Unemployment Insurance Improvement Act Nails Key Floorboard under State Programs

On Monday, September 27, Senators Ron Wyden, Sherrod Brown, and Michael Bennett introduced the Unemployment Insurance Improvement Act of 2021 (UIIA), and were joined on October 12 in the House of Representatives with a companion bill introduced by an ideologically diverse group of Democrats, led by Representative Don Beyer alongside Representatives Alexandra Ocasio-Cortez, Cori Bush, Mikie Sherrill, Jimmy Gomez, and Scott Peters. The proposal represents a targeted attempt to fix weaknesses in the underlying unemployment insurance (UI) safety net exposed during the COVID-19 pandemic, with five critical new requirements for all state UI programs.

There is an urgent need to ensure that the nation’s unemployment insurance system is included in the “Build Back Better” economic plan. While unemployment insurance prevented millions from falling into poverty during the COVID-19 pandemic, it required Congress to pass an alphabet soup of temporary programs to fill the holes in a withered state-based safety net that only covered one in four jobless workers before the pandemic and that would cover less than 20 percent of all UI claimants by June 20, 2021. Congress relied on the existing state unemployment insurance agencies to distribute federal pandemic aid, and the crush of applications overwhelmed websites and business processes that were not designed with the needs of claimants in mind. Given that members of Congress themselves were deluged with constituent requests for help in navigating these delays, fixing this creaky infrastructure ought to be an urgent recovery priority.

This commentary explains the main features of the UIIA briefly and then delves deeply into the bill’s proposal to require twenty-six weeks of benefits, which would have the largest impact on the overall system and provide a key protection against cutbacks that occurred after the Great Recession.

The Unemployment Insurance Improvement Act Explained

While the Unemployment Insurance Improvement Act does not match the expansive vision advanced by advocates for the unemployed in June, it does follow key principles from that push. Because there exists a national interest in an adequate unemployment insurance system, states are already required to meet minimum standards in the operation of their programs, or the employers operating in the state will be subject to an increase in the federal unemployment tax from 0.6 percent to 5.4 percent of the first $7,000 in wages (effectively, from $42 to $378). The UIIA builds on this existing legal regime but with a new set of standards. The problem is that current federal standards outline how states must process benefits in a timely fashion and handle tax collections and payments, but leave underlying eligibility rules largely to the whims of state legislatures. This has led to wide disparities in the percentage of unemployed workers receiving UI benefits during and before the pandemic. The UIIA also would establish firm eligibility standards in federal law that states would then have to follow. This approach stands in contrast to the 2009 UI modernization provisions, which used grant funds as a carrot to persuade states to implement these reforms, and did not sustain lasting positive change. The UIIA sets an important precedent of establishing federal standards for how states operate their UI programs. Specifically the bill would require states to make the following changes:

• Use an alternative base period to calculate UI eligibility: Every state requires a minimum amount of earnings to qualify for UI. Standard unemployment applications omit earnings from the current calendar quarter and the most recently completed quarter, meaning that up to six months of the recent earnings are not included. The UIIA would require states to use an alternative base period for those ineligible under the standard base period to recalculate eligibility using their most recently completed quarter’s earnings. In states using the alternative base period, 2 to 6 percent of claimants become eligible this way.
• Expand part-time worker eligibility: Roughly half of states discriminate against part-time workers in UI benefit eligibility, disqualifying them solely because they are limited to part-time work even if they have earned enough to qualify for UI. Not only would the UIIA forbid this practice, it would also require states to pay partial unemployment benefits to those workers who find a part-time job that pays less than their unemployment benefit amount.
• Expand monetary eligibility: Low-wage workers have to work far more hours to qualify for UI benefits, which are set as flat dollar amounts in all states except Washington. To provide for fairer qualifications, states would be required under UIIA to cover any individual with a minimum UI benefit that has at least $1,000 in their highest quarter of earnings, and $1,500 in their entire base period.
• Improve access to benefits: UIIA would require states to ensure that employers do a more thorough job notifying separated workers about UI benefits and to ensure their online systems have basic features such as electronic submission of documents and self-service password recovery that would have enabled states to respond to the pandemic far more easily.

Key Proposal Would Set a Minimum of Twenty-Six Weeks of Unemployment Duration

Most importantly, the UIAA would require all states to provide twenty-six weeks of benefits to all jobless workers. Throughout the history of UI programs the basic package of unemployment benefits has been capped at twenty-six weeks in all states. Indeed it has become conventional wisdom among policymakers—and jobless workers—that if they are laid off from a job they can expect twenty-six weeks of benefits.

