The recent failure of the Senate to extend unemployment insurance (UI) benefits has sparked debate around the country.  This Senate report from the Joint Economic Committee focuses on the question of whether extending UI benefits causes the unemployed to be less aggressive in their job search or to be more discriminating, taking only those jobs similar in rank and experience to the job they lost.  This widely held notion is based on studies done in the 1970s and 1980s that found that unemployed workers found jobs just before their benefits ran out.  The committee heard testimony from authors of these decades old studies, who replied that those studies were no longer applicable because they were primarily concerned with temporary or cyclic layoffs in manufacturing industries. Manufacturing now comprises less than 20% of the economy. 

This Senate committee was chaired by a Democrat, leading some to respond that the report is biased in favor of extending benefits.  However, the report includes testimony from Alan Greenspan, former Federal Reserve chairman and a staunch conservative, who said “when you’re in period of job weakness where it is not a choice on the part of people whether or not they’re employed or unemployed, then, obviously, you want to be temporarily generous”.

It is the states have been largely responsible for the lack of funding for their unemployment reserves.  As this National Unemployment Law Project report shows on page 3, for the past four decades states have been lowering the wage base they collect UI taxes on from almost 50%  of taxable wages to less than 30% of taxable wages.  It is the states that have been unable to extend UI benefits simply because they have not prepared for the “rainy day” of a serious recession.  Many states and advocates for the unemployed then come crying to the Federal government to help them and their citizens who are suffering from the lack of planning by state politicians.

As a small employer, I strongly oppose the numerous burdens that states and the Federal government put on employers.  Under current law in most states, UI rates charged to employers are based on the experience ratings of each employer, which penalizes those employers with greater turnover.  Thus, employers are reluctant to hire a new employee if they are not sure that the increased business will be more or less permanent.  If they let that new employee go in 4 months, the employee will be able to collect unemployment insurance, which drives up the experience rating and UI rate of the employer and costs the employer more for all employees.

In my opinion, unemployment insurance should be paid for and based on the experience rating of a worker, not the employer.  If UI is to be part of the social contract, then collect it from the citizens who may benefit from that insurance, not the employers.  Some might counter that proposal with the argument that, once the burden of the insurance tax is shifted to the employee, there is the possibility of collusion between an employer and employee to defraud the system.  For example, an employee who wanted to quit a job – and would thus be unable to collect UI benefits – could ask the employer to fire him or her so that they could collect UI benefits.  Since the employer now has no “skin in the game”, the employer might agree to falsify the employee’s record to show that the employee was fired.  In the long run, however, it is the employee who will bear the cost in higher insurance premiums.

We are currently seeing the results of bad planning and policies that target and penalize employers.  Although some economic indicators show an uptick in spending and an increase in sales for some industries, businesses in general are reluctant to hire simply because the cost burden of a new employee requires such a commitment from the employer.

For now, solutions include extending UI benefits for now and dipping into federal stimulus funds for the money.  Why have the Democrats refused to touch the stimulus money to fund further extensions?  I have heard little of any substance from Democratic politicians explaining why they don’t want to pay for UI benefit extensions with stimulus funds.  If anyone has, please let me know.

The ultimate solution has to come at the state level where states need to keep adequate reserves for unemployment claims.  Secondly, states need to transition away from employer based unemployment insurance.