See also: Strengthening Unemployment Protections in America by Rachel West, Indivar Dutta-Gupta, Kali Grant, Melissa Boteach, Claire McKenna, and Judy Conti
Unemployment insurance, or UI, has been a bedrock of the nation’s social insurance system for eight decades. It is an essential ingredient for economic security, shared prosperity, and a stable economy. A partnership between states and the federal government, UI provides critical support for involuntarily unemployed jobseekers and their families by replacing a share of lost wages while workers search for a new job.
UI also helps stabilize the economy during downturns by boosting the spending power of struggling families and creating demand in the local and national economies. It is a powerful tool for economic stimulus: Every $1 spent on UI benefits generates as much as $2 in additional economic activity. From 2008 to 2010, UI closed more than 18 percent of the shortfall in gross domestic product, or GDP. In 2009 alone, UI kept more than 5 million Americans out of poverty and saved more than 2 million jobs by boosting demand in a sagging economy. Finally, UI prevented 1.4 million home foreclosures between 2008 and 2012, with significantly lower default rates in states where UI benefits were larger.
As important as UI has proven to be in the past, however, the system has not kept pace with changes in the labor force or the economy over the past several decades. As a result, many states’ UI programs are underprepared for the next recession—which, while unpredictable, is inevitable: The U.S. economy has never gone longer than a decade without a downturn, and the nation is in its seventh year of expansion. Absent efforts to modernize the system and bring it into the 21st century, UI’s effectiveness in protecting workers and the economy will continue to decline with enormous consequences for both working- and middle-class security and economic growth.
This issue brief identifies the main challenges facing states’ UI programs; provides recent state-level data on UI eligibility rules, recipiency rates, benefit adequacy, and program solvency; and recommends steps that states can take to substantially strengthen their UI programs. In addition, the Appendix provides new analysis comparing the characteristics of each state’s UI recipients with its broader population of unemployed workers, showing which groups of jobseekers state programs have underserved in recent years. The recommendations provided in this brief are based on a new comprehensive proposal to modernize UI, “Strengthening Unemployment Protections in America,” developed by the Center for American Progress, or CAP; the Georgetown Center on Poverty and Inequality, or GCPI; and the National Employment Law Project, or NELP.
States have tremendous flexibility over changes to their UI programs, particularly in the areas of program eligibility, benefit adequacy, and financing. The CAP, GCPI, and NELP report calls on the federal government to play a broader, more assertive role—both in setting stronger minimum standards and in providing more resources to states—but states need not wait for congressional action to enact key reforms to UI. The recommendations below would dramatically improve states’ UI protections, significantly increasing economic security for working families, boosting labor force participation, and protecting states’ economies against the next recession.
Key challenges facing the unemployment insurance system
- Technology and globalization mean that many jobs lost in recent years are not returning and that workers need to retrain for employment in a different sector. Yet too few unemployed workers have access to tools for successful re-employment, first employment, and/or training.
- Changes in the American workforce in the past 80 years mean that workers are more vulnerable than ever to involuntary unemployment. Yet UI’s reach has been undermined by policy choices that severely restrict the number of unemployed workers it reaches. As a consequence, in 2015, only about one in four unemployed workers received UI—a historic low. And in 13 states, fewer than 20 percent of unemployed workers were protected by UI, as Table 2 (available in the PDF version) shows. Low and shrinking eligibility has disproportionate effects on women, younger workers, workers of color, and those with alternative work arrangements.
- Since UI was first enacted, recoveries from recessions have become slower and increasingly jobless. At the same time, UI’s capacity as an automatic macroeconomic stabilizer has been steadily undermined by policy decisions, including states making deep cuts to benefit eligibility and adequacy while neglecting necessary improvements to financing. As of 2015, for example, fewer than one in three states had even the minimally adequate level of reserves in their UI trust funds. As a result, the UI system is unprepared for the next recession.
Modernizing states’ unemployment insurance programs
The new proposal from CAP, GCPI, and NELP develops recommendations for Congress and state governments that would substantially strengthen and modernize the UI system. When enacted, these reforms would protect more working families from the risk and hardships of unemployment by ensuring a robust employment, training, and income-security system for involuntarily unemployed workers. In addition, these reforms would prepare and protect state and national economies against future recessions.
The report calls for new federal standards for the UI system and proposes significant increases in federal funding to states—including for expanded re-employment services, information technology infrastructure upgrades, and program administration—to help achieve these standards. The proposal would lessen the fiscal pressure states face during recessions by providing full federal funding for an improved Extended Benefits program, as well as for at least one year of work sharing benefits in states where unemployment is high or rising rapidly. It would also offer incentive funding to states that extend their maximum UI duration beyond 26 weeks and reward states that meet new trust fund solvency targets.
