Update 542 — June Adds 850,000 Jobs;
How Many Covid Job Losses to Recover?
This morning’s June jobs report showed the U.S. economy added a substantial 850,000 jobs, with average hourly earnings rising 3.6 percent from a year ago. But labor force participation remained stuck, unemployment actually increased, and the job market has 6.8 million fewer jobs than it did before the pandemic.
26 states are poised to cut unemployment insurance benefits anyway, despite evidence that UI benefits do not depress employment. This illustrates the closing window of opportunity to fix the broken UI system, a reform long-sought by progressives. The Covid crisis shed light on its flaws, giving rise to many ideas of reform. We cover that and more in the advent of the report, below.
Happy Fourths all,
The State of Unemployment Insurance
Unemployment Insurance (UI) was created during the New Deal era as a form of social insurance to provide temporary wage replacement for workers who lost their jobs. UI provides an essential financial lifeline to millions of families and is a reliable stabilization mechanism during periods of economic contraction. UI is not a single system, but rather 53 separate systems structured through federal-state partnerships. While the Department of Labor has loose regulatory oversight and covers part of the administrative costs, each state runs its own UI program and determines most funding, benefits, and eligibility criteria.
Each state has generally provided 26 weeks of benefits and replaced about half of workers’ previous wages. However, as UI trust funds began to dry up due to shifts away from traditional forms of employment and ill-advised revenue reductions, states made deep cuts to their UI programs, curtailing accessibility and slashing benefits and durations. Just before the pandemic, UI benefits only replaced around 40 percent of a worker’s pre-layoff wages — at a weekly average of $371 — with benefit durations lasting as short as 12 weeks in some states. Additionally, restrictive eligibility criteria prevented 72 percent of unemployed workers from receiving regular UI benefits in 2019.
How UI Fared During COVID
Regular UI was ill-equipped to fulfill its intended functions of stabilizing household incomes and the macroeconomy in the face of the COVID-19 crisis. To prevent a complete collapse of UI, Congress passed emergency relief legislation in early 2020 that provided $600 supplemental weekly benefits (later extended at a reduced $300) and expanded access to nearly 16 million workers who had been ineligible for regular UI (self-employed, independent contractors, part-time workers). At the height of the pandemic, more than 30 million Americans were receiving some form of UI benefit.
While Congress’s swift action prevented misery for countless families, grafting an improvised federal bailout onto dozens of antiquated state UI systems created its own problems. After decades of neglect and mismanagement, many states struggled to get benefits out the door, with approximately half of UI recipients not receiving their first payment. Some families had to wait months as states struggled to accommodate an influx of federal aid.
Initial Claims for Regular
Source: US Department of Labor
As the economy recovers, Republicans seem insistent on repeating old mistakes. Even as employment remains more than 6.8 million below its pre-recession levels, Republican states are prematurely rolling back the expanded pandemic unemployment benefits intended to run through September. As of this writing, 22 states have cut off their $300 supplemental federal UI benefit, with four more states expected to follow in the coming weeks.
Economic Implications of Cutting UI
Republican governors’ decisions to unilaterally cancel their states’ federally funded enhanced UI benefits are driven by conservative hysteria over labor shortage and inflation. Proponents of cutting off UI payments claim the enhanced benefits disincentivize recipients from returning to work, forcing employers to raise wages and pass higher prices onto consumers.
No economic evidence argues that supplemental UI benefits discourage people from returning to work. Drops in UI recipients for states that have cut benefits have not been matched with stronger than average job growth. In fact, cutting supplemental benefits could undermine economic recovery by drying up billions in consumer spending. UI has proved to be an effective form of stimulus with a 1.7 fiscal multiplier rate, meaning that every $100 increase in UI spending leads to $70 additional GDP in the private sector. The federal government’s pandemic UI program has added up to $100 billion to the US economy.
GOP governors’ unprecedented actions reveal the underlying structural flaws in our patchwork UI program. If states are able to opt out of federal benefits, Congress’s ability to enact rapid economic relief is hindered. This ideologically driven sabotage can only be remedied through comprehensive legislation fixing UI’s unequal power distribution.
Legislation to Fix a Broken System
Unemployment Insurance needs drastic overhauls to increase effectiveness and preparedness for the next economic crisis. Multiple left-of-center organizations and elected officials have begun reimagining how UI should be structured.
In June 2021, the Economic Policy Institute and other organizations proposed modernizing reforms to UI. EPI highlighted the experiences of women, nonwhite workers, and disabled workers in the economy. The joint project calls for the following reforms to UI:
- Use federal regulations, tax penalties, and new non-compliance reporting methods for workers to enforce a federal minimum standard for benefits eligibility, duration, and levels and allow states to enact more expansive plans
- Create a single, federal UI tax, increase the taxable wage base, and tax contractor payments at the same rate as employee hours for large businesses that use many contractors
- Shift to an hours-worked requirement, require an ABC test for proper worker classification, include workers and separation reasons not traditionally counted for benefits, create a Jobseeker’s Allowance, and allow part-time workers to receive up to 110 percent of pre-layoff average weekly wages
- Increase normal duration for benefits to 30 weeks and use automatic triggers to extend benefits to a maximum of 99 weeks during economic crises that would scale back as the economy recovers
- Establish a wage replacement rate of at least 85 percent for the lowest earners and a 50 percent rate for higher earners
- Instate a minimum benefit of 30 percent (or inflation-adjusted $250) of a state’s average weekly wage and a maximum benefit of 150 percent of a state’s average weekly wage
Such proposals would go a long way toward fixing a broken system. But Congress must take the lead. Senators Wyden and Bennet released a blueprint for reforming UI in April 2021, offering crucial reforms to modernize, standardize, and improve UI benefits. These include:
- Minimize disparities between states by creating a federal standard of 26 weeks minimum of benefits covering 75 percent of a typical worker’s wages while improving administrative funding and formulas
- Cover part-time workers, good cause separations, and offer benefits the first week of unemployment
- Create a $250 per week Jobseeker’s Allowance with an additional $25 per week for each dependent
- Enact automatic triggers to expand the Extended Benefits program which would also be fully funded on the federal level
- Lower the Federal Unemployment Tax and increase the taxable wage base
- Require states participating in the Unemployment Trust Fund to maintain certain solvency levels and supplement state-level Unemployment Trust Funds to encourage more expansive benefits
Representatives Cori Bush and Emmanuel Cleaver published a joint letter calling for a federal floor for eligibility, wage replacement rates, and minimum weeks of benefits for UI. The principles laid out by Bush and Cleaver neatly align with the Wyden/Bennet blueprint. This group of four could pursue a dual-chamber proposal incorporating proposals from the EPI joint project.
The economy that existed when Unemployment Insurance was first created is not today’s economy and begs to be updated to address this reality. While there is clear desire in some corners of Congress to tackle UI reform, the window for action is rapidly closing. As the economy continues to improve, the saliency of this issue will likely diminish. If UI reform is not part of the next reconciliation package, there is a high probability that we head into the next economic crisis in the same leaky ship, with tens of millions of families being unjustly punished for Congressional inaction.