Opinion | Rescue the System That Rescues Our Workers
The unprecedented federal action to prop up unemployment insurance system during the pandemic wound down last week even as the pace of hiring in the United States slowed dramatically. The wind-down affected nearly 12 million workers — an estimated 5.1 million self-employed, contract and gig workers and 3.8 million long-term unemployed people who lost benefits completely, and three million who kept benefits but lost the $300 weekly federal supplement — bringing the programs created by last March’s CARES Act and renewed by this March’s American Rescue Plan Act to an end.
Without federal aid, unemployment insurance returns to its prepandemic self. This system involves 53 separate programs. Operating under a federal umbrella of sorts, they collect payroll taxes into a trust fund. This fund provides a cash benefit to workers who have worked previously, are willing and able to work, and lost their job. States are free to decide how big the benefits are, how long they last and who is eligible to receive them.
Unemployment Insurance is the rare benefit that expires. But it does have one powerful, permanent constituency: the businesses whose payroll taxes finance the program. Those taxes, which cover benefits and program administration, are a cost businesses pay, with little if any direct upside for them.
State legislators thus contend with both an ephemeral base of support among beneficiaries and perpetual discontent among many taxpayers. It’s little wonder that both the generosity and relevance of unemployment insurance have eroded over time. Indeed, the size of the relief package in the CARES Act shows just how inadequate the benefits really were.
The expiration of pandemic benefits points to the flaw at the heart of unemployment insurance: The constituency that pays for benefits isn’t the constituency who receives them. Lasting reform to the unemployment insurance system will mean finding a way to benefit employers directly.
The first unemployment insurance law in the United States was enacted in Wisconsin in 1932. It applied the theory of prevention to unemployment. Just as businesses made workplaces safer when they had to bear the cost of on-the-job injuries, the law assumed that if the costs of unemployment were borne by employers, then they would try to prevent layoffs. Wisconsin’s program focused less on helping the unemployed and more on shaping the behavior of firms by penalizing them. The current federal system, passed in the Social Security Act of 1935, took Wisconsin as its model and set up similar programs in each state under a federal umbrella.
Today, unemployment insurance is funded through a per-head payroll tax that varies widely from state to state, from 0 percent to 18 percent on the first $7,000 to $52,700 in wages. Those taxes are also “experience-rated”: An individual company’s tax rate goes up if it lays off a lot of workers who get benefits.
If a state has to borrow from the federal government to pay a surge in claims, the tax rate might go up automatically. Eleven states’ funds, plus that of the U.S. Virgin Islands, are currently in debt, although American Rescue Plan funds may be used to pay off those loans.
This financing scheme potentially raises taxes on businesses that are struggling, while failing to stabilize employment during major disruptions like our current one. Instead, it incentivizes both states and businesses to make unemployment benefits less generous and harder to get so that their taxes can remain low.
What might a system that benefits businesses look like? To start, it could provide tax predictability. That would mean a federally uniform unemployment insurance tax with no variation across states and no experience rating.
One might argue that if unemployment insurance is a program for workers, then workers should pay the taxes. But all businesses benefit from stable family incomes and consumer demand, especially during recessions.
Still, unemployment insurance could tap more sources of revenue. For instance, in Alaska, New Jersey and Pennsylvania workers contribute to a shared employer-employee tax, similar to Social Security. More workers could be brought into the program by requiring contributions and giving permanent eligibility to independent contractors — again, like Social Security.
Beyond making unemployment insurance less of a burden, reform can be designed to benefit businesses directly. There’s a pandemic blueprint for this, too: the Paycheck Protection Program. While it was mired in fraud and missed many eligible people — not a surprise for a crisis-era program with a mandate to spend hundreds of billions of dollars quickly — it was a life raft for many businesses and is estimated to have saved millions of jobs.
The principle behind the P.P.P. — that directly reducing payroll costs during a downturn saves jobs and reduces unemployment — is supported by decades of evidence. A system using pooled-tax contributions to provide temporary payroll relief to businesses in acute need could prevent layoffs and make businesses beneficiaries of a program they have long bankrolled.
Of course, some businesses may prefer to lay off workers rather than reduce their pay or accept government help. Yet, there is an assumption that goes hand-in-hand with layoffs: That there is a ready pool of workers to hire back when the economy grows again. In this recession, much like the last one, employers have struggled to quickly find qualified workers to fill positions.
Congress can continue ignoring unemployment insurance and limp through each new crisis, applying expensive, short-term fixes each time. Or it can provide workers and businesses with the certainty of an effective, efficient program that will withstand the next crisis.
Kathryn Anne Edwards is a labor economist at the nonprofit, nonpartisan RAND Corporation and professor at the Pardee RAND Graduate School. Her research focuses on the interaction of public programs, labor supply and earnings.
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