However, states need not wait for Congress to act: The report also proposes many reforms that states can undertake starting today to significantly strengthen their UI programs. The remainder of this issue brief summarizes top recommendations for state action, the vast majority of which are already in place in at least one state today. State progress on select recommendations is shown in Table 1 (available in the PDF version). Several reforms—including broadening the reach of re-employment services, as well as cracking down on worker misclassification and the employer tax evasion tactic known as SUTA dumping—can be immediately undertaken by state governors, while other must be enacted through legislation. Greater detail on each of the recommendations can be found in the full CAP, GCPI, and NELP report, “Strengthening Unemployment Protections in America.”
1. Ensure that more unemployed workers have access to re-employment assistance and training and reduce layoffs
CAP, GCPI, and NELP’s proposal introduces new ideas to support worker training and upskilling, encourage entrepreneurship, and increase geographic labor mobility, as well as help more workers stay in the jobs they already have. The proposal would significantly increase federal resources to help states fund many of the reforms below, including more than $2.3 billion for the workforce system’s effective re-employment programs and services for UI claimants and other jobseekers, as well as one-time funds for states to establish work sharing and Self-Employment Assistance programs.
Strengthen re-employment services
- Increase the use and improve the targeting of re-employment services: Intensive, staff-assisted re-employment services—including comprehensive assessments, individual job search plans, and career counseling—have been shown to be effective at helping unemployed workers return to work. State governors can use their executive authority to immediately provide these services to at least half of UI claimants who are not likely to return to their former employer or industry. They can also take advantage of federal resources to update the statistical models used to identify workers who would most benefit from re-employment services and use these models to prioritize service delivery.
- Provide additional support to workers who are reskilling: States should provide qualifying workers with up to 26 weeks of additional UI benefits while they are participating in state-approved education or training full time.
Reduce layoffs by implementing effective job-retention measures
- Increase the use of work sharing: Work sharing programs—also known as short-time compensation programs—provide an alternative to layoffs by giving employers the option to reduce work hours for all or some employees, who then receive partial UI benefits to replace part of the lost income. Work sharing programs should be established in the minority of states where they are not currently in place. All states should seek to maximize employer participation by providing administrative flexibility, permitting employers who have laid off greater numbers of people to participate, automating the processing of employer plans and claims filing, and conducting meaningful employer outreach.
- Encourage entrepreneurship through Self-Employment Assistance programs: Self-Employment Assistance, or SEA, programs assist UI claimants in starting small businesses by providing entrepreneurship training and other resources and waiving UI’s typical work-search requirements so that participants can build their businesses on a full-time basis. SEA programs should be created in the District of Columbia and the 44 states where no active program is operating, and all state SEA programs should connect participants with local Small Business Development Centers.
- Improve experience rating: Experience rating is the practice of adjusting an individual firm’s tax rate according to its historical behavior—its experience—with layoffs so that it absorbs some of the costs of these layoffs, which otherwise fall on workers, taxpayers, and the economy. States should bring their methods for experience rating in line with best practices and should deter layoffs by gradually raising their lowest maximum experience-rated tax rate—which can be as little as 5.4 percent under current law—to at least 7 percent.
2. Provide more Americans with enhanced protection against the shock of unemployment
CAP, GCPI, and NELP’s proposal lays out how states can update their UI eligibility criteria to reflect their modern labor forces—including expanding coverage to underserved groups such as women, workers of color, and low-paid workers. The tables in the Appendix (available in the PDF version) compare the characteristics of all of states’ unemployed workers with the subset of workers who receive UI. If all states adopted just three of the recommendations below—extending eligibility to part-time workers, extending eligibility to workers who voluntarily quit a job for good cause, and extending eligibility to workers who qualify under the alternative base period—the UI system would cover 13 percent more newly unemployed workers, according to updated analysis by the Urban Institute commissioned for the CAP, GCPI, and NELP report. Furthermore, by improving the adequacy of UI benefits, these recommendations would not only increase working families’ economic security but also boost states’ labor force participation rates. The more workers that a state’s UI program protects—and the more adequate that protection—the more powerful UI’s stabilizing response will be when the state’s unemployment rate rises. (see Table 1 in the PDF version for individual states’ eligibility provisions)
Reform eligibility criteria
- Modify the base period for determining eligibility: Many individuals do not qualify for UI under the standard base period—generally the first four of the previous five completed calendar quarters—despite having recent work history. States that have not already done so should adopt the alternative base period, comprising the immediately preceding four quarters—which would disproportionately affect eligibility of low-wage workers—as well as the extended base period, which would affect workers with qualifying conditions such as illness or injury. States should also extend the base period to 18 months to cover workers with erratic work schedules; this longer period would avoid penalizing workers for scheduling practices that they cannot control.
