Jobs and Unemployment

Appendix table: How proposed UI reforms correct flaws in current policy

The table below summarizes key proposals under the five priority recommendations for urgent interventions to ensure that the unemployment insurance system can sustain families and the economy. A subset of these proposals are highlighted in the Executive Summary. Individual chapters in the report discuss these policies in detail and provide additional important reforms.

Current policy/law

Proposed reform and rationale

Guarantee universal standards

State control. With few exceptions, states decide eligibility, benefit levels, and benefit duration. Establish federal minimum standards to ensure geographic, racial, and gender equality.
All or nothing tax relief. State employers are subject to a $42/employee federal tax, rising to $420 if state fails to comply with federal rules. This penalty rate has never been invoked. Give the federal government usable enforcement tools. Encourage the use of statutory tax penalties by allowing the federal government to apply incremental increases to the federal tax rate on employers that fail to meet minimum universal standards and other key obligations of a more equitable UI system.
Unreviewable enforcement discretion. The U.S. Department of Labor has sole authority to decide whether to investigate or sanction state noncompliance. Worker voice in enforcement. Provide workers with a pathway to report state noncompliance to the federal government and an avenue for challenging federal inaction.
Workers vulnerable to state failures. States may take months to process claims in times of high demand. Workers can get retroactive benefits, but often have no way to pay their bills while they wait. Hold workers harmless for state delays. Ensure that workers with pending applications that are not being processed in a timely way receive at least the minimum weekly benefit.

Reform financing

State financing. The unemployment system is jointly financed by states and the federal government through payroll taxes paid by employers. During normal economic times, state tax funds pay for the benefits their workers receive and federal tax funds underwrite the cost of administering the program. The federal government finances 50% of the Extended Benefits (EB) program, and in recent recessions has paid for 100% of the EB program and funded emergency benefits programs enacted on an ad hoc basis. Provide federal financing for benefits. Use federal funds generated by a single, federal unemployment insurance tax to pay for all UI benefits.

If UI tax rates paid by employers are level across states, we can remove the most fundamental barrier to adequate benefit financing, and thus adequate benefit amounts.

Taxable wage base. State UI tax is imposed on the first dollars of employees’ wages, up to a cap that varies by state. Most states’ wage bases are under $15,000. Broaden the taxable wage base. To make UI taxes more efficient and more progressive, set the UI taxable wage base cap higher, to equal the Social Security wage base cap (currently $142,800), and index it.
Experience rating based on UI claims. Different employers within a state face different tax rates, depending on the employer’s “experience” with unemployment, measured by the share of former workers who receive UI benefits over a given period. This tax model, known as “experience rating,” is intended to reduce layoffs, but also encourages businesses to challenge workers’ benefit claims. Adopt an hours-worked formula for experience rating. Reform experience rating to use an “hours worked” formula in which an employer’s tax rate depends on how much the hours worked by their employees changed, on a quarterly basis, over a three-year period.

If we switch to basing tax rates on changes in workforce hours, we eliminate the incentives to deny workers benefits, but keep the incentives for retaining rather than terminating employees.

State trust fund balances based on expected benefit awards in high-cost periods. Currently, in good times states deposit excess UI revenues in a “trust fund” account, to be drawn on during recessions. Regulations encourage states to ensure that fund balances hit a certain ratio of expected payouts in high-cost periods. States can hit targets through benefit cuts rather than revenue increases. Remove the incentive to cut benefits to lower trust fund balance targets by basing state trust fund targets on industry-adjusted benefit costs per capita.
Partial, unpredictable federal financing of UI during downturns. States can borrow from the federal government to pay UI benefits, subject to substantial interest and penalties. In past recessions, Congress has forgiven these loans or waived some interest and penalties. In a federal–state financing system, automatically grant states financial relief during local downturns. To reduce pressure on states to slash benefits, especially in post-recession periods when trust fund balances are low, automatically grant federal relief, such as forgiveness of state loans.
Weak tools for combating employee misclassification. Some employers circumvent UI taxes by claiming that their workers are independent contractors rather than employees. During the recession, app-based workers received temporary CARES Act benefits, but the companies that profited from their labor largely fail to pay their share. States are hamstrung in their efforts to combat the practice, in part due to complex tests that are unpredictable and costly to administer. Require the ABC test. The ABC test, already adopted in a few states, is a simpler and more protective legal test that presumes a worker providing a service to a business is an employee unless: (A) the individual is free from the direction and control of the business; (B) the labor is provided outside the usual course of the business; and (C) the service provider is customarily engaged in their own independently established business. Workers should be able to enforce the law if their employers are fraudulently misclassifying them to evade UI taxes.
UI tax imposed only on wages. Because employers are taxed based on their employees’ salaries, payments to contractors are not taxed. Tax large businesses that use a lot of contractors. To further account for misclassification that the ABC test cannot reach, and to reduce tax incentives for outsourcing, tax contractor payments at the same rate as employee hours, but only if the contractor receives a Form 1099, and only for large firms.

