Thursday, April 2, 2015

The Unemployment Insurance Recipiency Rate

While the media focuses on the headline unemployment and newly unemployed statistics, it tends to forget about Americans that have been excluded from collecting state unemployment benefits, the only benefits that were available to unemployed workers after the federal emergency unemployment benefits expired at the end of 2013.  While the number of Americans that have been put back to work because of an improving economy since the end of the Great Recession is substantial, according to research by the Economic Policy Institute, a record number of jobless workers are excluded from collecting the only source of unemployment benefits that were available to them.

Let's look at a bit of background information to start.   In the United States, the federally-funded, state-administered unemployment insurance scheme has provided a worker who has lost his/her job unemployment benefits for up to 26 weeks.  In states that had sharply rising unemployment rates, an extended benefit program provides an additional 13 to 20 weeks of unemployment insurance benefits.  In June 2008, Congress passed the Emergency Unemployment Compensation program which provided a maximum of 63 weeks of additional unemployment benefits.  This program expired on December 2013, leaving workers dependent on state-level unemployment insurance benefits.  While the federal government funds unemployment programs, state governments regulate the program's eligibility rules, benefit amounts and weeks of benefits available with the goal of providing temporary income replacement, ensuring that consumer spending is maintained during an economic contraction.  Unemployment benefits are paid by trust funds maintained for each state held at the U.S. Treasury; these funds are financed with employer payroll taxes for the most part.  The system is designed so that states can increase the balance of their unemployment trust funds during periods when the economy is strong and there is low unemployment since, during periods of positive economic growth, states pay less in UI benefits than they gather in revenues.

The total cost of UI benefits to states are driven by three factors:

1.) the unemployment rate.

2.) the share of prior wages replaced by UI benefits.

3.) the benefit recipiency rate.

The last factor, the benefit recipiency rate, is a measure of the percentage of jobless workers that actually get UI benefits.  One of the important indicators that is used to measure the success of state unemployment insurance programs is the proportion of unemployed individuals in the state that receive UI benefits.  In general, a falling benefit recipiency rate is considered to be a hinderance to unemployed workers since there is empirical evidence that UI benefits actually improve the fit between a worker's skills and earnings experience and the skills required and compensation provided by the new job. 

Let's focus on how the benefit recipiency rate varies from state-to-state.  From the late 1960s to 2011, all states paid regular UI benefits for at least 26 weeks.  During the period between 2001 and 2007, even though the economy was booming, many states failed to adequately fund their unemployment trust funds, causing severe problems when the Great Recession hit.  As the level of state UI payouts grew steadily during and after the Great Recession, some states cut UI benefits with nine states abandoning the traditional 26 weeks of UI payments altogether.  These states included Arkansas, Florida, Georgia, Illinois, Kansas, Michigan, Missouri, North Carolina and South Carolina.  Here is a table showing the state-by-state changes:

Here is a graphic showing the short-term UI recipiency rate for each state with the states that reduced their benefits highlighted in red:

It is often assumed that most unemployed workers get unemployment benefits.  On average, in 2014, the short-term UI recipiency rate across the United States was 34.7 percent, meaning that 65.3 percent of short-term unemployed workers did not get state UI benefits.  Recipiency rates varied from a low of 14.8 percent in South Carolina to a high of 65.7 percent in New Jersey with 21 states having 70 percent or more of their short-term unemployed workers going without UI benefits.  Almost all of the nine states that cut their UI benefits saw faster than average declines in UI recipiency rates; for example, South Carolina which cut its UI duration from 26 weeks to 20 weeks saw its recipiency rate decline by a substantial 12.9 percentage points.

Let's close with this graph that shows the UI recipiency rate for the United States from 1977 to 2014:

It is very clear that unemployment insurance recipiency rates are at historically low levels, in fact, the level in 2014 was the lowest level in post-World War II history and the current level of 23.1 percent is just above all time lows.  Unemployment insurance recipiency rates have remained at extremely low levels since 2011 at the same time as the size of the potential labor force has grown as new potential workers enter the workforce.  With the two factors working against each other, despite the headline 5.5 percent unemployment rate, we can see that millions of unemployed American workers are suffering like they have never suffered before.

1 comment:

  1. That last line. It's obvious that everybody is trying their best to stay employed and channel finances to their family, what little they get anyway. But like you said, things are never just as it seems. We really need to find out more about the underlying problems so we can find more solutions!