- Promote parity for low-paid workers: Low-wage workers typically must work more hours than higher-wage workers to qualify for UI because monetary eligibility rules in most states are based on earnings. States should ensure that workers are monetarily eligible for UI if they have earned at least 300 times the state’s hourly minimum wage during the base period and worked in at least two quarters. This would ensure, for example, that a worker who earned the minimum wage for 15 hours per week over a period of 20 weeks would qualify for UI. Furthermore, states should consider requiring employers to report hours worked, as well as using this information to create an alternative eligibility standard based on hours for workers who do not meet the earnings-based standard.
- Extend eligibility to part-time workers: One-third of states do not currently allow unemployed part-time workers with qualifying work histories who wish to seek comparable part-time employment to receive UI. These states should allow part-time workers to receive UI. States should also allow certain claimants who qualify based on full-time work but have experienced a significant life change—such as the birth of a child—to search for part-time work, waiving the full-time work-search requirements for these individuals.
- Reform qualifying reasons for leaving work: States should make several commonsense exceptions to the typical requirement that workers must lose a job through no fault of their own to qualify for UI. First, states should permit employees who face unreasonable scheduling practices to voluntarily separate from work without disqualifying them from receiving UI. Second, states should consider allowing unrestricted voluntary separations for compelling personal or family reasons—or, at a minimum, expand allowable reasons to include escaping domestic violence; caring for themselves or a family member during illness or injury; caring for children when child care has been lost and an alternative arrangement cannot be reasonably secured; or moving with a spouse, partner, or co-parent who must relocate. States should exempt employers from charges through experience-rated taxation in the case of a non-work-related voluntary separation.
- Extend protection to seasonal and temporary workers: States should treat seasonal and temporary workers identically to other workers for purposes of determining UI eligibility. In particular, states should treat the end of temporary workers’ assignments as involuntary termination of employment and eliminate requirements that temporary workers report back to the temp agency that laid them off to ensure there is not a new assignment available before they may be eligible for UI. These requirements trap workers in a repeated cycle of short-lived, dead-end jobs.
- Enact strong partial UI formulas: Partial UI allows claimants to work part time and receive a portion of their UI benefits while seeking more stable long-term employment, thereby encouraging claimants to remain connected to the workforce and allowing them to take in a more adequate income. States should allow claimants to qualify for partial UI as long as they are working less than full time and earning wages less than 150 percent of their weekly benefit rate. States should also disregard part-time wages worth at least half of a claimant’s weekly benefit rate when calculating a claimant’s partial UI benefit.
- End the widespread misclassification of employees as independent contractors: States can act now—including through governors’ executive action—to crack down on employers that avoid paying UI taxes and illegally prevent their employees from accessing UI by misclassifying them as independent contractors. For example, states can increase resources for identifying employers that are in violation and enforcing existing laws or establish a task force to investigate how enforcement efforts can be strengthened.
Boost benefit adequacy
- Offer at least 26 weeks of benefits without delay: States should provide a uniform maximum duration of at least 26 weeks—the conventional maximum duration under the program’s original design—of state-funded UI benefits for all claimants in nonrecessionary times. And the 42 states that require eligible workers to wait one week to qualify to receive benefits should eliminate this so-called waiting week. (see Table 2 in the PDF version)
- Ensure that benefits replace a sufficient share of wages for low- and middle-income recipients. To calculate a claimant’s weekly benefit amount, 29 states currently use the so-called high-quarter method, which bases benefits on the worker’s highest-earnings quarter during the base period. Remaining states should switch to the high-quarter method and replace at least 50 percent of wages for workers whose benefit amount falls below the maximum weekly benefit. States should tie their maximum weekly benefit amount to at least half of their average weekly wage.
Increase program access and recipiency
- Make workers aware that they may qualify for UI: Notify all employees of potential UI eligibility, such as by sending workers notifications by mail when they separate from employers. States could achieve this by requiring employers to alert the state to the separation—at which time the state would send notification to the worker, an action that is already federally reimbursable—or by requiring employers to notify workers of potential eligibility directly, as under Massachusetts law.
