Study: Unemployment Insurance Reform Could Spur Job Growth

A burdensome unemployment insurance system may be hindering job growth, according to a new study by the Tax Foundation.
by | October 18, 2011

A new study concludes that the unemployment insurance (UI) program is in need of fundamental reform, as the increasing burden on states and employers could be hampering job growth.

According to the Tax Foundation study, Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds, 34 states have depleted their unemployment insurance reserves and been forced to borrow $37 billion from the federal government to pay their share of the benefits. Starting on Sept. 30, states must begin to pay over $1 billion in interest on those loans. In many cases, businesses and employees could be expected to pick up the tab for the interest payments.

"These new interest obligations and tax increases, if they ultimately occur, come at a time when private sector hiring is already at a low level and states are under significant fiscal pressure," Joseph Henchman, president of the Tax Foundation, said in the study's introduction. "These unemployment insurance fiscal policies may exacerbate negative job growth and tax trends, instead of operating counter-cyclically as the program was intended."

The study explains that employers pay state and federal unemployment insurance taxes based on their layoff history. It notes that states typically cut unemployment insurance taxes during good economic times and raise them during economic downturns.

The foundation, which aims "to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government," according to its website, recommends a few options for reforming the UI system. They include: "eliminating the firewall between administrative costs and benefits, reducing cross-subsidies through greater use of experience ratings [company layoff histories], relying more on face-to-face training and advising, adopting elements of state workers' compensation programs and experimenting with individual accounts to encourage saving." These changes could help the program provide those with a "safety net" between jobs, the study notes.


More from Finance