U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

31–492 2007

THE UNEMPLOYMENT COMPENSATION ASPECTS OF 

THE U.S. DEPARTMENT OF LABOR FY2007 BUDGET 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

MAY 4, 2006 

Serial No. 109–71 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

DEVIN NUNES, California 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON HUMAN RESOURCES 

WALLY HERGER, California, Chairman 

NANCY L. JOHNSON, Connecticut 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

PHIL ENGLISH, Pennsylvania 

DEVIN NUNES, California 

JIM MCDERMOTT, Washington 

BENJAMIN L. CARDIN, Maryland 

FORTNEY PETE STARK, California 

XAVIER BECERRA, California 

RAHM EMANUEL, Illinois 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii 

C O N T E N T S 

Page 

Advisory of April 13, 2006, and Revised Advisory of April 24, 2006, announcing the hearing ..................................................................................................... 2 

WITNESSES 

U.S. Department of Labor, Employment and Training Administration, Hon. 

Mason Bishop ....................................................................................................... 9 

U.S. Government Accountability Office, Sigurd Nilsen, Ph.D. ............................ 25 

National Association of State Workforce Agencies, Roosevelt Halley, Columbia, South Carolina .............................................................................................. 35 

American Federation of State, County, and Municipal Employees, Greg 

Devereux, Seattle, Washington ........................................................................... 39 

American Institute for Full Employment, Wayne Brough, Ph.D., Adjunct 

Scholar .................................................................................................................. 44 

Institute for International Economics, Howard Rosen ......................................... 46 

Heritage Foundation, Center for International Trade and Economics, Tim 

Kane, Ph.D. ........................................................................................................... 57 

SUBMISSIONS FOR THE RECORD 

Devereux, Greg, Washington State Federation of Employees, Olympia, WA, 

statement .............................................................................................................. 81 

Oxfeld, Eric J., Strategic Services on Unemployment and Workers’ Compensation, statement ..................................................................................................... 82 

Samuel, William, American Federation of Labor and Congress of Industrial 

Organizations, statement .................................................................................... 89 

(1) 

THE UNEMPLOYMENT COMPENSATION 

ASPECTS OF THE U.S. DEPARTMENT 

OF LABOR FY2007 BUDGET 

THURSDAY, MAY 4, 2006 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON HUMAN RESOURCES, Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:04 a.m., in 

room B–318, Rayburn House Office Building, Hon. Wally Herger 

(Chairman of the Subcommittee) presiding. 

[The advisory and revised advisory announcing the hearing follow:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HUMAN RESOURCES 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

April 13, 2006 

No. HR–8 

Herger Announces Hearing on 

Unemployment Compensation Aspects of 

U.S. Department of Labor Fiscal Year 2007 Budget 

Congressman Wally Herger (R–CA), Chairman, Subcommittee on Human Resources of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on the U.S. Department of Labor (DOL) budget for 

fiscal year 2007. The hearing will take place on Wednesday, May 3, 2006, in 

B–318 Rayburn House Office Building, beginning at 2:00 p.m. 

Oral testimony at this hearing will be from both invited and public witnesses. Invited witnesses will include a representative from the DOL. Any individual or organization not scheduled for an oral appearance may submit a written statement for 

consideration by the Subcommittee and for possible inclusion in the printed record 

of the hearing. 

BACKGROUND: 

The Unemployment Compensation (UC) program provides benefits to unemployed 

workers who have a history of employment. Within a broad Federal framework, 

each State designs its own benefit program and imposes taxes on employers to pay 

for regular unemployment benefits. A Federal tax also is imposed on employers to 

fund the Federal responsibilities under the system, including certain administrative 

expenses, loans to States, and the Federal half of extended unemployment benefit 

costs for certain workers. Taxes collected are kept in Federal trust funds that are 

part of the unified Federal budget. During calendar year 2005, $33 billion in unemployment benefits was paid to nearly 8 million eligible workers. 

The DOL budget for fiscal year 2007 includes a number of proposals designed to 

strengthen the integrity and otherwise improve the operation of the UC system. 

Proposals included in the budget would increase the use of eligibility reviews, better 

prevent and recover overpayments, speed returns-to-work of unemployment beneficiaries, improve tax collection, and extend the 0.2 percent Federal Unemployment 

Tax Act (‘‘FUTA’’) surtax. 

In announcing the hearing, Chairman Herger stated: ‘‘The President’s budget includes a number of proposals designed to improve the efficiency and effectiveness 

of the unemployment compensation system in paying benefits and helping laid off 

workers get back on the job. The Subcommittee also wants to make this system 

work better for States, employers, and especially unemployed workers. I look forward to hearing from the Administration and others about proposals included in 

President’s budget designed to do just that.’’ 

FOCUS OF THE HEARING: 

The focus of the hearing will be on unemployment-related issues in the DOL fiscal 

year 2007 budget. 

3 

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD: 

Requests to be heard at the hearing must be made by telephone to Michael Morrow or Kevin Herms at (202) 225–1721 no later than the close of business Wednesday, April 26, 2006. The telephone request should be followed by a formal written 

request faxed to Allison Giles, Chief of Staff, Committee on Ways and Means, U.S. 

House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 

20515, at (202) 225–2610. The staff of the Committee will notify by telephone those 

scheduled to appear as soon as possible after the filing deadline. Any questions concerning a scheduled appearance should be directed to the Committee staff at (202) 

225–1721. 

In view of the limited time available to hear witnesses, the Committee 

may not be able to accommodate all requests to be heard. Those persons and 

organizations not scheduled for an oral appearance are encouraged to submit written statements for the record of the hearing in lieu of a personal appearance. All 

persons requesting to be heard, whether they are scheduled for oral testimony or 

not, will be notified as soon as possible after the filing deadline. 

Witnesses scheduled to present oral testimony are required to summarize briefly 

their written statements in no more than five minutes. THE FIVE–MINUTE 

RULE WILL BE STRICTLY ENFORCED. The full written statement of each 

witness will be included in the printed record, in accordance with House 

Rules. 

In order to assure the most productive use of the limited amount of time available 

to question witnesses, all witnesses scheduled to appear before the Committee are 

required to submit 200 copies, along with an IBM compatible 3.5-inch diskette in 

WordPerfect or MS Word format, of their prepared statement for review by Members 

prior to the hearing. Testimony should arrive at the Subcommittee office, B– 

318 Rayburn House Office Building, no later than close of business on Monday, May 1, 2006. The 200 copies can be delivered to the Subcommittee staff in 

one of two ways: (1) Government agency employees can deliver their copies to B– 

318 Rayburn House Office Building in an open and searchable box, but must carry 

with them their respective government issued identification to show the U.S. Capitol 

Police, or (2) for non-government officials, the copies must be sent to the new Congressional Courier Acceptance Site at the location of 2nd and D Streets, N.E., at 

least 48 hours prior to the hearing date. Please ensure that you have the 

address of the Subcommittee, B–318 Rayburn House Office Building, on 

your package, and contact the staff of the Subcommittee at (202) 225–1025 

of its impending arrival. Due to new House mailing procedures, please avoid 

using mail couriers such as the U.S. Postal Service, UPS, and FedEx. When a 

couriered item arrives at this facility, it will be opened, screened, and then delivered 

to the Committee office, within one of the following two time frames: (1) expected 

or confirmed deliveries will be delivered in approximately 2 to 3 hours, and (2) unexpected items, or items not approved by the Committee office, will be delivered the 

morning of the next business day. The U.S. Capitol Police will refuse all non-governmental courier deliveries to all House Office Buildings. 

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Wednesday, May 

17, 2006. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

Those filing written statements who wish to have their statements distributed to 

the press and interested public at the hearing can follow the same procedure listed 

above for those who are testifying and making an oral presentation. For questions, 

or if you encounter technical problems, please call (202) 225–1721. 

4 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

* * * CHANGE IN DATE AND TIME * * * 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HUMAN RESOURCES 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1025 

April 24, 2006 

No. HR–8 Revised 

Change in Date and Time for Hearing on 

Unemployment Compensation Aspects of 

U.S. Department of Labor Fiscal Year 2007 Budget 

Congressman Wally Herger (R–CA), Chairman, Subcommittee on Human Resources of the Committee on Ways and Means, today announced that the Subcommittee hearing on the unemployment compensation aspects of U.S. Department 

of Labor Fiscal Year 2007 Budget, previously scheduled for 2:00 p.m. on Wednesday, 

May 3, 2006, in room B–318 Rayburn House Office Building, will now be held on 

Thursday, May 4, 2006, at 10:00 a.m. 

All other details for the hearing remain the same. (See Human Resources Advisory No. HR–8, dated April 13, 2006). 

f 

5 

Chairman HERGER. Good morning, and welcome to today’s 

hearing on the President’s budget proposals for the U.S. Department of Labor (DOL) for Fiscal Year (FY) 2007. The economy grew 

a robust 4.8 percent in the first quarter of 2006. That is the fastest 

growth since the third quarter of 2003 and the 18th consecutive 

quarter of growth. Since the 2003 tax cuts, economic growth has 

averaged a strong 3.9 percent. With that growth, the economy has 

created millions of jobs. During the last year, the economy created 

an average of 174,000 jobs each month, which is expected to continue in tomorrow’s job report for April. Since August 2003, we 

have seen a total of 5.2 million jobs. The unemployment rate is a 

very low 4.7 percent, the lowest since July 2001 and below the average of the 1960s, 1970s, 1980s, and 1990s. 

Still, despite the sharp drop in the number of unemployed Americans in recent years, too many Americans remain unemployed. We 

owe it to all workers to examine what we can do to better connect 

unemployed workers with jobs to stimulate even more growth and 

job creation. We also owe it to taxpayers to ensure unemployment 

benefit payments are correct. The Office of Management and Budget estimates that more than $3 billion in unemployment benefits 

were incorrectly paid in 2005. There is plenty of work to be done 

in that area as well. The President’s DOL budget proposals under 

our jurisdiction have two purposes. First, to promote better program integrity when it comes to collecting unemployment taxes and 

paying unemployment benefits. Second, and more importantly, to 

help workers get back on the job quickly. 

This Subcommittee has explored the issue of improper unemployment benefit taxes and payments before and acted. In 2002, we 

provided States a record infusion of Federal funds they could use 

to improve unemployment benefit program integrity, among other 

purposes. In 2004, we passed the State Unemployment Tax Act 

(SUTA) Dumping Prevention Act (P.L. 108–295) meant to ensure 

employers who lay off more workers pay their fair share of unemployment taxes. That law also gave States access to the National 

Directory of New Hires (NDNH) so they could ensure unemployment benefits end when workers go back to work. Earlier this year, 

we heard from the Government Accountability Office (GAO) about 

their research, which showed that workers who collect unemployment benefits stay unemployed more than twice as long as those 

who don’t collect benefits. I was pleased to note bipartisan agreement on that hearing on the need to help unemployed workers 

quickly return to work. That background will be on our minds 

today as we learn more about the Administration’s FY2007 budget 

proposals. After hearing from the DOL, we will hear from a variety 

of witnesses representing GAO, the States, Government employees, 

think tanks, and other interested parties. They will provide more 

context about the DOL budget proposals. I am pleased to note that 

every group that requested to testify at this hearing will appear before us today. We look forward to the testimony of all our witnesses. Mr. McDermott, would you care to make a statement? 