- Facilitate connections to UI benefits: States should ensure that the process of filing initial and continuing claims for UI benefits through their automated online claim-filing systems can be readily understood and accomplished by the vast majority of claimants, including workers with limited English proficiency, disabled workers, older workers, and workers with literacy challenges. States should also provide alternate means of filing claims for workers who are unable to file through the online system. Furthermore, they should encourage employer filing by providing methods for employers to file initial and weekly claims on behalf of their employees for short-term layoffs and business shutdowns, partial UI, and work sharing.
3. Prepare the unemployment insurance system for the next recession
The next recession is inevitable, and it is critical that policymakers strengthen UI—the U.S. economy’s first line of defense—before it arrives. CAP, GCPI, and NELP’s proposal would significantly increase federal resources for states to combat downturns and maintain their programs’ solvency. The proposal would boost federal dollars for workforce development and re-employment initiatives, including Reemployment Services and Eligibility Assessments, or RESEAs. Furthermore, as part of the plan to repair the Extended Benefits, or EB, program, the report proposes full federal funding for the EB program, ending the current equal split with states. It would also provide full federal funding for work sharing for at least one year in states where the EB program was activated. Additionally, states that exceeded trust fund solvency targets would be rewarded with differentially higher interest rate payments. States would also receive partial federal reimbursement for certain types of UI benefits, including benefits claimed for reasons unrelated to the employer. (see Table 1 in the PDF version)
Reform UI’s financing and improve solvency
- Make the state unemployment tax significantly more progressive: States should broaden the taxable wage base of their State Unemployment Tax Act, or SUTA, taxes to at least half of the Social Security taxable wage base—or about $59,000—over a period of six years and link the base to the Social Security base going forward so that it does not erode. Simultaneously, they should lower the SUTA tax rate, raising sufficient revenue to support their obligations under the CAP, GCPI, and NELP proposal.
- Ensure trust fund solvency: Only 18 states currently have an average high-cost multiple, or AHCM, of 1.0 or greater in their unemployment trust funds—meaning they have a level of reserves sufficient to finance UI benefits for at least one year under recession-like conditions. States should build up reserves such that they attain an AHCM of at least 1.0 within five years and maintain this target thereafter. They should link SUTA tax rates to trust fund reserves so that rates automatically increase when the trust fund is forecasted to dip below this target AHCM during economic expansions.
- Prevent unemployment tax evasion: State governors can act now through executive action to increase funding for enforcement efforts to reduce SUTA dumping, a tax evasion scheme whereby a firm buys another firm that has a lower SUTA tax rate—or creates a shell company—and shifts its workers to this new firm in order to avoid taxes.
Improve the ability to respond to recessions
- Ramp up re-employment services during recessions: Executive action can also allow state governors to provide Reemployment Services and Eligibility Assessments, or RESEAs, to every long-term unemployed worker receiving Extended Benefits during periods of federal reimbursement, when unemployment is high or rising.
- Relieve financial burdens on employers during times of reduced demand: States should adjust their SUTA tax rates to become countercyclical such that rates fall as unemployment rises. To further decrease employers’ tax burdens and encourage the use of work sharing as an alternative to layoffs, states should suspend experience rating of work sharing benefits during periods of federal reimbursement.
UI is a crucial pillar of the social insurance system, benefiting both American families and the economy. With more than two-thirds of Americans experiencing at least one year of their own unemployment or the unemployment of their household heads during their working years—and with the next recession inevitably approaching—now is the time to update this system for the 21st century.
In the midst of partisan gridlock, states should not risk waiting for congressional action before taking steps to modernize their UI programs. Fortunately, states can enact many meaningful changes on their own, starting today. By adopting reforms to strengthen UI, states would ensure a significantly more robust system of assistance for unemployed workers and their families, raise labor force participation, and benefit economically from much greater protection when the next recession arrives.
Rachel West is an Associate Director for the Poverty to Prosperity Program at the Center for American Progress. Indivar Dutta-Gupta is Director of the Project on Deep Poverty and Senior Fellow at the Georgetown Center on Poverty and Inequality. Kali Grant is the Program Coordinator for the Project on Deep Poverty at the Georgetown Center on Poverty and Inequality. Melissa Boteach is the Vice President of the Poverty to Prosperity Program at the Center for American Progress. Claire McKenna is a Senior Policy Analyst with the National Employment Law Project. Judy Conti is the Federal Advocacy Coordinator with the National Employment Law Project.
For the tables and appendix, please see the PDF version of this issue brief.