There’s two major gaps in this conventional wisdom. First, only eight states and Washington, D.C. offer all unemployed workers twenty-six weeks of benefits. In other states, the length of state unemployment benefits is limited by the amount a worker earned prior to being laid off. A typical formula in so-called variable duration states like Nebraska limits total benefits to 33 percent of base period wages, or twenty-six weeks of benefits, whichever is lower. So if Owen from Omaha was laid off after earning $400 per week over thirty weeks in their base period ($12,000 total), he would qualify for $200 per week in UI under the state’s formula which sets UI benefits as half of the average weekly wage. Under Nebraska rules, Owen would have his total UI benefits capped at $4,000 total, which is one-third of his total base period earnings. Owen would thus have a potential duration of twenty weeks ($4,000 divided by $200).

While variable duration has long been a feature of many state unemployment benefit systems, duration policy changed dramatically in the wake of the Great Recession. The financial crisis that triggered the Great Recession drove thirty-six state unemployment trust funds into insolvency and coincided with the rise of the Tea Party movement and big shifts in state legislatures. The result was a set of historic, draconian, cutbacks to unemployment benefits. The most notable of these was the reduction of the maximum unemployment duration in the states described in Table 1: Alabama, Arkansas, Florida, Georgia, Idaho, Kansas, Michigan, Missouri, and North Carolina. The laws enacted were severe—slashing UI benefits to as few as ten weeks in Idaho, twelve weeks in Florida and North Carolina, and thirteen weeks in Missouri. Unlike changes to eligibility rules that only impact certain segments of the unemployed, cuts in durations are across the board and hurt most workers in the UI program. These cuts directly impact the effectiveness of the UI safety net—benefits are too short, and thus a large share of those unemployed at any given time in a state have been out of work too long even to qualify for them. With the total value of benefits reduced so much, workers are less likely to wrestle with difficult online application procedures, including statutory waiting periods for benefits. So, it’s no surprise that after these big cuts, the percentage of workers receiving unemployment benefits reached an all-time low of 26 percent nationally in 2013, and in Florida, Georgia, and North Carolina fewer than one in eight jobless workers were receiving an unemployment check as of 2016.

Absent intervention in the UI system, these extra-low benefit durations will get worse in 2022. Most states that offer less than twenty-six weeks use a maximum duration based on the state unemployment rate and the corresponding ranges they set. For instance, if Missouri has a state unemployment rate of 6.2 percent, since it is between 6 percent and 6.5 percent, the maximum number of weeks their UI system allows right now is fourteen. Some states such as Florida determine the duration by taking the lowest maximum duration and adding an additional week for each 0.5 percent increase in the state’s average unemployment rate above a base rate (5 percent for Florida). In Idaho, the duration is dependent on a chart that takes into account both the period of earnings to highest quarter earnings and the state unemployment rate. Three states with maximum duration rates under twenty-six weeks—Arkansas, Michigan, and South Carolina—do not have their duration based on the state unemployment rate and instead use a standard number of weeks.

Table 1 summarizes the ranges under state statute and includes an analysis of state laws and the current relatively low unemployment rate in these states. If current unemployment rates are applied to the statutory formulas, the result will be that states will offer some of the lowest durations ever seen in the UI program. As of next year, there will be eight states that offer sixteen weeks of unemployment benefits or less under state laws that already automatically restrict UI benefits when the unemployment rate drops. Table 1 does not even include Tennessee, which is scheduled to lower benefits to twelve weeks in December 2023 under legislation passed this spring, which would pay twelve weeks of benefits when the unemployment rate in the state is 5.5 percent or below and would only pay twenty weeks of benefits if the unemployment rate is above 9 percent.

TABLE 1

The combined impacts of variable duration formula and the caps in duration below twenty-six weeks means that a twenty-six week package of UI benefits is far from the current law of the land. Indeed, the largest group of states caps UI benefits at one-third to 60 percent of base period wages or twenty-six weeks, whichever is lower. To summarize state laws on UI duration shake out as follows:

