Since the late 1930s, unemployment insurance (UI) has been the nation’s first line of defense against income loss from joblessness. The program provides a temporary replacement for a portion of lost earnings for individuals involuntarily unemployed. During economic hard times, UI has been a reliable macroeconomic stabilizer to bolster commercial recovery by injecting funds into local markets.
Unemployment insurance is the largest social insurance program operated as a federal–state partnership in the United States. The UI program functions broadly under federal law and is administered by state agencies under companion state laws. Funding for federal and state administration and benefit costs are derived mostly from employer taxes levied by federal and state governments. Within the U.S. Department of Labor’s Employment and Training Administration (ETA), the Office of Unemployment Insurance (OUI) oversees federal UI policy.
The tremendous job loss experienced during the COVID-19 pandemic demonstrated the UI program’s essential role in keeping regional economies afloat, but it also revealed many of its flaws. As federal legislation will soon be introduced in the U.S. Congress that addresses the challenges to the federal–state UI system laid bare during the COVID-19 pandemic, a timely book provides valuable background context for reform.
Economist Stephen A. Wandner’s insightful new book, Transforming Unemployment Insurance for the Twenty-First Century: A Comprehensive Guide to Reform, published by the W.E. Upjohn Institute for Employment Research, distills his program-wide assessment of chronic deficiencies in the UI program. The book’s central theme is that the federal–state UI program is collapsing, and it requires a fundamental reset. Few of the recommendations in the book are new, but Wandner does an excellent job of laying out historically bipartisan consensus about what should be done to make the program work as intended, while also identifying ongoing changes in the workforce that make some novel approaches necessary.
A History of Administrative Challenges
As Wandner correctly underscores, for decades, the federal partner has lacked the management tools needed to provide proper oversight of state UI program administration. Wandner points out dramatic cuts to full-time equivalent (FTE) staff in ETA’s OUI, but it should be noted that ETA’s combined national and regional staff has also declined dramatically, from 419 in fiscal year 2006 to 168 in fiscal year 2021. The absence of federal oversight tools has resulted in the UI programs in many states prioritizing low employer taxes over a functional safety net. In contrast, state actions have compelled the federal government to enlarge its partnership role in recent recessions by using vast sums of general revenues to pay for emergency benefit assistance as a substitute for state regular unemployment benefits.
Here lies the push–pull of American federalism when a federal–state partnership is out of balance. State UI programs—absent stronger federal involvement—have stingy benefit levels, inadequate financing, declining recipiency, deficient administrative funding, depersonalized state computer-aided claims processing, and a burgeoning freelance workforce outside of the program’s coverage network.
Simply put, the UI program’s value to workers and employers, along with its usefulness as a countercyclical mechanism, has sorely deteriorated and should be reversed. Moreover, the way that states have tightened eligibility requirements and reduced benefit adequacy has meant that the people and communities that need these protections the most are unable to access and benefit from them.
Wandner’s book canvasses the UI program’s origins to the present, with the bulk of analysis confined mostly to the past half-century—a period for which Wandner often had a front-row seat in national policy deliberations. Much of the book’s potency derives from Wandner’s examination of the severe challenges facing the UI program. His recommended solutions arise from years engaged in applied research both inside and outside of federal service. The supporting evidence and clear explanation of the challenges and considerations should serve as great a resource to policy analysts as the solutions he tenders.
The current threadbare nature of the UI program is the culmination of many years of neglect. It has been plagued for decades by recurrent state staffing shortfalls, lack of federal and state reforms of benefit and tax policies, and operational processes often proven heartless and confusing to users and outright defective during claims surges. With so many challenges, the system was unable to rebound from the administrative stresses of the Great Recession. During the engineered shutdown of the economy in 2020–21 due to the COVID-19 contagion, when the unemployment rate swelled to a pandemic high of 14.7 percent, the proverbial “chickens came home to roost” as state UI systems broke down coast to coast. Despite generous federal financial assistance, jobless workers were frustrated by the lack of state agency responsiveness and struggled state-to-state with baffling eligibility requirements. Meanwhile, hampered by rickety computer operating systems and unreliable safeguards, state systems experienced delays, unintended overpayments, and fraud.
