Unemployment Benefit Expansions: A Guide for Policy Responses in the Wake of COVID-19
The Unemployment Insurance (UI) system replaces wages for workers who lose their jobs. The Department of Labor oversees the system, but states administer programs and set eligibility and benefit guidelines. In most states, unemployed workers are eligible to receive about half of their previous wages for up to about 26 weeks.
The UI system provides important financial stability for workers who lose their jobs and, in times of great economic downturn, it can minimize negative effects for firms across sectors by stabilizing Americans’ propensity to consume. Because states design and implement their own programs, reform to the UI system can serve as an important policy lever as policymakers consider stimulus options.
Amid coronavirus, unemployment threatens to reach as high as 20% according to the Treasury Department. During just the week of March 8–14, the first real week of COVID-19 related downturn, UI claims increased by 70,000, or 33%. Sharp changes to unemployment insurance systems are needed to stabilize the American economy, incentivize compliance with public health guidance, and keep American families financially secure.
What Tools Are Available
States are mostly empowered to design their UI systems as they see fit, controlling regulations about how long benefits last, when benefits kick in, benefit amounts, which workers are eligible for benefits, and requirements for keeping benefits. Even modest changes to each of these areas could translate to meaningful financial assistance for many unemployed workers over the coming months as businesses close or scale back operations in response to the COVID-19 pandemic.
Extending Maximum Benefit Weeks
In most states, unemployed workers are eligible for UI benefits for a maximum of 26 weeks — 10 states provide fewer than 26; Montana provides up to 30. Virologists expect mitigation efforts (e.g., business closures, expansions in teleworking, restriction of restaurants to take-out only service) to last 3–4 months, with the number of COVID-19 cases peaking in June or July. If a worker was laid off today, she would run out of benefits, in most states, in mid-September. At its peak in the Great Recession, the median duration of employment was 25 weeks. If 1) unemployed workers are unable to begin searching for work until restrictions on gatherings and business activity are lifted in four months, and 2) it takes half as long to find a job as it did in 2009, they’ll need at least a month more of UI benefits to sustain them to the first day of the new job, let alone the first paycheck. These are very rosy assumptions; COVID-19 threatens to wreak as much or more havoc among labor markets as the Great Recession did.
By extending benefit eligibility weeks, we can also extend the timeline for mitigation efforts. Workers will have more flexibility to observe public health instructions like social distancing and sheltering in place, allowing us to “flatten the curve” by spreading the case load out over a longer period of time.
There is precedent for expanding benefits amid a crisis. In 2008 and again in 2014, Congress implemented the Emergency Unemployment Compensation (EUC) program, which provided up to 53 weeks of additional benefits to individuals who had exhausted regular state benefits. Additionally, the Extended Benefits (EB) program provides up to 20 additional weeks when a state experiences high employment. During the Great Recession, in some states, unemployed workers became eligible to receive up to 99 weeks of UI benefits. Since all states are likely to experience high unemployment in the coming months, Congress should consider focusing on the EUC program. In the meantime, states can unilaterally increase their benefit week maximums.
Removing Benefit Waiting Periods
A one-week waiting period is often enforced for UI beneficiaries so that states have time to verify claims and collect any documentation from the employee and the employer. During this week, if in effect in the employee’s state, workers must meet the eligibility requirements (such as searching for work) and submit a weekly claim, but they do not receive any payment. The average weekly UI benefit is about $400. Forgoing seven days of UI benefits can cost a family of four about two weeks of groceries or 1/3rd of their monthly rent for a two-bedroom apartment. In some states, such as Georgia, there is a 2-week waiting period.
Several governors have announced they are removing this waiting period in their respective states, such as North Carolina, California, Wisconsin, and Ohio. All states should temporarily remove this waiting period to ensure recently unemployed workers are able to maintain financial stability during their transitions.