• Best: eight states and Washington, D.C. provide a uniform twenty-six weeks of duration. These states are: Connecticut, Hawaii, Illinois, Louisiana, Maryland, New Hampshire, New York, West Virginia, and Washington, D.C.
• Average: twenty states provide at least one third of base period wages to all workers with a cap of twenty-six weeks. These states are: Arizona, California, Colorado, Delaware, Iowa, Kentucky, Maine, Massachusetts (thirty weeks in periods of high unemployment), Minnesota, Mississippi, Nebraska, Nevada, New Mexico, Oregon, Rhode Island, South Dakota, Vermont, Washington, and Wisconsin.
• Less generous: Five states provide twenty-six weeks but less than one third base period wages to all workers. These states are: Indiana, Tennessee,Texas, Utah, Wyoming. (Tennessee will provide only twelve to twenty weeks of benefits as of December 2023.)
• Unique: Seven states use an array method or count weeks of work and provide twenty-six weeks or more. These states are: Alaska, Montana (twenty-eight weeks), New Jersey, Ohio, Oklahoma, Pennsylvania, and Virginia.
• Restrictive: Ten states have less than twenty-six weeks in their laws. These states are: Alabama, Arkansas, Florida, Georgia, Idaho, Kansas, Michigan, Missouri, North Carolina, and South Carolina.

Based on pre-pandemic data for the calendar year 2019, the combined impact of these laws translated into 36 percent of workers eligible for less than twenty-six weeks of benefits.¹ If the economy returns to pre-pandemic trends in 2022, the UIIA would mean that more than one-third of UI beneficiaries would be eligible for more weeks of benefits than under current law. However, this significant improvement would have a limited impact on the federal budget. Because most UI benefits are charged back to previous employers through experience rating, there would be a limited net budget impact on aggregate state unemployment trust funds (which are counted as part of the federal budget and held by the Treasury).

Map 1 displays the percentage of workers in each state in 2019 who were eligible for less than twenty-six weeks. On one extreme, in states such as Connecticut that provide a uniform duration of twenty-six weeks of benefits, 0 percent of UI recipients receive less than twenty-six weeks. On the other end of the spectrum, in states such as Arkansas with a stunted cap, 100 percent of workers receive less than twenty-six weeks. Other states are in between. (Data for Alabama reported to the U.S. Department of Labor does not appear to be accurate and is thus omitted.) Despite this variation, the map visualizes how most of the states would have workers that would benefit from this critical provision of the UIIA.

Map 1: Percentage of Workers Eligible for Fewer than Twenty-six Weeks of Benefits

Why Twenty-Six Weeks of Unemployment Insurance Benefit Duration Is Critical

The twenty-six week unemployment insurance benefit duration proposal would represent a significant shift in the reality of unemployment compared to the past several decades. With the exception of layoffs during the shutdowns forced by the pandemic, an increasing share of layoffs have been permanent. With laid off workers increasingly forced to look for a new job, durations of unemployment have gone longer both during economic recessions and relatively good economic times. As displayed in Figure 1, unemployment duration was under twelve weeks in 1990 but never returned that low after the 1990s recession, and remained near twenty weeks even after the ten years of economic recovery that preceded the pandemic. Lengthening the duration of the basic package of unemployment benefits is a key response to this important changing workforce dynamic across the economy. This new requirement is especially important as the nation looks ahead to a challenging period of UI policy making: state unemployment trust funds are set to experience a pandemic-induced decline to –$12 billion in assets at the end of fiscal year 2021, and state legislatures will face predictable complaints from employers about automatic tax increases. As described above, Tennessee legislators already succumbed to this pressure and reduced the maximum duration of unemployment benefits from twenty-six to as few as twelve weeks. With American Rescue Plan Act aid to states wearing off in 2022, more states will likely join Tennessee in reducing UI benefit duration, unless the UIAA is passed before they can make those changes.

FIGURE 1

Download

Unemployment benefit duration is even more important when considering equity within the nation’s UI system. African Americans consistently have longer durations of unemployment than white workers, and the shrinking of duration has occurred especially in Southern states such as Arkansas, North Carolina, South Carolina, and Alabama that have a large African-American workforce. Establishing a uniform duration of benefits would go a long way to making the UI system more equitable. Moreover, as the workforce ages, long-term unemployment is an especially acute challenge for workers displaced from well paid-jobs and who struggle to find new employers to take them on later in their career.

Looking Ahead

The Unemployment Insurance Improvement Act would make a set of targeted reforms that would begin to level the playing field between states, and guarantee more reasonable protection for unemployed workers. While Congress’s appetite for adding items to the Build Back Better reconciliation package has waned, it’s hard to think of a more direct lesson from the COVID-19 pandemic. The nation’s economy needs a stronger jobless safety net and policymakers should not wait any longer to start fixing it. The introduction of the UIIA should be seen as the start to a critical policy debate that needs to end with lasting reforms to the UI program.

1. Author’s analysis of U.S. Department of Labor data submitted on Employment Training Administration form 218

Tags: work, u.s. economy, unemployed, unemployment benefits