For those unfamiliar with the federal–state UI program, Wandner provides in Parts 1 and 2 of the book a valuable primer on the program’s economic objectives, governmental delivery structure, and summarizes its historical expansions, contractions, and weaknesses. This background on how federal and state policies evolved is useful to support Wandner’s proposed remedies. For those readers who wish to “cut to the chase” and examine Wandner’s prescriptions for reform, they can jump directly to chapter 14. However, it would be inadvisable to do so because Wandner’s analysis gives key context for his recommendations.
A federal–state administrative structure requires a distribution of power between governments. Reforming the UI program and its public administration is technical and complicated, and requires more than casual knowledge about the often-clashing issues of federalism and income support policy. Wandner dives deep into the complexities. For example, some advocacy groups criticize federal and state laws for restricting benefits, while others charge that the UI program makes joblessness attractive to certain workers and businesses. In chapter 6, Wandner unpacks the disincentive and incentive effects of unemployment benefits and taxation policies. Likewise, Wandner makes an important observation in chapter 7 about the federal UI taxable wage base: we would not expect the Social Security system to be viable if we had kept the federal wage base frozen since 1983, but that is what has been done with the federal UI taxable wage base as it only applies to the first $7,000 of wages.
Proposals for UI Reform
Tackling each thorny issue deftly, Wandner provides reform options along with his preferred solution. For example, in chapters 4, 8, and 14, Wandner examines the duration policy of regular unemployment benefits. In the early years of the UI program, because of solvency concerns, state durations were set at no higher than fifteen weeks of benefits within a year. This policy of limited duration largely persisted until the late 1940s, when the Truman administration sought to establish a federal standard nationwide of twenty-six weeks—the normal period judged to provide for essential needs during temporary spells of unemployment. During that period, Truman tallied up his view of UI in whistle-stop remarks, saying “local merchants would certainly have felt the pinch a lot sooner, and a lot worse (in 1949), if it were not for unemployment insurance.” Similarly, the Eisenhower administration in the mid-1950s encouraged states, without the imposition of a federal standard, to provide twenty-six-week durations. In the Kennedy administration, the U.S. Department of Labor issued in 1962 a recommended policy to states (still in effect in 2023) “that all eligible claimants be allowed a uniform potential duration of at least 26 weeks of benefits,” and “that if a state considers they must vary duration in relation to base-period employment or wages, the variable potential duration should range from a minimum of 20 weeks to a maximum of 30 weeks,” along with other unsuccessful attempts at benefit expansions during the Kennedy and Johnson years. By the 1970s, through federal nudging, Wandner reports that all states provided at least twenty-six-week durations through 2010, when some states began rolling back benefit generosity due to many factors, including dodging employer tax increases. Currently, thirteen states have maximum potential durations of less than six months of benefits and other states are considering similar reductions. Wandner next presents four plausible duration policy options before selecting his preference to impose a federal standard where all state “durations should uniformly be 26 weeks, regardless of the past wages of the recipients, aiding low-wage workers during periods of unemployment.”
With equal formulation and specificity, Wandner unspools a succession of other recommendations to restore the effectiveness of UI in meeting its objectives. In the main, the reviewers agree with Wandner, who argues for additional federal standards to rejuvenate state UI programs and increase their utility to jobless workers. In selected areas of reform, Wandner offers the following remedies:
- Access and Recipiency: Require employers to provide better information to workers about the program and how to apply for benefits. A Canadian-type record of employment should be provided to separated workers and the state UI agency.
- Additional Benefit Standards: Fifty percent wage replacement rate during periods of low unemployment; a maximum weekly benefit amount of 66.67 percent of each state’s average weekly wage in covered employment; and a minimum benefit amount of approximately 30 percent of the state’s average weekly wage.
