A Hamilton Project Discussion Paper

Reforming Unemployment Insurance for the Twenty-First Century Workforce

Abstract

Despite significant changes in U.S. labor market, the basic structure of the nation's unemployment insurance (UI) program has remained unchanged since it was created in 1935. The current system is in need for reform in order to meet the needs of a twenty-first century workforce. Shortfalls in the current program fall into four categories: (1) overly restrictive eligibility criteria have resulted in low recipiency rates; (2) benefit levels are low; (3) the federal tax system used to finance the program is regressive; (4) and the mechanism to automatically extend UI during periods of prolonged economic downturns is broken. As a result of these and other factors, only about one-third of unemployed workers currently receive assistance under the UI program, and that assistance falls short of the original goal of replacing at least half of previous earnings. In addition, the system provides no assistance either to the self-employed or to those who become reemployed at lower wages.

In this paper we propose three broad reforms, each designed to help the UI system better meet the needs of a twenty-first century workforce. First, we propose strengthening the federal role in UI by setting federal standards that would require states to harmonize their eligibility criteria and benefit levels. These new standards would aim to raise average national benefit levels and average national recipiency rates. Expansions in the program would be financed by raising the FUTA taxable wage base over time to $45,000 to adjust for inflation over recent decades. Second, we propose a wageloss insurance program, as part of the UI program, to provide an earnings supplement for those workers who become reemployed at a wage lower than the wage they earned at their previous job. Finally, we propose allowing self-employed workers, and perhaps others, to contribute up to 0.25 percent of annual income, up to $200 per year, into Personal Unemployment Accounts (PUAs). These contributions would be matched by the federal government and could be withdrawn later to cushion severe income losses or to finance training or job search.