Update UI to match the modern workforce

Recent earnings above a certain threshold as a test for eligibility. To qualify for UI benefits, workers must be able to show that they earned money in an amount greater than a specific threshold over a specific period. Arizona, for example, requires minimum wage workers to average more than 30 hours of work a week to be eligible for UI, excluding many low-wage workers who are underemployed. Replace the dollar earnings requirement with an hours worked requirement. Make workers eligible if they work at least 300 hours in any of the six quarters before separation.

If we base eligibility solely on hours worked and extend the period for qualifying hours over six quarters, we can expand UI eligibility to low-paid and part-time workers who are attached to the labor force but whose earnings are too low or uneven to pass the traditional “monetary eligibility” requirement.

Restrictive “reason for separation” rules. The UI program is intended to insure workers against involuntary separation from employment. However, many states use eligibility criteria that exclude workers who separate from work through no fault of their own. Expand eligible reasons for separation. Ensure UI eligibility for workers who leave their jobs because they have compelling personal or family reasons, their rights are violated in the workplace or their safety is threatened, they are retaliated against for engaging in labor action such as a strike, or they are in a seasonal or temporary work arrangement that ends.
Onerous continued eligibility requirements. After workers establish their UI eligibility, they must meet sometimes burdensome weekly reporting and job-search requirements to show that they are available for, and actively seeking, work. In some cases, workers who seek part-time work as a bridge back to employment, or who engage in education and training programs, are considered unavailable for work. Institute more flexible continued eligibility requirements. To eliminate red tape and prevent pointless disqualifications for needy families, streamline reporting, and make workers searching for part-time work eligible for UI, as well as those participating in union-led training programs. Eliminate or relax work-search requirements, which do not meaningfully support labor market reentry.
Exclusionary definitions of “qualifying workers.” In the current UI system, workers without recent work history are ineligible for UI, even when they are involuntarily unemployed. In addition, immigrant workers who are not authorized to work are ineligible for benefits. Expand the definition of qualifying worker. Create a Jobseeker’s Allowance to support self-employed workers, seasonal workers, temporary workers, undocumented workers, new entrants to the labor market, and people returning to the labor market after taking time off for health or caregiving reasons or because they were incarcerated.

By providing income support to all job seekers who lose work through no fault of their own, we can facilitate reemployment, benefiting both job seekers and the broader economy.

Punitive overpayment collections. While attention during the pandemic has been focused on criminal enterprises defrauding UI programs, the vast majority of improper payments in normal times are the result of confusion or mistakes by claimants, or errors by the UI agency. Claimants are often required to repay these overpayments—sometimes with penalties— even when they are not the result of any misrepresentation on their part. Assure fairness in the assessment and collection of overpayments. Exempt households with incomes under 200% of the federal poverty line from repayment obligations, except in cases of fraud. Require all states to have a provision that permits waiver of nonfraud overpayments when contrary to the purposes of the UI program or otherwise contrary to equity.

By waiving repayment collections, we avoid destabilizing workers who may no longer have access to funds to repay the overpayments, as they spent the benefits on necessities during their period of unemployment.

Expand UI benefit duration

State-provided unemployment benefits range in duration from a low of 12 weeks to a high of 30 weeks, depending on the state. The most common minimum benefit duration is 26 weeks, though some states in recent years have reduced duration to below this level, in some cases to periods as short as 12 weeks. Increase benefit duration in normal economic times to 30 weeks. Make the minimum potential benefit duration (PBD) 30 weeks during periods of low unemployment.

Increasing the PBD would help provide benefits that last long enough to alleviate economic insecurity and enable workers to secure jobs that can sustain their families.

Inadequate benefit duration during economic downturns. When the labor market deteriorates to certain levels, economic metrics trigger extended benefits. Tier 1 of the EB program adds up to 13 weeks and tier 2 adds an additional seven weeks. Increase benefit duration during periods of labor market distress. Use automatic triggers to increase benefit duration in tiers as the labor market weakens, reaching a maximum of 99 weeks during times of severe labor market distress.

