Abstract
The Unemployment Insurance system of the United States is a federal-state partnership. It responded well to the usual frictional unemployment and to the several recessions since its creation in 1935. The recent Great Recession beginning 2008, however, was its most severe test. Numerous extended-benefit programs were called upon to aid the large number of unemployed men and women who had exhausted their benefits. This article examines the performance of the Unemployment Insurance program during that test with emphasis on coverage, benefits, funding, the Unemployment Trust Fund and the several Extended Benefit programs. In addition to the entire United States system, it focuses on the experience of the five largest states: California, Florida, Illinois, New York and Texas as a sample of the whole.
Keywords
A “recession” is defined as a decline in the gross domestic product in two consecutive quarters. That occurred in 2008 Q4 and 2009 Q1. The Dow Jones Industrial Average went from 13,930 in October 2008 to 7,063 in February 2009. However, the aftermath of and recovery from the recession lasted at least through 2012. This was especially so for employment and unemployment rates.
As indicated in Table 1, the U.S. unemployment rate went from 4.6% in 2007 to 9.6% in 2010. In some states it was worse. In California it went from 5.4% to 12.4% (Table 2). This resulted in huge increases in expenditures for unemployment compensation benefits.
U.S. Population, Employment and Unemployment, 2005 to 2014 (Numbers in Thousands).
Source. U.S. Department of Labor, Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Household Data, Annual Averages. Table 1. Retrieved from www.bls.gov/cps.
Number of Unemployed and Unemployment Rate for the United States and Five Largest States, 2005 to 2014 (Numbers in Thousands).
Source. U.S. Department of Labor, Bureau of Labor Statistics. Regional and State Unemployment, Annual Averages, Table 1, 2005 to 2014 inclusive. Retrieved from www.bls.gov.
The terms “unemployment compensation” (UC) and “unemployment insurance” (UI) are the same thing and will be used interchangeably in this article. In California, where UC usually stands for the University of California, UI is favored.
An earlier article published in 2010 examined unemployment compensation at the beginning and depth of the Great Recession. 1 This article considers the recession and the response to it using data from 2005 through 2014. As with the earlier article, it presents data and analysis for the United States and for the five largest states in terms of the size of their civilian labor force (CLF): California, Florida, Illinois, New York and Texas. Together they represent 37.8% of the U.S. CLF. They are also located in different parts of the country and are a pretty good sample of the whole.
Origins and Development
The unemployment insurance system of the United States is a federal–state partnership. It was created by Titles III, IX and XII of the Social Security Act of 1935 (SSA; P.L. 74-271) and the Federal Unemployment Tax Act of 1939 (FUTA; P.L. 76-379). Title III authorized federal grants to the states for the administration of state unemployment programs. Title IX established the Unemployment Trust Fund (UTF). And Title XII allows loans and advances to insolvent state programs. The FUTA created the funding mechanism as we know it.
By July 1937, all 48 states, the District of Columbia and the then territories of Alaska and Hawaii had adopted their own State Unemployment Tax Acts (SUTAs). Puerto Rico followed in 1961 and the Virgin Islands in 1978. For unemployment compensation purposes, DC, Puerto Rico and the Virgin Islands are considered “states.”
The unemployment insurance system worked well in dealing with the usual “frictional unemployment” due to normal job change and the “cyclical unemployment” caused by recessions. However, the Great Recession was the most severe test of the system ever.
Coverage
Initially, the unemployment insurance program applied only to private sector employers with eight or more employees in industry and commerce. These parameters were expanded over the years. Unemployment insurance is now required of almost all employers in the private and public (governmental) sectors, most not-for-profit organizations (NPOs), many agricultural and domestic workers and, since 2000, Indian Tribal Organizations.