Increasing Benefit Amounts
Maximum weekly UI benefit amounts range from $235 in Mississippi to $790 in Washington. States vary in their calculations of benefit amounts, but it’s commonly a percentage of their earnings in the base period (typically the year before they were let go). Unemployed workers are typically eligible for about 50% of their previous wages, but not more than the maximum. For instance, if an employee’s weekly wages were $800 for the past year, he would receive $400 per week in UI benefits. However, if a Washington employee’s wages were $1,800 per week, she would only be eligible for $790 per week in UI benefits.
In some states, workers who previously made more than double the maximum are not high earners. For example, in Mississippi, to receive 50% of weekly wages without exceeding the maximum, a worker’s annual wages would need to be below $24,440; if that worker were the only earner in a family of four, they would be below the federal poverty line.
In order to offset the financial shock of unemployment millions of Americans are beginning to face, states should increase replacement rates and maximums. Both increases are needed in states with low benefit maximums, where even low- and middle-earners are hitting the cap, and thus receiving less than 50% of their wages.
States should temporarily increase replacement rates to 100% for the bottom 75% of earners. To achieve this simply, states can put a $1,500 weekly maximum in place. This ensures there is no negative effect on wages for the families who will struggle the most to pay rent and put food on the table after a job loss. These workers are the most likely to lose their jobs in the coming months as restaurants and retail shops close and telework operations expand.
Expanding Partial-Benefit Programs
To qualify for UI benefits in 22 states, workers must be entirely unemployed. However, 28 states and DC have implemented work share programs, which allow businesses to reduce employees’ hours without laying them off entirely, and UI benefits can fill the gap in wages. For example, if a restaurant that switched to only taking take-out orders reduced their staff’s hours by 50%, states would allow employees to collect 50% of the state’s weekly UI benefit amount. There is still a reduction in wages for employees in absence of an increase in replacement rates — for the 50% of hours worked, they’ll collect 100% of their wages, but for the 50% of hours reported on their UI claims, they’ll collect 50% of their wages, consistent with how UI benefit amounts are calculated.
Costs to states are theoretically the same in absence of work share programs. Following the previous example, the state would have to pay 100% of UI benefits for 50% of the staff at the restaurant, as opposed to 50% of UI benefits for 100% of the staff. However, part-time employment is generally more desirable to both states and workers than unemployment.
Additionally, work share programs can help employers retain their workers and workers retain their livelihoods. After all, part-time employment in a downturn can easily be reversed into full-time employment in an expansion. Since the cost of replacing workers is non-trivial, firms should reduce hours instead of entirely laying off employees when staff are willing and able to enter workshare programs.
Expanding the Pool of Eligible Workers
Because few states (11 and DC) have paid sick leave policies, it is incumbent on UI offices to fill wage gaps for uncompensated workers who need to take leave. Eligible workers should include those who have to quarantine themselves or who are unable to perform their normal duties because of risk or exposure, as well as those who need to take leave to care for a family member. Some states have taken steps to do this so far, such as Massachusetts.
Employees should not need to be ill or quarantined themselves to claim unemployment or paid leave related to coronavirus. States should enact policies to include caretakers of children who must take leave to be home as a result of school closures or workers who need to care for ill family members and/or other aging Americans displaced from nursing homes. Medical documentation should not be required to be eligible for leave paid for via UI benefits. Finally, remote work should not be considered a universal substitute by any employer or state for leave; caregiving will require some to take time off even when they’re personally healthy.
Removing Work Search Requirements
In many states, UI benefits are contingent on seeking work. Rules vary across states, but in many cases, UI regulations require claimants to make contact with a few potential employers or participate in a few job-search activities. While these regulations could be warranted in better economic circumstances, they are unreasonable and potentially harmful in the current context.
Few industries are in a position to absorb new workers right now, and in-person job searching activities (such as job fairs) directly defy public health guidance to socially isolate. Additionally, as COVID-19 spreads, states should not penalize unemployed workers who become too sick to look for a job. Rather than enforcing job search logs, states should be focused on quickly verifying claims and dispersing benefits to the influx of claimants.
