Working and Poor: How Economic and Policy Changes Are Affecting Low-Wage Workers

13. Unemployment Insurance over the Business Cycle: Does It Meet the Needs of Less-Skilled Workers?

Chapter 13 Unemployment Insurance over the Business Cycle: Does It Meet the Needs of Less-Skilled Workers? Phillip B. Levine T he unemployment insurance (UI) system is one of the primary ways that the government seeks to alleviate the hardship associated with an economic downturn.1 It was first introduced in the United States at the national level as part of the 1935 Social Security Act to provide financial support for the millions of workers who lost their jobs during the Great Depression. The system is still designed to provide greater relief at times of economic hardship . Workers are more likely to receive benefits in a recession, since benefits are paid only to those who lose their jobs through no fault of their own and these circumstances are much more common at such times. But the system of UI financing also helps offset the hardship associated with a downturn. Firms pay a tax to fund benefits that is at least partially “experience-rated” in that those firms that lay off more workers often have to pay a higher tax. This higher tax provides them with an incentive to lay off fewer workers. Since layoffs are more common during a recession, experience rating can reduce layoffs the most during those periods. On the other hand, the insurance aspect of unemployment insurance serves to lessen the ability of the system to help out during hard times. Benefits are not paid out according to need but according to the loss incurred. In fact, eligibility rules make it more difficult for those with the greatest need to qualify for bene- fits. To satisfy those rules, workers cannot have left a job voluntarily, although this serves as less of a constraint during a recession. But more importantly, workers must have had a sufficient work history prior to the job loss, typically measured as minimum earnings requirements, to qualify for benefits. Lower-wage workers and those who have difficulty maintaining steady employment because of lack of skills may have a tougher time satisfying these requirements, particularly during periods when jobs are scarce. 366 / Unemployment Insurance over the Business Cycle The insurance aspect of the system also contributes to the way in which it is financed, and that structure may limit its benefits during a recession. The taxes paid in can be thought of as an insurance premium that covers the costs of benefits paid out. In this way, the system is self-financing. But benefits must be limited in duration to prevent an excessive drain on fund reserves, even when it is difficult for a worker to find a job. Moreover, if the system’s reserves become too low during a recession, taxes may need to rise to cover the greater benefit payments. This raises the cost of labor at precisely the time when firms are more likely to be struggling and may result in additional layoffs. These conflicting provisions of the system make it unclear to what extent UI helps out during a recession. The purpose of this chapter is to explore this issue, especially UI’s impact on less-skilled workers over the course of the business cycle and changes in this effect over the last quarter-century. I also briefly explore whether this impact differs by race-ethnicity and gender. Throughout the chapter, I separately examine both the benefit and tax sides of the program, since both may affect workers’ outcomes. I partly rely on a review of past empirical work and partly provide original data analysis to draw conclusions. I also provide policy recommendations directed at improving the system’s ability to help out less-skilled workers without sacrificing the insurance nature of the UI system. INSTITUTIONAL DETAILS The UI system is administered at the state level, although the federal government establishes certain minimum guidelines. Each state system has different rules, but the general organization of the programs is similar. In this section, I describe the benefit and tax sides of the system separately. UI Eligibility and Benefits Before an unemployed worker can collect UI benefits, she or he must first satisfy two different sets of eligibility requirements. The first, labeled “nonmonetary eligibility,” involves the circumstances under which the individual has become unemployed (for a detailed discussion of nonmonetary eligibility and related issues, see Fishman, Farrell, and Gardiner 2003). To qualify for UI benefits, an individual generally has to lose a job...