taxes andbenefits since the tax rate in all stateswould be at least 1.1 percent on the first$11,000 of earnings. Because the floor isbelow the rate most states now set, theseresponsible states would likely use therevenue remitted back to them to offset

reductions in their state rates by acorresponding amount. Employers inapproximately one-third of the statesnow paying less than 1.1 percent in stateUI taxes, would see their tax rates rise.But these states could use the increasedrevenues for a variety of purposesincluding: job training; job search

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assistance; more generous benefits,particularly for low-wage earners(including dependent benefits andbenefits for workers in training); and/orbroader eligibility (e.g., allowing part-time workers to qualify, institutingalternative base periods). These revenueswould be collected by the federalgovernment and remitted automaticallyback to the states on the basis of theirinsured unemployment rate (the numberof workers collecting unemploymentinsurance as a share of the total numberof civilian workers in the labor force).

Return to the states the excess

unemployment taxes in the federal UITrust Fund. Congress should not spendtaxes collected from employers forunemployment insurance to pay off thenational debt. For example, in 1998FUTA revenues were $6.2 billion, ofwhich only $3.6 billion was appropriatedfor state and federal UI administration.These should be returned to state UItrust funds, allowing states to reduce

taxes a proportionate amount.

Give states significantly more flexibilityin how they run their UI systems. Thereare many advocates for devolution of UIresponsibilities to the states, includingbusinesses and states themselves. Andindeed, giving states more flexibility canreduce the considerable regulatorystraightjackets and micro-management

from Washington that limit them frommaking needed changes. But at the sametime, without a federal floor andperformance requirements, states willengage in a race to the bottom forbenefits and taxes. Therefore, while thefederal government should set a floor, itshould also give states considerably more

flexibility in how they operate their UIprograms. In exchange for a higherfederal floor, states should be given moreflexibility. But accountability measures,including indices of how well workersare able to access UI benefits, should bepart of any federal UI tax allocationformula.

Exempt the first $2,500 of UI benefitsfrom federal taxation. In 1986, Congresssubjected all UI benefits to federalincome taxes, lowering the after-taxvalue of benefits and reducing the rate atwhich workers collect UI. Exempting ashare of UI benefits from federal taxes

would provide a more generous safetynet, while preserving incentives for mostworkers to get back to work.

Step Three: Make UI a Trampoline,Not Just a Safety Net

At its heart the UI system is designed fora world in which job skill requirementsremain constant. The overriding goal of the

system, and of most who administer it, is toget workers back to work as soon as possiblein their existing occupations. And the waystate programs are evaluated on theduration of benefits paid puts pressure onstates to get workers back to work quickly,even if they could benefit from skillupgrades. Yet, in a rapidly changing labormarket based increasingly on technologyand higher-skill work, many unemployed

workers need to upgrade their skills tosucceed. Moreover, in a knowledge-basedeconomy, helping workers upgrade theirskills between jobs can boost productivityand economic growth.

As a result, states should:

Make it easier for laid-off workers to

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collect UI while they are upgrading their skills for new employment. Underthe prior Job Training Partnership Act,states were prohibited from denyingbenefits to unemployed workers who arein qualified training programs. However,the legislation left it up the states todefine "qualified." Moreover, as anoversight, Congress failed to include asimilar provision in 1998 WorkforceInvestment Act (WIA). As a result, manystates do not make it easy for workers tocollect benefits while in training.

Some states inform workers that theycannot collect benefits while in trainingunless their skills are "obsolete," as if

only the “buggy whip braiders” and“bowling alley pin setters” of the NewEconomy should get new skills. Manystates don’t tell workers that they cancollect while in training. And in somestates, the breadth of courses andtraining providers that qualify is limited.For example, some states do notconsider English as a Second Languagecourses or Adult Basic Education

courses as qualified training, yet theindividuals who take these courses areprobably the ones most in need ofboosting their skills. Other statesautomatically disqualify someoneenrolled in higher education, even ifthey are in classes that are clearly careeroriented (e.g., IT systems management)and short-term (e.g., under a year). Theend result is that in some states it is

difficult to qualify for benefits while intraining. Many Workforce InvestmentBoards do little to encourage workers tocollect UI while in training. Forexample, while Tennessee’s stateWorkforce Investment Board’s Web sitepromotes lifelong learning stating, "Asthe job market changes, your skills need

to keep up," it doesn’t mention that laidoff workers should consider using UIfunds to support themselves while intraining.

With this in mind:

♦ Congress should amend WIA tomake it clear that workers in WIA-qualified training must be eligiblefor UI benefits.

