How to Solve Several UI Challenges at Once

Amid the ongoing public health and economic crises, jobless workers still need additional assistance to pay recurring bills, such as rent. Indeed, research suggests that the $600 weekly federal benefit bump has played an important role for both consumers and the broader economy, estimating a 29% decline in spending among unemployed households without the supplemental benefit.

Continuing the $600 supplemental benefit design, however, would result in five out of every six recipients collecting more from unemployment benefits than from returning to work, according to estimates from the Congressional Budget Office. Such an approach would be inequitable for those who remain in the workforce, and over time, could lead to reduced employment and slower economic growth.

COVID-19 has also heightened the administrative challenges that have long plagued state UI programs, delaying benefit delivery. Earlier this spring, a BPC survey of likely voters found that only 61% of those who had applied for UI (and were not aware of having been denied) had received their benefits.

Furthermore, outmoded administrative systems have generally shown to be incapable of implementing anything more sophisticated than a flat, across-the-board benefit adjustment, which has hampered the federal government’s options for enhancing state benefit levels during the crisis. Specifically, policymakers have been unable to calibrate supplemental UI benefits to wage replacement rates—to ensure total UI benefits do not exceed previous earnings.

These challenges are partially due to the fact that federal funding for UI administration has declined by 30% over the past 20 years (adjusted for inflation). States have had to make do with less funding, causing their technology systems to suffer. State UI systems need additional support to respond to this crisis and ensure dislocated workers efficiently receive their benefits.

Congress should supplement weekly benefits in a way that also provides states with federal funds to address their administrative challenges, and more broadly, support for their other COVID-related needs. As the President’s executive memorandum exhausts, we propose that each state receive funding equivalent to a weekly amount of $400 per worker on UI for the next six months. A portion of this allocation would provide a flat increase in weekly benefits, with the remaining funds going to states to first upgrade their UI administrative systems and then be available as general aid for other COVID-related expenditures. The proposal would operate in four steps:

1. The federal government would provide each state with a weekly funding supplement equivalent to $400 per worker on UI (hereafter referred to as “per worker”).
2. Each state would be required to use a fixed portion of the weekly $400 per worker funding to supplement state UI benefit levels. Specifically, each state would administer a flat, across-the-board benefit supplement that is set by the U.S. Department of Labor and equivalent to the amount needed to provide that state’s median-income unemployed worker with a 90% wage replacement.
3. After determining the portion of the weekly $400 per worker purposed towards supplementing benefits, states would be directed to use the remaining balance to upgrade their UI administrative systems and be subjected to performance measures.
4. Once a given state demonstrates that it has the ability to deliver benefits efficiently, any remaining balance would be available as general aid for the state to use as it wishes for other COVID-related expenses. For example, states could use these resources to shore up UI trust funds, which have come under pressure due to the unprecedented joblessness resulting from COVID-19.

Table A1 in the appendix details the resulting state-by-state weekly benefit supplement for workers. As the table shows, this funding formula would enable policymakers to tailor the weekly benefit supplements to reflect each state’s unique workforce and UI system. For instance, to provide 90% wage replacement for median-income workers in Arizona, $358.50 of the $400 per worker would be used as a flat weekly benefit supplement, with the remaining funds available for administrative system upgrades and then other COVID-related purposes. In Oregon, on the other hand, only $187.60 would be needed for the flat weekly benefit supplement to achieve a 90% replacement rate.¹

In total, we estimate that over the next six months the federal government would provide states with roughly $250 billion to supplement weekly benefits, update administrative systems, and, in turn, address other COVID-related needs.

This approach carries significant advantages for workers and the economy, as well as for states in need of critical upgrades to their UI administrative systems.