[The opening statement of Chairman Herger follows:] 

6 

Opening Statement of The Honorable Wally Herger, Chairman, Subcommittee on Human Resources, and a Representative in Congress from 

the State of California 

Good morning and welcome to today’s hearing on the President’s budget proposals 

for U.S. Department of Labor for fiscal year 2007. 

The economy grew a robust 4.8 percent in the first quarter of 2006. That’s the 

fastest growth since the third quarter of 2003, and the 18th consecutive quarter of 

growth. Since the 2003 tax cuts, economic growth has averaged a strong 3.9 percent. 

With that growth, the economy has created millions of jobs. During the last year, 

the economy created an average of 174,000 jobs each month, which is expected to 

continue in tomorrow’s jobs report for April. Since August 2003, we have seen a 

total of 5.2 million jobs. The unemployment rate is a very low 4.7 percent, the lowest since July 2001 and below the average of the 1960s, 1970s, 1980s and 1990s. 

Still, despite the sharp drop in the number of unemployed Americans in recent 

years, too many Americans remain unemployed. We owe it to all workers to examine 

what we can do to better connect unemployed workers with jobs to stimulate even 

more growth and job creation. 

We also owe it to taxpayers to ensure unemployment benefit payments are correct. The Office of Management and Budget estimates that more than $3 billion in 

unemployment benefits were incorrectly paid in 2005, so there is plenty of work to 

be done in that area, too. 

The President’s budget proposals under our jurisdiction have two purposes. First, 

to promote better program integrity when it comes to collecting unemployment taxes 

and paying unemployment benefits. Second, and more importantly, to help workers 

get back on the job quickly. 

This Subcommittee has explored the issue of improper unemployment benefit 

taxes and payments before, and acted. In 2002, we provided states a record infusion 

of federal funds they could use to improve unemployment benefit program integrity, 

among other purposes. 

In 2004, we passed the SUTA Dumping Prevention Act, meant to ensure employers who lay off more workers pay their fair share of unemployment taxes. That law 

also gave states access to the National Directory of New Hires so they could ensure 

unemployment benefits end when workers go back to work. 

Earlier this year, we heard from the Government Accountability Office about their 

research showing that workers who collect unemployment benefits stay unemployed 

more than twice as long as those who don’t collect benefits. I was pleased to note 

bipartisan agreement at that hearing on the need to help unemployed workers 

quickly return to work. That background will be on our minds today as we learn 

more about the Administration’s fiscal year 2007 budget proposals. 

After hearing from the Department of Labor, we will hear from a variety of witnesses representing GAO, the states, government employees, think tanks, and other 

interested parties. They will provide more context about the DOL budget proposals. 

I am pleased to note that every group that requested to testify at this hearing 

will appear before us today. We look forward to the testimony of all our witnesses. 

f 

Mr. MCDERMOTT. Thank you, Mr. Chairman. I think when you 

come to one of these hearings, it is always interesting to have Mr. 

Herger and I present our view of the world because you get two 

different views of what is going on. I think, as we convene this 

morning, it is fair to say that we know two things for certain. The 

American economy is changing, and the Federal Government is not 

changing fast enough to meet the needs of the people of this country. Now, not long ago, economic growth and job security across the 

American landscape seemed understandable and predictable by a 

vast majority of workers, whether it be blue collar or white collar 

or whatever. But those days, really, are gone. Technological change 

and an increasing interconnected world have expanded the opportunities for some and dramatically increased uncertainty for others. 

Now in this new national workplace, support programs should do 

more than enable workers to upgrade their skills and help them 

transition from one job to the next when they must. The statistics 

7 

make clear that our concerns are warranted and real action is essential if we are to serve the American people. On that point, Mr. 

Herger and I agree. 

Job security is declining precipitously for certain segments of the 

population, especially men in their 40s and 50s. According to the 

Bureau of Labor Statistics (BLS) from the DOL, the median tenure 

for the current employment of men age 45 to 54 has dropped from 

12.8 years on a job in 1983 to 9.6 years on a job in 2004. That is 

a 25 percent decrease. For men ages 55 to 64, it is even worse. The 

median employment tenure has declined 33 percent over the same 

period. In short, these workers are much more likely to change jobs 

than their counterparts of 20 years ago. Some of what you are seeing here today or hearing today is a reflection of what has happened to the job market. Some job changes are voluntary, of course. 

But many are not. Hardships like factory closings, corporate 

downsizing, technology are forcing painful changes upon our workers. The transitions can be difficult and stressful, even for displaced workers who find new employment. For example, according 

to a biannual BLS report again—that is DOL—5.3 million Americans were laid off jobs they held for more than 3 years between the 

years 2001 and 2003. Even as recently as the last 4 or 5 years, you 

are still getting a clear majority of those reemployed lost wages 

compared to their prior job. They went to a job making less money. 

The reality is that over one-third of these workers lost 20 percent 

or more of their prior earnings. They are taking a 20 percent drop. 

Furthermore, low-income workers experience much wider income 

swings today compared to 20 years ago. More and more vulnerable 

families are being brought to the brink of financial ruin. That is 

where we are, and here is what we are doing about it. Now I commend the Administration for suggesting ways in which the integrity of the Unemployment Insurance (UI) Program can be strengthened, even as I question how these particular proposals would be 

implemented. It is one of America’s most valuable programs, and 

it is important to prevent overpayments and fraud, whether committed by individuals or by employers. We should, however, I think 

attempt to hold individuals harmless when small or modest errors 

occur through no fault of their own and equally address the issue 

of UI underpayments. The challenge we have to address is to improve the UI Program overall. 

Benefit levels in some States are entirely too low to serve the 

purpose of the program or to meet the needs of people. Give somebody $221 a month, as some States do, is simply not an adequate 

replacement of the finances that they had when they had a job. In 

many States, the maximum weekly unemployment benefit is 

enough to buy a few tanks of gasoline, which is going up, forcing 

workers to choose between putting food on the table and conducting 

a meaningful job search using their car. Furthermore, today’s economy relies more and more on part-time employees who are frequently denied unemployment benefits when they lose their jobs. 

Finally, we have got to put some teeth into efforts to ensure that 

employers are paying their fair share. Why does the Administration oppose efforts to crack down on employers who misclassify 

their employees as contract workers for the purposes of avoiding of 

paying unemployment taxes? Even if we address all of these issues, 

8 

we have to recognize that the UI Program is not enough to meet 

the challenges that a globalized economy presents. Currently, there 

are two Federal programs that constitute the bulk of our first response capability. 

The Employment Services (ES) Program aims to match job seekers with current employment opportunities, and the Workforce Investment Act (WIA) (P.L. 105–220) provides job training and placement services through local One-Stop Centers. We have them in 

Seattle, and I visited them. At a minimum, I can’t understand why 

the Administration defends its policy to continually decrease funding for these programs to the tune of $2.2 billion at a time when 

businesses and workers they rely upon are challenged most. The 

ES Program enjoys wide support within the business community 

because it links employers with workers that possess skill sets that 

they are looking for. The Federal Government has made a positive 

difference in the lives of countless Americans through these programs, and we can and should do more. Congress can help some 

displaced workers by making it easier for them to move to new 

jobs. Congress could develop a means by which labor policy provides a cushion for workers transitioning into new jobs and improves economic security for workers and families experiencing the 

turbulence of a fast-moving economy. In addition, Congress could 

implement economic tax and education policies that reflect the 21st 

century economy and create family wage job opportunities in the 

future. In Washington State, we used to have unemployment that 

dealt with loggers and fishermen and airplane employees, all of 

whom during certain periods of the year knew they weren’t going 

to be working. You don’t work in the woods in the snow. You don’t 

fish when fish is out of season. You have an unemployment program. That is not what we have today. Regrettably, I believe the 

Congress is not doing enough to help the American worker. This 

Nation was founded on the principle that hard work produces results, and it is our responsibility to recognize the new economic reality and pass progressive legislation that safeguards the American 

dream. Unemployment insurance came into being in this country 

in 1935, when there was nothing for a worker who lost, and we had 

the major Depression. It has been adjusted some over the years. 

But the 21st century, hard work still ought to mean economic security and upward mobility for the American people, and I look forward to hearing today from today’s witnesses and finding out what 

is ahead for this Committee. Thank you, Mr. Chairman. 

Chairman HERGER. Thank you, Mr. McDermott. Before we 

move on to our testimony today, I want to remind our witnesses 

to limit their oral statements to 5 minutes. However, without objection, all of the written testimony will be made a part of the permanent record. To start the hearing today, we will hear from the DOL 

budget proposals from the Honorable Mason Bishop, Deputy Assistant Secretary in the Employment and Training Administration at 

the DOL. Mr. Bishop? 

9 

STATEMENT OF THE HONORABLE MASON BISHOP, DEPUTY 

ASSISTANT SECRETARY, EMPLOYMENT AND TRAINING ADMINISTRATION, U.S. DEPARTMENT OF LABOR 

Mr. BISHOP. Thank you, Mr. Chairman and distinguished Members of the Subcommittee. I am pleased to have the opportunity to 

testify before you today relating to the President’s FY2007 budget 

request as it does relate to the UI Program. The Administration is 

committed to improving the benefit payment and tax integrity of 

the Federal-State UI system. Although States put much effort into 

preventing, detecting, and recovering improper benefit payments, 

they are still too high. In FY2005, an estimated $3 billion in UI 

benefits were paid in error. We project that a little more than half 

of this amount, or about $1.6 billion, is attributable to causes that 

States can detect in the course of normal program operations and 

potentially recover. While access to new databases and automated 

data matches have improved States’ ability to identify potential improper payments quickly, investigations required to establish payments as improper and collection efforts are very labor intensive. 

Thanks to the efforts of this Subcommittee, loopholes in many of 

the State UI laws that had permitted some employers to pay less 

than their fair share of State unemployment taxes were closed 

when Congress enacted the SUTA Dumping Prevention Act of 

2004. Investigating potential cases of SUTA dumping is time-consuming, and the legal costs associated with prosecution of these 

cases is quite high. However, no new Federal funds were provided 

to States to enforce their new SUTA dumping statutes. The department has developed a set of legislative proposals that will help 

States obtain new tools and resources to combat improper benefit 

payments and employer tax evasion. These proposals will, first, 

allow States to use up to 5 percent of all recovered improper payments for additional Benefit Payment Control activities. Second, 

allow States to use up to 5 percent of tax payments recovered as 

a result of employer fraud or tax evasion, such as SUTA dumping, 

for additional tax integrity activities. Third, we would require 

States to impose at least a 15 percent penalty on improper payments due to claimant fraud and to use any fines collected for additional Benefit Payment Control activities. 

