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Recession alert: we need a new unemployment insurance system

Originally published: Reports from the Economic Front on November 27, 2022 (more by Reports from the Economic Front)

With the Federal Reserve pushing up interest rates, we appear headed for a new recession. Sadly, our unemployment insurance system remains broken: too few unemployed receive benefits and the benefits are far too low. As a result, the next recession, when it comes, will again bring unnecessary suffering to millions of workers and their families.

It doesn’t have to be this way. Federal action during the recent pandemic crisis shows how our unemployment system can be dramatically improved. The problem is that many business and political leaders are content with the system as it is now. That means it is up to us to start agitating for reform, and the sooner the better.

Lessons from the pandemic crisis

The U.S. economy fell into a sharp pandemic-driven economic downturn beginning March 2020. Some 22 million jobs disappeared during the first two months of the recession, raising fears of a major economic collapse. And yet that didn’t happen.

One of the primary reasons was that the federal government acted fast, enacting five relief bills in 2020 and another the following year. All together the six bills pumped some $5 trillion into the economy. Thanks to that spending the COVID-19 recession was the shortest on record. In fact, according to the US Census Bureau, the Supplemental Poverty Rate, which adjusts income to include the value of government aid, actually fell from 11.8 percent of the population in 2019 to 9.1 percent in 2020—the lowest rate on record!

Key to this achievement were three federally financed programs that, by design, strengthened the country’s unemployment insurance system:

  • The Pandemic Unemployment Assistance (PUA) program extended unemployment benefits to workers normally ineligible for unemployment benefits under our existing system. These include workers who do not earn enough wages or work sufficient hours to become eligible for regular benefits, new entrants into the labor force, self-employed workers, and independent contractors.
  • The Federal Pandemic Unemployment Compensation (FPUC) program increased weekly benefits to the unemployed, first by $600 (April 5, 2020 to July 31, 2020) and then later by $300 (December 26, 2020 to September 6, 2021).
  • The Pandemic Emergency Unemployment Compensation (PEUC) program provided extra weeks of benefits to people who had exhausted their regular state benefits but remained unemployed.

Of course, other federal initiatives also made a difference. Noteworthy were the expansion of the Child Tax Credit and the reduction, or in some cases elimination, of premiums for Affordable Care Act marketplace enrollees. But the PUA, FPUC, and PEUC were real game-changers for working people. More than 1 out of every 4 workers relied on unemployment benefits at some point during 2020. The Center on Budget and Policy Priorities estimates that these pandemic programs helped 5 million people stay out of poverty in 2020 and 6 million in 2021. Sadly, these three programs were made time limited, and their time has run out.

Flawed at birth

Our unemployment insurance system was established by the 1935 Social Security Act. It was not the system desired by most working people. Rather than a progressively funded, comprehensive national system of unemployment insurance that paid benefits commensurate with worker wages, the act established a federal-state cooperative system that gave states wide latitude in determining standards.

States were free to decide whether to enact their own plans, and if so, to determine eligibility conditions, the waiting period to receive benefits, benefit amounts, and the duration of benefits. It was not until 1937 that programs were established in every state as well as the then-territories of Alaska and Hawaii. And it was not until 1938 that most began paying benefits.

While the unemployment insurance system has been improved in a number of ways over the years, including by broadening coverage and boosting benefits, its basic structure remains largely intact. States still decide, within broad federal guidelines, how to treat their unemployed workers.

A mean-spirited system

We have a mean-spirited system, a fact made crystal clear by the ways in which pandemic-era federal initiatives dramatically changed outcomes. A decent unemployment insurance system should above all provide financial support to those suffering unemployment. However, our existing system serves a remarkably small percentage of those experiencing unemployment.  This is illustrated in the figure below, which shows the unemployment insurance recipiency rate—the Department of Labor’s measure of the share of unemployed workers drawing unemployment benefits—over the years 1950-2022.

