Unemployment Insurance

Kathryn Anne Edwards, RAND Corporation

3/19/2021
@keds_economist
kathryne@rand.org
Basics
• Temporary cash benefit for workers who have lost their job through no fault of
their own and are willing and able to work

• State-run program, benefits administered by state workforce agencies and

benefit formula determined by state legislatures

• Each state has a trust fund that finances benefits

Basics
• Temporary cash benefit for workers who have lost their job through no fault of
their own and are willing and able to work  The vast majority of the
unemployed do not receive this benefit, receipt has declined greatly over time,
and varies by state

• State-run program, benefits administered by state workforce agencies and

benefit formula determined by state legislatures

• Each state has a trust fund that finances benefits

Basics
• Temporary cash benefit for workers who have lost their job through no fault of
their own and are willing and able to work  The vast majority of the
unemployed do not receive this benefit, receipt has declined greatly over time,
and varies by state

• State-run program, benefits administered by state workforce agencies and

benefit formula determined by state legislatures  Everything varies by state,
including benefit amount and replacement rate, which have declined over time

• Each state has a trust fund that finances benefits

Basics
• Temporary cash benefit for workers who have lost their job through no fault of
their own and are willing and able to work  The vast majority of the
unemployed do not receive this benefit, receipt has declined greatly over time,
and varies by state

• State-run program, benefits administered by state workforce agencies and

benefit formula determined by state legislatures  Everything varies by state,
including benefit amount and replacement rate, which have declined over time

• Each state has a trust fund that finances benefits  19 insolvent now, 34
insolvent in the last recession
Status this Recession
• March of 2020, Congress passed the CARES Act and made the single largest
intervention into unemployment insurance in its history
• Created a new program, PUA, for workers who were not eligible through their earnings
history for benefits in their state, either because they had not earned enough, or
because they were not in covered employment (independent contractors)

• Created a new program, FPUC, to add $600 weekly to the state benefits (expired in
July and has been restarted since in lower amounts)

• Created a benefit extension, PEUC, to add additional weeks of benefits (also expired
and restarted)
Three Unemployment Insurance
Programs
1. The Intended Program - a temporary benefit for workers who lost their job
through no fault of their own that replaces about half of lost wages

2. The Actual Program – most unemployed do not get, half do not apply, and
the benefit amount has greatly eroded in replacement terms, insolvent

3. The Pandemic Program – everyone gets it and its generous but it

periodically expires or may expire, federal government pays for it
Why?
• Why a pandemic program?
• Because the actual program was ineffective

• Why did the actual program get so ineffective?

• Fundamentally flawed financing
Origins
• Created by 1935 Social Security Act
• Old Age Insurance (aka Social Security)
• Aid to Families with Dependent Children (aka welfare, ended in 1996)

• Key Features
• State-run program
• Legislatures determine tax rates, tax base, earnings eligibility tests, benefit levels
• Payroll taxes are paid by employers only
• SUTA: pays for benefits, deposited into state trust fund
• FUTA: pays for administration, deposited into federal trust fund and remitted back to states
Tax
• Federal
• FUTA is 6.0% on first $7000 of covered earnings, but states in good standing are
rebated 5.4%, so the paid tax is 0.6%, or $42 per worker per year

• States
• SUTA rate and base varies by: state, experience rating, and how much money is in the
trust fund

• Firms
• Pay more on all current and future employees if former, laid off workers claim benefits
Tax Incentives
• Federal
• FUTA is 6.0% on first $7000 of covered earnings, but states in good standing are
rebated 5.4%, so the paid tax is 0.6%, or $42 per worker per year

• States
• SUTA rate and base varies by: state, experience rating, and how much money is in the
trust fund

• Firms
• Pay more on all current and future employees if former, laid off workers claim benefits
Tax Incentives
• Federal
• FUTA is 6.0% on first $7000 of covered earnings, but states in good standing are
rebated 5.4%, so the paid tax is 0.6%, or $42 per worker per year

• States
• SUTA rate and base varies by: state, experience rating, and how much money is in the
trust fund  Race to the bottom for lowest tax burden (Amazon HQ2)

• Firms
• Pay more on all current and future employees if former, laid off workers claim benefits
Tax Incentives
• Federal
• FUTA is 6.0% on first $7000 of covered earnings, but states in good standing are
rebated 5.4%, so the paid tax is 0.6%, or $42 per worker per year