Next we would allow States to permit collection agencies to retain up to 25 percent of hard to collect fraud payments and delinquent employer taxes they recovered. We would also provide an incentive for employers to respond to requests for information more 

timely and completely. Employers accounts would be charged when 

they cause improper payments. This would be required only if the 

improper payment were due to the failure of the employer to provide timely or accurate information and if the employer had established a pattern of failing to respond on a timely basis or adequately to such requests. Next we would require all employers to 

report a start work date to the State Directory of New Hires to improve improper payment detection and better target investigations. 

Finally, our proposal would authorize the U.S. Department of 

Treasury to intercept Federal income tax refunds to recover improper payments of UI benefits and certain unpaid employer taxes. 

Together, these seven legislative proposals would reduce improper 

payments and increase improper payment recoveries and delinVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\31492.XXX 31492
10 

quent tax collections by an estimated $2.36 billion over 5 years and 

$5.4 billion over 10 years. 

Our proposal also includes a provision that will give States the 

opportunity to test changes in the UI Program designed to better 

serve the 21st century economy and the workforce. It authorizes 

the Secretary of Labor to waive certain Federal requirements at 

States’ request to permit them to run demonstration projects that 

would accelerate the reemployment of claimants or improve the effectiveness of the State in carrying out UI administrative activities. 

The legislative proposals I just described would give States access 

to additional funds in the long term. The department’s request for 

FY2007 appropriations include a modest increase of $40 million to 

give States additional resources right away to expand certain improper payment reduction efforts. Specifically, we request $10 million to prevent and detect fraudulent UI claims filed using personal 

information stolen from unsuspecting workers. We also propose $30 

million to expand the Reemployment and Eligibility Assessment 

initiative, which ensure eligibility requirements are met by UI 

beneficiaries and offers personalized assistance with work search 

plans and other services through One-Stop Career Centers Nation 

wide. These proposals would pay for themselves in reduced benefit 

payment outlays, and we estimate over $225 million in savings. In 

conclusion, I do thank the Chairman and the Subcommittee for allowing me to come testify and would be willing to answer any questions the Subcommittee might have. Thank you. 

[The prepared statement of Mr. Bishop follows:] 

Statement of The Honorable Mason Bishop, Deputy Assistant Secretary, 

Employment and Training Administration, U.S. Department of Labor 

Good morning. Chairman Herger, Ranking Member McDermott and distinguished 

members of the Subcommittee, thank you for this opportunity to discuss the President’s Fiscal Year (FY) 2007 Budget proposals related to Unemployment Insurance 

(UI). 

The Administration is committed to improving the benefit payment and tax integrity of the federal-state UI system and has developed a set of legislative proposals 

for your consideration that will give states new tools and resources to combat improper benefit payments and evasion of employer taxes. Reducing improper payments is an important component of the President’s Management Agenda, and the 

Department of Labor (the Department) is committed to aggressively implementing 

this agenda to improve the results our programs deliver for taxpayers. 

Although states put much effort into preventing, detecting, and recovering improper benefit payments, the number of such payments is still too high. This is a 

major concern for Secretary Chao and the Department. In FY 2005, an estimated 

$3 billion in UI benefits were paid in error. We project that a little more than half 

of this amount, $1.6 billion, is attributable to causes that states can detect in the 

course of normal program operations and potentially recover. However, to date, 

states have been successful in detecting only 59% of these estimated payments. Further, only about half of the improper payments detected are subsequently collected. 

While access to new databases and automated data matches have improved states’ 

ability to identify potential improper payments quickly, investigations required to 

establish payments as improper and collection efforts are still quite staff and time 

intensive. The Department is continuing to work with the states to find better and 

more efficient ways to reduce improper payments. 

Thanks to your leadership, Chairman Herger and Ranking Member McDermott, 

and the bipartisan efforts of this Subcommittee and the Congress, loopholes in many 

state UI laws that had permitted some employers to pay less than their fair share 

of state unemployment taxes were closed when Congress enacted the SUTA Dumping Prevention Act of 2004 (Public Law 108–295). I am pleased to report that all 

states—except Alaska—have enacted state statutes to combat SUTA (state unemployment tax act) dumping. However, enforcement of the law is still essential. As 

11 

Carl Camden of Kelly Services noted in last year’s hearing on implementing this 

legislation ‘‘You can have the tightest laws on the books and the slickest detection 

tools in place . . . it’s all meaningless if you drop the ball with enforcement.’’ As 

states have begun implementing their SUTA dumping laws, it has become clear that 

these practices have been widespread and costly to state unemployment funds. Prior 

to implementation of SUTA dumping legislation, Michigan estimated it was losing 

between $62 and $95 million annually in state unemployment taxes because of this 

practice. In addition, as of April 2005, North Carolina showed just over $18 million 

lost due to SUTA dumping. However, investigating potential cases of SUTA dumping is time consuming, and the legal costs associated with prosecution of these cases 

are quite high. No new Federal funds were provided to states to enforce their new 

SUTA dumping statutes. 

Legislative Proposals 

The Department believes that it is in many states’ self-interest to devote additional resources to prevention, detection, and recovery of improper benefit payments 

and to enforcement of SUTA dumping laws. And the Department is committed to 

helping States obtain new tools and resources to help reduce fraud and benefit overpayments, as recommended in a recent Program Assessment Rating Tool review of 

the UI program. To this end, the Department has developed a set of legislative proposals that will give states access to additional resources to combat improper payment and employer tax evasion. 

Allow States to Use a Percentage of All Recovered Improper Payments 

for Benefit Payment Control (BPC) Activities. Under current Federal law, all 

improper payments collected by a state must be deposited in the state’s unemployment fund where they may be used only for the payment of UI benefits. 

We propose to amend Federal law to permit states to use up to 5% of all improper 

payments recovered to augment administrative funding for BPC activities. This 5% 

would be deposited in a special state fund where it could be used only for this purpose. 

This amendment would reduce improper payments and increase improper payment recoveries by an estimated $86 million over five years and $236 million over 

ten years. 

Allow States to Use a Percentage of Certain Tax Payments for Tax Integrity Activities. Under current Federal law, all taxes collected by a state must be 

deposited in the state’s unemployment fund where they may be used only for the 

payment of UI benefits. 

We propose to amend Federal law to permit states to use up to 5% of tax payments recovered following a state investigation and assessment of taxes owed due 

to employer fraud or tax evasion such as SUTA dumping for additional UI tax enforcement activities. This 5% would be deposited in a special state fund and would 

be used only for this purpose. 

This amendment would increase recoveries of unpaid taxes by an estimated $13 

million over five years and $19 million over ten years. 

Require States to Impose at Least a 15% Penalty on Fraud Improper Payments. Currently, all states impose penalties on employers who are delinquent in 

paying contributions. It makes sense to require all states to impose a similar fine 

whenever it determines an individual has defrauded the system. The Department’s 

Office of Inspector General (OIG) has devoted considerable resources to uncovering 

UI fraud; these investigations suggest that UI fraud schemes are more complex, 

costly, and far reaching than in the past. 

Individuals who commit UI fraud—a very small percent of all beneficiaries—are 

sometimes required to do nothing more than repay the amount received fraudulently. While a limited disqualification from future benefits may be imposed, this 

sanction is meaningless if the individual goes back to work and remains employed. 

Although state laws provide for criminal penalties, cases are rarely prosecuted due 

to the relatively low dollar amounts involved and the high cost of prosecution. 

Under our proposal, the Social Security Act would be amended to require states 

to impose a penalty of not less than 15% on improper payments that are due to 

fraud and to deposit any fines collected in a special state fund, from which they may 

be withdrawn onlyfor BPC activities. The proposal is limited to improper payments 

due to fraud to ensure that penalties will be required only when there was intent 

to deceive on the part of the beneficiary. 

This amendment would reduce improper payments and increase improper payment recoveries by an estimated $314 million over five years and $855 million over 

ten years. 

Allow States to Permit Collection Agencies to Retain a Percentage of 

Fraud Improper Payments and Delinquent Employer Taxes Recovered. SevVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
12 

eral states have explored using private collection agencies to collect certain improper 

payments or delinquent employer taxes. One of the problems states have encountered is finding a way to pay the private agency’s costs of collection, which can be 

up to 25% of the amount collected. Federal law would be amended to permit up to 

25% of any amount collected by the collection agency on fraud improper payments 

or delinquent taxes to be retained by that agency. This would be permitted only 

when the State UI agency has (1) made its own collection efforts and (2) declared 

the amount uncollectible. Thus, the proposal only applies to hard-to-collect debt that 

would not otherwise be collected. 

This amendment would increase recoveries of improper payments and delinquent taxes by an estimated $126 million over five years and $341 million over ten years. 

In addition, our budget includes legislative proposals that would support the Department’s integrity activities by providing states with new tools to more effectively 

prevent, identify, and recover improper payments and delinquent taxes. 

Prohibit States from Non-Charging Employers When Improper Payments 

Occur Due to Employer Fault. Our budget proposal also includes an amendment 

that would reduce one of the most common reasons for improper payment—an erroneous initial determination of eligibility—by providing employers with an additional 

incentive to respond to state requests for separation information. 

Employers sometimes fail to respond or provide incomplete or late responses to 

requests for information related to reasons their former employees were separated 

from employment. When this happens, payments may be issued based on the beneficiary’s statement and ‘‘charged’’ to the employer’s experience rating account, which 

may later cause his/her tax rate to increase. The employer may appeal after benefits 

have been paid and provide information at an appeal hearing that results in benefits being denied retroactively. The benefits already paid are established as improper payments, and in many states, the employer’s account is relieved of those 

benefit charges. If the employer had responded fully and timely, the improper payment would have been avoided as well as the administrative costs connected with 

appeals and establishment and recovery of improper payments. States tell us they 

believe that some employers are not as conscientious as they should be in meeting 

deadlines for providing information about reasons for separation, and routinely file 

appeals at which information is provided that results in their being relieved of 

charges for benefits already paid. 

To provide an incentive for more timely and complete responses, Federal law 

would be amended to prohibit relief from charging when the employer or its agent 

is at fault, even if the improper payment is eventually recovered. The prohibition 

would only apply if the improper payment was due to the failure of the employer 

to provide timely or accurate information and if the employer had established a pattern of failing to respond on a timely basis or adequately to such requests. This amendment would reduce improper payments by an estimated $84 million 

over five years and $233 million over ten years. 