In the private sector, employers are covered if they have one or more employees on one day in each of 20 weeks in the current or preceding year or if they pay $1,500 or more in wages in any calendar quarter in the current or preceding year. The $1,500 threshold is not indexed and wage rates have increased significantly over the years. Moreover, many states have adopted even lower thresholds. In California, for example, the standard is $100 in any calendar quarter. If you are an employer, you are covered.
All state and local governments must provide unemployment benefits regardless of size. Elected officials, judges and the state National Guard are exempted. U.S. government employees and ex-service members honorably discharged or separated are entitled to unemployment benefits paid for by the federal government but administered by the states. NPOs are covered if they have four or more employees in 20 weeks of the calendar year. Governments, NPOs and Indian Tribal Organizations may fund their unemployment benefits on a reimbursement basis.
A farm that employs 10 or more workers for 20 weeks of the year or has a quarterly payroll of $20,000 or more is covered as are domestic workers in private households that pay $1,000 or more in wages in any calendar quarter.
The railroad industry is inherently inter-state, which does not lend itself to state administered unemployment benefits. The industry is covered by the Railroad Unemployment Insurance Act of 1936 (P.L. 75-722) administered by the Railroad Retirement Board.
Unemployment Benefits
Eligibility
Individuals who are unemployed through no fault of their own who are ready, willing and able to work, and are actively seeking employment, are entitled to unemployment benefits. If they quit or were discharged for “gross misconduct” as defined by the state, they are not. There are no federal standards for benefit eligibility as there are for coverage and funding. The only federal constraints are that benefits may not be denied solely on the basis of pregnancy or termination of pregnancy. In addition, benefits may not be paid to professional athletes between seasons or to educators between terms if they have a reasonable expectation of being reemployed. Undocumented aliens are not entitled to unemployment benefits because they are not available to work lawfully in the United States.
Duration
In 44 states the duration of regular unemployment benefits is 26 weeks. The exceptions are Massachusetts 30 weeks; Montana and Arizona 28 weeks; Michigan, Missouri and South Carolina 20 weeks; and Florida, Georgia and North Carolina variable depending on the unemployment rate.
Weekly Benefit Amount
Table 3 reports the average “weekly benefit amount” (WBA) and related data for the United States for 2005 to 2014. The average WBA climbed from $267 in 2005 to $310 in 2010 and has remained rather stable thereafter while declining somewhat from 35.8% of average wages to 32.8%. The average duration of collecting unemployment benefits increased from about 15 weeks from 2005 to 2009 to almost 19 weeks in 2010 and 2011. More telling is the fact that the percentage of claimants who exhausted their (26 week) benefits increased from about 36% before the recession to 55.3% in 2010.
Unemployment Benefits in the United States, 2005 to 2013 (Numbers in Thousands).
Source. Social Security Administration. Research and Policy Analysis. Annual Statistical Supplement to the Social Security Bulletin, 2006 to 2015. Table(s) 9.A2, pagination varies. Retrieved from www.ssa.gov/policy/docs/statcomps/supplement.
Again, there were marked differences among the five study states. As indicated in Table 4, the average WBA in 2013 ranged from $231 in Florida to $341 in Texas. This is partly a function of the maximum WBA for which a large number of claimants are eligible. It ranged from $275 in Florida to $454 in Texas. Note the percentage of average weekly wages replaced by the unemployment benefit and the average duration of collecting unemployment compensation and the exhaustion rates. Florida stands out with over two thirds of its claimants exhausting their benefits.
Unemployment Insurance Benefits, United States and Five Largest States, 2013.
Source. Social Security Administration. Research and Policy Analysis. Annual Statistical Supplement to the Social Security Bulletin, 2015. Table 9.A2. Retrieved from www.ssa.gov/policy/docs/statcomps/supplement. Whittaker, J. M., & Isaacs, K. P. (2015, December 9). Unemployment insurance: Programs and benefits (Table 1, pp. 6-7). Retrieved from https://www.fas.org/sgp/crs/misc/RL33362.pdf
Taxation
Unemployment benefits are subject to income taxation as regular income. Unlike Social Security retirement benefits, the revenue produced does not revert to the UC program.
