Layoffs Flood a Weakened Unemployment System

What safety net? Decades of revision have cut the number of workers eligible for unemployment insurance, as well as the benefits they get

As the ranks of the unemployed surge, worker advocates and some economists are worried that the safety net for those cast into joblessness may be ill-equipped to handle the toll rising in the current recession. That system has not kept pace with demographic shifts in the work force, they argue, and leaves too large a percentage of workers ineligible for benefits. Just 37% of jobless U.S. workers are covered by unemployment insurance, down from 42% during the 1981-1982 recession and 50% during the 1974-75 downturn.

"When only 4 in 10 have access to a safety net, that safety net is pretty weak," says Sharon Parrott, senior policy analyst for the Center for Budget Priorities, a research and advocacy group in Washington. "The unemployment insurance system hasn't kept up with changes in the workforce. The recession is hitting at a time when most workers don't have a basic safety net when they lose their jobs."

Many economists and analysts agree that the U.S. unemployment insurance system needs to be fortified to cope with the depth of this recession. In addition to changes in the system over the past several decades, the jobless have fewer resources to cushion the impact of a lost position. "The unemployed are in a corner now," says John Challenger, chief executive officer of Chicago outplacement firm Challenger, Gray & Christmas. "They've run out of home equity, any savings they had in the stock market have been hammered, and consumer credit has dried up."

jobless benefits shrank dramatically

As companies continue to slash jobs, pressure for a policy solution is mounting. On Dec. 5, the government reported that the U.S. lost 533,000 jobs in November— since December 1974—lifting the official unemployment rate to 6.7%. Factoring in discouraged workers who have stopped hunting for jobs and part-timers who can't find full time work, unemployment is closer to 13%.

The system for insuring the unemployed was created in 1935 as part of other New Deal programs designed to help break the Great Depression. Because of demographic and policy shifts, the program now covers a smaller proportion of jobless workers than in the past. Americans today receive a maximum of 39 weeks of unemployment benefits, down from 65 weeks in the 1970s, for example. The average weekly benefit is $293, and replaces just over a third of the average worker's weekly wage.

President-elect Barack Obama is advocating a massive stimulus, including job-creation programs in renewable energy and infrastructure projects—a call he reiterated Dec. 6 in his weekly radio address. But those solutions aren't rapid fixes, while aid to the unemployed provides a quick injection of cash into the economy. Each government dollar spent extending unemployment benefits yields $1.64 in gross domestic product and a temporary dollar increase in food stamps triggers a $1.73 return, says Mark Zandi, chief economist and co-founder of Moody's, a subsidiary of Moody's Corp. (MCO). "The bang for the buck is very high," he says.

The Unemployment Insurance Modernization Act

In June and again in November, Congress voted to extend unemployment insurance benefits for 13 weeks on top of the standard maximum of 26 weeks. But these emergency measures may not suffice with the unemployment rate continuing to rise.

Economists predict the official rate will rise to at least 8% in 2009—and possibly as high as 10%. "The [unemployment insurance] system is there; it just needs more money," says Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business.

Other economists worry about the U.S. deficit and say government support potentially dulls incentives to look for work. Yet the need for an adequate system is widely recognized. "If it enables people to stay in their homes, keep up with debt, or look for another job, it's all to the good," says Dan Seiver, a finance professor at San Diego State University.

To that end, legislation that has passed in the U.S. House could become part of Obama's major stimulus package. The Unemployment Insurance Modernization Act would provide $7 billion in incentive funding for states to cover more than 500,000 workers who now don't qualify for benefits. The measure provides $500 million for states to administer the program.

The unemployment insurance system, jointly financed and administered by the federal and state governments through employer payroll taxes, became more restrictive during the 1980s. In the name of cutting the size of government, revisions made it harder and more expensive for states to borrow from the federal government to meet their unemployment insurance needs.

Beginning in 1982, states were required to repay loans from federal unemployment trust funds with interest. This and other policies gave states incentives to tighten eligibility requirements and restrict benefits. As a result, steady part-time workers who have been laid off and are seeking new part-time work are ineligible for unemployment benefits in some states.

outdated rules disqualify many

Other changes further chipped away at benefits. In 1986, unemployment benefits started being taxed. States also were required to reduce or eliminate unemployment insurance payments to those receiving pensions or Social Security payments. The current system also renders many low-wage workers ineligible for unemployment benefits.

To qualify, a claimant must have earned a minimum amount of money specified variously by each state. But because rules in many states were set in the pre-computer era—before access to earnings data was readily available—laid-off workers' most recent quarter of employment does not count in 30 states, and many low-wage workers thus fail to meet minimum-income levels required to qualify for benefits. A Government Accountability Office report in 2007 found that low-wage workers were twice as likely as higher-paid earners to become unemployed, but only one-third were as likely to collect benefits. Freelance or contract workers—whose ranks have increased in the past decade—also do not qualify for government assistance when they are out of work.

Meanwhile, other layers of the safety net have become less available to the unemployed. The current recession is the most severe since the 1996 welfare reform legislation that reduced government assistance to poor families.

Prior to those reforms, 80% to 85% of very poor families qualified for public Aid to Families with Dependent Children programs, commonly known as welfare.

Now the program, renamed Temporary Assistance for Needy Families, provides benefits to only 40% of this population. "Unemployment insurance and food stamps act as stabilizers in a downturn," says Maurice Emsellem, policy director of the National Employment Law Project, an advocacy group for low-wage workers in Washington. "The weaker [programs] are, the more families fall into poverty. That deepens the recession."

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