Require Employers to Report ‘‘Start Work Date’’ to the State Directory of 

New Hires. The SUTA Dumping Prevention Act granted state UI agencies access 

to the National Directory of New Hires, which allowed states access to a wider universe of hires, including those by Federal agencies and multi-state employers who 

may report all new hires to a single state. Access to these data has proved to be 

extremely valuable. States matching UI payment files with the national directory 

have seen a significant increase in the number of improper payments identified compared to the number identified using their own state new hire directories. As you 

may know, individuals who are working and receiving UI benefits concurrently are 

the single largest cause of improper UI payments. 

However, these data could be even more effective for UI payment integrity if all 

employers report the date when an individual started work. When the start work 

date is not provided to the directory, states must contact employers to get this information—a time consuming and costly process. In some cases, investigations may not 

be pursued because of the lack of the start date in the directory. The Department’s 

OIG has recommended amendments to Federal law to require employers to report 

a new hire’s first day of earnings. 

For this reason, we propose to amend Federal law to require that the date the 

individual starts work be reported by all employers to the applicable state directories of new hires, which in turn will report this information to the National Directory of New Hires. This amendment would reduce improper payments and increase 

improper payment recoveries by an estimated $60 million over five years and $167 

million over ten years. 

Authorize the U.S. Department of the Treasury to Intercept Federal Income Tax Refunds for Certain UI Purposes. The Administration’s FY 2005 and 

FY 2006 budgets included legislative proposals authorizing the U.S. Department of 

13 

the Treasury to recover improper payments of UI benefits through offset from an 

individual’s Federal income tax refunds via the Treasury Offset Program (TOP)— 

a government-wide debt matching and payment offset system that matches delinquent debts owed to various government agencies to Federal income tax refunds. 

This year’s proposal is expanded to also authorize the collection of certain unpaid 

employer taxes using TOP. 

Both the National Governor’s Association and the National Association of State 

Workforce Agencies passed resolutions encouraging the use of the TOP system for 

recovering these debts. 

This amendment would increase recoveries of benefit improper payments and de- linquent taxes by an estimated $1.677 billion over five years and $3.55 billion over 

ten years, thereby contributing to state UI trust fund solvency and lower employer 

taxes. 

Together, these seven legislative proposals would reduce improper payments and 

increase improper payment recoveries and delinquent tax collections by an estimated $2.360 billion over 5 years and $5.401 billion over 10 years. We are pleased 

that the FY 2007 Budget Resolution passed by the Senate and the Budget Resolution passed by the House Budget Committee both include our UI integrity proposal 

and are hopeful Congress will enact this legislation before the 109th Congress adjourns. 

The FY 2007 budget also includes a legislative proposal that will give states the 

opportunity to demonstrate innovative initiatives to better serve the 21st century 

economy and workforce. The UI program was designed over 70 years ago when our 

economy and workforce were quite different than they are today. While the program 

has served our nation’s workers and economy well, we should be open to exploring 

innovations that could improve its performance in the future. 

Permit States to Request Waivers of Certain Federal Requirements. Certain requirements of Federal law may limit states’ flexibility in establishing new 

ways to help beneficiaries become reemployed quickly or undertake other innovations to improve the administration of the UI program. This new proposal would authorize the Secretary of Labor to waive certain Federal requirements at states’ request to permit them to run demonstration projects that would accelerate the reemployment of claimants or improve program administration. It is important to note 

that the Department could not grant a waiver if it would limit the state’s ability 

to promptly determine and pay benefits to eligible workers or deny due process of 

the law. The demonstration would also have to be cost neutral with respect to the 

effect on the state unemployment fund. The proposal would permit states to experiment with program design in ways that may benefit unemployed workers and provide important experience and information for the federal-state UI system. We 

would welcome the opportunity to work with you on demonstrations that spur innovation and flexibility in the UI program. 

Appropriations Requests 

The legislative proposals I just described would give states access to additional 

funds in the long term. However, following enactment at the Federal level, state legislation will be required before certain proposals related to new resources can be implemented. Thus, there would be some delay before theses funds would be available. 

The Department’s request for FY 2007 appropriations includes increased funding for 

state UI operations to reduce improper payments and speed the reemployment of 

UI beneficiaries. This modest increase of $40 million would give states additional 

resources right away, in FY 2007, to expand certain improper payment reduction 

efforts. 

Each of the increases proposed for FY 2007 would more than pay for itself in reduced benefit payment outlays from state unemployment funds. I hope that you will 

communicate your support for the initiatives described below to the Committee on 

Appropriations. 

Combat Identity Theft. Also in support of UI payment integrity, the FY 2007 

budget requests an appropriation of $10 million to prevent and detect fraudulent UI 

claims filed using personal information stolen from unsuspecting workers. Most UI 

claims are now filed by telephone or the Internet, making the UI program convenient for unemployed workers to access and more efficient to administer. However, 

telephone and electronic access create new opportunities for schemes to obtain benefits fraudulently. The Department’s OIG documented identity theft schemes in the 

UI program as a top management challenge. At the core of the OIG’s concerns is 

that identity theft is now conducted by ‘‘nontraditional organized crime groups’’ that 

result in more sophisticated fraud schemes than previously seen within the UI program. The OIG reported that two schemes, one involving four states, were responsible for over $11 million lost to the unemployment trust fund. Based on available 

14 

data, we estimate that the nationwide incidence of identity theft improper payments 

is approximately $313 million a year out of benefit outlays totaling $32 billion a 

year. The $10 million request for FY 2007 would be used to deploy a suite of safety 

checks that include automated address verifications, electronic screens to detect ‘‘at 

risk’’ claims, staff training to detect the warning signs that are indicative of fraud, 

increased investigative staffing, and enhanced employer outreach efforts. The requested funds for identity theft prevention and detection would enable states to staff 

positions to promptly examine and reconcile discrepancies in individuals’ personal 

identifiers before first payments are made. The proposed safeguards would more 

than pay for themselves, as these activities are expected to prevent an estimated 

$77 million in improper payments. We think this is a good investment of scarce taxpayer resources. 

Ensuring Continued Eligibility and Promoting Reemployment. Another 

key element to improving UI payment integrity is ensuring that UI beneficiaries 

meet requirements for continued eligibility. In general, beneficiaries must be able 

to work, be available to work, and actively seek work to remain eligible. Facilitating 

reemployment of UI beneficiaries is also a priority for the UI program. The best way 

to help UI beneficiaries is to help them find good jobs quickly. We have developed 

an initiative that supports both of these objectives. 

Last year, the Department provided funds to 20 states and the District of Columbia to provide Reemployment and Eligibility Assessments, or REAs, to UI beneficiaries. A number of independent studies found that attention to eligibility and reemployment service needs assessments resulted in relatively shorter claims duration 

for beneficiaries by speeding reemployment and reducing improper payments. The 

REAs strengthen the integrity of the UI program by assuring eligibility requirements are met and offering personalized assistance with work search plans and 

other services through One-Stop Career Centers. In the FY 2007 budget, we request 

an appropriation of $30 million to expand the REA initiative to additional states for 

reviewing beneficiary eligibility and providing job search assistance in person. We 

estimate that this $30 million expansion of current REA efforts would reap as much 

as $151 million in savings to state unemployment funds. 

Conclusion 

Thank you for the opportunity to present initiatives that we believe will improve 

the benefit payment and tax integrity of our nation’s UI program and promote innovations that can make it more responsive to the demands of our 21st century economy and workforce. We look forward to working with the Subcommittee on these 

issues. I will be glad to respond to any questions you may have. 

f 

Chairman HERGER. Thank you, Mr. Bishop. The gentleman 

from Louisiana, Mr. McCrery, to inquire. 

Mr. MCCRERY. Thank you, Mr. Chairman. Mr. Bishop, I noticed 

in the Administration’s budget proposal that you propose to extend 

the 0.2 percent FUTA surtax. As you know, that was created a 

number of years ago as a temporary surtax. Why does the Administration think it is necessary to continue that temporary surtax? 

Mr. BISHOP. Well, as you know, we looked at that surtax a few 

years back in terms of reform—— 

Mr. MCCRERY. Right. 

Mr. BISHOP. —and I think that we would continue to want to 

tie that to reform efforts. At this point, the Office of Management 

and Budget made a decision that they wanted to recommend to 

Congress to continue that surtax in order to assure that there were 

moneys in the Federal unemployment trust fund to conduct the 

kinds of activities we need to do. 

Mr. MCCRERY. Well, what is the balance on the trust fund now? 

Mr. BISHOP. Do you know the latest balance? Thirty billion? I 

will have to get that. 

Mr. MCCRERY. It is about $30 billion, isn’t it? 

Mr. BISHOP. Thirty billion roughly, I believe. Yes. 

15 

Mr. MCCRERY. How much do we spend in a typical year from 

the trust fund? 

Mr. BISHOP. Well, our appropriation for State administrative activities is roughly $2.7 billion to $2.8 billion. Then there obviously are loans that some States have. We don’t have many States 

that have loans at this time. As you know, when we run into recessionary times, which we did about 4 years ago, often the trust fund 

can go down quite a bit, and with redact distributions and other 

things. We do believe in having a healthy trust fund level. But 

again, you know, it is a really a balancing act that Congress and 

the Administration have to discuss, and we can continue to discuss 

that with you if you like. 

Mr. MCCRERY. I hope we do. It sounds to me, Mr. Chairman, 

like the Administration is really holding on to that surtax as some 

sugar to include in a future reform proposal, which is fine. But in 

the past few years, actually, the Administration has had a proposal 

for reform, which basically dealt with moving to the States much 

of the responsibility for collection and distribution of administrative 

taxes and costs. What has happened to those proposals? Are you 

looking at polishing those and bringing them back to us? Or what 

is the status? 

Mr. BISHOP. Well, again, we would be more than willing to talk 

to Congress at any time around administrative funding reform. We 

have not specifically proposed that in the FY2007 budget. Instead, 

we have proposed the UI waiver proposal that we believe would 

give States—while they wouldn’t, under our waiver proposal, specifically be able to do administrative funding reform, they would be 

able to ask for waivers that might help speed the reemployment of 

claimants or other administrative efficiencies they might be able to 

find in their laws. We have felt that through waiver authority, it 

may demonstrate that States can operate these programs in different ways that better connect to the 21st century rather than the 

20th century when the law was originally created back in the 

1930s. While we don’t have a specific proposal for administrative 

funding reform, if Congress would like to engage in that discussion, 

we would be more than willing to do so. But at this point, we have 

proposed the UI waiver authority so we can at least get the ball 

rolling and start showing that, indeed, States probably can make 

more sense of the program as it is currently constituted. 

Mr. MCCRERY. Okay. Well, thanks. We look forward to working 

with you to reform the system, and I appreciate your somewhat 

frank answer to the question. I yield back, Mr. Chairman. 

