COVID-19 pandemic spotlights both critical importance of and structural gaps in Unemployment Insurance

Researchers have been sounding the alarm about weaknesses in our Unemployment Insurance (UI) program for many years. Unfortunately, it has taken a pandemic for state governments and Congress to pay attention. As a result, this core social insurance program will not be able to perform its key functions – supporting individual workers and their families in challenging times and acting as a financial cushion – to full effect. Workers, especially the most vulnerable ones, will suffer more harm than they should in the coming months, and the nation’s economy will not receive the much-needed boost it could and should have.

The good news is that we have a unique opportunity at this moment, when Congress is exploring and enacting a broad range of policy responses to the COVID-19 crisis, to not only provide temporary emergency UI benefits, but to shore up and reform the program in several key ways.

The Erosion of UI

The U.S. UI program has eroded substantially in the past few decades, researchers find. Most recently, Academy Member Stephen Wandner and his W.E. Upjohn Institute colleague Christopher O’Leary report that the UI benefit program has been shrinking since 1980, serving a smaller percentage of the unemployed (the UI recipiency rate), and, for the unemployed workers whom it does serve, paying a smaller percentage of the wages that they have lost (the wage replacement rate). (An Illustrated Case for Unemployment Insurance Reform)

Data compiled by Academy Member and previous lead actuary of the U.S. Department of Labor Unemployment Insurance Office Robert Pavosevich shows that, as of 2018, the average weekly benefit amount was less than the federal poverty level in six states. Only eight states provide benefits greater than the historic recommendation of 67% of the state’s prior year’s average weekly wage. Across the country, unemployed workers are receiving benefits far too low to meet their income needs: the average wage replacement rate ranged from just 32% in Alaska – about a third of regular income – to just over half, 56%, in Hawaii. Compounding these, the recipiency rate was less than 20% in 11 states.

The length of time that unemployed workers receive benefits is also a problem. Ten states have reduced the potential maximum weekly benefit duration to less than 26 weeks and only two, Massachusetts and Montana, set a higher maximum duration (28 and 30 weeks, respectively).

Moreover, these numbers have fallen substantially since the Great Recession. With respect to recipiency, for example, between 2003 and 2009, the share of unemployed Americans who applied for UI was roughly 60%. In the following few years, however, the rate fell sharply to around 45%, down to 43% by 2018.

Numbers from two years ago, when the economy was strong and unemployment at a historic low, illustrate the serious dangers posed by this weakened system to the challenges we face now. About 6.4 million Americans were unemployed in 2018. Of those, fewer than half (43%) applied for UI, and just over one in five of those unemployed (22%) received benefits. Indeed, as O’Leary and Wandner note, “[W]e illustrate the decline of the UI program in recent decades and the wide variation in the program among the states, differences so wide as to endanger the integrity of the program in many states, making it inadequate for a large number of unemployed American workers.”

Likely impacts of UI problems in the current crisis

In just the past few weeks, with the coronavirus epidemic in its early stages, unemployment rates have already spiked sharply. The U.S. Department of Labor (DOL) reported that, for the week ending March 21, the advance figure for seasonally adjusted initial claims was 3,283,000, the highest level of these claims in the history of the series. Also, given massive layoffs in the airline, hotel, restaurant, and other industries, those numbers will likely grow in the next few weeks.

Academy Board Chair and Century Foundation Fellow William Rodgers has developed a model that suggests that the real March unemployment rate will be much higher than the official reported numbers. Rodgers’ estimate predicts a rate between 15 and 20 percent, with spikes nearing 45 percent in Louisiana, Maine, and New Hampshire. Others are assessing the longer-term damage of the pandemic. Heidi Shierholtz, director of policy at the Economic Policy Institute, told Politico reporter Rebecca Rainey:

“Under the latest numbers, EPI expects a loss of around 14 million jobs by the summer even with a congressional relief package factored in. The economist part of me is totally freaked out about what this means for working people. In the coming weeks, millions are going to be laid off and [unemployment insurance] systems are just crashing. It absolutely will be possible for some [to be retrained in in-demand fields]. Some people will luck out and get those jobs, but there will still be millions lost.”

