American Unemployment Insurance Is a National Disgrace. It’s Time to Federalize It.
An idea whose time may be around the corner is the federalization of US Unemployment Insurance (UI). Currently, there are different programs in each state (plus DC), with different levels of benefits and administrative competence. In several states, such as North Carolina and Florida, the program has been hammered to a pulp, with recipiency rates sinking below 10 percent.
In theory, there is a benefit to each state choosing its preferred level of coverage, but in practice, federalism in this regard has been a failure. Overall, until the economic collapse in 2020, fewer than one-third of unemployed workers received benefits. The temporary, extraordinary increases under the Trump administration in 2020 are one sign of the inadequacy of the program. Not surprisingly, there is a malign racial cast to the program’s inadequacies.
By the most recent data, there are still almost 10 million unemployed. That number looks good compared to April of 2020, when it had reached a horrendous 23 million, but it looks very bad compared to pre-COVID levels of 6 or 7 million just a month or two prior.
In addition, there are millions of “missing workers”: those who have given up looking for work but are not counted as unemployed. The latest employment-population ratio is 2.9 percentage points below its peak in 2019, and over 6 percentage points below its level in 2000. Each percentage point reflects between 2 and 3 million people who could otherwise have jobs.
Elite opinion is coming around to some type of federalization. Centrist institutions such as the Brookings Institution, the Urban Institute, and the Center for American Progress have issued research and commentary favorable to this direction. The Obama administration had a modest plan of its own.
To those who think such a change unlikely, we could ask if we had imagined, way back in December of 2020, that the incoming administration would sign on to a $3,000 per child, fully refundable tax credit, among a variety of surprising domestic spending initiatives.
In contrast to prevailing nostrums on the Left regarding the unsurpassed popularity of “universal programs,” UI has been subject to significant reductions over recent decades. UI is “universal” like Social Security, meaning it requires an earnings record. It’s not that “everybody” gets it, like the fabled but nonexistent Universal Basic Income, but that anybody who qualifies can get it, in theory.
The principal constraint on UI support is that, unlike Social Security, it is a creature of state governments’ policies, with an emphasis on the plural. Taking it national but retaining the social insurance angle, wherein the program is funded by payroll taxes, could raise the floor of benefit levels and eligibility.
Some state governments have been openly hostile to UI, with reports of administrative practices designed to curb the provision of benefits. This hostility is returning now, as red state governments have announced the cancellation of the $300-a-week supplemental benefit top-up enacted last year with the blessings of their leader, Donald Trump.
That aside, a program that ordinarily failed to serve more than two-thirds of potential beneficiaries, that provides arbitrary and wide differences across states, whose administration is nearly dysfunction in some places, and whose design severely hampers the program’s effectiveness as an automatic stabilizer, is ripe for reform.
What would federalization mean? One example of a plan has been proposed by Arindrajit Dube, who has emerged as one of the nation’s leading labor economists. The key elements of UI are the benefit level, the rate at which lost earnings are replaced, and the potential duration of benefits. Nationally uniform benefits could be set to exceed the worst state laggards and even approach those of the higher-level states. The replacement rate(s) could be structured as a progressive formula, with higher rates applied to lower earnings levels. The duration of benefits could be set to a higher national minimum and automatically vary with national and state unemployment rates.
The automatic factor is an essential feature to avoid the delay and legislative wrangling that entail the need to expand the program in the teeth of economic crises. Administration could be moved to federal control, with adequate funding. Some states’ programs rely on computer systems running COBOL, a computer language invented in the 1950s. The antiquated state of these systems has facilitated sophisticated fraud schemes founded on mass identity theft of potentially eligible workers.
Another reform angle is to allow continued UI benefits for workers who are unable to find work in their own professions, at former rates of pay. It would not do to oblige laid-off, skilled nurses, for instance, to take jobs serving Big Macs.
Federalization need not be an all-or-nothing affair. One alternative to full federalization would be the establishment of national standards for taxes, benefits, and the like. The program could still be administered by state governments, as the Supplemental Nutrition Assistance Program (SNAP) is now. This compromise looks less tenable in light of the degree of extremist rejectionism regarding federal programs now observed in the reddest states.
A possible downside of a national program is that it might pitch benefits below the highest levels currently available in some states. This problem bedeviled guaranteed income proposals, back in the day, given similar state variation in benefits provided under Aid to Families with Dependent Children. This would seem easily avoided, however, if reform enabled states to supplement an ample national benefit, as they can do now with respect to the minimum wage.
Economists are obliged to motivate such changes with relatively arcane concepts. For instance, a leading benefit of UI is said to be “consumption smoothing.” This is quite a euphemism for avoiding hunger, eviction, mortgage foreclosure, or the ability to pay for medical care! A leading cost is said to be “moral hazard,” which simply refers to the incentive that benefits provide for the unemployed to delay returning to work.
For our purposes, UI is good because it facilitates survival for those who have lost their jobs. It’s not that complicated. It also strengthens the ability of workers to decline undesirable employment and strike a better wage bargain with the employer. If UI is available to striking workers, it aids union organization, not least by amplifying the threat to strike and possibly precluding the need for it.
In macroeconomic terms, the unemployed tend to spend most of their benefit, since they usually have little in the way of savings to fall back on. A robust UI program set on automatic pilot aids recovery from recession by raising consumer spending in a timely fashion.
Moral hazard is better seen as a feature than a bug. We can see the latitude UI affords the unemployed under protest now, as the Right complains that overly generous benefits give rise to labor shortages and impede economic recovery. They are unhappy that UI takes some edge off the threat of starvation. The real moral hazard is on the employer side, since the boss can exploit the threat of poverty in conditions of mass unemployment to force the acceptance of reduced pay.
The evidence for labor shortages is weak and limited to particular sectors of the economy. But what’s so bad about a labor shortage? A “shortage” — fewer applicants for jobs at the wages bosses are offering — motivates employers to offer higher wages and improvements in working conditions. Incentives!
Democrats, including their leader, Joe Biden, are proclaiming their worker-friendliness. Policies to prevent destitution resulting from unemployment are basic in this regard. Grabbing the UI bull by the horns is a good way to support that claim.
Max B. Sawicky is an economist and writer in the wilds of Virginia. He has worked at the Government Accountability Office and the Economic Policy Institute.
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