May 9, 2021

New personal income data show the need for broad and permanent unemployment insurance reform

6 min read
Recently released data from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) show...

Recently released data from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) show that unemployment insurance (UI) made up an unprecedented share of total wage and salary income1 in 2020—reflecting the immense economic fallout from the pandemic and the large federal response to the crisis.

Importantly, more than 70% of UI dollars during the pandemic have come from emergency federal programs to prop up the inadequate state-run UI systems, revealing the gross inadequacy of existing UI benefits, the scale of the ambitious but temporary federal response, and the resulting obvious need for broad structural reform of the UI system. Key findings are:

  • Nationally, UI benefits as a share of total wage and salary income peaked at over 10% in the second quarter of 2020. Before 2020, UI benefits had never been as high as 3% of total wage and salary income.
  • At the state level, UI benefits had never exceeded 6% of any state’s wage and salary income before 2020. But in the second quarter of 2020, four states saw UI benefits exceed 20% of state wage and salary income.
  • State UI programs could not meet the needed support for an unprecedented number of unemployed workers. Two key pieces of federal legislation helped fill the gap. The Federal Pandemic Unemployment Compensation (FPUC)—mostly the extra $600 in weekly benefits included as part of the CARES Act in March 2020—contributed the most federal dollars in 2020. But the Pandemic Unemployment Assistance (PUA) program (which expanded eligibility to workers traditionally left out of UI benefits) was also hugely important. In 13 states, PUA accounted for more than 45% of total UI dollars received in the fourth quarter of 2020.
  • These pandemic-related UI programs greatly equalized the protectiveness of the UI system as a whole across groups. In particular, states with a higher share of Black residents were more reliant on federal assistance to provide UI benefits. But if the pandemic programs fade with no structural reforms, the UI system will revert to being one that sees stingier benefits precisely in those states with higher Black population shares. This disparate racial impact is a key reason why reforms are needed.

Figure A shows the UI share of total wage and salary income by state. For some states, including Hawaii, Michigan, Nevada, and New Jersey, unemployment insurance accounted for more than 20% of wage and salary income during the second quarter of 2020.

Figure A

This unprecedented level of unemployment insurance supporting workers, families, and state economies was the result of the federal government stepping in to bolster the inadequate existing unemployment insurance system.

The CARES Act, passed in March 2020, created three federal unemployment assistance programs2: Federal Pandemic Unemployment Compensation (FPUC), Pandemic Unemployment Assistance (PUA), and Pandemic Emergency Unemployment Compensation (PEUC). FPUC provides additional income to individuals eligible for regular UI in their states. Early in the pandemic, this provision provided individuals with $600 per week on top of existing UI benefits. After Senate Republicans allowed the FPUC payments to expire in July 2020, the Trump administration authorized the Lost Wages Assistance (LWA)3 program using Disaster Relief Funds, which provided six weeks of additional $300 weekly UI payments. In addition to halving the benefit amount, LWA funds were exhausted by September, leaving unemployed workers highly vulnerable until Congress renewed the FPUC at $300 per week in December.

PUA and PEUC are programs to help unemployed individuals who have exhausted or would not qualify for traditional UI. The PEUC program provides up to 53 weeks of additional payments once a person has exhausted their traditional UI benefits. PUA extends UI eligibility to workers who would not have qualified for unemployment under the existing UI system—workers such as independent contractors, app-based platform or other so-called “gig” workers, part-time workers whose hours did not meet the requisite thresholds, workers with little work history (particularly young people and students), and workers who voluntarily left jobs because of health concerns for themselves or to take care of others.

For most of 2020, federal unemployment assistance composed more than 70% of all unemployment insurance income. Figure B shows the dollar contributions of each UI program per quarter in 2020. During the second quarter, income from FPUC was almost 63% of the total UI income in the nation. The FPUC’s large share of UI reflects the inadequacy of benefit levels in most state’s existing UI systems. Absent the extra $600 from the FPUC, the average UI benefit from existing state UI programs was only $387—an amount that typically replaced 30-50% of a worker’s previous earnings. With such meager levels of support from the existing system, it is not surprising that total UI benefit dollars in most states were dwarfed by the added federal benefits. And although some critics claimed that the $600-per-week benefit would disincentivize unemployed workers from seeking jobs, there is little evidence that the FPUC reduced employment.

