How the American Unemployment System Failed

The nation’s unemployment insurance program, conceived during the Great Depression, was meant to keep jobless workers and their families from suffering drops in income that could tip them into poverty or force them to liquidate their assets to afford food, rent and other necessities.

Its goals included allowing the unemployed to wait for a productive job to materialize, rather than take the first one that appeared, and providing stability to the economy in recessions, mitigating the expected drop in consumption when millions of workers lost their jobs.

The tussle in Congress last month over whether to extend emergency unemployment payments that were on the cusp of expiring — potentially pushing 12 million people into some form of destitution, according to the Century Foundation, a liberal policy research group — was a reminder that the system as designed has not been up to its task.

Unemployment insurance is controlled and funded by the states, within loose federal guidelines. But Washington has been repeatedly called on to provide additional relief, including emergency patches to unemployment insurance after the Great Recession hit in 2008. Indeed, it has intervened in response to every recession since the 1950s.

While a federal backstop may make sense for times of economic upheaval, the repeated recourse to Capitol Hill underscores the shortcomings of a chronically underfunded, patchwork system that has not kept up with changes in the workplace and puts the unemployed at the mercy of the nation’s political winds.

While the surge in unemployment caused by the pandemic could offer an opening to overhaul the program — an opportunity strengthened by Democrats’ takeover of the White House and the Senate — any push for change must overcome powerful incentives vying to further shrink the program.

The system gives states incentives to scale back coverage.

In 2019, only 27 percent of unemployed workers received any benefits, a share that has been declining over the last 20 years. The benefits have eroded as well, to less than one-third of prior wages, on average, about eight percentage points less than in the 1940s.

The immediate reason is money. But the problem is complicated by the program’s architecture: Reluctant to raise taxes from employers, many states have resorted to cutting benefits.

Consider the wage base against which unemployment taxes are levied. There is a floor established by the federal government. But it has remained stuck at $7,000 a worker since the 1970s. In Florida, Tennessee and Arizona, employers have to pay taxes only against this minimum, and face tax rates that can be as low as one one-hundredth of a penny on the dollar.

As their tax base has failed to keep up with either inflation or workers’ earnings, these states have shortened benefits, reduced weekly payments or increased hurdles to qualify, making it more difficult for workers with low or irregular earnings to collect anything.

In Arizona, nearly 70 percent of unemployment insurance applications are denied. Only 15 percent of the unemployed get anything from the state. Many don’t even apply. Tennessee rejects nearly six in 10 applications.

In Florida, only one in 10 unemployed workers gets any benefits. The state is notably stingy: no more than $275 a week, roughly a third of the maximum benefit in Washington State. And benefits run out quickly, after as little as 12 weeks, depending on the state’s overall unemployment rate.

“The iceberg under the surface is about funding,” said Till von Wachter, a professor of economics at the University of California, Los Angeles. “The difficulty to reform it is that it is a federal-state partnership.”

States competing to be the most business-friendly, with the lowest taxes, will sort of naturally allow their unemployment systems to become underfunded, said Robert Moffitt, a professor of economics at Johns Hopkins University. The outcome is hardly optimal.

“The program was set up to have tremendous cross-state variation,” he said. “This makes no sense. It creates tremendous inequities.”

The program has not kept up with changes in the way people work.

Even states with more generous unemployment systems leave lots of people out. In New Jersey, where the coverage rate is the highest in the country, fewer than 60 percent of unemployed workers got benefits in 2019.

For low-wage workers, the program can be pointless. Mr. von Wachter notes that a program conceived to provide at most half of unemployed workers’ lost wages leaves low-wage workers in the lurch. Yet in many states that doesn’t matter, because minimum earnings requirements to qualify for benefits knock low-wage workers out of the system.

The gaps in the largest social insurance program for working-age Americans have become increasingly problematic as economic and demographic changes have transformed both the profile of the work force and the nature of work.

