Issue Brief

December 2001

Columbia University

The Clearinghouse On International Developments In Child, Youth and Family Policies

U.S. Unemployment Insurance: A Safety Net With Holes

Just released last week, the current rate of unemployment shows an increase from 5.4 to 5.7 percent, the highest rate in six years. Behind these numbers are 8.2 million persons who are currently out of work, many of whom are struggling to meet their daily expenses.

Unemployment insurance, which was designed for such hard times, offers an important safety net for those suffering the effects of the current recession and from the September 11th disaster. However, unemployment insurance rules are tight and many of the unemployed are ineligible, or get too little help. In late 2001, only 39 percent of those who were unemployed were eligible to receive benefits. Furthermore, when looking at other industrialized nations who have unemployment insurance programs, the American system falls behind and joins a small group of second-tier countries where fewer of the unemployed are covered, where the benefits are less generous, and where the period of time for necessary benefits is briefer.

In this Issue Brief, we will describe unemployment benefits in the United States. Because current United States unemployment insurance benefits are limited, we also summarize recent proposals for improving the U.S. system. Congress could improve provisions quickly. Finally, looking at the rest of the industrial world, we review prevalent practice and list some additional features Americans might want to explore.

Unemployment Insurance in the United States

Through the 1935 Social Security Act, unemployment insurance was created as a federal-state program to provide temporary and partial wage replacement to the involuntarily unemployed. A Federal Unemployment Tax (currently 6.2 percent of the first $7,000 paid annually to each employee) is largely returned to states that establish qualified programs. Of this, 5.4 percent goes to the states that in turn determine eligibility, benefit amounts, duration, and their tax structures. Some credit employers who have low unemployment experience by reducing their taxes. The federal part of the tax finances administration, loans to states that use up their funds, and half of an "extended benefits" program, described below.

Eligibility
A United States H.R. Committee on Ways and Means publication states that, "in order to qualify for benefits an unemployed person usually must have worked recently for a covered employer for a specified period of time and earned a certain amount of wages." Although 97 percent of all wage and salary workers are "covered", constituting 89 percent of the civilian labor force, only 38 percent of unemployed persons received benefits at a given time in 1999. The number has fluctuated in recent years between one-third and almost 40 percent. In late 2001 it was 39 percent when 4 million people were drawing benefits at the same time out of a covered labor force of almost 130 million.

If 89 percent of the civilian labor force is "covered" why then are so few Americans receiving benefits? The answer is that states have developed what a congressional report calls "diverse and complex methods for determining eligibility".

In general there are three major factors used by states to determine eligibility.

1. The amount of employment and earnings in the most recent base year or a high-wage quarter in that year. Most states require at least two quarters of work per year, with great variability in minimum required earnings. (For the minimum benefit in 1999, Nevada $600, Oklahoma, $4,280) Low earners often fail to qualify in some states even though they work enough hours, because they earn low wages or are "contingent" or part-time workers. Some of the people who lost jobs because of September 11, had not worked long enough to qualify; and the recently employed often fail to qualify.

2. Demonstrated ability and willingness to seek and accept suitable employment. Here, states are generally similar although they vary in the rigor of enforcement with regard to job preferences, transportation, and job "suitability".

3. Disqualifications, as defined by federal or state law. People who leave work voluntarily or are discharged for misconduct or the refusal of suitable work are not eligible. Beneficiaries must be ready and willing to accept work at once. If the unemployment arises from a labor dispute, there is no eligibility. Over one fourth of those "monetarily eligible" are disqualified for all these reasons.

At the end of 2000, 44 percent of the unemployed were workers who had lost their jobs. Some of them were ineligible for the reasons given above. Eight percent were new labor market entrants, 14 percent were job leavers and 35 percent reentrants. Many or most of those in the latter three categories did not qualify for benefits.