Figure B also shows that after peaking in the second quarter, total UI income declined during the rest of 2020. State UI income and FPUC income fell in the second half of the year as the federal program expired, states started reopening, and overall unemployment began falling. Yet even with the decline of FPUC income in the last quarter of the year, federal assistance still composed more than 70% of total UI income.

By the end of 2020, PUA made up the largest share of federal UI assistance, surpassing FPUC and contributing 33% of total UI income. The PUA program composed more than half of UI income in the fourth quarter in Arizona, Florida, Georgia, Indiana, Louisiana, Mississippi, New Hampshire, North Carolina, and Ohio.

These numbers are a stunning indictment of the existing UI system. The majority of all unemployment dollars in these states is coming from a program designed to assist workers who would not qualify for any unemployment assistance under the existing UI system. This underscores the need for a comprehensive UI system that supports self-employed individuals, “gig workers,” and other types of workers currently excluded from traditional UI.

Figure B

Figure B

All states benefitted from federal UI assistance, but there is considerable variation in the share of states’ UI income that comes from federal sources.

While in the fourth quarter Wyoming received slightly less than half of its UI income from federal programs, eight states received more than 80%: Arizona, Florida, Georgia, Indiana, Michigan, Mississippi, North Carolina, and Ohio. States where federal assistance takes up a larger share of UI income are characterized by low benefits, high monetary eligibility requirements, and fewer weeks of benefits in their standard state UI systems. Mississippi has the lowest average benefit payout in the nation. Arizona has the highest monetary eligibility criteria, disqualifying many low-income and part-time workers. Whereas most states offer 26 weeks or more of UI benefits, there has been a growing and troubling trend over the past decade of states cutting benefits below this long-standing norm. For instance, Florida provided only 12 weeks of UI benefits before the pandemic.

Figure C

Figure C

These shortcomings of many state-based UI systems deepen racial inequities because Black workers are more likely to live in states with weak UI systems. Figure D shows that, in 2020, states with a greater share of Black residents were more reliant on federal assistance to provide UI benefits.

Figure D

Figure D

The federal unemployment insurance programs created by the CARES Act were a lifeline for millions of workers and families across the U.S. However, the unprecedented magnitude of the federal response is indicative of the woefully inadequate benefits and gaping eligibility holes in existing state UI programs. Moreover, decades of disinvestment in state UI systems meant that even as the federal government stepped in, millions of eligible workers were still unable to access benefits. Allowing the FPUC program to arbitrarily expire in July 2020—long before the end of the crisis—demonstrates the need to link economic support programs, like expanded UI, to actual economic conditions and not let them be dependent on political actors.

Federal UI reform efforts should set a high floor for UI benefits nationwide, ensure that all workers are eligible, and make certain that access is rapid and equitable. In a recent Hamilton Project report, Arindrajit Dube lays out a proposal for expanding eligibility, tying benefits to automatic triggers, increasing benefits rates, and increasing short-time compensation (work-sharing). Comprehensive reforms such as these will enhance the recovery as the pandemic is contained and insulate workers from harm in the next economic crisis.

1. For the analysis of this blog, total wage and salary income includes wages, salaries, and income from unemployment insurance. To learn more about the definitions of wages or unemployment insurance, see BEA.

2. Federal aid also comes from the Extended Benefits (EB) program, a federal and state program that extends UI benefits with automatic triggers based on the unemployment rate.

3. The LWA provided states the option to match $100 per week per worker for a $400 total benefit. Individuals eligible for $100 or less per week from traditional UI (low-income workers) were excluded from LWA benefits. South Dakota elected not to receive LWA funds.

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