The Great Recession
The number of unemployed doubled from 7 million in 2007 to well over 14 million in 2009 and 2010, and the unemployment rate went from 4.6% to 9.6% over the same period (Table 1). Even this understates the true magnitude of the downturn.
The CLF as a percentage of the civilian noninstitutionalized population declined steadily from 66% from 2005 through 2008 to 62.9% in 2014. This was reflected in an increase in the percentage of the working-age population “not in the labor force” from 34.0% to 37.1% over the same period. This implies that there has been a structural change in the nation’s employment situation that coincided with the Great Recession. This is important. One of the important factors in a national economy is the percentage of the population in the labor force (working or actively seeking employment).
The States
The unemployment insurance system is a federal–state partnership with the states having significant administrative discretion. The impact of the Great Recession differed among the states.
Table 2 reports the number and percentage of unemployment for the United States and for the five study states. Note the significant variations among the states. In 2010, at the depth of the recession, the U.S. unemployment rate was 9.6%, five percentage points higher than it was in 2007. Among the five study states, the differential ranged from 7.0 and 7.3 for California and Florida, respectively, to 4.1 and 3.9 for New York and Texas, respectively. That is quite a difference. In 2010, the unemployment rate of the five states ranged from 12.4% in California to 8.2% in Texas.
Funding Unemployment Insurance
In all but three states, unemployment insurance is paid for by the employer. Alaska, New Jersey and Pennsylvania require employees to contribute. The SSA and the FUTA established the funding rules that are basically still in place.
The FUTA tax is 6.0% on the first $7,000 of earnings per employee per calendar year. That comes to $420 per employee ($7,000 × 0.06). The $7,000 minimum wage base has not been increased since 1973. However, as of 2014, only three states had a wage base of $7,000: Arizona, California and Puerto Rico. The others were all higher. Many much higher. The State of Washington had the highest at $41,300. 2
Of the statutory 6.0% FUTA tax (on the first $7,000), the federal government receives 0.6%, which amounts to $42 per covered fulltime employee ($7,000 × 0.006).
In 1976, Congress passed a temporary FUTA surcharge of 0.2% making the federal share 0.8%. The temporary measure was extended repeatedly until it was repealed effective July 1, 2011. It is now 0.6%.
The federal share of the FUTA tax may be used only to pay for state and federal unemployment program administrative expenses and for the federal government’s 50% share of Extended Benefits (EB) program (discussed below). Currently, 80% of the 0.6% federal share of the FUTA goes into the Employment Security Administration Account that pays for the administrative expenses of the federal and state programs. The remaining 20% goes into the Extended Unemployment Compensation Account (EUCA) used to finance the federal share of the permanent EB program. Regular (26 weeks) unemployment benefits are paid for from the states under the provisions of their SUTAs.
If a state has an approved SUTA program, and all do, 5.4% of the 6.0% FUTA may be offset and collected by the state. One of the conditions of federal approval is that the states maintain a system of “experience rating” designed to encourage employment stability by rewarding those employers that maintain stable employment.
There are four methods of calculating experience ratings: reserve ratio, benefit ratios, benefit–wage ratios and payroll decline. The most common is the reserve ratio method under which the balance in the employer’s account is divided by its total covered wages paid. The resulting ratio is then applied to a table to determine an employer’s tax rate.
The states may also adopt an unemployment tax rate that is higher than the minimum 5.4%. As of 2013, eight states used the minimum 5.4% rate and eight states had rates above 10.0%. The highest was Massachusetts at 12.7%. Thus, the maximum unemployment contribution paid by the employer per employee is the actual state wage base × the actual tax rate. The most expensive state unemployment program for an employer with a poor experience rating was North Dakota ($33,600 × 0.0978 = $3,286 per employee). The most economical was Florida ($8,000 × 0.054 = $432). California is the second lowest ($7,000 × 0.062 = $434). 3 Table 5 displays the wage base, tax rates and maximum tax per employee for our five example states. Table 6 exhibits the same for the five highest and the five lowest states.
