This is updated from the original April 7, 2020 post.
Unemployment insurance is a major element of the U.S. government’s response to the economic dislocation caused by the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, expanded the unemployment insurance system to provide relief to those who are out of work, but some of those benefits expire on July 31 unless Congress acts before then. Here is a primer on unemployment insurance before and during the pandemic.
How does unemployment insurance work in ordinary times?
Created in 1935, the federal-state unemployment insurance (UI) program (as it was structured pre-COVID-19) 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 needed economic stimulus that helps mitigate the severity of recessions.
What are initial claims?
Initial claims are the number of new applications filed by individuals seeking UI benefits—one indication of the health of the job market. In late March, initial claims for UI benefits surged to roughly 6.9 million in a single week—which followed an unusually large 3.3 million new claims filed the week before—because workplaces were shut by lockdown measures put in place to slow the spread of coronavirus. The previous high was 695,000 claims filed the week ending October 2, 1982.
While initial claims have declined since then, they continue to exceed 1 million per week. The total number of workers collecting unemployment benefits (often called “continuing claims”) stood at 32 million, or roughly one in every five people in the labor force, during the week ending on June 27, 2020. The total includes more than 15 million people who are collecting benefits under pandemic-related expansions of the program.
Who pays for unemployment insurance?
The regular, pre-pandemic program is funded by taxes on employers, including state taxes (which vary by state) and the Federal Unemployment Tax Act (FUTA) tax, which is 6 percent of the first $7,000 of each employee’s wages. However, employers who pay their state unemployment taxes on time receive an offset credit of up to 5.4 percent, meaning that the FUTA tax for an employee earning $7,000 or more may be as little as $42. The credit is reduced in states that are overdue in repaying unemployment insurance debt owed to the federal Treasury.
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 federal taxes on employers automatically increase until the debt is paid.
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 run this program. For instance, while the standard maximum time for which eligible people can collect benefits is 26 weeks, when the COVID-19 crisis began in late February, states like Florida and North Carolina limited state-paid benefits to just 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, UI 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 jobs voluntarily, people looking for their first jobs, and people reentering the labor force after leaving 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 in 2019. 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…are among the least likely to get UI benefits. “
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. The main reason low-wage workers do not qualify for unemployment benefits is not low hourly wages per se. Rather, it is because many workers who earn low hourly pay also have intermittent employment, and most states’ eligibility rules require laid off workers to have minimally steady earnings over the previous year to qualify for at least 20 weeks of benefit payments.
What has Congress done during the pandemic crisis?
During recessions, Congress usually funds additional weeks of UI benefits for those who have exhausted their regular benefits. The CARES Act extended the duration of UI benefits by 13 weeks and increased payments by $600 per week through July 31st. All the extra benefits and extensions in benefit duration, as well as the expansion of UI eligibility to previously ineligible workers, are entirely financed by the federal government.
Because of the extra $600 a week, maximum UI benefits will exceed 90 percent of average weekly wages in all states. About two-thirds of workers are making more from UI than they did when they were working, according to researchers at the University of Chicago’s Becker Friedman Institute. One out of five eligible unemployed workers will receive benefits at least twice as large as their lost earnings.
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. The act also waives work history requirements. These newly eligible workers will receive the average UI benefit for workers in their state, plus the additional $600.
What happens after the extra $600 a week in pandemic emergency UI benefits expires on July 31?
An abrupt end to the $600 bonus would reduce household incomes and consumer spending at a time when the economy is still suffering the economic ill-effects of the pandemic, but there is disagreement about how best to extend or modify the extraordinary benefit.
House Democrats voted to extend the additional weekly benefits into January 2021 in the HEROES Act, their latest relief package. Senate Democrats have introduced legislation that would tie enhanced unemployment benefits to joblessness levels in each state. Under their bill, the additional $600 a week would be phased out gradually once state unemployment levels drop below 11 percent. For each percentage point drop in the unemployment rate, there would be a $100 decrease in UI weekly payments. Under this proposal, any additional benefit would be fully phased out once a state’s unemployment rate fell below 6 percent.
“[A]t least through mid-April, there was no evidence that higher UI replacement rates were impeding re-hiring.”
Some analysts and members of Congress are worried that the additional $600 per week will discourage people from going back to work But, at least through mid-April, there was no evidence that higher UI replacement rates were impeding re-hiring. For now, there are more than four unemployed workers for every job opening. But big question is what happens going forward as the economy starts to recover. To avoid discouraging people from going back to work when employers need them, some politicians and economists have advocated making the extra federal benefit less generous.
Trump administration officials have signaled a willingness to extend UI benefits in some form, though they oppose extending the $600 a week bonus. Options discussed by Republicans include cutting the $600 extra federal benefit to between $200 and $400 a week and sending another round of $1,200 checks to some households as well as a proposal to provide a $450 a week bonus for a few weeks to people who go back to work.
A proposal from, among others, Glenn Hubbard and Jason Furman, who chaired the Council of Economic Advisers in the Bush and Obama presidencies, respectively, calls for shifting from a flat dollar bonus to an approach that would supplement regular UI benefits up to 40 percent of wages, capped at $400, when a state’s unemployment rate is particularly high, around 15 percent. This supplemental benefit would be reduced when the unemployment rate falls and would end when a state’s unemployment rate falls to about 7 percent.
What other changes might be made to the UI system?
Even though the CARES Act provides much needed relief to many, 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.
One major problem emerged during the COVID-19 crisis. State labor offices with outdated computer systems were overwhelmed by the volume of claims. Andrew Stettner, a senior fellow at the Century Foundation, estimates that by the end of May, only about 18.8 million out of 33 million claims (57 percent) had been paid nationwide. That number has steadily improved from 47 percent of paid claims at the end of April and 14 percent at the end of March. For people who rely on UI to meet their basic needs, waiting weeks or even months to get their checks will create many hardships, even though the benefits are retroactive to the time of filing. Efforts could be made to improve the functioning of the UI system so applications can be processed and checks delivered more quickly.
“Although the federal government is fully 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.”
Although the federal government is fully 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. States can borrow from the Treasury if they exhaust their reserves, but they must repay the federal government within two to three years, or taxes on employers automatically increase until the debt is repaid. In either case, barring some change in the law, the need to repay the loans relatively quickly will lead to higher unemployment insurance payroll taxes on private employers, raising the burden on employers as they try to increase payrolls, and holding back the recovery. States that are reluctant to see payroll taxes on employers increase may instead tighten eligibility rules in the program, slow the rise in weekly benefit payments, or reduce the maximum duration of regular UI benefits.
Among the options Congress could consider are:
- giving states up to three extra years to repay the debt;
- allowing states to accumulate debt for regular UI programs for up to three additional years;
- assuming all the cost of regular state UI payments for benefits after the 13th week of joblessness when the state jobless rate exceeds some threshold.