Establishing Unemployment Insurance as a True Worker Benefit

The American unemployment insurance (UI) system is a mess.

Benefits are difficult to access, stingy, and short-lived. To make matters worse, workers receive almost no assistance in their job-seeking efforts. This weak coverage turns unemployment into more than a bump in the road: For many Americans, a layoff stunts career advancement and shrinks future earnings prospects. Our patchwork of programs is constantly failing working families.

A perpetual flow of workers requires UI, even when the unemployment rate is low.

Unfortunately, policymakers tend to overlook issues with UI until there is a recession, even though hundreds of thousands of people cycle into and out of jobs every month. In fact, U.S. workers experience over 15 million unemployment spells per year. Across the span of an entire career, individuals are unemployed around six times. Each disruption of income can have serious consequences for one’s livelihood; temporary job loss can lead to permanent disasters such as home foreclosure.

Yet, few in the labor force are guaranteed proper protections.

Around one in four unemployed workers receive benefits, a much lower proportion than in other countries, and those who do see less than half of their prior wages replaced on average. A number of states enforce harsh restrictions on benefit sizes, which particularly hurt middle-class workers. In addition, one of every five unemployed jobseekers is out of work longer than benefits usually last. The government could help speed up the time between jobs, but relative to the size of the American economy, U.S. spending on employment programs is one-fifth the amount in other rich countries.

Benefits function as bare-bones welfare when we need true social insurance.

Eligible workers who overcome the various administrative hurdles to claim UI are less likely to live in poverty. Nevertheless, many recipients still cannot afford essential living expenses, such as mortgage payments, which are largely locked in. Unemployment insurance worthy of the name must do more than merely prevent destitution; it must ensure that workers can finance their everyday lives during the transition between jobs.

Without adequate coverage, workers are stripped of the freedom to make life decisions.

Individuals often feel forced to take the first offer that comes their way, even if they suspect the workplace is unsuited or unsafe for them. Meanwhile, families may lack the requisite financial stability to adopt their preferred household arrangements. For instance, couples wishing to have a parent at home to raise the kids can be prevented from doing so. The UI system effectively penalizes that option by making it too risky to rely on one income.

The path forward is clear: It’s time to revamp unemployment insurance.

Congress cannot continue to leave UI reforms on the backburner. Workers require more robust unemployment coverage so the career ladder does not collapse under them as they climb it. Other countries provide more generous unemployment benefits while holding higher employment rates than here in the United States. We are capable of reaching those standards. We can turn UI into a true worker benefit that ensures American families have the security they need to thrive in a dynamic economy. To do it, we must tackle three problems.

The cash crunch problem is that unemployed workers need time to secure a quality job, but inadequate UI benefits prevent extensive searches. Without reliable coverage, workers are bargaining with potential employers from a position of weakness. They are then forced to accept lower salaries and subpar labor conditions.

At the same time, a worker’s location matters a lot.

Each state has distinct rules for calculating benefits, including a maximum weekly amount, which can be quite low. People with identical jobs can receive very different benefit coverage in different states. Consider two UI recipients, one in Arizona and the other in neighboring Nevada (seen below). Each was previously earning a $50,000 annual salary. The Arizona worker and the Nevada worker would have 33 percent and 52 percent of their respective weekly wages replaced while they search for new jobs. What is the main reason for this disparity? Arizona’s maximum weekly benefit is $320, while Nevada’s is $562.

Benefit caps have hampered middle-class workers for decades. Soon after unemployment insurance was established by the Social Security Act, the average weekly benefit limit across the United States was around 60 percent of the average weekly wage among covered workers. States have increased their statutory weekly maximum amounts over time, but the increases have largely not kept pace with the average wages of insured workers. Last year, the average benefit cap was just under 40 percent of the average weekly wage in total covered employment nationally. And because that’s just an average, many states replace wages at a lower rate.

Things look even bleaker when we factor in the difficulty of receiving benefits. Many gig workers and recent entrants to the workforce are outright ineligible. Administrative dysfunction keeps workers from efficiently obtaining support. Some applicants are rejected despite having legitimate claims because the burden of proof is too high. Others aren’t informed they qualify or give up on applying due to the burdensome process. As a result, those most in need of income support are less likely to access it: The poorer you are, the less likely you are to get UI when you lose work. And those who do jump these hurdles may find little respite at the finish line, as states have slashed benefit durations in recent years.

Better benefits would go a long way to change these dynamics.

Greater UI generosity elevates wages by affording recipients the time to find higher-caliber jobs. The improved match leads workers to remain in their jobs for longer. Absent a major change in course, though, millions of unemployed workers will continue settling for less than they are worth each year.

The second major problem, the single-income penalty, is that unemployment causes a more severe financial shock to households with one worker than to households with multiple workers. Weak unemployment benefits are at the root of the disparity.

This can be shown most clearly with an example. Let’s consider two nearly identical families: the Andrews and the Billups. Both families consist of a married couple in their late 20s with a newborn. Each couple has a total income of $70,000. Where the households differ is that the Andrews family prefers a traditional family structure — one worker, one caretaker to raise the child — whereas the Billups parents are both in the formal labor force.

As seen below, the salaried worker in the Andrews family (on the left side) earns $70,000 annually and the caretaker has no official income. Both Billups adults (on the right side) earn $35,000 per year.

