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Unemployment Insurance:
A Broken System*
A COALITION REPRINT:
February 5, 2010
How Low Can We Go? State Unemployment Insurance Programs Exclude Record Numbers of Jobless Workers
Kimball & McHugh, EPI 3/15
by Marianne Hill, Ph.D. Dr.
Hill has published articles in the Journal of Human Development,
Feminist Economics, and other economics journals. She
also writes for the American Forum and the Mississippi
Forum.
Over 7.8 million people have lost their jobs in the current
recession. Employment is down 15% in manufacturing, 6% in professional
and business services, and more than 6% overall in the private
sector, compared to early 2008. The unemployment rate has soared
into the double-digits and is expected to average 10% in 2010.
Good thing that unemployment insurance provides income to help
tide these workers over this rough patch, right? Not so fast.
The share of unemployed workers receiving benefits has gradually
shrunk since the 1970s. In 1975, over half of unemployed workers
received benefits. In 2008, only 37% of the unemployed were covered;
in some states the figure was less than 25%. And so-called “discouraged
workers,” those who want but are not actively seeking employment,
are not considered part of the labor force and so are not even
included in these figures.
Unemployment insurance, in short, is not a benefit that everyone
who loses a job can count on. Several groups are working to change
this. The American Recovery and Reinvestment Act (ARRA), better
know as the Obama stimulus package, provides temporary funding
for states that expand their unemployment coverage, and so far
28 states have done so. Others, however, are resisting even a
temporary expansion of coverage that would be fully federally
funded.
Why Unemployment Compensation?
When unemployment insurance was established as a nationwide program
in 1935, it was hailed as a means of enabling workers to protect
their standard of living between jobs. With it, workers are better
able to keep their homes and their health. It helps to stabilize
family well-being and maintain the labor force in a region. By
enabling workers to engage in longer job searches, unemployment
compensation also improves workers’ job choices. It even
enhances employers’ flexibility in hiring by making lay-offs
less painful.
Unemployment insurance is also an important countercyclical tool:
it bolsters consumer spending during economic downturns and then
automatically drops off as the economy recovers and unemployment
falls. Because it reduces the need for other forms of government
intervention to raise demand in a downturn, the program has supporters
across the ideological spectrum.
Coverage and benefits vary by state. The average weekly benefit
in the fall of 2009 was $310—about 36% of the average weekly
wage. Benefits are paid from state funds that are financed by
a payroll tax on employers. This tax is levied on anywhere from
the first $7,000 to the first $35,700 of each worker’s annual
earnings depending on the state; the national average is $11,905.
The tax rate ranges from 0.57% to 4.63% of the taxable portion
of wages, with a national average of 2.25%. (Who bears the cost
of this tax is debated: economists have shown that whether or
not a company is able to pass the cost of payroll taxes forward
to customers or back to employees depends on conditions in its
particular product and labor markets.)
Shifts in employment patterns and a tightening of eligibility
requirements are behind the nationwide reduction in effective
unemployment insurance coverage. Today almost 30% of the U.S.
work force is employed in nonstandard work arrangements, including
part-time, temporary, contract or on-call work, and self-employment.
Most of these jobs are subject to the payroll tax that funds unemployment
benefits—yet these workers often find they are ineligible.
For instance, persons who are seeking only part-time employment
do not qualify for unemployment benefits in many states. This
affects women in particular, including heads of households, who
often work part time due to dependent care responsibilities. People
who work full-time but only for part of the year may also find
it difficult to qualify for unemployment benefits.
Many workers who are not eligible for benefits provide income
that is critical to their families. In 2007, 41% of workers worked
only part-time or part-year. Among heads of households, this figure,
though lower, is still sizeable: in 2007, it was 32% overall and
42% for female family heads. Besides child care, elder care can
also mean part-time or part-year work for many. Nearly one-third
of working adults with older parents report missing some work
to care for them.
Who Are the Unemployed?
Certain industries, regions, and workers are being hit harder
than others this recession. In December, 22 states and the District
of Columbia had unemployment rates of over 10%, but only three--North
Dakota, South Dakota and Nebraska--had an unemployment rate below
5%. California, the District of Columbia, Michigan, Nevada, Rhode
Island and South Carolina all had seasonally adjusted jobless
rates of 12% or more, as did Puerto Rico.
