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Reforming Unemployment Insurance Stabilizing a System in Crisis and Laying the Foundation for Equity
By Rebecca Dixon and William Spriggs
The unemployment insurance system is the country’s only automatic income support program for individuals who have lost work. It kicks in automatically when job losses start—without the delays and political and policy wrangling about if, when, or how to respond. The program serves as a key stabilizer during economic downturns by buttressing consumer spending, demand, and sentiment—preventing people’s fears of job loss from constricting private demand for spending on goods and services faster than the initial job losses.
As we saw these past 15 months, however, when so many businesses had to shut down to help stop the spread of COVID-19, the unemployment insurance program has big holes in who normally gets benefits. Faced with massive job losses, the program would have proven an insufficient automatic stabilizer because of its huge gaps in coverage. Thankfully, Congress acted quickly to plug (albeit temporarily) some of those holes, and unemployment insurance served as the primary vehicle to help people who lost work and were left with no income. Since the start of the pandemic, the program has injected hundreds of billions of dollars into the U.S. economy, keeping millions of families in their homes and out of poverty.1
Because unemployment insurance is a federal–state hybrid program, states have broad flexibility to determine eligibility and benefit levels. This has led to notable coverage variations across states. For example, southern states with large Black populations have among the lowest benefit payments.
The UI program’s shortcomings, laid bare by the pandemic, meant that the injection of income support was not automatic for the millions of workers locked out of the program by outdated eligibility rules; it was not automatic for people caught in their state’s “race to the bottom” to slash benefits. But when the scale of the pandemic’s unemployment crisis became clear, Congress had to step in, to supplement benefit amounts and expand the program temporarily to cover workers not normally eligible for benefits due to their nonemployee status or because they worked part time or for low wages.
In the wake of lessons learned from the pandemic, unemployed workers and their advocates are speaking up, organizing, and demanding long-term reforms to fundamentally transform the unemployment system. This report provides a brief history of race- and gender-based exclusions and analyzes the program’s coverage, performance, and revenue base, pinpointing gaps and offering a vision of a revamped UI system with minimum federal standards that will more effectively and expansively provide income support to unemployed workers while stabilizing the macroeconomy.
The unemployment insurance system was conceived during the Great Depression in the 1930s by Labor Secretary Frances Perkins as part of President Franklin D. Roosevelt’s New Deal. As the program was created in the context of a broader system of patriarchy and racial hierarchy, Congress made compromises in its design that were laser-focused on protecting the earnings of white male breadwinners in manufacturing. Congress also compromised to give states huge discretion in implementing the program so they could have control to mirror their practices of racial exclusion. The program’s architects designed a system that attempted to reconcile opposing goals: to support the intended workers while excluding enough other workers to get it across the finish line in Congress. Federal unemployment insurance law has never meaningfully addressed those exclusions.
The composition of the U.S. workforce has shifted enormously since the 1930s. In just the past two decades, the United States lost about 4 million manufacturing jobs while gaining about 4 million food service jobs. In February 2020, there were roughly the same number of manufacturing workers as restaurant workers. But the unemployment insurance system, designed for full-time, higher-wage manufacturing workers, was never amended or adapted to industries where many workers are part time and are paid poverty wages. The almost 6 million payroll positions lost in March and April 2020 in food services was greater than the entire nondurable manufacturing workforce in February 2020 (BLS-CES 2021).
Clearly, the rules about who has access to unemployment insurance need to catch up to our racial and gender equity values and to the realities of working people and families today.
On the revenue side, the financing of the unemployment insurance system no longer matches the source of labor market collapses. In the 1930s, the state unemployment insurance systems on which the federal program was modeled taxed companies with an eye to swings in inventories. Manufacturers would hire workers when the economy expanded, guess wrong on the strength of growth, and then, when inventories piled up from weak sales, lay workers off.
Today, the companies that create excessive churn in the labor market (relying on low wages and high labor turnover rates) often do not pay more into the system, because workers under this style of low-road management—temporary, contract staffing, part-time, and low-paid workers—too often do not qualify for unemployment insurance. Since the 1980s, recessions have been more related to financial markets than inventory cycles, and they have been more severe than state unemployment trust funds were designed to handle. The disruptions are greater, causing more permanent job losses than cyclical temporary layoffs. The average duration of unemployment is trending upward, and it takes longer to return to previous peak employment levels (Freeman 2013). For Black workers who face systemic employment discrimination, the recovery is always longer.
Unfortunately, the system has no protection for workers in this “race to the bottom.” Women and Black, Latinx, Indigenous, and immigrant workers will bear the brunt of the pain unless we transform the system. Black and Latinx workers have lower recipiency rates than white workers, despite facing higher unemployment rates. Women have a lower recipiency rate than men, because they are more likely to work in low-paid, part-time dominated industries (Nichols and Simms 2012). Every severe downturn mars the early earnings history of young people, disrupts women’s labor force participation, and makes it harder to return to the labor market.2 Race, gender, and intergenerational equity fault lines in the unemployment insurance program must be addressed.
