Job seekers attend the JobNewsUSA.com South Florida Job Fair on June 26, 2024 in Sunrise, Florida.
Joe Raedle |
Renewed fears of a recession in the US have brought unemployment into focus.
However, the system that workers rely on to receive unemployment benefits risks collapsing in the event of another economic downturn, as it did during the Covid-19 pandemic, experts say.
“The country is absolutely not prepared” for the next recession, says Michele Evermore, a senior fellow at the Century Foundation, a progressive think tank, and former deputy director for policy in the U.S. Department of Labor's Office of Unemployment Insurance Modernization.
“In fact, we are currently in an even worse situation,” she said.
Unemployment insurance provides temporary income support to laid-off workers, helping to support private consumption and the U.S. economy as a whole during times of downturn.
The pandemic has exposed “major cracks” in the system, including “massive technology failures” and an administrative structure that is “ill-equipped” to pay benefits quickly and accurately, according to a recent report by the National Academy of Social Insurance.
There are also wide differences among the states that administer these programs in factors such as benefit levels, duration and eligibility, according to the report, which was written by more than two dozen unemployment insurance experts.
“The pandemic has exposed long-standing challenges to the UI program,” said Andrew Stettner, director of the Department of Labor’s Office of UI Modernization, during a recent webinar on the NASI report.
The US unemployment rate was 4.3% in July, still far from its peak during the pandemic. It is low by historical standards, but it has gradually increased over the past year, fuelling rumors of an impending recession.
Policymakers should address the system’s weaknesses in good times “so that it can perform even in bad times,” Stettner said.
Why unemployment insurance failed
Already at the beginning of the pandemic, unemployment rose explosively.
In April 2020, the national unemployment rate was nearly 15 percent, the highest since the Great Depression, the worst economic downturn in the history of the industrialized world.
At the beginning of April 2020, the number of applications for unemployment benefits peaked at over six million; before the pandemic, there were around 200,000 applications per week.
According to experts, the states were poorly prepared for the flood.
Meanwhile, state unemployment offices were tasked with implementing a series of new federal programs enacted by the CARES Act to improve the system. These programs increased weekly benefits, extended their duration and provided help to a larger pool of workers, such as those in the gig economy.
Later, states had to take stricter measures to prevent fraud when it became clear that criminals, attracted by higher social benefits, were embezzling funds.
The result of all this: Thousands of people received their benefits with significant delays, placing a huge financial burden on many households. For others, it was almost impossible to reach customer service representatives who could help them.
Years later, the states have not yet fully recovered.
For example, the Labor Department generally considers benefit payments to be timely if they are made within 21 days of filing for unemployment benefits. This year, about 80% of payments were made on time, according to the agency, compared with about 90% in 2019.
It is imperative to build a system that is needed “for the worst phase of the economic cycle,” said Indivar Dutta-Gupta, a labor market expert and fellow at the Roosevelt Institute, during a recent webinar.
Possible areas for improvement
The experts who wrote the National Academy of Social Insurance report identified many areas where policymakers need to make improvements.
These included administration and technology. States were at a 50-year low in funding at the start of the pandemic, leading to “cascading failures,” the report said.
Today's system is largely funded by a federal tax on employers of $42 per worker per year. The federal government could, for example, choose to increase that tax rate, the report said.
Raising such funds could help states modernize outdated technologies, for example by streamlining mobile access for workers and allowing them to access portals 24 hours a day, seven days a week. It would also make it easier to pivot in times of crisis, experts said.
Funding is the “biggest trap” that has led to government systems “really falling apart,” Dutta-Gupta said.
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In addition, policymakers could consider more uniform rules for the duration and amount of benefits and who is eligible, said Evermore, one of the authors of the NASI report.
States use different formulas to determine factors such as eligibility and weekly benefit payments.
According to U.S. Department of Labor data, the average American received $447 per week in benefits in the first quarter of 2024, or about 36 percent of their weekly wage.
But benefits vary considerably from state to state. These differences are largely due to benefit formulas, not wage differences between states, experts say.
For example, the average benefit recipient in Mississippi received $221 per week in June 2024, while in Washington and Massachusetts states they received about $720 per week, according to Labor Department data.
In addition, 13 states currently provide benefits for less than a maximum of 26 weeks or six months, the report said. Many are calling for a 26-week standard in all states.
Various proposals have also called for an increase in weekly support amounts, for example to 50 or 75 percent of lost weekly wages, as well as the provision of additional funds for each dependent.
There are reasons for optimism, Evermore said.
Senate Finance Committee Chairman Ron Wyden (D-Oregon), ranking committee member Senator Mike Crapo (R-Idaho), and ten co-sponsors proposed bipartisan bills in July to reform certain aspects of unemployment insurance.
“I'm pretty encouraged right now” by the will of both parties, Evermore said. “We need something, we need another big deal before we get into another downturn.”
Correction: Andrew Stettner is the director of the U.S. Department of Labor's Office of UI Modernization. An earlier version misstated his title.