Unemployment hits some population groups much harder than others—young
people, people of color, and anyone with relatively few years
of education are among those hit hardest. Black men had the highest
jobless rate among workers over 20 years of age in December, at
16.6%. The rate for black women was 13.1%. In contrast, the jobless
rate was under 10% for both white men (9.3%) and white women (7.4%).
Hispanics had an unemployment rate of 12.9%.
A combination of factors including occupational segregation, lower
educational levels, and discrimination result in lower incomes
for women and for black and Latino men, exacerbating the impact
of higher unemployment. Data from 2005-2007 show that black women
working year-round, full-time earned $15,900 a year less than
white men; for Hispanic women the wage gap was $21,400. Lower-income
families have fewer assets to see them through rough economic
times, and their extended families are also hard-pressed as demands
upon them increase. Nonprofits, another part of the social safety
net, suffer from increased demand for services and decreased donations
during recession. As a result, families of blacks, women and Hispanics
suffer severe setbacks during a period of recession, and unemployment
insurance can be especially critical to them.
Families in which one or more wage earners lose their jobs bear
costs greater than just the lost wages. Savings are exhausted;
rates of illness, both mental and physical, increase; debt levels
often rise (inadequate medical insurance coverage is a major factor—in
2008, 60% of the unemployed lacked health insurance); and the
pursuit of a college education or other training may be postponed.
Studies have documented a rise in suicide rates, mental and physical
illnesses, and domestic and other violence among the unemployed.
These problems become widespread during recessions and become
a burden on society, not just on individual families.
Some Improvements Underway
Under the Obama stimulus package, states that elect to expand
their programs in certain ways receive federal funds to finance
these changes for at least two to three years. States will qualify
for funds if they make unemployment benefits more available in
a number of ways:
• Change the base period used to determine whether a worker
qualifies for benefits and if so, the amount he or she will receive.
• Make unemployment insurance available to certain individuals
who are seeking only part-time work and/or to those who lost or
left their jobs due to certain compelling family reasons (for
example, domestic violence or a spouse relocating).
• Provide an additional 26 weeks of compensation to workers
who have exhausted regular unemployment benefits and are enrolled
in and making satisfactory progress in certain training programs.
• Pay an additional dependents’ allowance of at least
$15 per dependent per week to eligible beneficiaries.
Another potential reform relates to the extension of benefits
beyond the regular 13- to 26-week period. Until now, states were
required to offer extended benefits during periods of especially
high unemployment (with half the cost covered by the federal government)
only if certain trigger requirements were met—and that did
not happen often. The ARRA offers states the option of adopting
less stringent trigger requirements and in 2009 covered the full
cost of the extended benefits out of federal coffers. As of January
2010, all of the 35 states adopting the new trigger requirements
have had extended benefits go into effect, compared with only
four of the 15 states that have kept earlier, pre-ARRA triggers.
In addition, in 2008 Congress authorized a separate program, Emergency
Unemployment Compensation, to provide federally funded benefits
after regular benefits are exhausted. But the National Employment
Law Project estimated that about 1.3 million workers would exhaust
their benefits under this program before December 2009.
A permanent expansion of coverage to a larger share of the unemployed,
with or without an increase in benefit levels, would cost more
than the $22 per month in average unemployment insurance taxes
currently paid per worker. This could be achieved by expanding
the portion of wages on which the tax is levied. To reduce the
negative impact on lower income workers, this could be accompanied
by adjustments to the earned income tax credit and tax exemptions.
Even if the reforms contained in the Obama administration’s
stimulus package were fully enacted, benefits and coverage would
be low in the United States in comparison to Europe. Much remains
to be done to ensure minimal income security here. As the unemployment
rate in the states hovers at an average of 10%, it is time to
revamp our broken system.
SOURCES: U.S. Department of Labor, especially
http://www.ows.doleta.gov/unemploy/finance.asp;
U.S. Bureau of Labor Statistics; National Employment Law Project,
http://www.nelp.org/; William
Conerly, “European Unemployment: Lessons for the United
States,” National Center for Policy Analysis, May 26, 2004;
National Institutes of Health, http://www.ncbi.nlm.nih.gov/pmc/;
Marcus Walker and Roger Thurow, “U.S., Europe Are an Ocean
Apart on Human Toll of Joblessness,” Wall Street Journal,
May 7, 2009.
*Copyright © 2009 by Dollars and Sense. Updated,
and reprinted with permission from Dollars and Sense,
Issue 284, September/October 2009.
See also Toward
a Strong Unemployment Insurance System, Boushey
& Eizenga
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