Include unemployment insurance reform in the labor policy arsenal

Unemployment is a much larger feature of our economy than much media coverage indicates. When only a fraction of workers are unemployed at a given time, the cumulative number of workers experiencing unemployment balloons quickly. Tens of millions of workers become unemployed every few years and face a serious dilemma: Will they be able to find quality jobs?

Most workers can’t because most states’ unemployment benefits aren’t enough to ensure financial stability. Covering food and electricity bills, let alone mortgage and car payments, becomes a challenge. In what amounts to a perverse waiting game, employers may offer lower wages because workers cannot come up with better, better offers. Time is money, and money is time.

New research confirms as much. A recent National Bureau of Economic Research working paper tracked the impact of permanent cuts to unemployment insurance benefits in seven states by linking them to business data. Listed and starting wages for jobs fell after benefit cuts took effect, and workers experienced a “substantial decline” in their bargaining power.

These results are not surprising. Unemployed workers struggle to gain any leverage in negotiations with employers when they have no security between jobs. Unemployment Insurance (UI) is insurance in name only without eligibility for adequate benefits. Improving the level of investment in unemployment programs will establish better worker bargaining power and fiscal stability. People could spend time looking for a good fit.

Unfortunately, UI improvements are often overlooked. Despite state programs’ paltry benefit levels and more than 1 million unemployment cases annually, policymakers are not pursuing reforms with the necessary urgency.

On average, unemployment benefits replace only 40 percent of former earnings. Still, even that poor rate paints a rosier picture than the full, troubling reality. Because so few can access benefits — slightly more than a quarter of unemployed workers receive UI nationally — the average unemployed worker received more than $0 in weekly benefits in just two states (Minnesota and New Jersey) in the first quarter of 2022. More than half of the unemployed workers in all but two states have received no benefits.

Furthermore, states often place strict caps on benefits, meaning that middle-class UI recipients may receive less than 40 percent of prior income. For example, an unemployed worker in Arizona who was earning $70,000 per year would only be covered at 18 percent of their income level. With unemployment insurance so weak, unemployed workers cannot remain financially stable.

The federal epidemic program has shown positive potential for improved and expanded unemployment insurance. Larger eligibility and benefit sizes gave workers more flexibility to reject subpar job offers and give up a harmful work environment, an invaluable source of health and financial security. Strong, albeit temporary, unemployment benefits were a real pandemic success story.

But we need more than temporary fixes in times of serious decline. Consider: The same amount of unemployment occurred during the pre-pandemic phase of Trump’s presidency — a period known for its low unemployment rate — that was between March 2020 and September 2021 (the months when the pandemic UI was initially passed and then expired). Even in good economic conditions there is high unemployment. Leaving unemployment programs untouched until the next crisis hits puts the livelihoods of millions more workers at risk. That’s why we need to make unemployment insurance expansion a permanent part of a strategy to improve labor outcomes.

There is too much reliance on tight labor markets alone to boost workers’ fortunes. Workers have a slight edge as employers bid against each other for employees. However, there is a limit to how much that competition can help. Employers are still overwhelmingly in the driver’s seat, and those favorable market conditions, which have helped enable recent labor efforts, may soon disappear.

Without good income security between jobs, many will continue to settle for less. Sometimes the best counter to excessive employer power is to give workers a period of financial safety while they look for a new job. Businesses must feel pressure to raise employment standards or risk losing hard-working employees.

To make that vision viable, we need to improve unemployment insurance. Our UI system – a complex set of state systems – is a porous mess. Until benefits improve, workers will continue to be relegated to poor pay and bargaining power. Unemployment is a serious obstacle for workers, but with strong unemployment insurance, it can be used as a tool for the welfare of workers.

Photo credit: iStock

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