State Cuts to Unemployment Insurance Did Little to Boost Employment or Save Money

WASHINGTON, July 28 -- The Economic Policy Institute issued the following news release:

In the depths of the Great Recession, eight states reduced the duration for which workers could receive unemployment benefits. One of these states--North Carolina--also cut the value of its weekly benefits. One rationale for these cuts was that states had exhausted their account balances in the federal Unemployment Trust Fund (UTF). Proponents also claimed that generous unemployment benefits were a disincentive for the jobless to return to work. However, a new Economic Policy Institute study shows that these cuts did very little for states' fiscal wellbeing and provided no discernible boost to employment growth in the states undertaking them.

In State Cuts to Jobless Benefits Did Not Help Workers or Taxpayers, EPI Research and Policy Director Josh Bivens, economist Valerie Wilson, and economic analyst Joshua Smith provide an overview of the U.S. unemployment insurance (UI) system, explain the interaction between federal and state financing of UI, and examine the economic conditions of states that cut the duration and dollar amount of jobless benefits.

"There's no evidence of any benefit to reducing the length or dollar amount of unemployment insurance when the economy is so weak," said Bivens. "It's hard to understand why states would shoot themselves in the foot like this."

The federal-state UI system allows states to build up balances in the UTF during periods of economic prosperity and low unemployment. However, inadequate account balances combined with the length and severity of the Great Recession meant that many state UTF accounts were insolvent at some point in the aftermath of the recession. Most states responded by raising UI taxes or borrowing from the Federal Unemployment Account. The money saved by cuts to unemployment insurance duration, meanwhile, could have been made up by tax increases on the order of a fraction of a percent. For example, while some unemployed workers in the eight states lost $255 a week in benefits, the same overall savings could have been achieved by raising payroll taxes just nine cents per worker per week.

"The key to prevent unemployment trust funds from becoming insolvent is to raise more revenue in good times to be able to spend it in bad times," said Smith. "The wave of insolvency in state unemployment insurance accounts in the aftermath of the Great Recession was the result of policymakers' failure to follow that simple rule."

At the same time, these states saw no measurable change in a key measure of labor market health: the employment-to-population ration (EPOP) of prime-age adults (those between 25 and 54). Simply put, cuts to UI caused financial hardship for unemployed workers while doing nothing to improve states' economic outlooks. Moreover, the burden of benefit cuts in these states was not equally shared: In every state that cut benefits, African Americans were even more overrepresented among the long-term unemployed than they were in the other 42 states collectively.

"There are still nearly 4 million workers who have been unemployed for six months or more," said Wilson. "The fact that the share of jobless workers who are long-term unemployed is so high--higher than it was at any point in the previous downturn--is proof that we need to expand unemployment insurance, not cut back on it."

Earlier this month, EPI launched a new website (http://www.epi.org/multimedia/understanding-long-term-unemployment/) examining long-term unemployment. Users can download data and view charts comparing long-term unemployment trends across states and demographic groups, as well as see the share of children with a parent who is long-term unemployed.

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