Unemployment Insurance Fixes to Address the Coronavirus Fallout
Dartmouth College and Wellesley College
Unemployment is spiking nationwide. Massachusetts received as many applications for benefits on March 18th as they did in all of February. Ohio received over 12 times more applications on March 15th-17th as they did in all of the full preceding week. Goldman Sachs predicts 2.25 million new unemployment claims in the coming week (the peak in the Great Recession was 661,000 claims in March 2009). These predictions and statistics indicate the great need to provide financial assistance to a large number of people. The Unemployment Insurance (UI) system is potentially a vitally important way to provide a financial lifeline in the current COVID-19 pandemic – but this potential can only be realized with considerable additional funding and modifications of the current system.
Considerable additional funding and modifications of the current UI system are needed in order to provide a vital financial lifeline during the COVID-19 pandemic.
- To understand what modifications will be needed in the current environment, it is important to first consider some basic features of Unemployment Insurance. Each state runs its own unemployment insurance system, establishing their own benefit levels and tax rates with limited federal guidelines and minimal federal funding support. UI is funded through a separate payroll tax whose proceeds are deposited into a separate trust fund, much like Social Security. To receive benefits, workers must have satisfied minimum work requirements before job loss (typically 6 months of paid employment). If eligible, a worker receives benefits that typically reflect half of their pre-unemployment wages up to a maximum benefit that averages around $480 across states. Those benefits typically last for up to 26 weeks. Workers are required to regularly demonstrate effort to find a new job.
- Existing state trust funds are insufficient to cover the massive surge in anticipated benefits. States have been charging insufficient taxes to adequately support anticipated benefits during a recession for decades. They have been able to do this because the Federal government has consistently bailed them out at times of crises by providing loans, sometimes at no interest. This is likely to occur in the current crisis as well, given the spike in unemployment claims. The chart shows the total number of weeks of UI paid and how, at the time of the recessions of 1982 and 2008 – 2011, reserves ran out. Trust fund reserve balances as percentages of total wages paid in a state are currently at roughly the same levels as 2008 at a time when the total number of weeks of unemployment insurance surged; 35 state funds became insolvent during that recession. Some states have slashed benefits in recent years because of their financial shortfalls. In Florida and North Carolina, for example, UI recipients can only collect benefits for 12 weeks (see Levine’s article in this volume). As before, states are likely to require billions of dollars of loans from the federal government.
- The traditional UI policy response in the presence of an economic downturn is to extend the length of time over which benefits can be received. In the Great Recession, federal legislation enabled workers in some locations, at some points of time, to receive UI benefits for up to 99 weeks rather than the typical 26 weeks. These extended benefits cost the federal government $223 billion between 2009 and 2013 and $70 billion in the peak year of 2010. Yet this is not the ideal policy solution if one’s goal is to get additional money, beyond the typical weekly payout from UI, into people’s hands quickly. If recipients are initially eligible for 26 weeks of benefits, a benefit extension only provides additional help in week 27 and thereafter.
- Negotiations in the Senate would allocate $250 billion for unemployment insurance, but for what? The details of the bill are unclear, but the right solution would be to increase the fraction of earnings that are replaced by UI and increase the maximum benefit amount available. Raising the replacement rate to 100 percent from 50 percent and doubling the maximum benefit level would immediately double the level of benefits that a UI recipient would collect. To simulate the cost of a plan like this, we start by noting that around 80 million weeks of UI benefits were paid out in 2018 (5.2 million recipients paid for an average of 15.3 weeks). At an average benefit of $356 per week, that totals $28 billion. Suppose the number of weeks of benefits paid out will rise to 266 million, which was the amount at the peak of the Great Recession in 2009. This will increase UI spending from $28 billion in 2018 to $95 billion. If we double benefit generosity, this would cost an additional $95 billion. This is less than the $250 billion figure currently being circulated. If provisions like this are included, they either used more dire assumptions regarding the magnitude of the recession or included other provisions beyond these.
- Other temporary modifications to the UI system are necessary as well. Workers who lost their jobs need to be actively searching for new employment to qualify for UI. This requirement clearly doesn’t make sense in an era of social distancing. Some states are already introducing this change. Removing the one week waiting period before benefits can be paid is also relevant. It appears that both of these provisions have already been incorporated into the recently enacted legislation (and these points have been suggested by others), although the details are not clearly specified.
What this Means:
The combination of direct cash payments to households and expanded unemployment insurance benefits make a strong one-two punch designed to get cash into the hands of households quickly. It will enable families to weather the storm and prepare the economy so that it can rebound as quickly as possible once we can commingle safely, and social distancing restrictions are removed. The ability to execute these proposals quickly through the tax system for the checks and through the existing UI system for the unemployment benefits is a significant advantage. Our current world is one of tremendous uncertainty, but these forms of economic stimulus and safety net support have the potential to provide meaningful and productive assistance.