Social distancing has shuttered stores and factories, and unemployment is soaring. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, expands the unemployment insurance (UI) system to provide relief to those who are out of work. What is the UI system, and how does it work?
How does unemployment insurance work in ordinary times?
Created in 1935, the federal-state unemployment insurance (UI) program temporarily replaces a portion of wages for workers who have been laid off, as long as they are looking and available for work. Although benefits vary by state, in most states the program provides up to 26 weeks of benefits to unemployed workers and, on average, replaces half of a workers’ previous wages. Because more workers lose their jobs during economic downturns, this program also provides some needed economic stimulus that helps mitigate the severity of recessions.
What are initial claims, and how have they changed recently?
Initial claims are the number of new claims filed by individuals seeking UI benefits – an indication of the health of the job market. The more initial claims, the more people losing their jobs. During the week ending March 28, 2020, initial claims for UI benefits surged to 6.6 million—which followed an unusually large 3.3 million the week before—because of lockdown measures put in place to slow the spread of coronavirus. The previous high was 696,000 claims filed in the week ending October 2, 1982.
Who pays for unemployment insurance?
The program is funded by taxes on employers, including state taxes and the Federal Unemployment Tax Act (FUTA), which is 6 percent of the first $7,000 of each employee’s wages.
States have extensive flexibility in determining benefits. Federal requirements are minimal, while ensuring that all states provide basic protections for eligible workers. States are free to choose the level of employer tax, the benefit level and duration of benefits, and the eligibility criteria, such as the extent and duration of prior employment. There is considerable variation in how states choose to run this program. For instance, while the standard maximum time for which eligible people can collect benefits is 26 weeks; at the time of writing, states like Florida and North Carolina limit this to 12 weeks.
What share of wages does UI pay in normal times?
Most state UI systems replace about half of prior weekly earnings, up to some maximum. Before the expansion of UI during the coronavirus crisis, average weekly UI payments were $387 nationwide, ranging from an average of $215 per week in Mississippi to $550 per week in Massachusetts. Since payments are capped, unemployment insurance replaces a smaller share of previous earnings for higher-income workers than lower-income workers; while program formulas vary significantly, states that have higher maximums tend to have higher replacement rates. In the fourth quarter of 2019, Hawaii’s UI average replacement rate of 55 percent was the highest, while D.C.’s average replacement rate of 21 percent was the lowest.
Do all the unemployed get UI?
No. In ordinary times, most unemployed workers don’t receive UI benefits. UI does not cover people who leave their job voluntarily, people looking for their first job, and people reentering the labor force after having left it voluntarily. Self-employed workers, gig workers, undocumented workers, and students traditionally aren’t eligible to apply for UI benefits.
In addition, most states require unemployed workers to have worked a minimum amount of time or received a minimum amount of earnings from their previous employer to be eligible. The minimum amount of earnings required to qualify for UI benefits ranged from $1,000 to $5,000 over the previous year. Due to differences in eligibility criteria, the UI recipiency rate—the portion of unemployed people who receive UI benefits – varies significantly across states. In the fourth quarter of 2019, Mississippi’s 9 percent recipiency rate was the lowest, while Massachusetts’s 57 percent rate was the highest.
Another consequence of earnings and work history requirements is that low wage workers—who are most likely to become unemployed—are among the least likely to get UI benefits. During the Great Recession, only one quarter of low-wage workers—defined as those who earned less than their state’s 30th percentile wage—received UI benefits when they became unemployed. In contrast, workers who earned more than the 30th percentile wage before becoming unemployed were twice as likely to receive UI benefits.
Does UI change in recessions?
Usually. During recessions, the federal government generally funds additional weeks of UI benefits for workers who have exhausted their regular benefits. For example, during the Great Recession the federal government enacted the Emergency Unemployment Compensation (EUC) program which, at its peak, provided up to 34 weeks of federally funded benefits for individuals who had exhausted their state’s regular benefits in all states, and up to 78 weeks for states with particularly high unemployment rates. It also raised the weekly benefit by $25.
What has Congress already done to address the current crisis?
The CARES Act—a $2 trillion relief package aimed at alleviating the economic fallout from the COVID-19 pandemic—extends the duration of UI benefits by 13 weeks and increases payments by $600 per week through July 31st. This implies that maximum UI benefits will exceed 90 percent of average weekly wages in all states.
In addition, the act temporarily (through December 31, 2020) loosens the eligibility criteria for UI to include part-time workers, freelancers, independent contractors, and the self-employed who are unemployed because of the pandemic. Furthermore, the act waives work history requirements. These newly eligible workers will receive the average UI benefit for workers in their state, plus the additional $600.
All of the additional UI benefits included in the CARES Act are paid by the federal government.
The Department of Labor recently issued guidance that appears to restrict eligibility for the expanded unemployment insurance benefits in the CARES act. For example, the guidance specified that gig economy workers are only eligible for UI benefits if they are “forced to suspend operations as a direct result of the COVID-19 public health emergency”, apparently excluding workers such as Uber and Lyft drivers who are experiencing a significant loss of income due to reduced demand. Similarly, it states that parents who had to stop working to take care of their children after schools closed will not be eligible for benefits once the school year is over—even though many families rely on child care, summer camps, and other facilities which may still be closed over the summer, and the guidance appears to provide a narrow interpretation of eligibility based on health reasons and on social distancing requirements. Thirty-three Democratic Senators wrote to Secretary of Labor Eugene Scalia asking him to review this guidance to ensure that those whom Congress intended to help (including gig workers faced with a drop in demand, for example) will be covered.
What other changes might be needed to the UI system to account for the coronavirus?
Even though the CARES Act will provide much needed relief to unemployed workers, it still has some shortcomings. Despite expanding UI coverage significantly, some workers are still ineligible, including undocumented workers and people entering the workforce for the first time, such as new high school and college graduates. Furthermore, it is unclear whether state UI systems will be able to handle the volume of claims in a timely manner. For people who rely on UI to meet their basic needs, having to wait weeks or even months to get their checks will entail many hardships, even though the benefits are retroactive to the time of filing.
Another problem is that the $600 increase in UI benefits expires at the end of July, and the UI eligibility expansions expire at the end of December. It is impossible to predict at this point when the need to socially distance will end and when economic conditions will recover. Creating triggers based on labor market conditions could automatically extend and, eventually, end these expansions without the need for Congress to spent time on new legislation.
Finally, although the federal government is fully responsible for funding the additional benefits under the CARES Act, the act doesn’t include funding to help states finance the huge increases in regular unemployment insurance benefits. While state spending on UI is not subject to balanced budget rules and states can borrow from the Treasury if they exhaust their reserves, they have to repay the federal government within two to three years, or else taxes on employers automatically increase until the debt is paid. In either case, barring some change in the law, the need to repay the loans relatively quickly will force many states to boost unemployment insurance payroll taxes on private employers, raising the burden on employers as they try to increase payrolls, and holding back the recovery.