♦ States should enact similarlegislation and administrative rulesmaking it clear that workers inapproved training can collect UIbenefits. Some states have already

enacted such legislation. Mainerecently clarified that any workersparticipating in training approvedunder the Workforce Investment Actare automatically entitled to UIwithout having to also seek newwork. Another Maine law made clearthat enrollment in a degree-grantingprogram cannot be the sole cause ofdenial of benefits. In addition,

Nebraska enacted a law covering bothWIA training and activities fundedunder the federal Welfare to Workprogram.

To be fair to the employers wholaid off the workers, however, statesshould charge back to the employer’saccount only some of the costs ifworkers enroll in training. This is thecase since it can be assumed thatwithout training, the worker wouldget back in the labor force sooner andcollect benefits for a shorter time.

Provide extended benefits to dislocatedworkers who are collecting UI and arein training. For many workers needingto upgrade their skills, a 26-week

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program is simply not enough time inwhich gain the needed skills. As a result,a number of states, including California,Massachusetts, Michigan, New Jersey,Oregon and Washington, provideadditional weeks of benefits to workerswho have been dislocated and are inapproved training program. For example,New Jersey provides an additional 26weeks of UI support to such workers.

Another way states can supportunemployed workers seeking to upgradetheir skills is to waive tuition costs atpublic institutions. For example, RhodeIsland lets UI recipients take any course,for credit, at any state-operated college or

university and waives tuition andregistration fees.

Use UI funds to help companies trainworkers in order to avoid layoffs andbetter position their workers. A numberof states, including Delaware, Minnesota,Massachusetts, New Jersey, RhodeIsland, and Tennessee, assess a smallsurcharge on the UI tax to pay for

employer-based training. For example,Rhode Island assesses an additional 0.2percent surcharge on employer UI taxesto fund an employer-based training grantprogram. Delaware's ”blue-collartraining tax” assesses a 0.10 to 0.15percent tax on taxable wages forcounseling, training, and placement ofdislocated workers. Indiana adopted atraining payroll tax to fund a new

apprenticeship and job-training program.These programs not only improvecompany productivity and reduce therisks of layoffs, but also provide skills toworkers so that if they are laid off theycan get back to work more quickly.

Provide reemployment assistance

vouchers to all workers who qualify forUI. Notwithstanding the changes madein the Workforce Investment Act to setup “one-stop" job centers, many unem-ployed workers do not receive effectivereemployment assistance, even whenthey go to “one-stops.” While somestates use WIA to create viable one-stopprograms, many others do not. As a re-sult, states should let unemployed work-ers receive vouchers (perhaps worth upto $250) to obtain such services. Voucherscould be redeemed (within the firstmonth of unemployment) at certifiedprivate, non-profit or for-profit employ-ment assistance organizations for serv-

ices such as resume writing, job huntingskills, interviewing, identification of ca-reer goals, etc. Because these are vouch-ers, workers are free to choose any certi-fied provider. Job search vouchers couldalso reenergize organized labor, whichwould be well positioned to capturemuch of this market. Because Labor al-ready has ties to many laid-off workers,they could bid to provide comprehensive

services to get these individuals back inthe workforce, and by doing so, enhancetheir usefulness to American workers.

Experiment with programs to get peopleback to work faster. Not surprisingly,there is evidence that more generousbenefits tend to prolong unemploymentspells. States have conducted various pi-lot projects, including back-to-work bo-

nuses, self-employment lump-sum pay-ments, and targeted reemployment serv-ices, that have been moderately success-ful in getting people back to work faster.These should continue to be used. Butstates should also experiment with pro-viding workers weekly benefits that de-cline with the duration of unemploy-

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ment. Under such an arrangement, theweekly benefit a worker would receivewould decline each week. Workerswould get more generous benefits thanthey normally would at the beginning oftheir unemployment, but less generous

benefits toward the end of 26 weeks.This could be done in such a way as tonot reduce the average weekly benefits aworker receives, but it could reduce thelength of time people are unemployed.

