Our Work

Unleashing UI’s Potential to Counter Recessions

• April 8, 2021
• Brendan McDermott

Prospects for economic recovery are brightening as nearly 3 million Americans per day get their Covid shots. But 18 million Americans still rely on unemployment insurance (UI) benefits, and many will continue to do so until the job market fully recovers and they can return to work. Fortunately, President Biden’s American Rescue Plan (ARP) Act, signed March 11, extended the benefits of 11.4 million jobless Americans until September 6.

Having averted an immediate crisis, the White House and Congressional leaders should now work to transform UI benefits so that they automatically deliver vital aid throughout this downturn and those in the future.

Unfortunately, it appears they cannot count on bipartisan support. As they did in 2020, Senate Republicans fought to cut the pandemic extension’s generosity, claiming it discourages people from taking jobs. To keep GOP obstructionism from causing yet another harmful lapse in September, Senator Ron Wyden is pushing to automatically extend the expansion until the unemployment rate falls below a predetermined threshold.

This makes sense from both a humanitarian and an economic perspective. Lawmakers should not only tie the generosity of benefits to the unemployment rate during this recession, they should do so permanently to insulate all future UI expansions from partisan wrangling in tough economic times.

In addition to preventing premature interruptions in benefits, this change would make future economic slumps less severe. Federal programs like UI that spend more in weak economies and less in strong ones are “automatic stabilizers” because they moderate swings in the business cycle without requiring Congressional action.

Replacing unemployed workers’ lost income through UI enables them to keep paying their bills, which helps to sustain demand across the
entire economy.

U.S. policymakers also should work to modernize other elements of the UI system. As we saw last spring when unemployment surged, outdated computer systems hampered states’ ability to get benefits to idled workers quickly. Congress wisely included $2 billion in ARP for updating UI systems. States should seize this opportunity to modernize their computer systems, and federal lawmakers should offer more resources if necessary.

In addition, Congress should develop a more equitable financing system for UI that fully pays for these expansions over the business cycle. The federal government and the states currently only apply their respective UI payroll taxes to workers’ earnings below a maximum level, which is typically very low. As a result, many low earners pay exactly as much in UI taxes as welloff workers do despite receiving smaller benefits when they become unemployed. The federal government should fully pay for these expanded benefits across the business cycle by raising more revenue from incomes that UI does not tax today.

More specifically, this policy paper proposes that the Biden administration and Congress embrace the following changes in unemployment insurance: 

• Permanently tie the share of lost wages replaced by UI benefits to the unemployment rate.

• Offer Extended Benefits for more weeks during severe recessions.

• Fund state IT modernization efforts and avoid duplication of efforts by developing UI administration technology for states at the federal level.

• Cover more jobseekers who are not currently eligible for UI by helping self-employed people save for gaps in work and expanding work-sharing programs.

• Pay for these reforms across the business cycle by taxing higher incomes than the program currently does.

Adopting these complementary sets of reforms – pegging UI benefits to the unemployment rate and modernizing the way benefits are delivered and financed – would create a stronger safety net for laid-off workers and help temper economic contractions.

Read the full report here.