Reforming Unemployment Benefits for After the Pandemic

Share  Tweet
An illustration of the superdole

In the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March, Congress guaranteed an extra $600-per-week “booster shot” for unemployment benefits in every state. This supplement to unemployment insurance (UI) will end after July 31, 2020, but could be extended. Four Republican senators threatened to delay the CARES Act because of the chance that with $600-per-week extra, many workers could receive more money than they had from their jobs. Senator Bernie Sanders (I-VT) made a passionate counter, promising to file an amendment blocking stimulus money for corporations unless the Republican senators dropped their proposal to reduce the UI supplement.

If someone gets more from UI than they earned from their job, they weren’t receiving a high-enough wage to begin with. But there is more at stake in the fundamental design of UI benefits, and the details of that design lend weight not only to the “booster shot” as good policy, but also to the imperative for systemic change.

To start, understanding why the unemployed should get an added $600/week requires knowing about replacement rates: the percentage that unemployment insurance makes up for the average weekly wage in a state. Every state has a different replacement rate based on their decisions around the minimum and maximum benefit. No state before COVID-19 replaced even 50% of their average weekly wage. The booster shot was intended to ensure that, on average, every state’s UI benefits replace at least 100%. Ella Koeze in The New York Times broke down the numbers: the average unemployment benefit across the country is $371.88, which replaces 38% of the average weekly wage; if you add $600, the weekly benefit replaces about 100% of the national average.

In most states that extra money would produce a replacement rate above 100%, and in any state one could coincidentally receive more than they earned. This was the target of Republicans’ criticism, which reflects conservative state governments’ ideological investment in a weakened, bare-bones UI system.

For example, Florida is a Right-leaning state that pays claimants a pittance. Its minimum benefit is $189.16, its maximum benefit is $275, and the duration for benefits is twelve weeks (most states have a twenty-six-week duration). Before you consider if cost-of-living explains the low numbers, the Bureau of Labor Statistics reports that Florida’s average weekly wage in 2019 was $955! And the state imposes bureaucratic hurdles for claimants on purpose. The National Employment Law Project found that less than 1 in 8 unemployed people in Florida received unemployment benefits in 2015 because of technicalities that would not impede claimants elsewhere. Until 2014, one requirement for UI benefits was a math, reading, and research skills test. Even during COVID-19, Florida has remained draconian as less than 22% of claims filed since March 15 have been paid out.

Florida is not an exception to a rule of stingy, conservative UI systems. According to a January 2020 study by Yu-Ling Chang, a professor in Berkeley’s School of Social Welfare, there was a statistically significant relationship between conservative state governance (measured by political scientist William Berry’s ideology score) and UI systems that provide inadequate benefits, have insufficient financing, and are difficult for applicants to access. This is by design: conservatives argue that involuntarily unemployed people will lose incentive to quickly find work unless their benefits are minimal and cannot be obtained quickly, if at all. Published before COVID-19, Chang had a cautionary tale: “[M]ost American workers are residents of states with frail UI systems and declining social protection. The overall downward social protection signals that the American UI system is under-prepared for the next economic recession, thereby exposing unemployed workers to the risk of economic insecurity.”

But in the wake of COVID-19, significant reforms to UI systems are essential. Some of the changes proposed here would institutionalize the principle of the booster shot – ensuring that the laid off aren’t forced into desperation – and others would be more fundamental. A report this year from 3P laid out some moderate changes to start: benefits should be centralized in the federal government, which can prevent the ‘race-to-the-bottom’ from states having threadbare programs. The minimum benefit – guaranteed regardless of earnings or work history – should be set at the one-person poverty line for each state; in the 48 contiguous states, that would be $1,041-a-month, or $260/week. Note that this is already higher than what many claimants receive, but it must be coupled with a higher maximum benefit to ensure a more adequate replacement rate.

Other countries’ UI systems provide guidance that proves this goal is attainable. In Switzerland, workers are required to pay monthly into an unemployment fund, and claimants receive 80% of their salary from the previous six months with a maximum benefit of $11,000/month (this and all further amounts are in US dollars). The benefit is paid out by daily allowances, depending upon how many monthly contributions one has made: for instance, if you’ve made monthly contributions for a year, you can receive 260 daily allowances within a two-year period. The maximum benefit may seem large, but remember that Switzerland has the highest per-capita wealth in the world.

In Denmark, workers voluntarily participate in one of twenty-four unemployment funds that are privately-managed (mostly by unions) but state-regulated; the Danish government also disburses the benefits paid into those funds. The maximum benefit is equal to the the greater of $2,845/month or 90% of one’s previous salary. This is for the “full-time insured,” but part-time workers can receive up to $1,896/month. If you leave your job voluntarily, you have a three-week waiting period before collecting benefits; after three weeks, you have more than likely been unable to find better work. The system pays out less to unemployed youths under 25, but those who have completed their educations are entitled to a generous unemployment benefit for one year, even if they do not belong to a fund. Most Danes voluntarily contribute to these funds because they provide financial security, and the higher replacement rate is crucial to that outcome.

OECD statistics bear out that Switzerland and Denmark’s UI systems provide greater financial security than that of the US. Suppose a single person without children, in their second month of unemployment, previously made 67% of the average wage. In the United States, the average, net replacement rate in that scenario is 57%; in Denmark, it is 83%, and in Switzerland, it is 72%. Bear in mind that the OECD is calculating “net replacement rate,” which usually includes social assistance; a single person with children will have a higher rate in all three countries (though Denmark and Switzerland are still far ahead) assuming they receive other benefits eligible to them. But the percentages I listed here purposely do not include housing assistance. When housing assistance is included, the percentages for the US and Switzerland do not change, and Denmark’s rate increases by one percent.

Denmark’s system is voluntary, but they have last-ditch social assistance for people who decided not to pay into an “a-kasse” (unemployment fund). The monthly social assistance benefit for the unemployed is $1,742, and $2,313 for those with children, which Denmark’s The Local newspaper reminds readers is “hardly a luxury existence.” This smaller benefit incentivizes Danes to contribute to an unemployment fund, but even their last-ditch assistance is better than America’s ordinary UI.

While critics may argue that more generous UI creates a “moral hazard” that discourages work, Denmark and Switzerland still require claimants to be registered job seekers and look for new work. That alone makes it impossible for people to ‘refuse’ work on UI, especially once the benefits run out. But the COVID-19 ordeal demonstrates that if UI systems are overly concerned with incentivizing work, they will fail to provide the level of economic security that a just society needs.