Make it easy for workers to find outabout and apply for unemploymentinsurance. In the past few years, anumber of states have allowed workers

to apply for benefits by telephone, andsome states have begun to allow onlineapplications. However, many statesmake it very difficult and more should bedone to get information about UI online.For example, of the six major choices onthe front page of Michigan’s Web portal,an unemployed worker would probablyclick on “education and careerdevelopment” and then on the sub-

category “job seekers,” and then on “laid-off workers” help.” If she then clicked onthe link for dislocated workers, shewould be frustrated to not be able to findany information about unemploymentinsurance or how to apply.8 If a Michiganworker is able to find the appropriateWeb site, they are still not able to applyonline and are told to look in thetelephone book to find a local state officeat which to apply.9 Moreover, while thesite explains how the program works, itfails to inform workers that they may beeligible for benefits while they areenrolled in training. Likewise,Tennessee’s Department of Labor andWorkforce Development home page hasa link for "services for job seekers." 10

Those services do not include, however,help with UI. Such sites are not uniqueto Michigan and Tennessee: Many stateshave Web presences which only the mostintrepid laid off worker can navigate tofind information about UI, much less

apply for benefits.Some states, however, do try to

promote unemployment insurance as abenefit that state residents should availthemselves of when in need. Forexample, a laid off worker going toWashington State’s Web portal wouldfind a link on the home page forunemployment insurance, which afterclicking on it, would allow him to apply

for UI benefits directly online.11

Step Four: Stop Using UI toSubsidize Companies That Lay Off Workers

Companies' UI tax rates are supposed tobe experience rated, that is, the more acompany lays off workers, the higher theirtax rate should be. But because states cap the

top rate and have a floor on the lowest rate,some companies particularly in seasonalindustries like construction andlandscaping are assessed a lower tax ratethan they otherwise would be if they werefully experience rated. For example, inMassachusetts, the construction sectorreceived 22 percent of all UI benefits butmade only 9 percent of all contributions.12 Conversely, other employers who seldom

lay anyone off pay higher rates. There arewithin-industry subsidies going on as well,where some firms that lay off fewer workerssubsidize other ones by paying a rate higherthan their experience rating alone would justify.

How many firms are at the extremes ofthe highest and lowest rates and are

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therefore subsidizing or being subsidized?One study of Massachusetts found thatabout 5 percent of firms are in eachcategory.13 Nationally, approximately 18.4percent of benefits cannot be charged back toemployers because their tax rates are alreadyat the maximum level. This is unfair to otherfirms who are assessed higher taxes in orderto cover the shortfall of these high-layofffirms whose tax rates are already capped.Moreover, ineffective inexperience ratingleads the firms already paying the top rate tobear no penalty for laying off more workers,since they can do so without seeing their UItaxes increase. Research shows that if thesecompanies had their UI tax rate increased to

adequately cover their layoffs they wouldreduce layoffs by at least 10 percent to 20percent, taking two-tenths to four-tenths of apercentage off the national unemploymentrate.14 Some earlier studies found muchhigher effects, up to two full percentagepoints added to the unemployment ratebecause of the failure to have a system that isfully experience rated.15

The easy answer to this is to raise the top

rates and use the increased taxes to lowerthe rates other employers pay. At least onestate, Rhode Island, recently did this.However, it is politically difficult in manystates because the firms that are alreadybeing subsidized oppose any change thatwould require them to pay their fair share,even though many more firms that lay offfew workers would benefit by slightly lowerrates. One idea would be to follow the

model of the worker's compensationindustry where rate schedules are setaccording to industry experience levels.16 Thus, industries with very low levels oflayoffs would have a lower schedule thanindustries with a very high one, andcompanies would move up or down on theschedule as they lay off more or fewer

workers. Such a change would enablepolicymakers to lower tax rates on the largeshare of employers. It would also reduce theincentive firms at the top rate have for layingoff workers. But this too would likelyencounter political resistance from theindustries assessed at a higher rate.Therefore, most states are unlikely to do thison their own since the firms at the top rateusually fight such changes. As a result:

Congress should require states to assessUI tax rates on employers that closelyreflect the total UI benefits paid to theirworkers.17 This could be done byrequiring that the UI benefits that are

paid out of the state’s general UIfund that otherwise would be paid bythe firm if it had been fully experiencerated can be no greater than 10 percentof total benefits paid. Congress mightwant to phase in this requirement overseveral years in order to enable thecompanies to absorb the tax increase.Raising the rates on companies that havehigh, chronic layoffs would allow states

to reduce rates on a large number ofemployers who lay off workersinfrequently. Some might object that thiswould penalize certain types ofindustries, such as seasonal employerslike landscaping firms. But there is norationale why other employers should bepaying for their workers’ benefits.Moreover, any negative economic impacton these sectors is likely to be made up

for by the reduced layoffs the higher taxwould inspire. Others might object thatthis would hurt weak firms who lay offworkers when their sales are down. Butif states adopt a reserve ratio approach tocollecting benefits, as opposed to abenefits ratio approach, the immediateeffects on the firm will be minimized.18