Chairman HERGER. I thank the gentleman. The gentleman 

from Washington, Mr. McDermott, to inquire. 

Mr. MCDERMOTT. Mr. Bishop, witnesses on the next panel will 

testify that Federal funding for the administration of UI has failed 

to keep pace with inflation. Do you agree with that? 

Mr. BISHOP. I agree that we are in a tight budget cycle and that 

often there are many competing priorities. 

Mr. MCDERMOTT. Do you agree that they have failed to keep 

up with inflation? 

Mr. BISHOP. I don’t have evidence of that. 

Mr. MCDERMOTT. You don’t have any evidence of that. You disagree with that? 

16 

Mr. BISHOP. I don’t have—I don’t have evidence. I disagree—— 

Mr. MCDERMOTT. We have a fundamental disagreement about 

whether—— 

Mr. BISHOP. The States get adequate funding in order to operate their State UI programs currently. 

Mr. MCDERMOTT. By your definition. You say it is a statement 

you are making. They get adequate money? 

Mr. BISHOP. They are all able to run their UI systems with the 

moneys they receive currently. 

Mr. MCDERMOTT. But is it possible, if you are not keeping up 

with inflation and don’t have enough people and whatever, that 

you then let some things slide through because you just don’t have 

enough people to look at the data? 

Mr. BISHOP. Well, it is just like any program. When you are 

managing programs at the Federal, State, or local level, any programs, you have competing priorities, and you have to take the 

moneys you have and deal with the competing priorities you have. 

Many of the competing priorities in the program, obviously, are 

benefit timeliness, payment accuracy, overpayments, and the like. 

They have to take the administrative moneys they receive and 

meet those competing priorities. 

Mr. MCDERMOTT. Do the best they can with it. 

Mr. BISHOP. Sure. 

Mr. MCDERMOTT. That is okay. I understand that. If there is 

a problem, then the next question I have is I see your proposal to 

seize the Federal tax refunds from individuals who have received 

overpayments. 

Mr. BISHOP. Yes. 

Mr. MCDERMOTT. Does it make any distinction between whose 

fault it is? 

Mr. BISHOP. It does. Yes, it does. There are actually a number 

of different kinds of overpayments, and there are some overpayments that are not the fault of the individual. Typically, the way 

it operates is when overpayments are not the fault of the individual, then the States do not establish overpayment recoveries in 

those cases. The only overpayments that would go to the Internal 

Revenue Service (IRS) are those that are at the fault of the claimant that have been established by the State, due process is provided to the claimant, and then that goes to the IRS for that collection. 

Mr. MCDERMOTT. You are not going to take innocent mistakes? 

Mr. BISHOP. No, we would not. Our proposal provides for due 

process—— 

Mr. MCDERMOTT. We haven’t seen the legislative language. 

That is why I am saying—— 

Mr. BISHOP. Yes. 

Mr. MCDERMOTT. You know, I am operating in the dark here 

as to what you really want to do, and I get worried when I am operating in the dark with you guys. 

Mr. BISHOP. Well, we apologize for that. We have just finished 

up our legislative language, and you will have it today. 

Mr. MCDERMOTT. Your statement is that it will not be applied 

to somebody where there is an innocent mistake? 

Mr. BISHOP. That is correct. 

17 

Mr. MCDERMOTT. Okay. Now if the Administration is interested in helping the UI recipients, it seems to me it is questionable 

why you would allow annual funding for the employment-related 

services to decline by $1.4 billion since 2002. What is your justification for cutting the money in a program which seems to be working? I mean, unemployment is down and everything. Why would 

you go in and cut the money? 

Mr. BISHOP. Which? I am sorry. I am not sure what you are ref- erencing when you say we cut $1.4 billion. 

Mr. MCDERMOTT. In the cuts in the WIA and the ES Program, CRS says you cut $1.4 billion from 2002. 

Mr. BISHOP. Well, first of all, the Employment Service Program has gone down. There was a cut last year of roughly $60 million. 

Thirty million dollars in the basic employment service and then the 

elimination of the reemployment service grants. Let me just walk 

you through—— Mr. MCDERMOTT. But $60 million—— 

Mr. BISHOP. Sixty million in the ES. 

Mr. MCDERMOTT. —is not $1.4 billion. 

Mr. BISHOP. Well, I would have to see where CRS is coming up with the $1.4 billion target. They may be including our proposed 

2007 budget for the WIA because I am not sure where $1.4 billion 

would be coming from. But let me just quickly explain what the situation is. Right now, essentially, I hate to admit, but in this country we fund two workforce investment systems. We fund a Statebased employment service system and a locally based WIA system. 

The labor exchange services authorized under the Wagner-Peyser 

Act (P.L. 73–30) for the ES are the exact same services that are 

authorized by the WIA, and they are called ‘‘core services.’’ We essentially are funding duplicative and inefficient administrative bureaucracies in the States and local communities. In fact, we are 

only training 200,000 people with $4 billion in this country right 

now. Given the public policy priority we have as a result of our 

need to be competitive in a global economy, where we need to give 

people better access to post secondary training activities and we 

are only graduating 200,000 in a program with $4 billion, we think 

that we can do a lot better. We have proposed the consolidation of 

these programs into one. We can still, even with the President’s 

FY2007 budget request for WIA, more than triple the number of 

workers trained because so much of the moneys are going to administrative overhead and bureaucracy and competing bureaucracies out there. 

Mr. MCDERMOTT. It is your testimony that there will be no reduction in services by taking that money out and making one program out of it? 

Mr. BISHOP. That is my testimony because right now—— 

Mr. MCDERMOTT. That legislative language is before the Congress? 

Mr. BISHOP. Yes, it is. Right now, out of that $4 billion, as 

States report to us, about $1.2 billion to $1.5 billion of that goes 

to administrative infrastructure. We are only training, exiting 

200,000 people in training right now under the WIA. Again, the 

services authorized under the Wagner-Peyser Act and the services 

authorized under the WIA are the exact same services. You have 

18 

got State-based ES, locally based WIA services. The One-Stop Career Centers you reference? I can show you One-stop Career Centers all over the country where you have got a One-Stop in one 

community and an employment service office in the exact same 

community competing for business. Even where they have brought 

them together in the same building, I can show you buildings 

where you go to one side, and it is the employment service. You go 

to the other side, it is the WIA. When you ask them who goes 

where, you get this sort of mumbled jumbled, ‘‘Well, if you are this 

guy or that guy or that,’’ and you can’t even explain it. We are not 

doing any favors to workers in this country by continuing to operate the programs as we are. They are inefficient. They are administratively burdensome. There is lots of overhead. We can do a lot 

better, and that is what we have proposed. 

Mr. MCDERMOTT. Well, you are making a heavy charge, and 

we will have some people here from the States, and we will ask 

them about it. Thank you. 

Mr. BISHOP. Sure. 

Chairman HERGER. I thank the gentleman. The gentleman 

from Colorado, Mr. Beauprez, to inquire. 

Mr. BEAUPREZ. Thank you, Mr. Chairman. Thank you, Mr. 

Bishop, for being with us today. I applaud your efforts to try to 

make the program better. One of the places that I am sure concerns you, I take it, from your testimony is the overpayment issue. 

Nine percent of total benefits paid out is, I think, excessive by almost anybody’s definition. It would seem to me that technology 

today probably offers some hope for improvement in that overpayment problem, $3 billion. Tell me, where is the hope? How can we 

get our arms around this, I hope, quickly? 

Mr. BISHOP. Well, first, technology has been wonderful just in 

its opportunity to allow people to apply for UI. Most people, often 

we get asked, ‘‘Where are the unemployment offices?’’ There really 

aren’t any anymore. Because of the Internet and telephone technology and other technologies, people now can apply in a much 

more easier, customer-service focused fashion. Where technology 

has helped us on the overpayment side are with things like better—many States now have agreements with the Social Security 

Administration, where we are using technology to cross match Social Security numbers. So that if somebody falsely grabbed a Social 

Security number and applied for UI benefits, we can start to find 

out now that that is a fraudulently obtained Social Security number. That is one major example. Also, the access to not only State 

Directory of New Hires, but Congress gave the workforce agencies 

access to the NDNH to assure that one of the biggest reasons for 

overpayments are people who go back to work, but then maybe collect an extra week or two, even though they have gone back to 

work. Well, now we have access to the NDNH, the States do. As 

a result of that, the ability to make that technological connection, 

we know when people are going back to work, and then we can set 

up an overpayment collection if we need to do so in those kinds of 

cases. Those are two big examples of how we—— 

Mr. BEAUPREZ. We have got a legitimate—well, not legitimate. 

We have got an overpayment problem to people who at least are 

legitimately supposed to here and working, but we have also got a 

19 

payment problem to people who aren’t even supposed to be legally 

working here? 

Mr. BISHOP. No, no, no. There are reasons why—there are particular reasons whey there are overpayments. Probably the largest 

reason for an overpayment that is the fault of the claimant is the 

claimant going back to work, but yet continuing to make a claim 

even though that individual has gone back to work. 

Mr. BEAUPREZ. I understand that. 

Mr. BISHOP. If you are an undocumented worker or illegal immigrant, whatever you want to call it—— 

Mr. BEAUPREZ. Illegal. 

Mr. BISHOP. —you are not allowed to work in the country. 

Therefore, you are not allowed to collect UI. However, there are 

cases, whether individuals here illegally or legally, where maybe 

they fraudulently obtain a Social Security number. 

Mr. BEAUPREZ. Right. 

Mr. BISHOP. They need that Social Security number in order to 

apply for UI. We now are in the process of connecting all States 

to be able to cross match with the Social Security Administration 

to assure that Social Security numbers are not being fraudulently 

obtained and used for UI purposes. We started a pilot in two 

States. That was resoundingly successful. Now we are in the process of rolling that out to every State. 

Mr. BEAUPREZ. Let me ask you then, one of the biggest questions I get asked by employers who would like to comply with the 

law that says you have to hire only legal workers is that they don’t 

have access to a good system to verify that their Social Security 

numbers they are being given are accurate. Will that possibility 

exist in the very near future? 

Mr. BISHOP. Congressman, I can’t answer that question. That 

is not within the realm of my discussion here on UI. That may be 

Homeland Security or another agency could help with that or another part of DOL. But I just don’t have information on whether 

that is available or not. 

Mr. BEAUPREZ. Well, let me stay on point then. We have got 

an overpayment problem. Do we also have a problem of some percentage of absolutely false, erroneous payments? 

Mr. BISHOP. Yes. 

Mr. BEAUPREZ. Do we know what that number is? 

