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Reforming Unemployment Insurance Stabilizing a System in Crisis and Laying the Foundation for Equity
The economic shock of the COVID-19 pandemic has shined a bright light on the nation’s unemployment insurance system. It has not been a pretty sight. Swamped by the sudden, massive influx of claims in March of 2020, many state UI programs faltered. Computer systems crashed and telephone helplines were perpetually busy. The problems persisted. By the fall, reports were widespread of people in need often waiting weeks—or months—for their benefits (Long and Fowers 2020; Zakrzewski and Riley 2020; Moss 2020; Iacurci 2020).
As state UI structures shook from the initial jolt, federal policymakers realized that benefit levels were too low and not available to enough workers. In part to offer stimulus to a sharply contracting economy, the federal government provided unemployed workers claiming standard UI benefits with a supplemental $600 per week in additional benefits. These Pandemic Unemployment Compensation (PUC) program benefits—enacted as part of the CARES Act—were hugely important to millions of Americans in need.
Also critical were two other temporary UI programs created by the CARES Act: Pandemic Emergency Unemployment Compensation (PEUC), which extended the duration of benefits, and Pandemic Unemployment Assistance (PUA), which provided benefits to some groups of workers left out of the regular UI system, such as the self-employed and temporary workers. Workers eligible for PUA were also eligible for the $600 weekly supplement. The PUA program brought sustained help to a broader swath of the U.S. workforce: As of March 2021, about 7.5 million workers who otherwise would have been without benefits were receiving them under the program (NELP 2020; Picchi 2020; U.S. DOL-ETA 2021c).
But there were problems. In addition to the delays in processing benefits, weaknesses of some of the state UI systems drew the attention of organized criminal enterprises, which engaged in identity theft and other forms of fraud to steal funds. Well-publicized cases of fraud led to measures that slowed the delivery of benefits to legitimate applicants in some states (Cohen 2020; Holzhauer 2020).
These problems were not simply the result of a once-in-a-century pandemic. If they were, perhaps the country could move on under the assumption that better public health measures would avoid future recurrences. Instead, significant underlying issues with the nation’s UI system were exposed by the stress of the pandemic-driven economic jolt. Under pressure, the system gave way in places where it was already broken (McDermott 2020; Adamczyk 2020).
The idea that the UI system needs an overhaul is not new. It is a product of the New Deal—and its design still bears the influences of that era and the decades immediately following. The eligibility standards for workers to qualify for aid—and the level and duration of the help they receive—remain rooted in outdated images of typical UI claimants as male factory workers whose plants have temporarily shut during a recession.
The notion of the economy these standards reflect is also obsolete, one where labor markets recover very quickly after recessions hit, and workers return to their old jobs. In that economy, beneficiaries would need aid for a few months until the nation recovers and the plant reopens. Like the 1950s image of the economy this reflects, the UI system marginalizes many women and workers of color, leaving too many of them without aid, or with much too little aid, when they lose jobs through no fault of their own (West et al. 2016; Edwards 2020; Kofman and Fresques 2020).
The UI system has failed to keep up with the modern economy
The American economy of today is not the economy UI was built for. The temporary shifts of the pandemic economy notwithstanding, more women are in the labor force. Factories that close often never reopen (at least in this country). Part-time work has grown as a share of the labor market since the mid-1950s (when data on part-time employment began to be collected). And online platform work and other emerging forms of employment arrangements are capturing a great deal of policy and media attention (BLS 2018, 2021a; Congdon and Vroman 2021).
Yet relatively little has been done to update the rules of the UI system to capture these shifts. As a result, the share of unemployed workers who actually receive UI benefits had fallen below 3 in 10 before the pandemic, down from closer to 4 in 10 (36%) in 2007 before the Great Recession (U.S. DOL-ETA 2021a). And as this report will show, workers whose lives are already the most financially precarious—disproportionately workers of color, women, and individuals with disabilities —are the most likely to be left out by exclusionary eligibility rules (Tucker and Vogtman 2020; Bhutta et al. 2020; Gould and Wilson 2020; Gould, Perez, and Wilson 2020; BLS 2019).
One reason for the failure to modernize the UI system is that federal policymakers tend to focus on UI only during economic downturns, legislating additional weeks of federally funded aid to address the immediate distress but doing little to reform the system as a whole.
