New Alabama Unemployment Insurance Law Makes Part-Time Work Pay

On May 12^th, Alabama Governor Robert Bentley, a Republican, signed legislation that provides unemployment insurance claimants with greater incentives to try part-time work.

As a rule, workers don’t have to be totally unemployed to receive jobless benefits. Like every state, otherwise eligible workers in Alabama can receive unemployment insurance (UI) to make ends meet during periods of partial unemployment. Partial unemployment occurs when unemployed claimants pick up part-time work while they look for a suitable full-time replacement. Employees whose usual hours and earnings are reduced because of a business slowdown may also receive benefits, but typically only if the cut in hours and wages is substantial.

States use different formulas to calculate partial benefit amounts. In general, workers can claim partial benefits as long as their wages from part-time work are less than the benefit they would receive if totally unemployed. This is the case in Alabama, along with an estimated half of states. In addition, most states effectively ignore a portion of wages when calculating the final payment, meaning the state’s program doesn’t deduct this amount, known as an earnings disregard, from the full benefit. A minority of states disregards a low, fixed amount; otherwise, states usually define it as a portion of benefits or part-time wages. The lower the disregard, the higher the amount of wages that’s deducted (and vice versa).

At just $15, Alabama has the distinction of having the lowest earnings disregard of 52 out of 53 UI jurisdictions (New York State doesn’t disregard any wages at all). This means that part-time wages greater than $15 are deducted from a claimant’s benefit. So, claimants earning more than $15 can take home their wages plus whatever’s left over after subtracting any wages above $15 from their full benefit. It’s not exactly a dollar-for-dollar reduction, but it comes close.

Crucially, under the new legislation, Alabama will now disregard part-time wages worth one-third of a claimant’s full benefit. To better understand the significance of this change, consider the following example featuring an average claimant in Alabama, eligible for a full benefit of $215. She finds a part-time job paying $200 per week. Under current law, were she to accept the job, her total income would be $230 (reflecting a partial benefit of $30 plus $200 in wages), just $15 greater than what she would receive by staying totally unemployed. Under the new law, her income would rise to $287 (reflecting a partial benefit of $87 plus $200). The following table breaks it down.

By raising the earnings disregard, Alabama legislators are acknowledging the tough choice facing the state’s unemployed claimants: if presented with the opportunity to work part time and take home just a tiny fraction more than they would by claiming full benefits, they may decide to turn down the job and continue receiving full benefits. This adverse incentive is evidenced by the fact that just 3.5 percent of regular UI payments in Alabama over the last five years were for weeks of partial unemployment, compared to 10 percent nationally.

When structured properly, partial benefits encourage claimants to try part-time work while they look for a full-time job because they come out financially ahead. Their reduced benefits supplement their part-time wages. They maintain stronger connections to work, which may better position them for job opportunities in the future.

Long-term unemployment is stubbornly high in Alabama. According to the Bureau of Labor Statistics, the percentage of the state’s unemployed who were out of work for longer than six months in 2014 was more than twice the level in 2007 (39% versus 18%). The rate at which claimants exhaust their benefits before finding a job is still 11 percentage points higher than the pre-recession rate (37% versus 26%). Given the consequences associated with long-term unemployment, including material hardship, poor health, and a lower probability of reemployment in a good job, states should be taking steps like this to prevent long spells out of work.

With a maximum benefit of just $265—the fifth lowest of all UI jurisdictions—Alabama’s UI program is far from exemplary. But state legislators and Governor Bentley deserve recognition for this small but significant step forward on behalf of the state’s unemployed, especially given the UI program cuts elsewhere in the region. Legislators in the eight other states where the earnings disregard is a low fixed amount should follow Alabama’s lead.

In general, states should re-examine their partial formulas to ensure that definitions of partial unemployment capture the range of available part-time work opportunities in the state and that claimants are not financially penalized when they choose to work. For many people who can’t find a job similar to what they lost, taking a part-time job with the hope of it eventually becoming full time, or just to stay connected to the labor force, is the kind of action states should encourage.