States Stuck with Unemployment Insurance Mess

June 27, 2011

Unemployment insurance is primarily the charge of state governments, but lately it has developed into an unhealthy relationship with Washington that has become unaffordable.  To restore some balance, Republicans in Congress are proposing to give states more flexibility in how they spend federal unemployment dollars.  Democrats call the plan an end to federal unemployment subsidies as most people know them, says the Wall Street Journal.

  • As part of the 2009 stimulus bill Congress agreed to subsidize all 13 weeks of extended benefits and gave states $7 billion to expand their eligibility.
  • Congress has since funded an additional 60 weeks of "emergency" benefits, for a total of 99 weeks.
  • The most Congress had previously extended benefits was up to 33 weeks during the early 1990s.
  • The catch is that states now can't reduce their weekly benefit amounts or eligibility.
  • The only real options for states whose unemployment trust funds are running dry is to take out loans or raise taxes on employers.

Meanwhile, more evidence has arrived that jobless subsidies are a disincentive to work.  

  • A recent report by Chicago Federal Reserve economists Luojia Hu and Shani Schechter indicates that benefit extensions account for a roughly 1 percent increase in the unemployment rate.
  • They calculate that between 10 percent and 25 percent of the recent decline in unemployment is due to people exhausting their benefits.
  • Allowing the extended emergency benefits to expire, they conclude, could help reverse their adverse effects on employment.

Source: "The Jobless Insurance Mess," Wall Street Journal, June 15, 2011. Luojia Hu and Shani Schechter, "How Much of the Decline in Unemployment is Due to the Exhaustion of Unemployment Benefits?" Chicago Federal Reserve, July 2011.

For text:

http://online.wsj.com/article/SB10001424052702304066504576343734042298022.html

For study:

http://www.chicagofed.org/webpages/publications/chicago_fed_letter/2011/july_288.cfm

 

Browse more articles on Tax and Spending Issues