Cash Benefits
Persons who are eligible for unemployment benefits receive cash benefits. Weekly benefits are set by the states and generally reflect regional wage scale variations. They replace between 50 and 70 percent of the individual's average weekly pre-tax wage up to a state-defined maximum, so that 50 percent is closer to actual replacement. (see Table 1 for more detail) New York's 2001 maximum benefit of $405 was double the maximum of low-wage states. The maximum number of weeks of potential benefit duration in all states is 26 weeks, but some states award benefits for much shorter periods based on work records. If a family had no other income for a year, unemployment insurance benefits would leave that family's income far below the poverty threshold in all but a handful of places, even after 26 weeks of benefits. Moreover, some people do not qualify for the full 26 weeks. The average annual duration (except during prolonged downturns) is about 15 weeks, but many exhaust their benefits while still unemployed. In the year 2000, of 6.8 million who collected benefits, 2.2 million exhausted them while still unemployed. In January 2001, the average national weekly benefit was $231.27.

Ten states enhance minimum and maximum weekly benefit amounts by adding modest dependents' allowances. Massachusetts, the most generous, adds an additional $25 per week per child. Its weekly minimum benefit ranges between $27- 40 and its weekly maximum is between $431 and $646. Other states with dependents' allowances added to unemployment insurance benefits are Alaska, Connecticut, Illinois, Iowa, Maine, Minnesota, Ohio, Pennsylvania, and Rhode Island (the second most generous). Since 1987, unemployment benefits have been included in taxable income.

Extended Benefits
Since the 1970's there have been permanent provisions to extend the maximum benefit period for the long-time unemployed from 26 to 39 weeks. The "triggers" have evolved and been modified. The complicated details are not provided here. In general, unemployment rates of 5, 6, 6 ½ percent (depending on the length of time and comparisons with earlier periods) justify the additional 13 weeks financed half by the state and half by the federal government. Under more unusual circumstances, including an 8 percent unemployment rate, extended benefits may go for 20 weeks, bringing the total to 46 weeks.

As we write, Congress is considering a new type of 13-week extension for the present crisis but the proposal will not help laid-off, part-time or recently employed people. Under these restrictions, many laid-off employees in small businesses near New York City's ground zero may not qualify either, but they fortunately also have a "disaster" option as noted below.

Disaster Unemployment Assistance (DUA)
Disaster unemployment assistance according to a Department of Labor summary "provides assistance to individuals whose employment or self-employment has been lost or interrupted as a direct result of a major disaster and who are not eligible for regular state unemployment insurance." Unlike TANF, this benefit is an entitlement, administered by the state agency administering unemployment insurance and ensures benefits equal to the state's unemployment insurance benefit schedule. It comes into effect after presidential proclamation of a major disaster and continues for 26 weeks, if the unemployment continues.

Funds for this program are provided by the Federal Emergency Management Agency and the program is overseen by the Department of Labor. DUA has covered many September 11 victim-families since it also covers somebody who has become a breadwinner for a household because the previous provider has died or cannot work because of injury. It has covered Reagan National Airport workers laid-off as a direct result of the temporary closing of the airport and others affected by the sudden downturn in the local economy.

The ramifications of recent disasters create potential eligibility for DUA for some people in Connecticut, New Jersey, Maryland, and Virginia in addition to New York and the District of Columbia. It is estimated that a total of 37,500 in New York City are expected to receive benefits under the DUA.

Making Unemployment Benefits More Adequate in the Current Crisis
In addition to the 13-week extension and DUA, public officials and experts have developed proposals for federal action and financing along these lines:

Raise the minimum wage. At present, a full-time, full-year job at the minimum wage would not pay enough to qualify workers for unemployment insurance in some states.
Increase benefits levels, especially during a downturn when consumer spending helps toward recovery.
Change eligibility rules to allow contingent and part-time workers and those with only limited job tenure to qualify.
Create more inter-state equity. Those who are eligible for unemployment in some states do not meet the hour or earnings rules in others.

What Do Other Countries Do?

Countries cannot borrow social policies directly from one another most of the time. However it is often useful to ask whether experience elsewhere in the industrial world adds to one's own country's menu of options.