Deindustrialization and the growth of low-wage service jobs have been accompanied by a persistent increase in the duration of joblessness since the 1970s. This has been driven, in part, by the decline of temporary unemployment — furloughs and other short-term arrangements — and the corresponding increase of permanent dislocations, forcing the unemployed to find jobs that require new skills.

The system was designed in 1935 for an industrial economy in which breadwinners — typically men — supported a family with a reasonably paid job that would last until retirement. It has proved an ill fit for a labor market where most working-age women are also employed, often in low-paid, part-time jobs that are insufficient to qualify for benefits. Certain new job types, like gig work, are not within the design of the unemployment system.

While workers are often required to acquire skills or certifications to find a new job, unemployment insurance programs offer little training or re-employment assistance. And the prospect of losing jobless benefits as soon as they earn a penny discourages workers from searching for temporary employment while waiting for something better.

There may be momentum to reconsider the safety net’s structure.

Perhaps there is an upside to the current crisis: The glaring insufficiencies of the regular unemployment system may encourage states and the federal government to undertake comprehensive changes.

Economists have been proposing changes for decades. One is to overhaul the “extended benefit” program, created in 1970 to provide the additional weeks of payments in times of high unemployment, the kind of automatic stabilizing feature that could remove the need for Congress to repeatedly consider extraordinary measures.

That program has not worked as advertised. The triggers to put extended benefits into effect — mostly a function of the share of workers claiming benefits in a state — are too slow to provide speedy assistance when the economy declines. The benefits may expire too soon to cover workers over the long downturns that have become part of the economic landscape. Most critically, the fact that states must pay for half of the extended benefits is a powerful incentive for them to erect hurdles to qualifying.

Some who have studied the system suggest that the federal government might pick up the tab entirely for extended benefits. Other proposals include raising the wage base and indexing it to wage growth; establishing a federal benefit floor and a minimum duration; and making it easier for low-wage and part-time workers to qualify for benefits. Ideas include allowing workers to maintain some benefits even after they find a job or go into training, and offering assistance to workers who quit because a spouse has relocated for career reasons. Some experts have even called for federalizing the program, a politically heavy lift that would run into many states’ mistrust of federal power.

Senator Ron Wyden of Oregon, the Democrat who will lead the Finance Committee, is pushing for President Biden to pursue an overhaul of unemployment assistance along these lines. Mr. Wyden has called for “increasing base benefits so that unemployed workers can cover essentials” and “ensuring all unemployed workers can get a benefit regardless of their work history.”

While Mr. Biden has not committed to the enhancements proposed by the senator, he has come out in support of ways to automatically adjust the length and amount of benefits depending on health and economic conditions, preventing Congress from blocking or slowing down relief.

It will not be easy, however, to bring states around to build a more expansive, uniformly generous program.

Mr. Moffitt of Johns Hopkins notes that Congress may be reluctant to extend automatic stabilizers simply because it likes to keep control over spending. If the federal government is going to bear the cost of emergency insurance, members of Congress will want their say.

Those looking for a silver lining might consider the last recession. The Obama administration provided billions of dollars in incentives for states to make their programs more generous, to open them more broadly to part-time workers and those with unstable or low earnings, to extend benefits for people in training programs, and to grant additional benefits to unemployed workers with dependents.

Many states went in the opposite direction. With their unemployment insurance funds exhausted, states had taken on debt to maintain regular payments for an avalanche of dislocated workers. By early 2011 they owed the Treasury about $42 billion. Rather than raise taxes to pay off the loans, many states, largely in the South and the Midwest, slashed benefits.

Today, the unemployment funds in 19 states face an aggregate debt of $47 billion to the federal government. Stephen Wandner, an expert in unemployment compensation at the National Academy of Social Insurance, expects many states to make further cuts in benefits. “These issues will all be fought out in state legislatures,” he said.

A more generous unemployment insurance system may require bypassing states’ incentives. That will require a substantial political effort.

Graphics data sources: Stephen Wandner of the National Academy of Social Insurance and Christopher O’Leary of the W.E. Upjohn Institute for Employment Research.