Increasing the PBD during downturns would help ensure that jobless workers have the support they need for long-haul job searches, and that the demand boost provided by UI benefit respending in the economy lasts long enough to expedite a true recovery.

Premature trigger-off of extended benefits. The EB program contains “look-back” provisions that trigger benefits off if there has been no significant increase in unemployment over the past two years. This allows extended benefits to trigger off while the labor market remains weak (when unemployment is stabilizing at an elevated level or falling only because people have left the labor force because they have given up searching for work). Additionally, after the 20 weeks of tier 1 and 2 EB benefits, further extensions have to be legislated on an ad hoc basis by Congress. Trigger off extended benefits in phases according to better measures of labor market distress. Reduce extended benefit durations gradually, and only as unemployment rates are declining and the declines are driven by rising prime-age employment.

Automatic benefit extensions that last as long as needed are more effective and efficient than emergency programs that end arbitrarily or cease and restart, causing extreme anxiety for workers and their families.

Increase UI benefit levels

Low wage-replacement rates. On average, UI benefits replace roughly 40% of a worker’s prelayoff wages. Health and retirement benefits and other forms of compensation that are not wages are not replaced, and their loss adds to a household’s financial distress. Raise replacement rates. A sudden loss of 60% of income is devastating to workers and their communities. Implement a progressive formula that replaces at least 85% of wages for the lowest earners and gradually decreases to replace 50% of wages for higher earners, 30% of wages for very high earners, and so on.
Disparate minimum and maximum benefit levels. States vary tremendously in their benefit levels, due to different minimum and maximum benefits, as well as formulas for computing benefits based on wage history. Standardize minimum and maximum benefit levels. Set a maximum weekly benefit amount at no lower than 150% of the state’s average weekly wage, and a minimum weekly benefit amount at 30% of the state’s average weekly wage (or an inflation-adjusted $250 if that number is greater).
No universal dependent allowance. Ten states currently offer dependent allowances that increase benefits for those with children or other dependents when setting UI benefit amounts, though amounts and eligible dependents vary by state. Establish a universal dependent allowance. Provide a dependent allowance of $35 (inflation adjusted) per dependent per week.

A dependent allowance provides an important backstop for households with children who are more likely to face food and housing insecurity when a job is lost.

Inadequate benefits for subminimum wage earners and tipped workers. There are 3 million tipped workers—disproportionately women and people of color—and over 100,000 workers with disabilities who are paid a subminimum wage. Further, some classes of workers, such as a few categories of agricultural workers, legally may be paid subminimum wages, while other workers are illegally paid subminimum wages. Whether workers receive subminimum wages legally or illegally, their low earnings depress their UI benefit levels. Improve treatment of subminimum wage earners and tipped workers. Calculate benefit amounts for subminimum wage earners and tipped workers based on the prevailing minimum wage or the worker’s wages with tips, whichever is greater.

Using a prevailing minimum wage standard for setting benefits for subminimum wage workers helps ensure that these workers aren’t penalized twice for their low earnings.

Big benefit reductions for part-time workers. Beneficiaries who accept part-time work while job searching typically lose all or most of their unemployment benefit, even if their part-time wages are far lower than prelayoff earnings. Allow part-time workers to keep more of their wages. To eliminate pointless and economically damaging disincentives for part-time work, implement an earnings disregard that allows workers to receive income totaling 110% of their prelayoff average weekly wage from combined UI benefits and earnings from part-time work.
Benefit levels that don’t adjust to economic downturns. Historically, benefit levels have not been adjusted during economic downturns, with the minor exception of a $25 weekly addition during the Great Recession. The current provision of higher benefits during the COVID-19 pandemic is an outlier. Increase benefits during economic downturns. To reflect the greater social value and lower potential costs of UI during recessions, increase benefits when extended benefits are triggered, and increase wage replacement rates, minimum and maximum benefit amounts, the dependent allowance, and the Jobseeker’s Allowance.
Taxation of benefits. UI benefits were fully tax exempt for the first 40 years of the U.S. system, but taxes were phased in between 1978 and 1986, reducing after-tax replacement rates. Reform taxation of benefits. To restore replacement rates, preserve state funds for state use, and eliminate needless tax hassles, exempt lower-earning households—those with less than $100,000 in adjusted gross income—from paying federal taxes on UI benefits, and phase in taxes for households earning between $100,000 and $150,000.

See related work on Unemployment insurance | Unemployment | Black Americans | Latinx Americans | Stimulus/stabilization policy | Women | Nonstandard work arrangements | Gig economy | Contingent workforce | Coronavirus