• States
• SUTA rate and base varies by: state, experience rating, and how much money is in the
trust fund  Race to the bottom for lowest tax burden (Amazon HQ2)

• Firms
• Pay more on all current and future employees if former, laid off workers claim benefits
 Prevent former employees from getting it (SUTA dumping v Equifax)
Tax Incentives
• Federal
• FUTA is 6.0% on first $7000 of covered earnings, but states in good standing are
rebated 5.4%, so the paid tax is 0.6%, or $42 per worker per year  Trust fund loans

• States
• SUTA rate and base varies by: state, experience rating, and how much money is in the
trust fund  Race to the bottom for lowest tax burden (Amazon HQ2)

• Firms
• Pay more on all current and future employees if former, laid off workers claim benefits
 Prevent former employees from getting it (SUTA dumping v Equifax)
Result
• Tax incentives mean that states pursue a “low-benefit, low-tax” policy
• The application and administration is also designed to deter enrolling in the
program

• But if this is how the program looked in 1935, why is not a problem until 2020?
Two eras of UI history
• Era 1 – The War Chest
• The flaws of the program were masked by how much money states amassed into their
trust fund
• Period of benefit and coverage expansion

1973 Recession

• Era 2 – Failure to Reform

• The flaws of the program were known to Congress, but Congress failed to address
them
• Period of benefit and recipiency decline
Who does unemployment serve?
• The unemployed
• The employers

I have a new commentary about who is the permanent constituency and what
lessons legislatures will learn from this recession.
“
Will States Learn the Wrong Lesson About Unemployment Insurance’s Failings?
”
Resources to Keep Track of All This
• Congressional Research Service – summaries of the program and legislative changes at
the federal level
“Unemployment Insurance: Programs and Benefits”
“Unemployment Insurance Provisions in the CARES Act”
Search here.
• Unemployment Insurance Program Letters – instructions from federal Department of
Labor of how to implement legislative changes
Search here.
UIPL No. XX-YY XX is the letter number published in year YY, and if there’s an
update, it’s called “Change 1”
“Unemployment Insurance Letter No. 16-20” explains PUA and has 5 changes
Resources to Keep Track of All This
• Department of Labor, Employment and Training Administration, Office of Unemployment
Insurance (DOLETA)

• Comparison of State UI Laws

https://oui.doleta.gov/unemploy/comparison/2020-2029/comparison2020.asp

• State Law Information

https://oui.doleta.gov/unemploy/statelaws.asp
People to Ask for Help (Economists v
Lawyers)
• Program history, goals, changes, status, new developments, claims analysis
W. E. Upjohn Institute for Employment Research (Economists)

National Employment Law Project (Lawyers)

Experts: Andrew Stettner, the Century Foundation Elizabeth Pancotti, Employ America, myself

• Difficulty in accessing benefits, application process, appeals, state rules

National Association of State Workforce Agencies (NASWA) and labor, industry, workforce department in your
state

Economic Analysis Research Network (EARN), State Priorities Partnership (SPP), and Kids Count Network (KC)

Legal Aid
 Primers

• Overview of Program Decline

• “How the American Unemployment System Failed.” The New York Times, January
2021

• A Visual (and Saucier) Discussion of Program Decline

• “Unemployment.” Last Week Tonight with John Oliver, March 2021

• It’s not just COBOL’s fault

• “Why It’s So Hard to Get Unemployment Benefits.” Vox, June 2020
 Primers from me about specific policy issues

• Introduction to program issues.

• “Millions Need Unemployment Benefits, Unfortunately the Delivery System is Broken.” LA Times,
April 2020
• A discussion of why the state variation limits Congressional options during a recession.
• “Is the U.S. Stuck with a Fixed Add-on for Unemployment?” RAND, July 2020
• History with black workers.
• “Racial Disparities in Unemployment Benefits.” RAND, July 2020;
• “Holes Just Big Enough.” LA Times, August 2020
• Aspects of failed or future reform
• “Unemployment Insurance and the Failure to Reform.” RAND, January 2021
• “A Bell that Can’t Be Unrung: The CARES Act.” RAND, January 2021
• How we think about unemployed people
• “The Pandemic is Completely Changing the Way We Treat Unemployment.” Washington Post,
February 2021.