State Unemployment Taxes, Wage Base and Rates, 2014.
Source. Whittaker, J. M., & Isaacs, K. P. (2015, December 9). Unemployment insurance: Programs and benefits (Table 2, pp. 9-10). Retrieved from https://www.fas.org/sgp/crs/misc/RL33362.pdf
High-Cost and Low-Cost States as Measured by Taxable Wage Base and Tax Rate, 2014.
The higher number is the maximum with a dependent allowance.
Source. Whittaker, J. M., & Isaacs, K. P. (2015, December 9). Unemployment insurance: Programs and benefits (Table 1, pp. 6-7, and Table 2, pp. 9-10). Retrieved from https://www.fas.org/sgp/crs/misc/RL33362.pdf
Unemployment Trust Fund
The money collected must be deposited in the UTF maintained by the U.S. Treasury. The UTF consists of 59 accounts. In addition to the 53 state accounts there are the Employment Security Administration Account mentioned above; the Federal Unemployment Account, used to make advances or loans to meet state shortfalls; the Federal Employees Compensation Account, used to pay benefits for federal employees and ex-military and two Railroad Retirement Board accounts.
There is no federal requirement as to how much money the states must keep in their UTF account. However, there is a requirement that they pay all promised benefits to claimants, and the Department of Labor recommends that they maintain a reserve balance sufficient to pay benefits for at least a year at the highest level experienced in the last 20 years. The “average high cost multiple” (AHCM) is a measure of a state’s attainment of that goal. A ratio of 1.0 indicates that the target is met. The AHCMs of our five study states were quite low before the Great Recession began and dropped to zero soon after.
Table 7 captures the financial experience of the unemployment insurance system in terms of revenues, expenditures and administrative costs. The impact of the Great Recession is clearly visible in the data. Note the lag in the state (SUTA) receipts relative to expenditures.
Revenues and Expenditures Associated With Unemployment Compensation, Fiscal Years 2005 to 2014 (In Billions of Dollars).
Note. Columns do not sum because of rounding and the omission of UC benefits for federal employees and former service members.
Source. Whittaker, J. M., & Isaacs, K. P. (2015, December 9). Unemployment insurance: Programs and benefits (Table 3, pp. 11-13). Retrieved from https://www.fas.org/sgp/crs/misc/RL33362.pdf
There is no actual money or real assets in the UTF (or in the 17 other trust funds maintained by the U.S. Treasury). When UTF receives contributions from the states or elsewhere they become part of federal revenues and offset spending in other areas and reduce the federal deficit. When the UTF is short of funds due to making loans to the states, it can borrow from the General Fund (with congressional approval).
When a state’s UTF account balance is insufficient to pay promised claims, the governor of the state or his or her designee writes a letter to the Secretary of Labor requesting a loan. When the loan is approved, funds are transferred to the state’s UTF account on a monthly basis.
The Treasury pays interest on the surpluses in the UTF accounts and charges interest on outstanding loans to the states. There are also additional costs of not repaying loan amounts in a timely manner. If a state repays its loan from the UTF by November following the second consecutive January 1 from when the loan was made, there is no “credit reduction.” If it does not, the 5.4% that the state can offset against the 6.0% FUTA tax is reduced by 0.3 percentage points in the second year retroactive. The cumulative 0.3 point reduction continues each year until it reaches 5.4% in year 19. By then, the state and its employers would be paying the full 6.0 FUTA tax.
Beginning in third year, there is a 2.7% “add-on reduction,” which is replaced in the beginning in the fifth year with a “benefit–cost ratio” (BCR). The calculations of the add-on and BCR reductions are rather complicated and need not detain us. The fact that they are on top of the 0.3 point increase provides a strong incentive for states to pay off their debt to the UTF as soon as possible.