12




Step Five: Make UI Work in theRecession

Congress established a program thatextends UI benefits for a minimum of 13

weeks in states that meet certainunemployment rate trigger mechanisms.But since 1983, only 12 states have triggeredthe program. One reason is that the measureused, the insured unemployment rate, hasdeclined relative to the total unemploymentrate as fewer workers qualify forunemployment insurance. (The insuredunemployment rate is lower than the totalunemployment rate). President Bush

recently proposed extending benefits by 13weeks for people who became unemployedafter Sept. 11, who live in states where theunemployment rate rises by at least 30percent, and whose benefits expire. But such

a hurdle is too high. As a result:

Congress should lower the UI extendedbenefits trigger from 5 percent of theinsured unemployment rate to 4 percent.

C

onclusion

It is time to reform unemploymentinsurance for the New Economy. Some ofthe needed changes can and should be madeby states. However, to fully ensure that thesystem is modernized, Congress needs to actto set a baseline under which states canoperate their programs. Enacted, the reformslisted here would not only help a large

number of Americans cope with the NewEconomy, it would raise overall rates ofeconomic growth.

Robert D. Atkinson is vice president of the Progressive Policy Institute and director of PPI’s Technology & New Economy Project.

Endnotes

1. U.S. Department of Labor, “UI As An Automatic Stabilizer,” http://wdr.doleta.gov/owsdrr/99-8/99-8_es.pdf.

2. Wayne Vroman, “Effects of Welfare Reform on Unemployment Insurance,” The UrbanInstitute, May, 1998. http://newfederalism.urban.org.html/anf22.htm.

3. U.S. General Accounting Office, “Unemployment Insurance: Role as Safety Net For Low-

Wage Workers is Limited,” December, 2000.

4. The GAO reports that eight states would deny benefits to someone who was working theday shift but was required to work the night shift and who quit because childcare was notavailable. In our view, workers should not have to prove that childcare is not available. Iftheir moving to a night shift meant that their children would be without a parent at night,they should be allowed to quit and collect UI while they look for a job that would enable

13

http://wdr.doleta.gov/owsdrr/99-8/99-8_es.pdf







14

them to fulfill their parental responsibilities.

5. Laurie J. Bassi and Daniel P. McMurrer; Essays on Interstate Competition in the UnemploymentInsurance System, (Washington D.C: United States Department of Labor, Employment and

Training Administration, 1996) p. 51. Http://wdr.doleta.gov/ owsdrr/98-5/98-5.pdf.

6. Stephen A. Wander and Thomas Stengle, “Unemployment Insurance: Measuring WhoReceives It.” Monthly Labor Review, July 1997, pp.15-24. (Rates in excess of 100 percent are aresult of factors such as paying benefits to some job leavers and reentrants, and paying someindividuals more than 26 weeks.7. Rebecca M. Blank and David E. Card, “Recent Trends in Insured and UninsuredUnemployment: Is There An Explanation?” Quarterly Journal of Economics, 1991, 106:1157-1189.

8. The site, which promotes the dislocated worker program of the state, doesn’t even list thelocation of the “one-stop” centers authorized under the Federal Workforce Investment Act. Itturns out that unemployment insurance is listed under the link for “business services.”

9. http://www.michigan.gov (click on the “business services” link).

10. http://www.state.tn.us/labor-wfd/.

11. http://access.wa.gov/.

12. Robert Tannenwald and Christopher J. O’Leary, “Unemployment Insurance Policy inNew England: Background and Issues,” (Federal Reserve Bank of Boston: April 1997) p. 24.13. Ibid.

14. Christopher J O’Leary and Stephen A. Wandner, editors, Unemployment Insurance in theUnited States: Analysis of Policy Issues, Chapter 8, (Kalamazoo, MI: W.E. Upjohn Institute forEmployment Research, 1997).

15. David Card and Philip Levine. 1994. “Unemployment Insurance Taxes and the Cyclicaland Seasonal Properties of Unemployment,” Journal of Public Economics 53, 1: 1-29.16. I am grateful to Dr. Stephen Woodbury of the Upjohn Institute for Employment Research

for this idea.

17. These are referred to as ineffectively charged benefits (IEC), which are not fully coveredby employer taxes.

18. Tannenwald and O’Leary, Unemployment Insurance Policy in New England: Background and

http://www.state.tn.us/labor-wfd/

http://access.wa.gov/

http://access.wa.gov/

http://www.state.tn.us/labor-wfd/




15

Issues, (Federal Reserve Bank of Boston: April 1997) p. 24.

ppi - modernizing unemployment insurance (2002)

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