Here’s what you need to know about inequality across the U.S. state-based unemployment system.
Why does the U.S. have such a peculiar system?
Compared to other advanced democracies, America has an unusual system of unemployment compensation. The contentious politics of the New Deal during the Great Depression in the 1930s created a federal-state partnership rather than a uniform, nationally determined benefit. To minimize the likelihood that the Supreme Court would invalidate the new program, in 1935 President Franklin D. Roosevelt and a Democratic Congress decided against taking over and expanding the reach of the only state unemployment system in place — which, at that time, was Wisconsin’s. Instead, FDR took the advice of Justice Louis Brandeis and gave states considerable control over the new unemployment insurance program.
Here’s how it works today. Each state places employers’ payroll taxes in a dedicated trust fund with the U.S. Treasury, which then disburses the money to states as needed. So long as states conform to loose federal regulations, federal law empowers states to decide how their program will run — including the unemployment tax rate employers must pay, how much of the employer’s payroll is subject to the unemployment tax, how much laid-off workers will receive in benefits, and what circumstances make someone eligible.
States have been cutting unemployment benefits
Before the Great Recession, many states would pay qualifying laid-off workers approximately half the state’s average weekly wage for between 26 and 30 weeks. The Great Recession in 2008 and 2009, however, severely shrank state unemployment trust funds.
Instead of raising taxes on employers to replenish the funds, a number of states instead cut benefits’ duration and amounts. For example, in 2012 Michigan reduced the maximum number of weeks a worker could collect unemployment from 26 to 20. That same year, Florida effectively reduced that time from 26 to 12 weeks, and reduced the maximum benefit amount from $7,150 to $6,325.
Researchers commonly measure the size of unemployment benefits by what’s called the “replacement rate,” which tells us how much lost income the state replaces while a worker is defined as unemployed, typically for a six- or 12-month period of joblessness. For a worker earning the national median wage, which was $39,810 as of 2019, who is unemployed for six months, Oregon, New Jersey and a few other states replace as much as two-thirds of lost income. About 30 percent of states replace less than 40 percent. Florida is at the bottom, replacing only 17 percent.
States determine who’s eligible, and they’ve been tightening the rules
Nationally, the percentage of Americans collecting unemployment has been falling steadily since the Great Recession. All states now require any potential unemployment recipients to give evidence that they are “actively seeking work” and are ready to accept any offer of “suitable” work. But states define these terms in different ways.
For instance, Maine and Delaware require workers to contact one new prospective employer per week to be classified as actively seeking work; Florida and North Carolina require five new weekly contacts. In Massachusetts, the unemployed are expected to apply for jobs with similar skill and pay profiles as their previous positions. North Carolina, in contrast, mandates that even lawyers and doctors apply for and accept any job paying more than $21,800 per year after collecting 10 weeks of unemployment.
Many states have been adding more such restrictive requirements and cut off any workers who don’t meet them, driving down the percent of the jobless collecting unemployment benefits. And because 10 states have limited how long anyone can receive benefits while more and more people are out of work for longer, higher proportions of the unemployed are exhausting their benefits.
As you can see in the figure below, states have considerably different rules for who can receive benefits. In New Jersey and Massachusetts in 2019, for example, more than half of the unemployed collected benefits; in other states, like North Carolina and Florida, that was only around 10 percent.
The Cares Act shook up the unemployment system
The $2 trillion dollar Cares Act extended each state’s benefits by 13 weeks and supplemented every state’s unemployment payments with $600 each week through the end of July.
What this means is that, in most states, benefits now replace more than 100 percent of lost wages for workers earning at or below the national median wage. Even states with the skimpiest benefits, like Florida, now replace at least 80 percent of the median wage for up to six months.
If state unemployment systems can actually get these funds into people’s pockets — still an open question — the stimulus measures will help stabilize workers’ incomes while businesses are closed. Should the recession linger, some Democrats are even talking of extending the unemployment stimulus payments through December.
Still, an increasing number of critics argue that these federal measures are too generous and will discourage workers from going back to their jobs. Sen. Lindsey O. Graham (R-S.C.) last week told a state task force panel that the Senate would only extend federal unemployment benefits over “our dead bodies.”
As policymakers weigh how to balance public health concerns with restarting the economy, debates about the appropriate balance between the federal government and states in determining unemployment compensation are sure to continue.
Sara Watson is an associate professor of political science at Ohio State University whose research and teaching focuses on comparative public policy and political economy.