Shoring Up the Unemployment Insurance System

The unemployment insurance (UI) system has provided an essential source of support for American workers and their families. Yet the system is not without its flaws, as panelists highlighted at the “Strengthening UI” session of NASI’s 23rd annual conference. The three speakers addressed a broad range of areas where the UI system could be improved and offered proposals that ranged from the very specific to new ways of conceiving of employment arrangements.

Gary Burtless of the Brookings Institution, focused on the extremely low UI taxable wage base. This amounts to an incredibly regressive levy on our country’s poorest workers. In addition, the low caps cause UI revenue to rise more slowly than wages, starving the UI system of much-needed funding during economic downturns. Burtless thus called for policymakers at the state and federal level to raise their UI tax bases and automatically continue raising the bases as wages grow.

Burtless’ policy proposal was concise and compelling. As a political scientist, however, I would have been very interested to hear more about why states ended up with such regressive systems of taxation. What were state governments thinking when they implemented such inefficient mechanisms for funding their unemployment systems? Do workers realize the extent of the regressivity of taxation?

Andrew Grant-Thomas, Deputy Director of the Kirwan Institute, presented evidence of another troubling phenomenon in the UI system: the underrepresentation of African-Americans and Latinos amongst UI beneficiaries. He examined a series of possible explanations, including the possibility that unemployed Blacks and Latinos lived in states with low UI coverage, that these groups were less likely to meet state eligibility criteria, and that these groups were more likely to be denied benefits.  His findings were very interesting and left me wanting to see further research that could more definitively identify the sources of the underrepresentation of minorities amongst UI beneficiaries.

Finally, Kevin Hassett of the American Enterprise Institute explored an intriguing proposal for the adoption of a German-style “work-sharing” system, where  firms that face a temporary decline in demand do not fire workers but instead cut workers’ hours, and the government partially subsidizes the worker’s lost wages. There is a strong case that this system is economically beneficial for workers, firms, and the economy as a whole.

Why has the U.S. been so reluctant to adopt a work-sharing system? One possibility can be found in recent research in comparative political economy (see, for example, this summary published in Labor Notes). Advocates of work sharing would do well to examine research on the long-run historical evolution of labor market institutions. This work suggests that a central determinant of the emergence and persistence of policies that promote greater labor market coordination (like work sharing and comprehensive UI) is the type of skills that workers possess and that firms need.

Institutions like work sharing and generous and comprehensive UI systems have typically developed in economies where employers had a strong interest in fostering and retaining highly specific skills among employees. In economies where firms relied largely on general skills portable between different kinds of companies and industries, like the U.S., employers did not press for such policies. Hassett and others who wish to implement policies like work sharing ought to focus on the mobilization of employers that require specific skills and learn from the approaches employed by business groups in other countries.

Many people recognize now that the American UI system was built for a labor market that no longer exists. Thus in addition to making the small but necessary updates to the UI system (like increasing the taxable wage base), policymakers must also consider how to redesign the entire system of unemployment support to more adequately reflect workers’ needs. For example, what role should unemployment insurance play vis-à-vis TANF and Food Stamps in terms of benefit adequacy and eligibility of beneficiaries? Should policymakers consider better automatic triggers for UI during recessions? What kind of integration between UI and the vocational training and education system should policymakers foster? Should the system be further federalized? NASI’s recent brief, Strengthening Unemployment Insurance for the 21st Century: An Agenda for Future Research, provides a good starting point for thinking through many of these issues.

Click here to view a video of the session, “Strengthening Unemployment Insurance: Promising Solutions to Systemic Problems.”