Another less obvious factor is likely the growing influence of corporate power and capital in our politics and economy. The share of private-sector workers in unions is down to about 6%, making it easier for employers to keep wealth they create for themselves and shareholders. The tilting of the economic playing field toward the wealthy and capital likely has a number of reasons, including changes in tax, antitrust, and trade policy as well as global economic shifts (Piketty 2017). But the effect in the U.S. is clear and not favorable to workers. The labor share of national income has been calculated to have declined from 65% to 57% from 1980 to 2012 (BLS 2021b; Farber et al. 2020; Clausing 2017).
The UI system in many states now fundamentally fails in its core missions
The deepening inequality is reflected in a UI system that in many states now fundamentally fails in its core missions. As Rebecca Dixon and William Spriggs explain in the Introduction, families need unemployment insurance to get them through temporary rough spells, and UI is one of the government’s most effective policies for fighting recessions. Yet states keep cutting and cutting. Particularly in states with histories of weak labor movements (which often overlap with those that have the most troubled racial history), UI benefits are now among the shortest, and reach the lowest shares of unemployed workers, of anywhere in the developed world. As of 2019 there were 10 states offering fewer than 26 weeks of benefits (two offering as few as 12 weeks of benefits), and in several of those states fewer than one in six workers were able to claim even that short span of benefits. Right before the pandemic (in January 2020), weekly benefits were replacing less than half of average wages, and in some states benefits topped out at less than $275 per week—equivalent to less than a $7 hourly wage. If that is even still a net, there is no safety in it (U.S. DOL-ETA 2020, 2021b; OECD 2021a, 2021b; CRS 2019).
Even these dismal numbers fail to capture the struggles of workers largely left on the margins of the American economy, and who are equally excluded by an assortment of technical but crucial UI rules. In many of these groups, workers of color and women are overrepresented, as noted in the Eligibility section of this report.
Too many workers fall through the cracks
Part-time workers, who are especially likely to be working women and individuals with disabilities, fall through the cracks of UI in most places. The obstacles to their claiming benefits are myriad: requirements to earn a certain level of wages over a short period; rules obligating beneficiaries to be seeking full-time employment; limits on the reasons a worker can leave a job; and loopholes that deny benefits for workers affiliated with staffing agencies, among others. The lack of UI coverage for lower-earning part-time workers also harms Black and Latinx workers, who are a disproportionate share of people working part time because they can’t get the full-time hours they want (BLS 2020; IWPR 2016; Golden and Kim 2020).
And, until the temporary Pandemic Unemployment Assistance experiment in 2020, UI offered no help at all for “gig” workers and millions of other workers around the country misclassified by their employers as contractors. Because UI taxes are imposed on wages, employers are incentivized to treat their workers as contractors, at least for legal purposes, and whole industries arguably are built on this kind of arbitrage. This treatment leaves the affected worker with no available benefit when they experience a work interruption. Black workers are more likely than other workers to be temporary help agency workers, and Asian workers are more likely than other workers to work for contract firms (Kosanovich 2018). Finally, genuine small-business entrepreneurs who might respond to financial setbacks by trying to enter the workforce, and who might benefit from some transitional funding, have no recourse.
States compete in a race to the bottom
It is not our goal here to resolve all of the deep structural challenges that have steered the nation’s unemployment insurance system to these straits. But some of the more immediate drivers are created by poor design of UI’s finances. As we explain in the report, regular state UI benefits and a portion of extended benefits in downturns are funded through state taxes on corporations. And states compete in a race to the bottom in UI taxes just as globally there is a race to the bottom for corporate taxes generally. The pressure to keep UI taxes low contributes to a climate in which states with depleted UI coffers slash their way to budget balance by shortening the duration of benefits, tightening eligibility, and (less visibly, but no less damagingly) underinvesting in UI system infrastructure. Further, nearly all states impose higher tax rates on businesses with higher shares of former workers claiming UI benefits. Evidence strongly suggests that this rule encourages employers to make it harder for separated workers to get the benefits they are due.
An opportunity to make needed repairs
The spotlight shining on the UI system provides a rare opportunity to make needed repairs to bring the system into the 21st century. UI reform is not just a set of technical fixes, but in a real and immediate sense is racial justice, is gender justice. And a UI system that is reformed to reflect both the current economy and the current workforce would not only strengthen the economy but also promote genuine economic opportunity for all.
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