While this sounds rather draconian, it is not. There are ways to mitigate the credit reductions which need not detain us. More important, the additional taxes attributed to the credit reductions are applied against the state’s outstanding loan. Thus, the mechanics are cleverly self-correcting.
The UTF balances for the years 2009 through 2014 are reported for our five selected states in Table 8. Four of the five had pretty much recovered from the Great Recession by 2014. California is the exception with its UTF balance of only $5.9 million. It is actually worse than that. In 2014, California had an outstanding UTF loan of over $8 million ($527 per employee). California’s problem is that it was hit hard by the recession (Table 2) and that its employer contribution formula is rather low. It uses the lowest allowed wage base ($7,000) and a low unemployment tax rate of 6.2% (Table 5). Its benefits are about average. The only other example state with an outstanding loan in 2014 was New York with $1.5 million ($170 per employee). This will probably be paid off in 2015 (see Table 9).
Unemployment Trust Fund Accounts of Selected States as of December 2009 to 2014 (Dollars in Millions).
Note. In 2009 and 2010 none of the five study states had outstanding UTF loans.
Source. National Conference of State Legislatures. State Unemployment Trust Fund Balances 2009-2014. Retrieved from http://www.ncsl.org/research/labor-and-employment/trust-fund-balances-2012.aspx
State Unemployment Insurance Revenue, UTF Balance, Outstanding Loans and Loans per Employee ($ in Millions Except for Loans per Employee).
Revenue for past 12 months.
Source. Whittaker, J. M. (2012, September 20). The unemployment trust fund (UTF): State insolvency and federal loans to states (Congressional Research Service; CRS Reports for Congress, RS22954, 2009-2015. Table titled Unemployment Trust Fund Accounts: Financial Information by State). Table number and pagination varies.
Nothing in federal law prohibits a state from borrowing from the private market or issuing bonds to pay for unemployment benefits. By doing so, the state avoids the time limits and payback requirements of a UTF loan. It may even get a better interest rate. There are no data on such state debt; and it would be difficult to glean from state budgets and financial documents. The amounts could be substantial.
The Extended Benefit Program
The Federal-State Extended Unemployment Compensation Act of 1970 (EUCA; P.L. 91-373) created a permanent EB program to ensure the continuation of benefits during periods of high unemployment. It provides an additional 13 weeks of benefits for those beneficiaries who have exhausted their regular benefit eligibility (for a total of 39 weeks) on a state-by-state basis. The cost of the program is shared equally by the federal government and the states. The permanent EB program was amended by the Omnibus Budget Reconciliation Act of 1981 (P.L. 95-35) and the Unemployment Compensation Amendments of 1992 (P.L. 102-318) before taking its current form.
The EUCA requires that a claimant have had at least 20 weeks of covered full-time employment during the base period or the equivalent in wages.
A state may “trigger” the EB program “on” when its “insured unemployment rate” (IUR) has been 5% or more for the last 13 weeks and is 120% of the rate for the same period in each of the last two years. A state has the option of triggering the EB program “on” if its IUR in the previous 13 weeks was at least 6% regardless of its past experience or if its “total unemployment rate” (TUR) is at least 6.5% and is 110% of the rate during the same period in either of the previous two previous years. Furthermore, if the TUR is at least 8% and 110% of the rate for the same period during either of the past two years, the extension is increased from 13 weeks to 20 weeks.
There is little motivation for states to use the optional trigger if Congress has enacted, or is likely to enact, a temporary extension fully funded by the federal government. Unemployment benefits have been temporarily extended in 1958, 1961, 1971, 1974, 1982, 1991 and 2001. There was little doubt that they would be extended again.