The politics around unemployment insurance are another nagging problem. Since 1980, with each new downturn drawing down state unemployment trust fund balances, conservative state lawmakers and policymakers have responded not by replenishing funds but by slashing eligibility and benefits. Already, as this report is being released, a conservative “revolt” has taken place, with half of states announcing plans to “secede” from the federal government’s expanded unemployment insurance programs. These misguided efforts will remove a half billion dollars a week from the nation’s economic recovery, while deepening inequities felt by workers of color and hurting families that need the aid to get by (Stettner 2021). Some of these states are now considering legislation to cut the duration of benefits and erect more barriers to benefits—further weakening the system and leaving those states ill-prepared for the next downturn.
In the wake of the COVID-19 crisis, Congress swiftly enacted changes to expand the program and improve eligibility and benefit sufficiency. Now the challenge is how to learn from those lessons and adopt permanent changes to strengthen the unemployment insurance system. The urgency of understanding the shortfalls and reforming the system are clear. U.S. payrolls remain down over 8 million jobs from their February 2020 peak (Gould 2021). Even if the economy generates a record-setting 1 million jobs each month until September, Labor Day will arrive with millions facing long-term unemployment and having exhausted their lifeline of unemployment benefits. Others will find themselves defined out of being eligible, as their low earnings and part-time status will not qualify them for benefits; but for the expiring Pandemic Unemployment Assistance program, they would have had nothing. The withdrawal of support will complicate, if not halt, the economic recovery.
This report examines the problems that resulted in an unemployment benefit system that struggled to rise to the crisis we faced in 2020 and will struggle again as states end emergency benefits, and when federal pandemic unemployment provisions expire in September. In addition, this report proposes critical first steps on the road to systemic unemployment insurance reform—fixes that state legislatures and governors can enact to ensure equity and adequate standards regarding just financing, eligibility, duration of benefits, and benefit levels and amounts—so that no one is left behind.
The Biden-Harris administration has proposed significant reforms to the unemployment insurance system in its fiscal year 2022 budget. Congress must seize this opportunity to begin to fix a failed system before more workers—particularly women and workers of color and their families—are hit again with a potential double dip in the labor market. If these fixes are not implemented now, the race to the bottom that has already started will leave us with a wholly inadequate system for the next downturn. Now is the time to fix UI.
—Rebecca Dixon is executive director of the National Employment Law Project. William Spriggs is chief economist at the AFL-CIO and a professor in, and former chair of, the Department of Economics at Howard University.
1. According to a recent audit by the U.S. Department of Labor’s Office of the Inspector General, as of January 2, 2021, states had drawn down a total of $392 billion to pay UI benefits for the PUA, PEUC, and FPUC programs. See U.S. DOL-OIG 2021. According to researchers at the Economic Policy Institute, the UI expansions in the CARES Act and regular UI payments reduced the number of those in poverty by 7.2 million in June 2020. See Zipperer 2020.
2. Since the 2001 downturn, women’s labor force participation has been relatively flat at near 60% (not counting the sharp drop in this rate during the COVID-19 pandemic). It dropped during the Great Recession and never fully recovered for white women. See BLS CPS 2021.
Bureau of Labor Statistics, Current Employment Statistics (BLS-CES). 2021. “All Employees, Food Services and Drinking Places” [CES7072200001], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/CES7072200001, June 7, 2021; “All Employees, Manufacturing (MANEMP)” [CES3000000001], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/MANEMP, June 7, 2021; and “All Employees, Nondurable Goods (NDMANEMP)” [CES3200000001], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/NDMANEMP, June 7, 2021.
Bureau of Labor Statistics, Current Population Survey (BLS-CPS). 2021. “Labor Force Participation Rate – 20 Yrs. & Over, White Women” [LNS11300029], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNS11300029, June 7, 2021.
Freeman, Richard B. 2013. “Failing the Test? The Flexible U.S. Job Market in the Great Recession.” National Bureau of Economic Research Working Paper no. 19587, October 2013.
Gould, Elise. 2021. “The labor market is down 7.6 million jobs since February 2020, but the total jobs shortfall should take into account pre-pandemic labor market trends,” Twitter, @eliselgould, June 4, 2021, 9:02 a.m.
Nichols, Austin, and Margaret Simms. 2012. Racial and Ethnic Differences in Receipt of Unemployment Insurance Benefits During the Great Recession. Urban Institute, June 2012.
Stettner, Andrew. 2021. Fact Sheet: What’s at Stake as States Cancel Federal Unemployment Benefits. The Century Foundation, May 13, 2021.
U.S. Department of Labor, Office of Inspector General (DOL-OIG). 2021. COVID-19: States Struggled to Implement Cares Act Unemployment Insurance Programs, May 2021.
Zipperer, Ben. 2020. “Over 13 Million More People Would be in Poverty Without Unemployment Insurance and Stimulus Payments,” Working Economics Blog (Economic Policy Institute), September 17, 2020.