Several states have removed these requirements in the last week, such as Wisconsin, Delaware, and Kentucky. Other states should follow suit immediately.
Funding and Feasibility
Economic uncertainty means uncertainty about costs of this proposal, but the changes I call for here are not cost-free. States and the federal government have signaled a willingness to spend aggressively on fiscal stimulus policies in the next month in many forms. Expanding UI benefits should be a top priority.
In the absence of an expansion of benefits or eligibility, the rise of the unemployment rate to 20%, and the maintenance of the ~$950 average weekly wage from Q3 of 2019, I estimate the total cost of UI benefits at about $391 billion. Below, I provide a few cost estimates using alternative assumptions:
- Scenario 1: If the wage replacement rate is increased to 100% (up to $1,500/week), the unemployment rate rises to 20%, and benefit eligibility periods are extended by 8 weeks (assuming everyone takes all 34 weeks): $620 billion.
- Scenario 2: If the wage replacement rate is increased to 100% (up to $1,500/week), the unemployment rate rises to 15%, 5% of workers who would otherwise be entirely unemployed participate in a 50% workshare program, and benefit eligibility periods are extended by 8 weeks (assuming everyone takes all 34 weeks): $584 billion.
- Scenario 3: If the unemployment rate rises to 15%, 5% of workers who would otherwise be unemployed are able to participate in a workshare program, 10% of workers take 5 weeks of leave paid for through the UI system, the wage replacement rate is increased to 100% (up to $1,500/week), and benefit eligibility periods are extended by 8 weeks (assuming totally unemployed workers take all 34 weeks and workshare workers take 26 weeks): $643 billion.
Even if UI programs are not expanded, states and the federal government would likely struggle to fill a $350 billion gap in funding for the UI system. Instead of simply plugging this hole, policymakers should think carefully and thoughtfully about how to ensure families can remain financially stable (and can comply with public health guidance) by including a sizable increase in funding for UI systems in fiscal stimulus packages. A $200-$300 billion increase is well-suited to achieve these goals.
Of course, expanding UI benefits is not a comprehensive solution to any of Americans’ current problems. Self-employed workers and workers in informal sectors will also need assistance if UI is not expanded to include them. Many families, regardless of employment status, will need financial assistance in the coming months. State and federal policymakers should ensure they increase funding and access for other social safety net programs, and consider policies like debt forgiveness and forbearance regulations, housing assistance, and stimulus payments that put cash directly in consumers’ pockets.
Federal policymakers can play an important role supporting this work. While interest rates are effectively zero, the Federal Reserve should loan money to states through the muni market to assist them with paying for UI expansions (and public health expenditures) among other fiscal stimulus measures. To help states pay for expanded benefits, Congress could classify UI benefits as non-taxable income, which would allow states to lower their benefit amounts by 10% without claimants seeing a reduction in net benefit amounts. Congress could also take on the burden of maximum benefit week extensions by enacting an EUC program so that states aren’t responsible for additional weeks of UI benefits at all.
Many of the proposed measures are not novel, having been enacted as Great Recession stimulus efforts, or implemented by states in just the last few days. Governors on both sides of the aisle have supported these measures, and political ideologies should not stand in the way of ensuring millions of Americans are able to afford basic necessities as unemployment soars in the wake of the COVID-19 pandemic.
Supported by concurrent federal changes, states are well positioned to make meaningful changes to their UI systems in the coming weeks that could benefit millions of Americans. They should start by ensuring everyone who needs UI benefits can easily access them for much longer periods than current rules allow. By relaxing eligibility regulations and increasing benefits, states will allow families to remain financially stable and will encourage compliance with public health guidelines in the coming months.
Elizabeth Pancotti is an economic researcher at Tufts University and the National Bureau of Economics. Her research primarily focuses on education, health care, and labor economics. She completed her BS in Economics at American University.