States that cut unemployment benefits following the Great Recession didn’t help the jobless or taxpayers, according to a recent report by the Economic Policy Institute (EPI), a left-leaning think tank.
The results matter in the context of North Carolina's handling of unemployment benefits last year, which received national media attention. In July 2013, Gov. Pat McCrory and the state legislature reduced the duration and weekly amount of unemployment benefits, explaining the cuts as necessary to tackle $2.5 billion in debt to the federal government. Since then, McCrory has said that kicking people off unemployment insurance compelled them to find work, a point that EPI and other research groups have disputed.
While the cuts in North Carolina were the most dramatic, other states used similar approaches to deal with accruing debt from unemployment insurance. Arkansas, Florida, Georgia, Illinois, Michigan, Missouri and South Carolina also reduced unemployment benefits some time between 2011 and 2013. Another 27 states were borrowing from the federal government to pay for unemployment benefits, but opted not to make cuts to their programs.
Much of the EPI analysis focuses on policy decisions made by states before the recession that positioned them to run out of money for unemployment benefits. To be sure, an extended period of unusually high unemployment in those states, and thus a spike in demand for benefits, also explain the shaky financial positions of some state unemployment insurance trust funds. But that's not the main reason, the authors contend. The main reason is poor financial planning.
A joint federal-state financing system supports unemployment benefits through payroll tax collections. States have wide discretion in deciding their tax rate and the amount that is subject to tax; the share of a worker’s total earnings taken out for state unemployment benefits ranges from 0.4 percent in South Dakota to 2.2 percent in Hawaii. The nationwide average is 0.9 percent, which translates to about $375 per worker.
If the financing system works correctly, states should build up account balances when unemployment is low and the economy is growing, setting aside a rainy day fund for future recessions. But it's tempting for states to do the opposite, lowering tax rates when the economy is on the upswing, which is exactly what 28 states did between 1995 and 2001. Because of these legislative reductions in the tax rates, these states didn't collect enough in revenue between 2001 and 2007, which then led eight states to cut unemployment benefits later on.
For a deeper understanding of the report's findings, Governing interviewed Joshua Smith, a senior policy analyst at EPI and one of the report's authors, Aug. 7. The transcript has been edited for clarity and length.
Now that we’re in this recovery and out of the recession, what are the main takeaways for state legislatures that want to be in a better position the next time we have a recession?
States need to find a way to better pre-fund their state unemployment insurance trust fund account. So, that means, in good times, they need to collect more revenue. Generally as fewer people are collecting benefits and more people are working, paying into the trust fund account, rates can go down and you still collect more revenue. But states really need to make sure they’re collecting more revenue during economic expansions because that’s how the system is designed. It’s designed to be counter cyclical. In good times, it collects more revenue than the benefits it pays out and in bad times it does the reverse.
By statute, some states basically do it backwards. The rate falls automatically when their trust fund account is fully funded and it goes up when it’s about to go insolvent. That’s not counter cyclical. That’s cyclical. And it makes no sense.
Before reading this report, I wasn’t familiar with the way unemployment benefits are funded and I would assume it isn’t mainstream knowledge. Do you think lack of public awareness allows states to make funding decisions that leave unemployment insurance trust funds insolvent?
I think that there is not knowledge about it and education can only help. It is really complicated and most people have no idea what goes into their payroll taxes. The one statistic that we put in our paper that people might react to is the amount they’re saving in taxes, which is about 37 cents per employee per week, and the amount of benefits that people are going without, which was an average was $252 per week. Cutting a couple of weeks of duration hurt a lot for a small number of people and the savings from cutting weeks of benefits were spread out so thin that they really didn’t help people that much.
But it depends on how you look at it. Michigan saved a couple hundred million dollars, which is absolutely real money. But I think most people, if they’re asked, would you give 30 cents a week to help people who are really down on their luck, most people would say "yeah, absolutely," and I don’t think that answer would be confined to the left side of the political spectrum.
Are you seeing any states that seem to be repeating the mistake of not investing in the trust fund as the economy improves?
California’s trust fund went insolvent in the aftermath of the recession and has been borrowing from the federal government through the federal unemployment account. Right now, they’re about $10 billion in the hole. And right now their tax base for the state unemployment insurance trust fund account is at the minimum level of $7,000. Even though California has a reputation of being a higher tax state, they haven’t raised that base at all. It’s gotten introduced in the legislature within the last couple years, but there’s been a lot of pushback from the chamber of commerce and other business groups. So, some states have run into political walls in trying to respond to this problem, with California being the prime example.
You call out North Carolina in the report as an example of what states should not do. What made North Carolina’s changes particularly notable?
The federal government gives a lot of latitude for states to design their own systems, to determine the duration of benefits, the level of benefits, the level of taxes, and so forth. Unless a state receives a specific exemption, there are certain limits to what they can and cannot do. If they break those limits, they’re subject to a penalty.
In this case, there were extra federal benefits in effect last summer when North Carolina made its decision to cut the duration of benefits of available and the level of weekly benefits available. At the time, the extended benefits program and the emergency unemployment benefits program were both in effect and the rules for those programs said that states could not lower their average weekly benefit amount and participate in those programs. North Carolina is the only state that did so without receiving a specific waiver. Immediately, they got cut off from those programs, which had been providing additional weeks of unemployment insurance that were paid for by the federal government.
When North Carolina cut its benefit amount, it also cut duration for what the state was offering, from 26 weeks to 19 weeks. But it also cut what the federal government was giving them, basically for free. So, citizens were cut off from federal benefits in addition to state benefits. And this occurred six months prior to when the emergency unemployment compensation program was cut off for everybody -- because it expired.
One of the questions you were examining in this report was whether cutting unemployment benefits would force people to go get jobs and the idea that maybe unemployment insurance was creating a culture of dependency on public assistance. How did you test this idea?
You have to examine the employment data, the number of people who have jobs. What we looked at was the employment-to-population ratio, specifically for prime-age workers. We wanted to see if these policies had a measurable effect on employment, the theory being that when people are cut off from benefits they become so desperate as to re-enter the job market and get a job right away. That did not occur. The employment-to-population ratio from before the policy change continued after the policy change. Even some folks on the right, the American Enterprise Institute has written about this as has the National Review Online, agreeing with our finding that cutting short-term unemployment benefits did not encourage people to find jobs.
There is some evidence that indeed people might hold out for a job they really want rather than the first one offered because they’re getting unemployment benefits. But this factor is more than made up for by the fact that if you’re receiving unemployment benefits, you have to show that you’re trying to get a job. Because you have to be applying to jobs when you’re receiving unemployment benefits, you’re more likely to start working than you would be if you were not receiving benefits and were not being forced to apply for jobs.
Those are two countervailing forces and what we find is that the second force outweighs the first. Even now, there are many more job seekers than there are job openings, but there just aren’t jobs for folks. Whether or not unemployment benefits are available to you sort of has nothing to do with the labor market problems writ large.