Are State Unemployment Systems Still Able to Counter Recessions?

Every Thursday, the U.S. Labor Department releases data on initial claims for unemployment insurance (UI). In tandem with the overall unemployment figures published the first Friday of every month, these data have long been considered key indicators of the nation’s economic health.

Recent research, however, has identified a disturbing trend: workers are both applying for and receiving UI benefits at much lower rates than they have in the past, even compared to comparable points in previous economic cycles.

To the extent that these lower rates are the product of legislative and administrative hurdles—policies intended to discourage application for and receipt of benefits—it is time to consider whether states are prepared to withstand future recessions.

Introduction

The share of eligible jobless workers who actually apply for and receive unemployment insurance—referred to as the “take up” rate—is important in three ways. First, and most obviously, it is important that people have access to needed benefits so that they can make ends meet when they find themselves involuntarily unemployed. Second, these benefits are important to the broader economy, serving both as stabilizer and stimulus when there is a financial downturn. Finally, a stable take-up rate is important for understanding and interpreting economic trends. When policy decisions drive the take-up rate downward, it can rob analysts of an important tool in understanding the economy.

This paper seeks to examine the declining take-up-rate trend; the intersection of take-up rates and recipiency; and the need for policy changes that would increase UI take-up and recipiency for workers who have earned these benefits. These are necessary in order to maintain the reliability of UI as a counter-recessionary tool and also the validity of initial claims data as an economic indicator.

Understanding Recipiency and Replacement Rates

An important metric that intersects with take-up is the recipiency rate—the overall percentage of jobless workers who are receiving UI benefits. Workers may take-up benefits but lose them later because of continuing eligibility requirements, affecting overall recipiency. Another important metric to understand is the replacement rate—that is, how much income unemployment insurance replaces.

In December 2017, we published Closing Doors on the Unemployed, an extensive examination of the dramatic decline in UI recipiency since the Great Recession. We found that states, faced with the challenge of replenishing diminished UI trust funds, chose cutting benefits over replenishing those funds as the means to restore solvency. This approach ignores the reality that entering a recession with an underfunded UI trust fund is a highly unwise and substantial risk for any state; cutting benefits to get to solvency is certainly the wrong avenue to take when preparing for a recession.

Entering a recession with recipiency and replacement rates that are too low to provide economic stimulus is also a significant risk. A major policy goal of the UI system is to maintain economic activity levels during downturns by giving involuntarily unemployed workers enough spending power to keep their families and communities afloat. Reducing both the recipiency and the purchasing power of these benefits discourages people from applying at all, and these factors combined erode more than the quality of individual lives; it is dangerous for the entire community.

[1] Many states have adopted alternative base periods to establish eligibility for workers who do not meet eligibility under the normal base period.

[2] Wayne Vroman, Unemployment insurance recipients and nonrecipients in the CPS, in Monthly Labor Review (Washington, DC.: Bureau of Labor Statistics,, 2009)

[3] Alix Gould-Werth and H. Luke Shaefer, Unemployment Insurance participation by education and by race and ethnicity, in Monthly Labor Review (Washington, D.C.: Bureau of Labor Statistics, 2012)

[4] United States Government Accountability Office, UNEMPLOYMENT INSURANCE: Low-Wage and Part- Time Workers Continue to Experience Low Rates of Receipt, (Washington, D.C.: Government Accountability Office, 2007)

[5] Stephane Auray, David L. Fuller, and Nicolas Lepage-Saucier, Why Do Half of Unemployment Benefits Go Unclaimed?, (2018)

[6] https://oui.doleta.gov/unemploy/bqc.asp Table IPIA 2017 Improper Denials by Cause

[7] https://oui.doleta.gov/unemploy/bam/2007/bam-cy2007.pdf pp. 15-17

[8] Vroman, Unemployment insurance recipients and nonrecipients in the CPS

[9] Gould-Werth and Schaefer, Unemployment Insurance participation by education and by race and ethnicity, p. 32

[10] Auray, Fuller, and Lepage-Saucier, Why Do Half of Unemployment Benefits Go Unclaimed?

[11] Auray, Fuller, and Lepage-Saucier, Why Do Half of Unemployment Benefits Go Unclaimed?, p. 2

[12] United States Government Accountability Office, UNEMPLOYMENT INSURANCE: Low-Wage and Part- Time Workers Continue to Experience Low Rates of Receipt

[13] Auray, Fuller, and Lepage-Saucier, Why Do Half of Unemployment Benefits Go Unclaimed?

[14] Dante Deantonio, Why Are Unemployment Insurance Claims So Low?, (New York: Moody’s Analytics, 2018)

[15] George Wentworth, Closing Doors on the Unemployed, (New York: National Employment Law Project, 2017)

[16] Gary Burtless, When the next recession hits, will unemployment benefits be generous enough?, (Washington, D.C. Brookings Institution, 2018)