Mr. BISHOP. We do. Like I said, let me give you kind of a quick 

breakdown, sort of a three broad category breakdown, the way we 

do it. We have what are called nonfraud recoverable overpayments, 

which are overpayments in the absence of fraud or abuse, but they 

are recoverable. That is about $1.4 billion. Then we have what are 

called the nonfraud not recoverable, where there was an absence 

of fraud or abuse, and the State does not choose to recover it. This 

gets to what Congressman McDermott was asking. Those are cases 

where an employer may have overstated quarterly wages, and so 

the recipient received more than he or she should have, and it 

wasn’t their fault. Therefore, the State typically won’t collect those 

back. That is about $722 million. Then we do have fraudulent overpayments, and that is about $811 million last year. That is kind 

of the three broad. Clearly, the first and third are the ones we really want to go after. 

20 

Mr. BEAUPREZ. Aggregated together, about $3 billion? 

Mr. BISHOP. About $3 billion. That is correct. 

Mr. BEAUPREZ. Thank you. I yield back, Mr. Chairman. 

Chairman HERGER. Thank you. The gentleman from California, 

Mr. Becerra, to inquire. 

Mr. BECERRA. Thank you, Mr. Chairman. Thank you, Mr. 

Bishop, for being here with us. Let me ask a couple of questions 

going back to a point that was raised by the gentleman from Washington, Mr. McDermott, on the tax refund offset that the Administration is proposing. If you grant the authority to seize some of 

these refunds that individuals receive for taxes paid for the purpose of collecting overpayments in unemployment that was given to 

the individuals, did I hear you say to Mr. McDermott that it would 

not include the seizing of refunds from those individuals where the 

overpayment that the individual received was as a result of innocent error? 

Mr. BISHOP. That is correct. In other words, the reason is, Congressman, because the State in those situations would not set an 

overpayment recovery in the first place. In other words, if, like I 

mentioned in my second piece here, if it was due to, say, the employer had overstated the quarterly wages and so, therefore, the recipient received more than he or she should have, the State won’t 

set up an overpayment recovery in that case. Therefore, there 

would be nothing to then send to the IRS. 

Mr. BECERRA. Tell me if there are any examples that you can 

think of where an individual would have received an overpayment 

in UI that was due not to the individual’s intention to defraud the 

Government, but where the refund, the tax refund that that individual may receive would still be subject to seizure? Is there any 

example? 

Mr. BISHOP. I can’t think of an example where that would happen. 

Mr. BECERRA. Okay. So long as the individual who received the 

UI overpayment did not receive it as a result of any intentional 

fraud, that individual would not be subject to having his or her tax 

refund seized for the purpose of collecting the overpayment? 

Mr. BISHOP. That is correct. Then let me just again add that 

when an overpayment is established by the State, those recipients 

have due process rights. If they feel that that overpayment has 

been set inappropriately or incorrectly or that, they have the ability 

to appeal and go through a continual appeals process. That process 

would have to play itself out before any referral to the IRS would 

occur. 

Mr. BECERRA. Thank you for that response. With regard to enlisting debt collection agencies to recover overpayments and delinquent unemployment compensation (UC) taxes, do you have a 

sense of how much we would pay someone to collect moneys owed 

to the Government? 

Mr. BISHOP. I don’t have a particular figure in my head. I think 

it would be similar to how other entities, Government sometimes 

allows private collection agencies to collect on behalf of other kinds 

of delinquent—— 

Mr. BECERRA. I would be very interested, Mr. Chairman, to the 

point, to the degree that the agencies and the Federal department 

21 

here could give us a response. I would be very interested to know 

where they head in this proposal. Because I have seen some proposals come forward from the Administration, where we would be 

paying debt collectors something in the order of 25 percent to over 

50 percent of the amount that is due to the Government as a duty 

for that debt collection when we know that the Federal Government, through its own enforcement agencies, could do it for a lot 

less money. It is just a matter of making sure you have a force in 

place within the Government to do so. I would be very interested 

to see what we come up with. Because I don’t want this to be soft 

debt collectors who go out there and make money on the taxpayers’ 

dime simply because the Government made an error in not collecting or in overpaying. I would be very interested in getting that 

information. 

Mr. BISHOP. Okay. 

Mr. BECERRA. Thank you. Final question would be a little bit 

off the subject on the issue of the minimum wage. We have not 

seen an increase in the minimum wage in close to 10 years now. 

At this stage, at $5.15 an hour, the minimum wage is at its lowest 

point ever. Even if you make the minimum wage, for a full year’s 

work—and over 2 million Americans today are working full time at 

the minimum wage—you are earning less, about two-thirds of what 

we consider to be poverty. You can’t even meet the threshold of 

what we consider to be poverty working at the minimum wage. 

While there are 2 million people who receive at the full-time basis 

the minimum wage, you have another 10 million Americans who 

earn something between $5.15 an hour, the minimum wage, to 

about $7 an hour. On top of that, if you include folks who make 

between $7 and $8 an hour, which is still a very, very modest 

wage, you are talking about another 8 million Americans who 

would fall into that category. Have there been any discussions 

within the DOL with the Secretary, Secretary Chao, about the need 

to try to increase the working wage for many millions of Americans 

who are right now earning the minimum wage at $5.15 an hour? 

Mr. BISHOP. We have a lot of conversations about helping increase wages, but let me tell you the context of the conversations 

we have. The context of the conversations we have are about the 

data that shows the gap that is emerging in our country between 

those that have post secondary educational attainment. That is not 

just 4-year degrees. It may be 2-year degrees, industry-recognized 

certifications, licenses, and so forth, apprenticeship programs. 

Those who do and those who do not. The concern we have is that 

if you look at that data, we have to, as a Government, our national 

policy has to be about trying to provide as much access to people 

as possible through various successful post secondary programs, 

specifically through community colleges often. That is the conversation we have. That is how people’s wages are going to rise. Their 

wages are going to rise through the ability to connect to post secondary and to go into very well-paying jobs, whether they be 

skilled jobs like in skilled trades or whether it be professional jobs 

or the like. We have many, many individuals who, with better access to post secondary education and training, could get higher 

wages. That is the kind of conversation we have been having. 

Chairman HERGER. The gentleman’s time has expired. 

22 

Mr. BECERRA. Thank you, Mr. Chairman. 

Chairman HERGER. The gentlelady from Pennsylvania, Ms. 

Hart, to inquire. 

Ms. HART. Thank you, Mr. Chairman. I want to touch on that 

issue before I jump into another question. I thought that was a 

very appropriate answer. A lot of the States have already addressed the minimum wage issue themselves. Notably, Washington 

State has a minimum wage of $7.63 an hour. It is interesting, if 

you look at unemployment rates and some of the States that actually have raised the minimum wage, and I don’t think the news is 

good, depending on how high they go, if they are going over what 

the market might want to demand. But I think our goal is to certainly find more opportunities for people to get educated so that 

they will obviously earning more money. I wanted to make that 

point. I think it is important for the UI Program to provide for opportunities for people to become reemployed as quickly as possible. 

I mean, obviously, there are time limits and other things placed on 

the program on purpose because the goal is not for people to be unemployed for as long as they can be under the program. The goal 

is for them to have some sustenance while they are looking and 

until they find another job. I noticed in your testimony a proposal 

to allow for waivers for certain requirements in the unemployment 

program, different rules. Can you give us some examples—— 

Mr. BISHOP. Sure. 

Ms. HART. —of unemployment waiver programs that some of the 

States could choose to operate if Congress actually makes this authority available to the States? I am interested in that and some 

of the things that you may be looking to learn from the types of 

waivers that we would grant. 

Mr. BISHOP. Yes, thank you, Congresswoman. First, our proposal for waivers would be in two broad areas. One, it would be 

waivers that would help facilitate more rapid reemployment, or the 

second would be methods of administration and more efficient ways 

to administer the program. Those are kind of the two broad areas. 

Frankly, our hope would be, just like when this kind of authority 

has been granted historically to States, that States would come up 

with things that we haven’t even conceived of at this point. We 

have thought of particular instances where, through this waiver 

authority, there might be ways—for instance, there might be accounts that people would like to be able to, States may want to 

work with their folks to establish. I mean, part of the problem we 

have now is we have a black or white system. Either you are unemployed and you get a check, or you are employed and you don’t. We 

can conceive of ideas that States may come up with sort of as the 

laboratories of democracy, which we like to say, whereby they may 

have ways to help people transition more easily from that sort of 

black or white kind of situation. Where they may want to set up 

accounts to help people use some of the money to get retrained 

while they are working or that maybe in certain cases they may 

want to do wage supplementation or other kinds of ideas. We are 

pretty much open to anything. We think that those are kind of the 

two broad areas. That within those two broad areas, there are 

things that the States would be creative about. I might add on the 

UI waiver authority that those waivers would not only come in 

23 

from the Governor, but they would have to be approved by State 

legislature. There is that check there. It would be approved by the 

Secretary, and that they would be time-limited demonstration 

projects and that they would have to be cost neutral, and the 

States would have to provide a final evaluation or report on the results of the demonstration as well. Our hope is to use this to learn, 

to be able to come to Congress and make suggestions on improvements in the program because, as has been stated earlier, it was 

created in 1935, and we are now in 2006. The economies of those 

two eras are very, very different. 

Ms. HART. Thanks. Further on that, I know one of the goals that 

in years past was addressed very well was the change in welfare 

and the system. 

Mr. BISHOP. Yes. 

Ms. HART. Obviously, we saw it work really well and the States 

moving forward. Now we are looking at some changes in the medical liability system and how it has worked well in the State of 

California and how we really do need to implement that Nation 

wide. I think it is a great idea to give the States the freedom to 

do that for a lot of reasons. But obviously, they can see results 

more quickly. Certainly, it is a lot easier to get the support from 

the House and Senate here on the Federal level if we have seen 

some real positive results with the program. I think that is a great 

idea, and I am very supportive. Let us know what we can do to 

help that happen. 

Mr. BISHOP. Thank you. I appreciate that. Thank you. 

Ms. HART. I yield back, Mr. Chairman. 

Chairman HERGER. I thank the gentlelady. Mr. Bishop, the 

SUTA Dumping Prevention Act of 2004 requires States to strengthen their UC laws to better prevent SUTA dumping, which involves 

unemployment tax avoidance schemes by some employers. That act 

also requires Secretary Chao to submit a report to Congress by 

July 15th of this year, 2006, assessing State actions to comply with 

this law and recommending any additional congressional actions. 

First, how is the implementation of this law going? Second, when 

will we receive your official report? 

