You may have heard that we’re in the middle of an unemployment crisis. It’s little wonder that an average of 365,500 people per week made new claims for unemployment benefits over the past month. These high numbers have been straining unemployment insurance programs at the federal and state level, and many states have run out of reserves to pay for them, triggering a reduction in benefits. But this crisis wasn’t inevitable. The pull back in unemployment benefits is just another result of state-level choices to cut taxes at the expense of state spending, spending that could be cushioning the blow of the Great Recession.
States are unable to adequately finance their unemployment insurance programs just when they are most needed not because they were unexpectedly overwhelmed. As a new report from the National Employment Law Project shows, it was because they failed to finance them during the good times like they’re supposed to. Here’s the way it works: federal law requires each state to collect unemployment insurance contributions from employers and deposit them into a state trust fund held in the treasury. During good times, the trust funds accumulate reserves so that claims can be paid out during downturns. This makes the program countercyclical, helping to pump money into workers’ pockets and therefore businesses (via their spending) when times are tough.
The problem is that employer contribution rates vary among and even within states. Not shockingly, business groups turn on political pressure to reduce employer contributions and taxes during good times before the coffers are adequately full. And too many states gave in to this temptation before the recession. As the report notes, “Thirty‐one states reduced UI taxes by at least 20 percent between 1995 and 2005.” Meanwhile, from 2000–09 the average UI contribution rate was .65 percent of total wages, “the lowest in the life of our federal‐state UI program.” That left many of the reserves underfunded, especially when they were called upon to respond to the financial crisis.
And now, of course, the demand for these benefits is at a historically high levels. So what have states done to address the fact that they don’t have the funds to pay them out? The solutions “have tended to focus more on curtailing and reducing benefit payments than on the revenue side of the equation,” the report says. That is, rather than looking at ways to hike taxes or employer contributions to make up the shortfall, most states have cut back on benefits for the unemployed.
Over the past thirty years, lawmakers have eroded long-standing features such as the duration of benefits that were “previously seen as untouchable,” and today’s responses follow that trend. Six states have reduced the maximum duration of benefits below twenty-six weeks, which has been the standard since the 1950s. Other states have put up barriers to benefits, like drug testing requirements and excluding seasonal workers. Several states and even the federal government have limited the number of unemployed workers who qualify, forced skilled workers to accept low-wage jobs and lowered the value of payments. Meanwhile, most states did nothing to raise revenues or “passed token policies that will raise a negligible amount of revenue”—the only states to buck that trend were Colorado, Rhode Island and Vermont.