Include unemployment insurance reform in the arsenal of labor policy

Unemployment is a much bigger feature of our economy than much media coverage indicates. Although only a fraction of workers are unemployed at any given time, the cumulative number of workers experiencing unemployment is rising rapidly. Tens of millions of workers find themselves unemployed every few years and face a serious dilemma: Can they afford to look for quality work?

Many workers cannot because unemployment benefits in most states are not adequate 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 can offer lower wages because workers cannot hold out for better, fairer offers. Time is money, and money is time.

New research confirms this. A recent National Bureau of Economic Research working paper tracked the effects of permanent reductions in unemployment insurance benefits in seven states by linking to business data. Listed and starting salaries for the jobs fell after the benefit cuts were implemented, and workers experienced a “substantial decrease” in their bargaining power.

These results are not surprising. Unemployed workers struggle to maintain any leverage in negotiations with employers when they lack security between jobs. Unemployment insurance (UI) is name-only insurance without the ability to qualify for sufficient benefits. Improving the level of investment in unemployment programs would establish better bargaining power for workers and financial stability. People could afford the time to find a good fit.

Unfortunately, UI reforms are often overlooked. Policymakers are not seeking improvements with the necessary urgency despite meager levels of benefits from state programs and the more than ten million unemployment events that occur annually.

On average, unemployment benefits replace only 40 percent of previous earnings. Still, even this weak rate paints a better picture than the full, worrying reality. Because so few can access benefits (just over a quarter of unemployed workers receive UI nationally), the average unemployed worker received more than $0 in weekly benefits in only two states (Minnesota and New Jersey ) during the first quarter of 2022. That is, more than half of the unemployed workers in all but two states received no benefits.

In addition, states often place strict limits on benefits, meaning that middle-class UI recipients can receive far less than 40 percent of previous earnings. For example, an unemployed worker in Arizona earning $70,000 a year would only be covered at 18 percent of their income level. Unemployed workers cannot remain financially stable when unemployment insurance is so fragile.

Federal pandemic programs demonstrated the positive potential of improved and expanded unemployment insurance. Greater eligibility and benefit size gave workers more flexibility to reject inferior job offers and leave harmful work environments, an invaluable source of economic and health protection. Stronger, albeit temporary, unemployment benefits were a real pandemic success story.

But we need more than temporary improvements during severe downturns. Consider: A similar amount of unemployment occurred during the pre-pandemic stage of Trump’s presidency, a period known for its low unemployment rates, as occurred between March 2020 and September 2021 (the months in which the UI initially occurred and then expired). Unemployment occurs even in good economic conditions. Leaving unemployment programs intact until the next crisis puts the livelihoods of tens of millions more workers at risk. That is why we must make the extension of unemployment insurance a permanent part of the strategy to improve labor outcomes.

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

Without better income security between jobs, many will continue to have to make do with less. Sometimes the best counter to employer overpower is to offer workers a period of financial security when they look for new work. Companies should feel pressured to raise labor standards or risk losing working employees.

For this vision to be viable, we must reform unemployment insurance. Our UI system, a complicated conglomeration of state systems, is a porous mess. Workers will continue to be relegated to worse wages and bargaining power until benefits are improved. Unemployment is a serious obstacle for workers, but with stronger unemployment insurance, it can be used as a tool for worker welfare.

Photo credit: iStock

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