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The Countrys Outdated Unemployment Insurance System Gets a MakeoverMaybe

February 2, 2009
The country’s 74-year-old unemployment insurance system could be getting a face-lift soon.

As part of the $800 billion-plus economic recovery package making its way through Congress, the federal government would boost unemployment checks by $25 a week, continue an extended benefits program and spend billions to encourage states to modernize their unemployment insurance programs.

Economic stimulus legislation approved last week by the House of Representatives would give states incentives to make it easier for part-time workers to qualify for unemployment benefits and provide benefits to people leaving work for a compelling family reason.

The American Recovery and Reinvestment Act also includes provisions to help the jobless keep or obtain health care. The Senate is working on its own version of the bill, and President Barack Obama could sign the recovery plan into law this month.

Changes to unemployment insurance woven into the package can’t come too soon for those who say the nation’s safety net is showing its age. At a time when legions of Americans are losing their jobs and the economy is teetering, critics say the jobless benefits program is fraught with problems, including inadequate funding, skimpy benefit payments and fusty eligibility requirements that haven’t evolved with the workplace.

An overhaul helps both workers and employers, says Rep. Jim McDermott, D-Washington, who has been a leading advocate for unemployment insurance reforms.

"We can’t adequately help the unemployed and our economy just by pumping resources into an unemployment program that is not designed for today’s crisis," McDermott said in a statement in January. "When we enable more unemployed workers to qualify for the unemployment insurance program, we put cash into the pockets of struggling families who will spend this money in their communities, supporting local jobs and businesses."

Others are wary of efforts to overhaul unemployment insurance. Calls for higher funding levels and bigger benefit checks could mean tax increases for businesses. And not everyone likes the modernization legislation, partly because provisions in it blur the line between jobless benefits and social welfare policy.

The original purposes of unemployment insurance are diluted by giving someone unemployment benefits when they leave work to care for a family member, says Larry Temple, executive director of the Texas Workforce Commission. "This isn’t a social services program," says Temple, whose organization runs unemployment insurance in Texas. "It’s not a welfare program."

Sense of urgency
The debate over unemployment policy has taken on greater urgency given the recession at hand. The housing market bust and financial crisis have led to economic stagnation and hundreds of thousands of pink slips. Some 1.9 million U.S. payroll jobs were lost during the last four months of 2008, and the unemployment rate rose to 7.2 percent in December. The amount of time people remain out of work also is growing, from an average of 16.5 weeks in December 2007 to 19.7 weeks in December 2008.

More and more laid-off Americans today are applying for unemployment insurance benefits, which are available to workers who are unemployed through no fault of their own and meet eligibility requirements set by states. For the week ending January 17, continued claims—the number of people requesting a weekly benefit check after having established eligibility—was 4.78 million. The figure is the highest on record dating back to 1967.

In January, some state electronic unemployment filing systems crashed amid the flood of applications.

Those applications also are putting pressure on state unemployment funds, some of which already have run dry. The cause of the funding trouble is hotly debated, with one side blaming excessively low taxes and another claiming the federal government shares too little tax revenue with states.

Businesses may recoil at having to pay additional taxes to support jobless workers.

But there’s evidence that unemployment insurance helps stabilize the economy during rough patches. A federal study in 1999 found that recessions in the 1970s, 1980s and early 1990s would have been an average of 17 percent deeper if the unemployment insurance program did not exist.

Employers and employees alike would gain from an unemployment insurance system that provides a sturdier safety net, says Randy Eberts, president of the W.E. Upjohn Institute for Employment Research. Eberts, whose not-for-profit organization studies employment programs, says putting money in the hands of laid-off workers stimulates economic demand amid downturns even as it helps keep people in the local labor pool for when business picks up.

"It really helps both sides," Eberts says. "It’s not just a handout to workers."

Dwindling benefits
Perhaps it’s not a handout, but what gets distributed to the unemployed has shrunk over the years, relatively speaking. The average weekly benefit of $10.94 in 1938 amounted to 43 percent of the average weekly wage at the time, according to Department of Labor statistics. The corresponding figure for 2007 was 34 percent, or $288.

"Nationwide, the average weekly unemployment insurance benefit is about $300, and in today’s world that amounts to a subsistence level," McDermott said last month.

McDermott and others also have criticized the unemployment benefits system as outdated. Such concerns find support in government data. In 2007, testimony from the Government Accountability Office, Congress’ research arm, indicated that the percentage of unemployed people getting unemployment insurance has dropped over the decades. The GAO found that the overall rate of unemployment insurance receipt—that is, the number of continued claims as a percentage of the total number of unemployed people—increased modestly from the mid-1980s to 2005, but still remained below the near-50 percent rate of the 1950s.

