RELEASE: Toward a Strong Unemployment Insurance System—The Case for an Expanded Federal Role
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Washington, D.C.– The purpose of the unemployment insurance system, as President Franklin D. Roosevelt noted upon signing the legislation into law, is both to alleviate hardships for the unemployed and to counter recessions. The rules are that to receive unemployment benefits, a worker must have lost their job through no fault of their own and be actively seeking re-employment. In the wake of the Great Recession, the unemployment insurance system has been effective in helping families hardest hit by unemployment. In 2009 alone, unemployment benefits lifted 3.3 million families out of poverty.
The second purpose of the unemployment insurance system affects us all, whether we are unemployed or not. The system is explicitly designed to act as an “automatic stabilizer” for the economy. The unemployment insurance system acts “countercyclically,” pumping money into the economy when unemployment is high by paying benefits that replace lost wages to those involuntarily unemployed while they search for work. This boosts economic growth just when the economy needs it most. Economists estimate that during the Great Recession, unemployment benefits closed about one-fifth of the recession-caused gap in total economic output. These benefits are paid for through federal and state taxes on employers, which are highest when employment is high and thus not inordinately pulling down employment during recessions.
In the wake of the worst recession since the Great Depression, however, our nation’s unemployment insurance system is in a crisis that threatens both its hardship-alleviating and automatic stabilizer functions. Most state unemployment insurance systems are now insolvent due to the lack of adequate payments into the system in the nonrecession years preceding the Great Recession and the subsequent tepid jobs recovery that has required many states to continue to pay benefits for an extended period of time. As a result, most states (32) have taken out loans from the federal government for their unemployment trust funds to the tune of over $43 billion (see Table 1 below).
This issue brief lays out the key elements of a plan to accomplish the goal of shoring up the unemployment insurance system’s role as an effective automatic stabilizer, while addressing the solvency crisis in the states. The first step is to clear the deck by forgiving the trust loans of insolvent states and rewarding states that maintained positive trust-fund balances. We propose a set of conditions for the deck clearing that will improve the core functions of the unemployment insurance system by:
- Clearly delineating and separating the federal and state roles by increasing the role of the federal trust fund during times of high unemployment
- Reducing the wide disparity in eligibility rules and benefits across states
Our proposal will reduce costs for states as their labor markets struggle to emerge from the Great Recession, improve benefits for the unemployed, and better stabilize our economy in future recessions.
To read the full brief, click here.