Executive summary: Reforming unemployment insurance

The unemployment insurance (UI) system is a cornerstone of our economic infrastructure. It supports working people who have lost their jobs through no fault of their own with cash benefits while steadying the economy during crises. A successful UI system can be the centerpiece of economic recovery, particularly for those communities, such as workers of color, who bear the brunt of downturns and are left behind in the wake of recessions. In addition to sustaining people through jobless spells, swift and adequate UI benefits during recoveries would allow workers to search for good jobs, not just the first job that comes along. UI benefits that serve as a bridge back to good, well-matched jobs help to ensure that the economy grows faster and that people don’t get trapped in low-quality jobs that depress their lifetime earnings.

Unfortunately, the current federal–state UI system, financed by state and federal taxes, is crumbling. It fails to serve many workers, ramps up too slowly and unevenly to stabilize the economy during recessions, and sets perverse incentives for states and employers that undermine program integrity. States set most rules, and the vast majority of states set benefits too low and cut them off after too short a time. Many workers, especially low-wage and involuntary part-time workers, are left out entirely, and workers of color are overrepresented in both these groups. Exclusionary eligibility rules are just one of many racial disparities state control creates.

Temporary UI programs first enacted as part of the CARES Act at the onset of the COVID-19 pandemic papered over a few of these problems. But even those emergency programs have proven inadequate, with already overstretched state systems failing to get out emergency benefits in a timely manner. Once again, workers of color, who are bearing the brunt of the coronavirus downturn, are at risk of being left behind. Half of the states are now choosing to cut off their residents’ access to these programs early, causing extraordinary harm to vulnerable families and impeding economic recovery. GOP governors’ attacks on these critical emergency benefits are the most vivid and recent manifestation of recurring dysfunction in the UI system: The federal government has ceded so much control to states that it has failed to equitably protect working people.

The fundamental necessity of the UI system, and the human suffering and economic instability caused by its repeated failures, should compel drastic changes. The basic remedy is clear: a stronger federal role. Building on recommendations from workers and experts alike, this report proposes five priority recommendations for urgent interventions to ensure the UI system can sustain families and the economy, with detailed actionable proposals for each recommendation.

The time is ripe for a fundamental worker-led reimagining of the UI system; in the meantime Congress must immediately implement the following equity-focused steps to repair and stabilize the system:

  • Guarantee universal minimum standards for benefits eligibility, duration, and levels, with states free to enact more expansive benefits
  • Reform financing of UI to eliminate incentives for states and employers to exclude workers and reduce benefits
  • Update UI eligibility to match the modern workforce, and guarantee benefits to everyone looking for work but still jobless through no fault of their own
  • Expand UI benefit duration to provide longer protection during normal times and use better measures of labor market distress to automatically extend and sustain benefits during downturns
  • Increase UI benefits to levels working families can survive on

Detailed summary of proposals

The tables below summarize some of our key proposals and compare them with existing policy. Individual chapters in the report discuss these policies in detail and provide additional important reforms. See the Appendix Table for a broader list of reforms.

Guarantee universal minimum standards for benefits eligibility, duration, and levels, with states free to enact more expansive benefits

There are no federal standards governing who can receive UI, how much money, or for how long. States compete to lower the UI tax burden for businesses and are currently replenishing depleted trust funds by shortening benefit duration and tightening eligibility. Some states offer just 12 weeks of benefits, and benefits replace just about 40% of average wages, which is not nearly enough for workers, particular low-wage workers with families, to get by. Workers experience radically different support from the UI system depending on where they live, with the average weekly benefit in states with high shares of Black workers significantly lower than that of states with high shares of white workers.

Key standards reforms
Current policy/law
Proposed reform and rationale
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.

Reform financing of UI to eliminate incentives for states and employers to exclude workers and reduce benefits

The current financing of the UI system incentivizes employers and states to obstruct delivery of unemployment benefits. Anemic funding formulas result in state UI trust funds that are easily depleted during recessions. To replenish those trust funds, states cut their benefits and restrict eligibility rather than raise payroll taxes. This race to the bottom manifested after the Great Recession and appears poised to repeat: In 2021, a handful of state legislatures have cut or proposed cutting benefits in their regular UI programs, with more likely to follow in 2022, even as the recurring need for federal intervention to fund emergency temporary benefits programs during recessions has shown that existing benefits are inadequate. In addition, the financing system rewards employers who prevent their employees from claiming benefits, turning employers into adversaries to workers navigating the UI system, rather than allies.

Key financing reforms
Current policy/law
Proposed reform and rationale
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 less than $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.

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 eligibility to match the modern workforce, and guarantee benefits to everyone looking for work but still jobless through no fault of their own

State rules have left too many holes in UI’s safety net. Leading up to the coronavirus pandemic, less than 3 in 10 (28%) of unemployed workers actually received UI benefits, down from the approximately 36% who received UI benefits before the Great Recession. State eligibility rules often exclude the share of the workforce employed in part-time, low-wage, seasonal, and temporary work. Due to historical inequality and ongoing systemic bias, people of color and immigrants are more likely than white workers, and women are more likely than men, to be in low-wage jobs. And workers of color are more likely to be working part time but want full-time hours. For these workers, a lack of workplace power is exacerbated by their inability to rely on UI while searching for better jobs. The changes proposed would cement their inclusion and expand eligibility to include other workers.

Key eligibility reforms
Current policy/law
Proposed reform and rationale
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.
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 workers. 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.

Expand UI benefit duration to provide longer protection during normal times and use better measures of labor market distress to automatically extend and sustain benefits during downturns

The standard number of weeks provided by most states for their regular UI programs is 26—well below international norms—and at least nine states currently provide fewer than 26 weeks of benefits. Though the Extended Benefits (EB) program provides additional jobless aid during periods of labor market distress, its current design is flawed, failing to respond to the true severity of recessions and failing to add enough weeks of coverage. These problems leave Congress to authorize ad hoc extensions. When Congress allows these temporary programs to lapse before the job market has recovered, as happened briefly in December 2020, it jeopardizes the financial security of millions of families and slows economic recovery.

Key duration reforms
Current policy/law
Proposed reform and rationale
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 benefits to levels working families can survive on

UI benefits typically only replace about 40% of workers’ prelayoff wages and vary tremendously by state. Furthermore, many states pay benefits that are much lower—so low that workers can fall quickly into poverty during a spell of job loss. In no state are UI benefits enough to cover a worker’s basic needs. Benefits are especially low for the kinds of jobs disproportionately filled by women and workers of color, many of whom lack the savings needed to survive spells of joblessness. In this way the UI system entrenches and deepens existing inequities, including the systemic racism that has prevented workers of color from building family wealth.

The policy proposals laid out below would better alleviate severe economic hardship and reduce inequities.

Key benefit levels reforms
Current policy/law
Proposed reform and rationale
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 set a minimum weekly benefit amount at 30% of the state’s average weekly wage (or an inflation-adjusted $250 if that number is greater).
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 pre-layoff 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.