Fix The Flaws COVID-19 Has Exposed In The Unemployment System

Congress was right to ramp up UI spending, but it should also address the long-term weaknesses in the UI system that this crisis has laid bare.

By Brendan McDermott | Fiscal Policy Analyst for PPI

Between March 15 and March 28, a record-shattering 10 million people filed to start receiving unemployment insurance (UI) benefits because of the economic impact of the COVID-19 pandemic. State UI systems are already buckling under the weight of these claims. Florida’s UI office is resorting to paper applications after the failure of their computer system, which was reportedly designed to make it harder for unemployed workers to claim benefits so former Governor Rick Scott could brag about the state’s low unemployment statistics. New York and Michigan, meanwhile, are asking residents to only apply for benefits on certain days based on the first letter of their last name to prevent the states’ UI websites from crashing. Since UI plays such an important role in keeping Americans afloat during economic crises, Congress temporarily expanded UI by $260 billion as part of last week’s $2.3 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Congress was right to ramp up UI spending. But it should also address the long-term weaknesses in the UI system that this crisis has laid bare. Lawmakers had to crudely raise UI benefits by a flat amount to accommodate outdated computer systems, and some UI claims systems are failing completely as demand for benefits surges. There is no guarantee that those who get benefits will receive them for as long as they need them. And while Congress funded state work-sharing programs that use the UI system to prevent layoffs, those programs are still only available in about half of states, leaving many employers with no option but to let workers go.

As the crisis continues and further relief measures are debated, lawmakers ought to seize the opportunity to make long-term improvements to the UI system by universalizing work-sharing agreements, modernizing state UI computer systems, and extending benefits automatically during long spells of unemployment.

Congress Expanded Benefits and Eligibility

The CARES Act increases benefits by $600 per week for all claims related to the COVID-19 pandemic, a substantial raise over the average benefit of $385 per week. This flat benefit is progressive as it replaces a higher proportion of a low-income worker’s lost wages than those of high earners.

As some Republican critics have complained, some lower-income workers will receive a benefit that is higher than their former income. Normally that would create an obvious disincentive to work, but many states have out-of-date processing systems that make it functionally impossible to achieve the original goal of setting benefit levels at exactly 100 percent of past earnings. In this pandemic-induced economic shutdown, high benefits are unlikely to cause serious problems because they are temporary and most people cannot work anyway.

In addition, the CARES Act extends benefit duration from 26 weeks (in most states) to 39 weeks. It expands eligibility to self-employed workers such as freelancers, contractors, and gig economy workers; people who quit their jobs to take care of a loved one with COVID-19; furloughed workers; people seeking part-time work; and people without enough of a work history to normally qualify. The $600/week benefit boost will support tipped workers as well, whose UI benefits are typically very low because their unreported tips do not count as past income when determining their benefit level.

The bill also takes the smart step of fully funding the 26 existing state work-share programs and giving the remaining states money to set such programs up. Work-share programs let employers temporarily reduce many workers’ hours in lieu of laying them off. The state then supplements their wages with prorated UI benefits to partially compensate them for their lost hours. To qualify, workers’ hours must be reduced between 10 and 60 percent and UI benefits typically last up to 26–52 weeks, depending on the state.

Work sharing is far preferable to mass layoffs during temporary economic crises. By keeping people attached to their jobs, it helps them pay the bills while also mitigating the long-term damage of unemployment, such as lower lifetime earnings and mental stress. Work sharing also helps businesses retain seasoned employees and avoid the costs of hiring and training new workers when conditions improve. OECD researchers found that work-sharing programs successfully kept workers permanently employed in other developed countries during the Great Recession, with Germany alone saving 250,000–400,000 jobs. During that same time in the United States, federal financing for state work-share programs generated $1.64 in economic activity for every $1 spent, making it among the most cost-effective recession-mitigating tools.

Still, these programs have never taken hold in the United States the way they have many European countries. One major reason is that the latter often have more rigid labor markets, which make it prohibitively expensive to lay off employees. But successful work-share programs such as Rhode Island’s — where the ratio of work-share claims to traditional UI claims was more than 4 times larger than the national average during the Great Recession — show that the model has room to grow in the United States.

Work Sharing for All

Congress’ aid to work-share programs will help many workers and businesses in the present crisis. But U.S. lawmakers should go further by turning work sharing into a national tool to fight unemployment.

Many employers do not participate in work sharing because they do not know it is an option. Rhode Island’s success is often attributed to its proactive outreach to businesses, which research shows can raise participation significantly. Additionally, many states have not automated their work-share claim and benefit systems, creating an onerous paperwork burden for both employers and program administrators. And burdensome program rules can needlessly discourage participation. For example, drawing work-share benefits can reduce the maximum UI benefit a worker would receive if they get laid off, so workers who expect future layoffs may not want to participate.

Some states have not offered these job-saving programs because of misplaced concerns about cost, even though independent analysts concluded that the program’s cost is “probably minimal” compared to layoffs. Some states have lowered the cost of administration by using automated claims systems, and countries such as Germany reduce their administrative burden by paying benefits to the employers to then distribute through their payroll system rather than having the government review and accept claims from every worker. But some states cannot adopt a work-sharing program even if they would like to because their outdated state computer systems cannot support the program at all.

Federal lawmakers should do more to encourage states and employers to participate in work-sharing programs now and require all states to establish work-share programs as soon as is feasible, with adequate federal funding to establish these programs with modern, automated claim and benefit systems. To allay state anxieties about cost, the federal government could guarantee automatic financial support for the program during tough economic times.

States could make these programs more attractive to employers by promoting them, giving employers reasonable flexibility in designing and modifying their arrangements and re-examining rules or processes that might unnecessarily discourage participation. To avoid propping up “zombie” businesses, it is essential that federal and state guidelines ensure benefits only go to businesses experiencing temporary economic shocks.

Other Overdue UI Reforms

Failing to expand work-share programs nationally was not the only missed opportunity in this bill. The federal government should also press states to modernize the mainframe computers their UI systems use so that they can target and adjust benefits more effectively. This will let future policymakers base their decisions on sound economic and social policy rather than the limits of antiquated technology. States should also modernize their UI systems’ website infrastructure so that they can nimbly respond to surges in claims like they are experiencing today.

Additionally, benefit duration should grow for longer than it does now in states experiencing particularly harsh economic downturns. The Extended Benefits (EB) program already requires states with high unemployment to extend UI benefits for longer than normal, but Congress has felt it necessary to extend those benefits even further during recent recessions. Offering longer automatic extensions in states with especially severe unemployment wouldn’t require new Congressional action — at painstaking length — and would insulate the decision from political pressures while targeting aid to the states that truly need it. In addition to helping workers keep their heads above water, the system would act as an automatic stabilizer in bad recessions.

With much of the U.S. economy cratering, Congress obviously needed to give the nation’s UI system a massive cash infusion swiftly and did not have time to deliberate over policy changes. It likely will need to do more to help the state systems buried under an avalanche of new claims. But the system also needs to be upgraded to help prevent unnecessary layoffs and ensure the aid reaches the people who need it.

That’s why lawmakers should be working now to improve UI for the short and long term. Sen. Michael Bennet, for example, recently offered a creative proposal to expand UI benefits and eligibility and normalize them across states. Leaders should keep fighting to ensure that UI adequately protects the millions of Americans who are relying on UI for their financial stability today, as well as the countless Americans who will do so during future downturns.

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