• Provides financial relief and economic support better calibrated to prior wages. Lawmakers originally enacted the federal $600 weekly supplement with the intention of replacing 100% of previous wages for the typical unemployed worker. However, due to the flat benefit design, lack of state-level variation, and unemployment disproportionately rising among low-wage occupations, the resulting UI benefits exceeded previous wages and non-wage benefits for the significant majority of eligible unemployed workers. By tying the federal supplement to the median wages of eligible unemployed workers in each state, our proposal would provide a benefit supplement over the medium term that is better calibrated to prior wages while supporting household finances and consumer demand, an important driver in economic recovery. Table A2 in the appendix compares UI wage replacement rates in each state under this proposal to the previous $600 supplement for low- (25th percentile), median- (50th percentile), and high- (75th percentile) income unemployed workers.
• Maintains simplicity for easy state implementation. State workforce agencies have repeatedly warned that their current administrative systems are incapable of efficiently implementing anything more sophisticated than a flat, across-the-board weekly benefit increase. At a time when delivering rapid financial relief is paramount, any new approach must fit this standard. While the supplement we propose would differ across the country, the Department of Labor would identify for each state the portion of their weekly $400 per worker to be disbursed as benefits. As a result, every state would only be required to implement its own singular, across-the-board benefit adjustment.
• Continues to treat states equally. One of the political drawbacks of implementing a benefit supplement based on a target wage replacement rate is that it would provide larger federal assistance to states that have less generous UI systems. By allowing all states to keep the balance of the $400 per worker benefit and use the remaining amount to update UI administrative systems (and allocate to other COVID-related needs once those systems are updated), this proposal would not disadvantage states with already generous benefit levels.
• Provides additional resources and accountability for UI administrative systems. Even before the pandemic, many state UI programs were underfunded and failing to adequately serve their workforces. COVID-19 has shone a spotlight on these shortcomings and the need for reform. Our approach would provide resources for upgrading state UI administrative systems and incentivize states to make these investments efficiently by holding them to performance measures while offering flexibility to use the funds for other priorities once the standards are met. A rough analysis suggests that after paying out supplemental benefits, states would have a balance of $79.2 billion available to improve their administrative systems. For comparison, the federal government currently provides roughly $2.5 billion per year for state UI administration. (For a more detailed breakdown of weekly funding provided to each state for administration and other COVID-related needs, see appendix Table A3.²) Since any leftover funding would be available for states to use on other COVID-related needs, states would have a strong incentive to quickly update their UI systems and meet the performance metrics. The pandemic has caused many budget gaps for states that need to be filled, and the remaining dollars from this proposal can serve as part of the solution. For instance, states could replenish reserves in their UI trust funds, many of which risk becoming insolvent due to the unprecedented joblessness caused by the COVID-19 recession and historic under-funding predating the crisis. Shoring up state trust funds could prevent future payroll tax hikes on employers when businesses are seeking to add jobs.

In the face of an unprecedented global pandemic and economic crisis, the UI system and the dislocated workers who rely on it are facing several significant challenges. Resolving these issues is necessary to provide timely financial relief to American families and support the economic recovery. Unfortunately, federal and state politics have gotten in the way of this common goal, as lawmakers have allowed the $600 federal supplement to expire without a replacement and longstanding administrative challenges remain unaddressed, all while state trust funds rapidly deplete and states remain in dire need of federal aid.

The proposal outlined here provides a path forward on all these fronts: a federal benefit supplement that is both meaningful and tied to median wages, and a new federal funding stream to allow for state administrative system upgrades and additional federal aid to state governments.

^{1 Estimates are based on median earnings of UI-eligible unemployed workers provided by the University of Chicago’s Unemployment Insurance Calculator, https://bfi.uchicago.edu/insight/blog/ui-calculator/, based on data from the May 2020 version of “US Unemployment Insurance Replacement Rates During the Pandemic.”
2 Estimates are based on authors’ analysis of available weekly state-level continuing claims data for each UI program for the week ending August 1, 2020, as reported in the August 20, 2020 claims report: https://oui.doleta.gov/press/2020/082020.pdf.}