Financial Support for the Unemployed Dries Up at the Worst Possible Time

Millions of workers have lost their jobs in the current recession. Employment is down 12 percent in manufacturing, 7 percent in professional and business services, and more than 5 percent overall in the private sector compared to last year. Over 5.6 million people have lost their jobs since last June. The ranks of the unemployed are continuing to grow; the unemployment rate in June hit 9.5 percent. Good thing that unemployment insurance provides income to help tide these workers over this rough patch, right? Not so fast.

The share of unemployed workers receiving benefits has gradually shrunk since the 1970s. In 1975, over half of unemployed workers received regular benefits. But in 2008, only 37 percent of the unemployed did; in some states the figure was less than 25 percent. And so-called “discouraged workers,” those who want but are not actively seeking employment, are not considered part of the labor force and so are not even included in these figures.

Unemployment insurance, in short, is not a benefit that everyone who loses a job can count on. Several groups are working to change this. The American Recovery and Reinvestment Act (ARRA), better know as the Obama stimulus package, provides temporary funding for states that expand their unemployment coverage, and so far this year 25 states have done so. Others, however, are resisting even a temporary expansion of coverage that would be fully federally funded.

Why Unemployment Compensation?

When unemployment insurance was established as a nationwide program in 1935, it was hailed as a means of enabling workers to protect their standard of living between jobs. With it, workers are better able to keep their homes and their health. It helps to stabilize family well-being and maintain the labor force in a region. By enabling workers to engage in longer job searches, unemployment compensation also improves workers’ job choices. It even enhances employers’ flexibility in hiring by making lay-offs less painful.

Unemployment insurance is also an important countercyclical tool: it bolsters consumer spending during economic downturns and then automatically drops off as the economy recovers and unemployment falls. Because it reduces the need for other forms of government intervention to raise demand in a downturn, the program has supporters across the ideological spectrum.

Coverage and benefits vary by state. The average weekly benefit in 2008 was $300—about 35 percent of the average weekly wage. Benefits are paid from state funds that are financed by a payroll tax on employers. This tax is levied on anywhere from the first $7,000 to the first $35,300 of each worker’s annual earnings depending on the state; the national average is $11,482. The tax rate ranges from 0.83 percent to 5 percent of the taxable portion of wages, with a national average of 2.42 percent. (Who bears the cost of this tax is debated: economists have shown that whether or not a company is able to pass the cost of payroll taxes forward to customers or back to employees depends on conditions in its particular product and labor markets.)

Shifts in employment patterns and a tightening of eligibility requirements are behind the nationwide reduction in effective unemployment insurance coverage. Today almost 30 percent of the U.S. work force is employed in nonstandard work arrangements, including part-time, temporary, contract or on-call work, and self-employment. Most of these jobs are subject to the payroll tax that funds unemployment benefits—yet these workers often find they are ineligible. For instance, persons who are seeking only part-time employment do not qualify for unemployment benefits in many states. This affects women in particular, including heads of households, who often work part time due to dependent care responsibilities. People who work full time but only for part of the year may also find it difficult to qualify for unemployment benefits.