Individuals are unemployed an average of 2.4 times between the ages of 25 and 44. That means each worker in the Andrews and Billups families can expect to become unemployed around two times before their children graduate from high school.

If a worker in each family loses their job, the households will struggle to cover basic expenses because unemployment insurance programs provide limited coverage. However, because the Andrews got all of their income from the laid-off worker, they are in a worse financial bind. With an average UI replacement rate of 40 percent, the Andrews’ annualized pre-tax income drops from $70,000 to $28,000, while the Billups’ income goes from $70,000 to $49,000.

A couple of factors complicate the hypothetical. For one, benefit caps limit the potential replacement rates for middle-class workers. Only about half of states offer benefit sizes that could possibly insure 40 percent of a $70,000 salary. Second, this scenario assumes that both workers qualify and receive benefits.

As discussed in the previous section, the actual amount of UI coverage the families can expect is much lower when factoring in that three-quarters of unemployed workers receive nothing. If each family received statistically average benefit coverage, the Andrews’ annualized pre-tax income would fall from $70,000 to $7,700 when their one salaried worker was laid off, while the Billups’ income would descend to $38,850. Although the worker in the Andrews family had an initial salary double that of a Billups’ adult, the Andrews family’s annualized income is around $31,000 below that of the Billups. The Andrews are penalized for preferring to have a parent raise their child at home, and substantially worse off as a result. Separate family-benefit programs such as the Child Tax Credit don’t even come close to resolving this disparity.

Single-worker households are at a clear disadvantage without more robust unemployment insurance protections. Those wanting a one-worker, one-caretaker household structure may feel unable to do so. Access to more generous UI would give households the security and flexibility to adopt their ideal work arrangements.

The third major problem, the castaway problem, is twofold: unemployed individuals frequently have their benefits expire before finding new positions, yet insufficient assistance is provided to speed up the job-seeking process and prevent unnecessary job loss. Opportunities to maximize employment levels with labor market programs are foregone or wasted as unemployed workers are subjected to avoidable economic scarring.

Since 2000, nearly 4 million UI recipients per year have still been unemployed when their benefits expired. The total has varied based on the strength of the labor market — it takes more time to land new positions during recessions — but a sizable fraction of UI recipients is jobless beyond their benefit eligibility even when economic growth is robust. In the strong economy of 2019, for example, a third of beneficiaries were without jobs after losing access to regular benefits.

Instead of efficient matching of workers and employers, there are a whole lot of missed opportunities. More than a million long-term unemployed workers are ready to work but languishing each month. The dearth of well-functioning active labor market policies (ALMPs), such as job search services, retraining programs, and employment subsidies, makes it harder for workers to escape unemployment and hinders the nation’s employment rate. More used to be spent on ALMPs, but national expenditures as a percent of GDP have drifted downward as American dominance in employment has faltered. The United States would need to spend almost an additional $100 billion per year on ALMPs just to catch up to other nations.

Exactly how additional dollars would get spent matters a lot, though. Some of the existing schemes meant to connect workers with businesses have proven to be ineffective due to haphazard design. The Work Opportunity Tax Credit is supposed to incentivize businesses to take chances on long-term unemployed workers and others thought to be riskier hires, but the complexity of claiming the credit hampers its impact. Similarly, over half of states run work-share programs that enable employers to keep their workers on payroll during downturns at a reduced salary while the government replaces some lost wages, but these policies are also difficult to access and maneuver.

In short, the government must become more involved, and in less clunky ways than it is now.

Federal policymakers cannot simply throw money at flawed employment policies nor expect pop-up emergency programs to be an overwhelming success. We need smarter investments modeled on what has worked well abroad and at a smaller scale here.

Policymakers may fret that more generous benefits will disincentivize work, but in practice, we have the opposite problem: Meager support is keeping workers from finding quality job options and leaving too many stuck on the sidelines. Unemployment traps are better countered by programmatic assistance, not by slashing support. Additional weeks of benefits would allow long-term unemployed workers to maintain necessary spending levels with only modest implications for the average time spent receiving UI, while expanded, centralized employment services can minimize the difficulty of unemployment spells. Americans, quite literally some of the hardest-working people in the world, deserve better.

National economic problems require nationwide solutions. Workers in all states utilize unemployment insurance. It is essential that UI coverage, both the cash benefits and re-employment assistance, meet a high standard regardless of location. Policymakers should implement and finance a comprehensive list of reforms at the federal level, which states can choose to supplement. A set of recommendations are listed below in four buckets: benefit generosity, benefit eligibility, benefit duration, and employment support.

American workers are facing a significant but solvable set of roadblocks when it comes to unemployment.

Unemployment is unavoidable but poorly insured against; meanwhile insufficient spending goes towards maximizing and solidifying job connections. Even when workers qualify for benefits, accessing that assistance is a challenge. These shortcomings prevent workers from searching for and finding jobs they are well-suited for, limit the household arrangements that working families can feasibly pursue, and leave millions of eager jobseekers stuck on the outside of employment and without support for far too much time.

Unemployment programs need to be stronger but also simpler. UI compensation must reach more people between jobs and replace a greater proportion of prior income. Those insurance payments must last for more weeks while workers access the employment programs that make it easier to secure quality jobs. Unemployment insurance must be transformed into a source of meaningful economic security for all workers.