Mr. BISHOP. Well, I guess the easy answer is we will make sure 

we submit the official report by the date that Congress has mandated. I will turn to my staff behind me and remind them that they 

have got to make sure we get that report up here. But we think 

the SUTA dumping implementation has gone very, very well. We 

actually only have one State—unfortunately, we do still have one 

State outstanding that has not enacted their State SUTA dumping 

law. But all of the other States have complied. States have really 

begun the process of enforcing and looking after that. Right now, 

the States that piloted the SUTA dumping detection software found 

many cases of potential SUTA dumping. In Utah, they found 36 

cases. Rhode Island, 21. In California, there was 419 cases of SUTA 

dumping. In Virginia, 62. Now this pilot was before the full legislation was enacted by the Congress, but it gives you some idea of 

what we saw early on as a result of those States piloting it. We 

will continue to monitor that, and we will, again, make sure we get 

the report up to you in a timely manner. 

24 

Chairman HERGER. Thank you. Could you tell us more about 

the outcomes in States that have started to match data in the 

NDNH with their State unemployment rolls? Are there savings 

that have already been found as a result of this? 

Mr. BISHOP. If I could, if I could follow up with you with the 

answers to those questions? It is still a bit early in terms of the 

access because the access to that national directory occurred 

through the SUTA dumping legislation. If I could, if I could forward you up some early results from that, we could do that as a 

follow-up. 

Chairman HERGER. That will be fine. Mr. Bishop, I want to 

thank you again for testifying. 

Mr. MCDERMOTT. Could I ask one clarifying question? 

Chairman HERGER. Quickly, yes. 

Mr. MCDERMOTT. We were presented with the text of this legislation just at the beginning of this hearing. I hadn’t had a chance 

to look at it when I asked a previous question. I have looked at it 

now, and it authorizes the IRS to recap overpayments. But I don’t 

see anything that says the States cannot seek overpayments and 

the IRS can’t help them do that if the overpayment was not at the 

individual’s fault. Now you state that the States won’t go after people when it is not their fault. But the legislation does not state 

that. But it is your intention, what Mrs. Chao sent up here dated 

May 3, the intention of that is that the States cannot go against 

people if it is not their fault? 

Mr. BISHOP. That would be the intention. If the Subcommittee 

feels we need to work on language that makes that more clear, we 

would love to work with you on that. 

Mr. MCDERMOTT. I would hope you would look at section five. 

Mr. BISHOP. Okay. 

Mr. MCDERMOTT. Because that is the section where I looked 

for it, called ‘‘Collection of Past Due,’’ and I think that that is 

where you ought to work out some language so that it is clear. 

Mr. BISHOP. Okay. We will definitely do that. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

Chairman HERGER. You are welcome. Again, thank you very 

much, Mr. Bishop, for your testimony. 

Mr. BISHOP. Thank you, Mr. Chairman. 

Chairman HERGER. Would the next panel please have a seat at 

the table? On this panel, we will be hearing from Dr. Sigurd 

Nilsen, director of education, workforce, and income security issues 

at the GAO. Roosevelt Halley, president-elect of the National Association of State Workforce Agencies (NASWA). My Ranking Member, do you have a constituent of yours that you would like to introduce? 

Mr. MCDERMOTT. Mr. Chairman, I would like to introduce Mr. 

Devereux, who is executive director of the American Federation of 

State and County Municipal Employees (AFSCME) in Washington 

State and also I think vice president of the international. Is that 

correct? 

Mr. DEVEREUX. That is correct. 

Chairman HERGER. Thank you very much. 

25 

Mr. MCDERMOTT. He represents the workers on the frontline, 

and so we look forward to hearing his thoughts today. Thank you 

for your courtesy. 

Chairman HERGER. You are welcome. Thank you. Good to have 

you with us. 

Mr. DEVEREUX. Thank you. 

Chairman HERGER. Dr. Wayne Brough, adjunct scholar at the 

American Institute for Full Employment. Howard Rosen, visiting 

fellow at the Institute for International Economics. Dr. Tim Kane, 

director of the Center for International Trade and Economics at the 

Heritage Foundation. Dr. Nilsen? 

STATEMENT OF SIGURD NILSEN, PH.D., DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES, U.S. 

GOVERNMENT ACCOUNTABILITY OFFICE 

Dr. NILSEN. Thank you, Mr. Chairman. Mr. Chairman and 

Members of the Subcommittee, I am pleased to be here today to 

discuss the DOL’s FY2007 budget request for the UI Program. I 

will focus on two areas. First, Labor’s efforts to prevent improper 

benefit payments and, second, what is being done to help speed UI 

claimants’ return to work. Regarding improper payments. Labor estimates that about $3.4 billion in UI overpayments occurred Nation 

wide in 2004, as you have heard already, including almost $2 billion that is attributable to UI claimants alone. These overpayments 

occur for a variety of reasons, including unreported or erroneously 

reported earnings in income, the most common cause, accounting 

for about 28 percent of overpayments. 

In addition, some UI overpayments result from identity-related violations. Labor estimates that approximately $313 million in 

overpayments result from identity theft each year. Labor has introduced several initiatives to help States improve their ability to detect and prevent overpayments in the UI program. Most notably, 

Labor has initiated a pilot using the NDNH to identify and prevent 

overpayments by identifying UI claimants who may be working. In 

2005, three States participated in the pilot. Five other States are 

now participating, and Labor says that by the end of this year, 

they will have 29 States participating in this program. Initial results show that the overpayment detections increased by between 

40 percent and 114 percent as a result of the access to this directory of new hires. Labor has also funded States to exchange data 

with the Social Security Administration on a real-time basis, giving 

States the ability to verify UI claimants’ identity and prevent most 

overpayments due to fraudulent or mistaken use of Social Security 

numbers. 

Labor’s budget request includes $10 million to detect and prevent 

fraudulent UI benefit claims using personal information stolen 

from workers. Labor estimates that this could generate savings of 

at least $77 million. As we have heard, Labor has provided its legislative proposal, which appears to increase its focus on overpayments. The proposal will allow Treasury to intercept Federal income tax refunds to recover UI overpayments and allow States to 

use a small percentage of recovered overpayments to fund their 

Benefit Payment Control and program integrity activities. It was 

our understanding also that the proposal will contain provisions 

26 

that will require States to charge employers a higher UI tax rate 

when claimants are overpaid, if it is determined that the overpayment was the employer’s fault, such as when the employers fail to 

provide wage information to the State in a timely manner. 

Turning now to efforts to help speed UI claimants’ return to 

work. We found that States make use of Federal UI program requirements to help connect claimants with reemployment services 

usually beginning at the time their initial claim is filed. States primarily target reemployment services to claimants identified 

through Federally required claimant profiling systems, a process 

that uses a statistical model to identify claimants who are most 

likely to exhaust their benefits before finding work. While claimants identified and referred to services through profiling can access 

the services available to all job seekers through the One-Stop system, participation in the services they are referred to is mandatory 

for profiled claimants. In 2005, Labor began awarding Reemployment and Eligibility Assessment Grants that focus on face-to-face 

eligibility interviews to ensure program compliance, coupled with 

referrals to reemployment services. For 2007, Labor has requested 

$30 million to continue this effort, and Labor estimates that this 

could be used to conduct interviews with about a half million claimants and save about $150 million by reducing the average duration 

of UI benefits. 

Despite efforts to link UI claimants to reemployment services, little data are available to gauge the extent to which these efforts are 

having the intended result. Few States go beyond the limited Federal reporting requirements to routinely track the extent to which 

UI claimants receive reemployment services. Fewer still monitor 

outcomes for UI claimants who receive these services. Labor has 

some initiatives that may begin to shed light on claimant outcomes, 

but these efforts may not go far enough. Labor has added a performance measure on the reemployment rate for their UI claimants. While Labor is evaluating the profiling process, it focuses exclusively on how well the models predict whether a claimant will 

exhaust UI benefits, not on whether the process results in shorter 

benefit durations or better employment outcomes for claimants. Finally, no additional funds have been requested in FY2007 specifically to conduct evaluations on profiling. Mr. Chairman, this completes my prepared statement. I would be happy to answer any 

questions you or Members of the Subcommittee may have. 

[The prepared statement of Dr. Nilsen follows:] 

Statement of Sigurd Nilsen, Ph.D., Director, Education, Workforce, and 

Income Security Issues, U.S. Government Accountability Office 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to assist you in your deliberations on Unemployment Insurance (UI) program performance issues as they relate to the Department 

of Labor’s (Labor) $2.7 billion fiscal year 2007 budget request for the UI program. 

My testimony will focus primarily on the results of our past work in UI benefit overpayment and reemployment services. The UI program has been a key component 

in ensuring the financial security of America’s workforce for over 70 years. The UI 

program is a federal-state partnership designed to partially replace lost earnings of 

individuals who become unemployed through no fault of their own and, which in 

turn, helps to stabilize the economy in times of economic downturn. In fiscal year 

2004, the UI program covered about 129 million wage and salary workers and paid 

about $41 billion in benefits to nearly 9 million workers who had lost their jobs. 

27 

1GAO, Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions in Overpayments, GAO–02–697 (Washington, D.C.: July 12, 2002). 2GAO, Improper Payments: Federal and State Coordination Needed to Report National Improper Payment Estimates on Federal Programs, GAO–06–347 (Washington, D.C.: Apr. 14, 

2006). 3GAO, Unemployment Insurance: Better Data Needed to Assess Reemployment Services to 

Claimants, GAO–05–413 (Washington, D.C.: June 24, 2005). 

Labor and states have a shared responsibility to enhance UI program performance 

by ensuring that only eligible individuals receive benefits while on the UI rolls and 

to foster reemployment. However, Labor’s Office of Inspector General (OIG) and others have found that numerous aspects of the UI program may be vulnerable to fraud 

and to improper payments to claimants, and, despite the size and scope of this program, there has been little information at the national level to fully assess states’ 

efforts to foster reemployment. 

Today, I will draw upon results of recent reports we have completed that provide 

information on UI program performance issues. In particular, I will discuss in relation to Labor’s budget request (1) Labor’s efforts to identify, estimate, and prevent 

improper benefit payments, and (2) what is being done at the state and federal levels to help speed UI claimants’ return to work. To address the first question, we 

drew upon two of our recent studies. In the first study, we reviewed Labor guidance, 

data, and reports and interviewed Labor officials and groups involved in unemployment insurance.1 In the second study, which reviewed states’ efforts to estimate improper payments on state-administered federal programs, including UI, Food 

Stamps, Medicaid, and other programs, we primarily conducted surveys of state officials, interviewed federal and state officials, and reviewed performance and accountability reports and our prior reports.2 To address the second question, we drew upon 

the results of another of our previous study, where we had conducted telephone 

interviews with UI and workforce development officials in 50 states; sent a followup questionnaire to gather information on the strategies states use to collect data 

on UI claimants who receive reemployment services; interviewed state and local program officials during site visits in Georgia, Maryland, Michigan, and Washington; 

and interviewed Labor officials and other experts in the area of UI and reemployment services.3

In summary, Labor estimates that about $3.4 billion in UI benefits was overpaid 

nationwide in calendar year 2004, but is taking actions to help states improve their 

ability to detect and prevent overpayments. Labor attributes a majority of overpayments to improper actions taken by claimants, although states and employers can 

also contribute to overpayments. Labor has introduced a number of initiatives to 

help states improve their ability to detect and prevent overpayments, including new 

computer matches with federal databases, a new core performance measure intended to provide states with added incentives for detecting and preventing overpayments, and additional funding for states’ overpayment detection efforts. Labor’s 

budget request for fiscal year 2007 includes funding to continue some of these efforts. As annual overpayments reach the billions, it will be important for federal and 

state stakeholders to take the necessary action to address the overpayment issue. 

