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Regular unemployment insurance (UI) benefits are paid from reserves held in state accounts at the U.S. Treasury. The Great Recession exhausted the majority of UI reserve accounts, and not all states have rebuilt reserves. We examine the adequacy of current state and systemwide UI reserves to weather a mild, moderate, or severe recession in the coming months. Our results suggest that a recession as severe as the average of those occurring since 1975 would cause 18 states to exhaust UI reserves. Our simulations account for the fact that several states have cut benefit generosity since the Great Recession ended. Results suggest that despite federal incentives for forward funding, reserves are insufficient in many states. By accepted standards, state benefit provisions are not excessive, but state-imposed constraints on financing make the system slow to recover from debt. We suggest modest actions for UI financing reform.

We present a graphic case for unemployment insurance (UI) program reform. Through a series of illustrations summarizing historical trends, we show how the UI system has diverged from its intended purposes. Our figures show the decline of the program in addressing its essential aims of paying adequate unemployment compensation during involuntary unemployment and providing reemployment services. We illustrate the big differences in UI programs that have emerged because of the broad discretion afforded states to determine benefit generosity. We also illustrate declines in the financial means for providing benefits and reemployment services and a widening divergence among states in the quality of UI programs. Our concluding section presents a list of reforms that would restore UI as a pillar of social insurance and the labor market.

Unemployment insurance experts lament the low Federal taxable wage base (TWB), last increased to $7000 per worker in 1982. The Federal TWB sets only a system minimum and by 2014 all but two states had TWBs that exceeded the minimum, opening up state TWB choice for study. States do align TWB with state payroll earnings. Indeed TWB/WAGE ratios within states have been remarkably stable for decades, though the ratio varies dramatically across states. Critics seem especially concerned about the tax regressivity of low TWBs, but the hypothesis that more progressive states choose less regressive (higher) TWBs is flatly rejected by the data. Earlier UI analysts focused on employer insurance equity, and the resistance of low cost, high-wage (stable) employers to subsidizing high cost, low-wage (unstable) employers. These analysts provided convincing evidence that (i) employers believed this to be the key issue, and (ii) the TWB did redistribute the insurance premium burden in the hypothesized direction. Across states – wage levels constant – economies characterized by greater income inequality and a preponderance of large (low turnover) firms are associated with lower TWBs. Apparently critics were right to imagine a link between wages and the TWB, but ignored the fact that this matching could be done better across location.

This study traces the origin and evolution of the partnership between the employment service and unemployment insurance programs in the United States. We examine objectives of the framers of the Wagner-Peyser and Social Security Acts that established these programs. Using primary sources, we then analyze early actions of the architects of social insurance to facilitate cooperation between the two programs to meet economic exigencies, grapple with political cronyism, and surmount legal barriers. We also discuss factors that caused changes in the employment service-unemployment insurance partnership over time. We identify reasons for the erosion in cooperation starting in the 1980s, and explain why ever since there has been a continuous decline in service availability. Reviewing evidence on the effectiveness of in-person employment services for unemployment insurance beneficiaries, we suggest ways to revitalize the employment service-unemployment insurance partnership. We explore the source of Wagner-Peyser Act funding, how it was formalized, then eroded, and how it can be renewed.

Regular state unemployment insurance (UI) benefits are paid from state reserves held in unemployment trust fund accounts at the U.S. Treasury. Employers covered by the federal-state UI system make contributions to reserve accounts based on taxable wages. The federal government provides incentives for forward funding of benefits to support UI as an automatic macroeconomic stabilizer in the economy. However, the Great Recession exhausted UI reserves for the majority of states, and not all of them have yet replenished those reserves. Based on patterns observed over the past 40 years, in this paper we simulate the effects on state and systemwide reserves supposing that a mild, moderate, or severe recession emerges in the coming months. Our results suggest that even a moderate recession would cause a majority of states to exhaust UI reserves and be forced to borrow to pay regular UI benefits. We note that recent experience with federal funding of extended and emergency benefits may have contributed to the current state UI financing posture, and we suggest that the taxable wage bases are insufficient. The UI system exists to help involuntarily jobless Americans while they are between jobs. By accepted standards of adequacy, benefit provisions are not excessive, but limits in the financing system make it slow to recover from debt. State reserve funds have not yet reached levels sufficient to weather another economic storm.