Commentary | Inequality and Poverty

Unemployment-Insurance Systems Could Falter As Joblessness Spreads—Viewpoints | EPI

Opinion pieces and speeches by EPI staff and associates.


Unemployment Insurance Systems Could Falter as Joblessness Spreads

by Jeffrey Wenger

The sustained low levels of unemployment during the late 1990s have made it easy for states to leave their unemployment insurance systems out to rust. Now that the economy is faltering and job losses are mounting, these systems need a good polish.

The unemployment rate has risen to 4.5 percent this Labor Day, while about 332,000 more unemployed workers are filing initial claims for unemployment insurance each week – about 70,000 more than at this time last year.

In all states, simply being unemployed isn’t enough to qualify for benefits. Depending on the state, workers must have worked enough weeks or hours, and (in most states) earned enough income, to be eligible for benefits. They must have lost their job through no fault of their own, continue searching for a job, and accept any reasonable offer of employment. These rules combine to make eligibility more difficult for low-income workers and workers with interrupted employment.

But eligibility for benefits is the smaller part of the unemployment insurance problem. Most states fail to provide adequate benefits. The average worker sees only one-third of lost earnings replaced by unemployment insurance.

The picture is worse for low-income workers. Minimum wage workers in California, where the minimum is $6.25 an hour, who worked full-time all year would be eligible to receive just $102 a week. This replaces 41 percent of lost wages, but it leaves them well below the federal poverty level.

Not all systems are so inadequate. Oregon provides full-time minimum wage workers with a benefit of $169 per week, or 65 percent of lost wages, in a state where the minimum wage is set 25 cents higher than California’s.

States should be able to pay adequate benefits. In the first quarter of this year, the average unemployment insurance system had enough money in its trust fund to pay benefits for 46 weeks of a typical recession. Texas has only enough saved up to pay benefits for 10 weeks; New York, enough for six. Only 13 states are close to being able to pay benefits out of their trust funds for 52 weeks, the length of time recommended by the Department of Labor.

The period of prosperity that started in 1992 presented states with an opportunity to strengthen their trust funds — they should be flush. Instead, many states reduced taxes on businesses that fund unemployment insurance. Nationwide, unemployment insurance tax rates as a share of wages fell by 41 percent from 1994 to 2000.

States can do one of three things to fix their financial woes: cut benefits, raise taxes, or borrow from the federal government. The first two options will damage the systems’ role as a stabilizer. When the economy sputters, insurance payments help fuel consumption and get things back on track.

Borrowing from the federal government is therefore the best option. But unemployment insurance systems never should have deteriorated seriously enough to require exercising any of the three options. Building up reserves during times of prosperity is the best way to help people survive the tough times.

Workers who lose their jobs through no fault of their own should be eligible for adequate assistance while they search for new work. Policymakers should have been better caretakers of our unemployment insurance systems during the boom, but shrinking trust funds shouldn’t prevent workers from collecting needed benefits.

Read EPI’s full report on the states’ unemployment insurance systems, Divided We Fall (PDF).

Jeffrey Wenger is an economist at the Economic Policy Institute.