EUC08
The recession that began in 2008 Q4 was the worst economic downturn since the Great Depression of the 1930s. The number of unemployed and the unemployment rate soared as did the number of discouraged workers no longer in the labor force (Table 1). The number of beneficiaries who exhausted their regular benefits soared from 2.7 million (35.6%) in 2008 to 7.5 million (55.3%) in 2010 (Table 3). The usual 26 weeks of benefits and the state-by-state permanent EB program extensions would not have been adequate to handle a contraction of this magnitude. Congressional action was required.
The Emergency Unemployment Compensation program (EUC08) was created by Title IV of the Supplemental Appropriations Act of 2008 (P.L. 110-252) signed November 18, 2008. EUC08 added up to 13 weeks of additional benefits for those who had exhausted their regular benefits. Recipients entitled to fewer than 26 weeks of regular benefits were entitled to fewer weeks of extended benefits.
As the recession worsened, Congress passed the Unemployment Compensation Extension Act of 2008 (P.L. 110-449) signed November 21, 2008. It increased the EUC08 extension from 13 to 20 weeks and labeled it Tier 1. It also established a Tier 2 with an additional 13 weeks of benefits for those who had exhausted their Tier 1 eligibility.
The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-50) was signed February 17, 2009. It is also known as the “Recovery Act” or “Stimulus Package.” The ARRA first increased unemployment benefits by $25 per week for all recipients who would not exhaust their benefits by January 1, 2010. Second, the ARRA made the first $2,400 of unemployment compensation exempt from federal taxation. Both of these measures were intended to help stimulate the economy by adding purchasing power to those most likely to spend it.
Third, the ARRA replaced the shared federal–state equal funding of the EB program with 100% funding from the General Fund as was the EUC08 program and the $25 additional benefit. The states remained responsible for funding the initial 26 weeks of regular benefits under their SUTAs.
The ARRA contained a number of other elements that affected unemployment compensation. They include $7 billion to encourage the states to modernize their programs and an increase in the duration of unemployment benefits paid by the Railroad Retirement Board to 52 weeks.
As the recession deepened, Congress passed the Workers, Homeownership and Business Assistance Act of 2009 (P.L. 111-92) that made a number of changes to EUC08. First, it added a week to Tier 2 and made it available to all states. Second, it added a Tier 3 with an additional 13 weeks of benefits for those who had exhausted their Tier 2 benefits. And third, it added a Tier 4 with 6 weeks of additional weeks of benefits for states in which the TUR was at 8.5% or higher. There were also a series of technical changes and extensions of EUC08.
From November 2009 through September 2012 the EUC08 added 53 weeks of extended benefits for a total eligibility of 79 weeks. And from September 2012 through its expiration at the end of December 2013 it added 47 weeks for a total of 73 weeks.
Prior to 2013, the states could choose to pay EB benefits before EUC08 benefits. Alaska was the only state to do so. With the passage of P.L. 112-96 in February 2012, states were required to pay EUC08 benefits before EB benefits. 4
Prior to February 2009, the EUC08 program was funded from the Extended Unemployment Compensation Account within the UTF. From the enactment of the ARRA to its expiration at the end of 2013, the EUC08 was paid for from the General Fund. States did not have to repay these funds. 5
Conclusion
By the end of 2013, the Great Recession was pretty much over. The number of unemployed had dropped to 11.5 million and the unemployment rate to 7.4%. In 2014 it was 9.6 million and 6.2%, respectively. And as October 2015 it was 7.9 million and 5.0%. 6
Given the severity of the Great Recession and the resulting unemployment, it is fair to say that the response by the federal and most state governments was effective. The EB and EUC08 programs as modified by the ARRA and other congressional actions did the job. Indeed, it may be concluded that the UTF funding arrangement is quite clever. The states and their employers build up reserves when the economy is strong and then draw upon them when there is a downturn. When a state exhausts its reserves it may borrow from the UTF under the permanent EB program. When the UTF runs out of money, it borrows from the General Fund. For most of the time the EUC08 was in force, the states and their employers did not have to repay the funds received. The only remaining concern is the impact of EUC08 on the federal deficit and the growing national debt.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.