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The recipiency rate declined from a high of 54 percent in 1952 to a low of 29 percent in 1984, and then a new low of 26 percent in 2013. What stands out is 2020, when, thanks to the PUA and PEUC, the recipiency rate reached 78 percent. However, since these federal initiatives did nothing to require states to modify their own programs, once the initiatives ended recipiency rates quickly returned to their unacceptably low pre-pandemic levels.

While such low recipiency rates are enough to label our system broken, it is not the only serious failing. The income replacement rate of unemployment benefits is also unacceptably low. As The Century Foundation reports:

In the first quarter of 2022, the average weekly UI benefit payment of $347.22 only replaced 39 percent of the average wages that had been earned each week by those accessing benefits. A year earlier, the combined payout from state benefits and the $300 per week Federal Pandemic Unemployment Compensation program totaled $617.36, which means federal and state UI benefits at that time equaled 79 percent of pre-layoff wages.

In 9 states, unemployment benefit payments are actually less than the federal poverty level for a family of one. In Arizona, for example, the average weekly unemployment benefit in the first quarter of 2022 covered only 88 percent of the federal poverty rate for a single person.

What gives?

There are several reasons why we have such a mean-spirited unemployment insurance system. One of the most important is that many business leaders want a miserly unemployment system because they believe it forces workers to accept employment on their terms. Thus, in May 2021, governors from Montana, South Carolina, Alabama, Alaska, Arizona, Iowa, Indiana, Idaho, Georgia, Missouri, Ohio, Wyoming, Mississippi, Arkansas, South Dakota, Tennessee, Utah, West Virginia, and North Dakota, citing the need to restore a sound business environment, announced that they were ending all federally funded pandemic unemployment benefits for their respective unemployed workers months before the programs were actually scheduled for termination.

Most businesses leaders also prefer minimizing unemployment benefits because it lowers their tax bill. Unemployment benefits are funded by firm payroll taxes that are determined by the value of worker earnings deemed taxable and the tax rate. States are free to set both within broad federal guidelines and most try to keep them as low as possible to satisfy business. One consequence of this policy is that it limits the funds available to compensate unemployed workers. If funds prove inadequate because of a serious recession, states are able to take out federal loans to cover their obligations. But the loans must be repaid with interest, which requires the borrowing states to do what they don’t want to do, boost future payroll taxes.

Determined to keep taxes low and avoid federal borrowing, many states have simply tightened eligibility standards, reduced benefit amounts, and shorted weeks of covered eligibility. The system thus becomes more punitive and less costly, thereby satisfying business interests on both counts. As The Century Fund explains:

For decades, the standard package of unemployment benefits was twenty-six weeks in all states, but over the past dozen years or so, ten states have cut back their benefits below this historical level. These states are Alabama, Arkansas, Florida, Georgia, Idaho, Kansas, Michigan, Missouri, North Carolina, and South Carolina. For example, in 2013, North Carolina cut benefits down to as few as twelve weeks, slashed the maximum benefit rate by 35 percent, and tightened qualification rules. North Carolina’s program went from 40 percent recipiency at the end of 2009 (in the middle of states) to one of the lowest, with recipiency averaging just 10.9 percent in July 2022.

The backlash to federal pandemic benefits carried over in state legislative sessions in 2022 to three additional states, which passed laws slashing their recipiency by reducing the number of weeks: Kentucky (as few as twelve weeks), Iowa (sixteen weeks), and Oklahoma (few as twelve weeks).

And then there is racism. As we can see in the following figure, there is a strong relationship between the share of a state’s black population and the benefit replacement rate; the greater the share, the more miserly is the unemployment benefit payment. The national average replacement rate in the first quarter of 2022 was 39.2 percent. Almost all the states with a significant black population share had replacement rates below that.

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Unfortunately, there is not much we can do to end recessions as long as we have our existing capitalist economy. But there are things we can do to reduce their cost to working people. Drawing on the experience of pandemic policies, we should replace our state-centered unemployment insurance system with a national one that is progressively funded, with broad eligibility standards, and that pays benefits that maintain adequate living standards for an appropriate period of time. In other words, the kind of system that workers were demanding back in the 1930s.

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