The report from the GAO also found a growing gap in unemployment insurance benefits between higher-wage workers and those earning a low wage—defined as an hourly wage less than that required for a full-time worker to earn the poverty threshold level for a family of four. That threshold wage was $10.11 per hour in 2007.

Between 1992 and 1995, low-wage workers were about half as likely to receive benefits as higher-wage workers. For the years 1998 and 2003, they were about one-third as likely, the GAO concluded.

The GAO testimony by Cynthia M. Fagnoni, the agency’s managing director of education, workforce and income security issues, noted that the nature of both work and unemployment has "changed in fundamental ways" from 1935, when most of the labor force consisted of men employed full time in the manufacturing or trade sectors. "In recent decades the share of low-wage jobs, the incidence of temporary and contingent work, the number of women in the workforce and the number of two-earner families, and the average duration of unemployment have all increased," Fagnoni said in written remarks.

Boosting benefits
The economic stimulus proposal tackles a number of the issues raised by Fagnoni and other observers. The House bill would enable states to fatten weekly unemployment checks by $25 throughout 2009. That provision is included in the Senate version, which also would temporarily limit taxes on unemployment compensation.

In addition, the legislation preserves a program that helps out-of-work individuals who exhaust regular benefits, which typically cover up to 26 weeks of unemployment. The current extended unemployment benefits program, which provides up to 33 weeks of extended benefits, is scheduled to begin phasing out at the end of March. The bill extends the program through the end of the year.

Then there is the unemployment insurance modernization wrapped into the bill. The legislation would give $7 billion in incentive payments to states that have, or would adopt, certain features in their unemployment insurance programs. Chief among the reforms specified in the act is use of an "alternative base period." This is designed to get states to consider a person’s earnings in the most recent completed quarter when determining eligibility—which can help lower-wage workers qualify for benefits.

For a state to obtain additional incentive funding under the measure, its unemployment law would need at least two provisions from a list of other reforms. The possibilities include allowing people seeking part-time work to qualify for benefits; extending the unemployment benefits of people who are in certain job-training programs; and not disqualifying individuals from jobless benefits if they’ve left work for a "compelling family reason," including cases involving domestic violence and "the illness or disability of a member of the individual’s immediate family."

Another reform option for states is providing additional benefits to out-of-work individuals with dependents.

The legislation calls for another $500 million to be given to states for purposes including administrative costs and re-employment services.

Long push for overhaul
Advocates have for years been pushing to renovate the unemployment benefits system. The House approved modernization reforms in 2007 as part of broader legislation, but the measure did not make it out of the Senate. A related unemployment reform bill also was proposed in the Senate in 2007. It, too, did not pass. That Senate bill was sponsored by Sen. Edward Kennedy, D-Massachusetts, and co-sponsored by Sen. Olympia Snowe, R-Maine, and then-Sens. John Warner, R-Virginia, and Barack Obama, D-Illinois.

Despite the bipartisan support, the legislation has not won over some major organizations in unemployment insurance.

The National Association of State Workforce Agencies, a group made up of state officials running unemployment and other workforce programs, has been polling its members about the 2007 bills. Of nearly 30 states that responded as of early January, the results were mixed, says Rich Hobbie, the association’s executive director. "It appears our members are divided on the issue of unemployment insurance modernization," Hobbie says.

Temple of the Texas Workforce Commission is bluntly critical of the legislation—starting with labeling it modernization. "There isn’t a new idea in there," he says. Temple says states including Texas have considered provisions in the legislation and already have adopted ones that fit their philosophy and the needs of their claimants.

Even though changes envisioned in the bill are voluntary, states "are basically blackmailed into adding eligible populations" to get relief, Temple says.

Worries of a disconnect
Eberts of the Upjohn Institute sees merit to modernizing the system. But he warns there can be unintended consequences of reform.

The growing ease with which laid-off people can apply for benefits over the Internet, Eberts says, may have contributed to longer spells of unemployment. That’s because applying in an office made it more likely that a person immediately would get connected to job counselors, training programs and other state efforts to return people to work.

"The use of Internet and telephone claims can create a disconnect between receiving benefits and actively seeking employment," Eberts says. "Without the need to actually show up at an employment service office, unemployment insurance recipients may not search as intensively or receive the services they need."

Whether political leaders can create a 21st century unemployment insurance system that weaves in lessons from the 20th century remains to be seen.