The UI system is woefully unprepared for this massive surge. A Washington Post article on the spike in unemployment claims reports that “laid-off workers are struggling to apply for unemployment aid as government websites crash and phone lines have hours-long waits. Then some are finding they do not even qualify for help.” And that system is about to face far worse. As Bloomberg‘s Steve Matthews reported on March 22, “Federal Reserve Bank of St. Louis president James Bullard predicted the U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50% drop in gross domestic product.”

In other words, not only will the official unemployment rate likely reach heights not seen since the Great Depression of the 1930s, these problems will be compounded by a historically low labor force participation rate and by growing numbers of independent contractors, so-called “gig,” and misclassified workers, who are not covered by UI.

Fixes Congress and states should consider

Such a crisis calls for immediate and dramatic action at every level of government. It also offers unique opportunities to assess – albeit, much later than optimal – what is not working well in our existing programs and to leverage this moment to address them. As such, current options that Congress is considering to strengthen and enhance the UI program should include longer-term policies that bolster its effectiveness in the future, both during crises and in better times.

The Economic Policy Institute has developed a Coronavirus “toolkit” that includes updated claims numbers and projections of the crisis’ likely impact on the labor market, along with commentaries that both highlight helpful aspects of the CARES Act and call for more robust action to address its insufficiencies. The Center on Budget and Policy Priorities’ Coronavirus Response Roundup summarizes Congressional and state actions to support workers and the economy during the pandemic and urges stronger and better targeted ones. And the National Employment Law Project (NELP) provides a range of resources for workers during the crisis, including fact sheets on both of the recently enacted relief packages and several UI-related policy briefs. NELP also highlights particular risks for front-line workers during the pandemic.

Across these runs a central theme: the US government must not waste this massive crisis, but rather address the long-standing problems with our social policy infrastructure that have made it worse. Stony Brook University economics professor and Academy Member Stephanie Kelton reflects this sentiment in her March 21 New York Times Op-Ed:

“The degree to which Congress’ relief efforts actually reach working families depends upon how effectively lawmakers of good will can fend off the various industry interest groups that will attempt to eat up as much of the allotments as they can. Congress shouldn’t just settle for short-term band-aids to patch holes in our health care infrastructure and our social safety nets. It can and should use this opportunity to make ambitious, lasting improvements.”

Congress and states are beginning to act. On March 27, Congress passed and President Trump signed a two trillion-dollar relief package that includes additional resources for state UI programs, along with requirements for enhanced and extended benefits for states that want to participate.

Recognizing his state UI program’s insufficient resources to deal with the flood of new claims, Maryland Governor Larry Hogan had already taken several helpful steps prior to the CARES Act’s enactment. Hogan expanded the agency’s daily operations by 50 percent to enable staff to answer more calls, created two new email accounts for employees and employers to report problems, and shared information about submitting claims online and “bulk claims” options for some employers. And Michigan, which has a poor record of supporting unemployed workers, has acted quickly to implement the standards needed to participate in the federal emergency UI provisions, demonstrating the Act’s potential to substantially improve supports for vulnerable and jobless workers.

These actions point to both the central importance of state leadership on UI and long-standing weaknesses in the program highlighted above. Indeed, President Trump stated with respect to the Families First and CARES Acts that he was opposed to giving funds to states to administer UI benefits because of their “antiquated systems.” He implied that the federal government could do a better job and says that, if states prove unable to handle the increase in UI applications, he will convene a group to explore a federal alternative.

As policymakers begin to consider options for additional measures to assist unemployed workers during this difficult time, most UI proponents believe that the focus should be on:

• Further extensions of extended benefits as unemployed workers begin to exhaust all of their entitlement to UI benefits;
• Ensuring greater access to benefits, i.e., some unemployed workers may not be receiving UI because applications are too difficult to complete, or too many of those who apply are found to be ineligible;
• Maintaining greater job attachment for American workers by improving the Short-time Compensation/Work Sharing program (either federalizing the program or paying STC workers whose hours have been reduced as much as 100 percent of reduced wages).

In the coming months, the Academy will continue to draw on Members’ expertise to analyze unemployment numbers and the impacts of relief packages. We will also work to surface new ways to use our current social insurance infrastructure to maximal benefit during this crisis, and to suggest enhancements that can strengthen those benefits in future crises.