- Expand Eligibility and Coverage: Eliminate waiting weeks for benefits and pension offsets; partial earnings disregards need to be roughly 50 percent of the average weekly benefit amount; increase the eligibility of workers separated from work for compelling personal needs; extend eligibility to the free-lance workforce by ensuring that workers who meet the ABC employee test are in covered UI employment nationwide; extended benefits should contain four or five phases of increased durations; unemployment benefits should not be taxed.
- Job Seeker’s Allowance: The social safety net would be greatly improved with a program to pay benefits to new labor market entrants as they seek work. However, it is not social insurance, and should be considered on its own merits outside of UI reform.
- Finance: Raise the UI taxable wage base to at least 50 percent of the Social Security wage base, phased in over a five-year period; increase the sufficiency of state tax rates; require employees in all states to contribute to UI financing, consider establishing a reinsurance program; revise the current system of experience rating to ensure employers pay their fair share; and forward fund benefits. Added federal and state unemployment tax revenues should result in increased financing for the administration of UI, Wagner-Peyser Act Employment Service (ES), extended benefit costs, and loans to states.
- Special Programs: Require states to operate programs of Short-Time Compensation and Self-Employment Assistance, with Reemployment Bonuses as optional, and mandate a federal–state study of Wage Insurance.
- Administration: State and federal staffing funded under the Federal Unemployment Tax Act should be dramatically increased to provide better claims and tax administration and more in-person reemployment services; services under UI and ES should be administered by merit-based government employees with cross-training.
- Data and Research: ETA UI data is important not just for program administration, but policymakers use these data for key broad economic observations; and program terminology across states should be uniform and understandable. Additional research funds could establish a center for research and development to provide for efficient information technology, common data systems, and improved means for fraud prevention and detection such as creating a searchable IRS-1099 earnings database.
Wandner offers two federal reorganization proposals. The first would restore within ETA the leadership role of the U.S. Employment Service (USES) to guide state job matching and placement efforts and to expand the interface of the UI work test and job search assistance services. This proposal is consistent with a finding by Louis Soares of the Center for American Progress in his 2009 report, “Working Learners: Educating Our Entire Workforce for Success in the 21st Century.” Soares advised that the USES should be enhanced and placed in charge of the American Job Center grid of local offices. The merits of these similar proposals are attractive. The authors of this commentary would include placing the Reemployment Services and Eligibility Assessment (RESEA) program under the USES, based upon past leadership and current state practices.
Wandner next offers a far-reaching reorganization proposal that would abandon the federal–state UI partnership and operate UI as a wholly federal enterprise. To accomplish this, Wandner recommends transferring federal administration of UI and USES programs from the Department of Labor to the Social Security Administration (SSA). He provides a blueprint for such a reorganization, with separate cost estimates prepared by actuary Robert Pavosevich, and a discussion of the pros and cons. As Wandner indicates in chapter 2, it took the Roosevelt and Truman administrations until 1949 to get the UI and USES labor-protection programs linked together and in the Department of Labor. In our view, the UI and USES programs are small compared to other programs already administered by SSA. The UI and USES programs likely would garner less attention and influence within the SSA bureaucracy and do so to the detriment of UI claimants and other jobseekers. Additionally, there may be a benefit to continuing to have states administer UI, as it would make it easier to connect claimants to other state-run assistance programs. Wandner realistically declares, and we agree, that “neither the Congress nor the states are going to want to change the federal–state administration of the UI program.”
The founders of the Social Security Act designed unemployment benefits as social insurance, not social welfare protection. Wandner’s primary concern is that the social insurance fabric of UI has frayed and his remedies are intended to mend it and expand the program’s utility. Given Wandner’s extensive UI credentials, policymakers should pay serious attention to the book’s contents.
We thank Chris O’Leary for comments to an earlier version of this book review.
Note: The authors of this commentary have previously worked with Stephen Wandner.