To begin with, only about one quarter of the world's unemployed have access to some kind of unemployment insurance. It takes a modern, developed, and robust economy to afford and to have the administrative capacity for an unemployment insurance program. In the words of the International Labor Organization, " for those who work in the rural or urban informal sectors, including 750 to 900 million underemployed workers …… there is hardly any protection at all."

By recent count, 69 countries in the industrial world had unemployment insurance programs, often but not always compulsory or economy-wide. Some impose a means test, some offer lump sum grants in addition to scheduled payments. Some guarantee lump-sum severance indemnities to discharged workers. The most generous countries are Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Luxembourg, Netherlands, Norway, Portugal, Sweden and Switzerland. The U.S. joins Australia, Canada, Ireland, U.K., New Zealand, and Japan in a second less-generous group, with fewer of the unemployed covered than in the first group and with benefit levels constituting lower replacement rates. U.S. replacement maxima are only slightly lower than Tier I, and with a briefer benefit duration. As noted in table 2.2 durations for up to a year is the most common period in Europe.

The leading countries, while more generous than the U.S., remain cautious about unemployment insurance because of possible work disincentives (as some research has suggested). In recent decades several countries have stressed "positive labor market policy", using unemployment insurance funds to create jobs, offer training, support mobility. And, during the 90's, as unemployment rose there was some benefit cut-back (duration and replacement rates) and tightening of eligibility. Some, in a move, which recalls U.S. "workfare", tie unemployment insurance to participation in training, as well as to acceptance of jobs that the benefits administration deems suitable, and to conducting very intensive job searches.

Without here attempting a review of many country variations, we do list a few features Americans might discuss:

Unemployment Assistance
Most high-level benefit countries offer a second tier of unemployment benefits called unemployment assistance. Among these countries are: Germany, Austria, France, and Ireland. As the insurance period ends, there is an easy transition to a means-tested cash benefit with a slightly lower replacement rate. The job search activity and rules continue, but this option offers a considerable grace period before one must turn to social or public assistance.

Benefit Duration (See Column 9 of Table 2)
These countries offer benefits covering long-term recessions. The United States' state 26-week maxima do not compare. The U.S. duration averages mask the termination numbers. The 13 weeks extensions occur only during high unemployment.

Benefit Maxima (See Table 2)
Even countries concerned about possible work disincentives offer more generous benefits.

Benefit Supplements for Dependants
Only 10 U. S. states offer such supplements, which are standard in much of the industrial world and are provided as additional flat rate benefits or an added percentage.

Special Provisions Covering Temporary and Seasonal Employees
This is not a general provision, but exists in a number of places; it addresses an important group of uncovered workers in the United States.

Special Coverage for Recent School Graduates
Whether through unemployment insurance, social assistance, or family allowances, a good number of countries, for example, Australia, Belgium, Luxembourg, offer modest economic help during the school-to-work transition if jobs are hard to come by. A number combine this with intensive counseling and training opportunity.

A Broader Financing Base
The U.S. unemployment insurance program is financed by a modest payroll tax. In many places, government and the insured also contribute. If the U.S. were to enact any of the proposed modifications, the current funding mechanism would need adjustment.

Conclusion:

The United States can and should be proud of what its unemployment insurance program has accomplished. For some of those who receive unemployment insurance, it is a valuable and important safety net. However, the current economic recessions and recent disaster calls attention to its holes and need for further improvement. When looking at ways of closings its holes, it is possible to look at other industrialized nations and at what options can be transferable. There are some useful ideas that could be considered, quickly enacted, and afforded.

The Clearinghouse on International Developments in Child, Youth and Family Policies provides cross-national, comparative information about the policies, programs, benefits and services available in 23 advanced industrialized countries to address child, youth, and family needs. For more information visit our website at www.childpolicyintl.org or call Tamara Cannon at (212) 854-9007. The Clearinghouse is funded by the W.T. Grant Foundation.

Still available upon request (and on our website) is our recent issue brief on Survivors Benefits. The Clearinghouse periodically sends updates regarding international developments in child, youth and family policies. If you know of someone interested in receiving these updates, please refer them to our website where they can register for our on-line updates. If you wish to be taken off our mailing list please contact us at childpolicyintl@columbia.edu.

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