Avoiding improper payments may do more to enhance program performance in the 

long term than detecting and collecting overpayments after they have occurred. To 

help UI claimants return to work quickly, states most often make use of federal UI 

program requirements to connect claimants with available services at various points 

in their claims. In addition, states provide targeted reemployment services to particular groups of UI claimants. The federal requirement of claimant profiling is typically the primary mechanism for targeting reemployment services to specific claimants. However, despite states’ efforts to design systems that link UI claimants to 

reemployment services, few data are available to gauge the extent to which their 

efforts are having the intended result. Labor’s current and planned initiatives may 

help fill the information gap, but they fall short of providing a comprehensive understanding of services and outcomes for UI claimants. 

Background 

The UI program was established by Title III of the Social Security Act in 1935 

and is a key component in ensuring the financial security of America’s workforce. 

The program serves two primary objectives: (1) to temporarily replace a portion of 

earnings for workers who become unemployed through no fault of their own and (2) 

to help stabilize the economy during recessions by providing an infusion of consumer 

dollars into the economy. UI is made up of 53 state-administered programs that are 

subject to broad federal guidelines and oversight. In fiscal year 2004, these programs covered about 129 million wage and salary workers and paid benefits totaling 

$41.3 billion to about 8.8 million workers. 

28 

4 In accordance with federal law, all state UI systems are experience rated so that employers’ 

contribution rates vary on the basis of their experience with unemployment. In practice, this 

typically means that an employer who lays off many workers that claim unemployment insurance benefits will pay more in taxes than an employer that lays off fewer workers. 

Federal law provides minimum guidelines for state programs and authorizes 

grants to states for program administration. States design their own programs, 

within the guidelines of federal law, and determine key elements of these programs, 

including who is eligible to receive state UI benefits, how much they receive, and 

the amount of taxes that employers must pay to help provide these benefits.4 State 

unemployment tax revenues are held in trust by the federal government and are 

used by the states to pay for regular weekly UI benefits, which typically can be received for up to 26 weeks. 

To receive UI benefits, an unemployed worker must file a claim and satisfy the 

eligibility requirements of the state in which the worker’s wages were paid. Generally, states require that workers must have a minimum amount of wages and employment over a defined base period, typically about a year before becoming unemployed, and have not already exhausted the maximum amount of benefits or benefit 

weeks to which they would be entitled because of other recent unemployment. In 

addition workers must have become unemployed for reasons other than quitting a 

job or being fired for work-related misconduct, and be able and available to work. 

In order to demonstrate that they are able to work and available for work and are 

still unemployed, claimants must submit a certification of continuing eligibility—by 

mail, telephone, or Internet, depending on the state—throughout the benefit period. 

This practice is usually done weekly or biweekly. States may continue to monitor 

claimant eligibility through an eligibility review program, in which certain claimants are periodically contacted to review their eligibility for benefits, work search 

activities, and reemployment needs. 

UI Performance Measurement 

Labor has the responsibility under Title III of the Social Security Act for ensuring 

that states operate effective and efficient UI programs. Various provisions of federal 

law require that certain UI activities be performed promptly and accurately. Section 

303(a)(1) of the Social Security Act requires, as a condition of a state’s receiving UI 

administrative grants, ‘‘such methods of administration . . . as are found by the 

Secretary of Labor to be reasonably calculated to insure full payment of unemployment compensation when due.’’ Labor uses various administrative data to provide 

information on the functioning of all UI program activities. Labor divides the measures into two categories: core measures, which entail oversight on key performance 

areas representative of the UI program, and management information measures, 

which facilitate the analysis of performance and to assist in planning corrective activities when necessary. 

One of Labor’s performance measurement efforts is the Benefit Accuracy Measurement (BAM) program, which is designed to determine the accuracy of paid and denied claims in the UI program. It does this by reconstructing the UI claims process 

from samples of weekly payments and denied claims using data verified by trained 

investigators. For claims that were overpaid, underpaid, or improperly denied, the 

BAM program determines the cause of and the party responsible for the error, the 

point in the UI claims process at which the error was detected, and actions taken 

by the agency and employers prior to the error. For erroneously paid claims, the 

BAM program determines the amount of benefits the claimants should have received, which becomes the basis for subsequent recovery efforts. BAM provides two 

rates of improper payments. The first, the Annual Report Overpayment Rate, includes estimates of nearly every divergence from what state law and policy dictate 

the payment should have been. The second rate, the Operational Overpayment Rate, 

includes only recoverable overpayments states are most likely to detect through ordinary overpayment detection and recovery procedures. Operational overpayments 

are the most likely to be detected and established for eventual recovery and return 

to the UI Trust Fund. 

Reemployment Services 

Since UI was established, there have been two major changes in the nation’s 

workforce development system that have directly affected states’ UI programs. Specifically, in November 1993, Congress enacted legislation amending the Social Security Act to require that each state establish a Worker Profiling and Reemployment 

Services (WPRS) system and implement a process typically referred to as claimant 

profiling. The claimant profiling process uses a statistical model or characteristics 

screen to identify claimants who are likely to exhaust their UI benefits before findVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
29 

5Of this amount, Labor officials told us that the states could have potentially detected and 

recovered $1.8 billion, or about 53 percent of the total overpayments it estimated occurred, using 

current procedures. 

ing work. Claimants identified through this process are then referred to reemployment services while they are still early in their claim. For profiled claimants, participation in designated reemployment services becomes an additional requirement 

for continuing eligibility for UI benefits. The second major change was the enactment of the Workforce Investment Act of 1998, which requires states and localities 

to bring together about 17 federally funded employment and training services into 

a single system—the one-stop system. State UI programs are mandatory partners 

in the one-stop system. Another mandatory partner is the federal Employment Service, established by the Wagner-Peyser Act in 1933 to link job seekers with job opportunities. The Employment Service (ES) has historically been collocated with state 

UI offices to facilitate UI claimants’ access to federally funded labor exchanges, job 

search assistance, job referral, placement assistance, assessment, counseling, and 

testing. 

Labor’s 2007 Budget Request 

For UI, Labor’s fiscal year 2007 budget includes a request for $2.7 billion. This 

amount is about $101 million higher than the fiscal year 2006 enacted level. This 

request, according to Labor’s budget overview, funds projected workloads and includes several UI program increases. First, Labor is proposing a $30 million increase in fiscal year 2007 for the amount available to states to conduct reemployment and eligibility reviews. Labor notes that the reviews—which entail in-person 

interviews with claimants at one-stop centers—can reduce overpayments as well as 

speed reemployment. Second, Labor is proposing a $10 million UI program increase 

to prevent and detect fraudulent claims due to identify theft. Labor proposes to use 

the new funding for staff to investigate and reconcile potential identity theft identified through data cross-matching. 

More than $3.4 Billion in Overpayments Estimated in 2004, but Labor is Taking 

Some Actions to Enhance Program Integrity 

Labor estimates that about $3.4 billion in UI benefits was overpaid nationwide 

in calendar year 2004, but is taking actions to help states improve their ability to 

detect and prevent overpayments. According to Labor’s Benefit Accuracy Measurement program, in 2004 (the most recent year for which we could obtain specific 

data) claimants were responsible for a majority of the overpayments. Claimants may 

fail to report their work as required, or may use Social Security numbers (SSN) that 

did not exist or that belonged to other individuals to fraudulently obtain UI benefits, 

resulting in overpayments. State agencies may also contribute to overpayments if 

they fail to properly record eligibility information. In addition, employers may contribute to UI overpayments if they fail to report required information to states in 

a timely manner. Labor has introduced a number of initiatives to help states improve their ability to detect and prevent overpayments, including new computer 

matches with federal databases, a new core performance measure intended to provide states with added incentives for detecting and preventing overpayments, and 

additional funding for states’ overpayment detection efforts. Labor’s budget request 

for fiscal year 2007 includes funding to continue some of these efforts. 

The Majority of Overpayments Are Attributable to Claimants 

Of the $3.4 billion in overpayments identified nationwide by the BAM program 

in calendar year 2004,5 almost $2 billion (58 percent) was attributable to UI claimants alone, while state agency errors and employers were responsible for overpayments by others (see fig. 1). With respect to claimants, overpayments may occur because individuals work while receiving benefits, fail to register with employment 

services (as required in most states), fail to look for a new job, or misrepresent their 

identity. In calendar year 2004, the most common cause of overpayments was unreported or erroneously reported earnings and income, accounting for almost 28 percent of overpayments in that year. The second-leading cause of overpayments—constituting 21 percent of all overpayments—was payments to individuals who are not 

entitled to UI benefits because of the circumstances under which they became unemployed (separation issues). Other sources of overpayments were attributable to 

individuals who failed to look for work (16 percent) and individuals who did not register for employment services (10 percent). Federal and state officials have reported 

that some types of overpayments are more difficult to detect than others. For example, in a prior report, some officials told us that it could be difficult for states to 

30 

6GAO, Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions in Overpayments, GAO–02–697 (Washington, D.C.: July 12, 2002). 7Department of Labor, Office of Inspector General, Semiannual Report to the Congress, April 

1, 2005—September 30, 2005, Vol. 54. 

accurately determine, in a cost-effective manner, if a claimant was actively searching for work (an eligibility requirement in some states). 

Figure 1: Responsibility for UI Overpayments (Calendar Year 2004) 

Note: Percentages do not add to 100 percent because of rounding. 

Other sources of overpayments include state agency errors and inaccurate or untimely information provided by employers. Labor’s BAM program shows that state 

agency errors, such as failing to properly record important eligibility information 

such as wages, accounted for about 15 percent of all estimated overpayments in 

2004. Employers accounted for about 6 percent of the total estimated overpayments 

in 2004. Employers and their agents do not always comply in a timely manner with 

state requests for information needed to determine a claimant’s eligibility for benefits. For example, one Labor OIG audit found that $17 million in overpayments occurred in four states because employers did not respond to the states’ request for 

wage information. Our work suggests that employers may resist requests to fill out 

paperwork from states because they view the process as time-consuming and cumbersome. In addition, because employers are unlikely to experience an immediate 

increase in the UI taxes they pay to the state as a direct result of overpayments, 

they do not see the benefit in complying with states’ requests for wage data in a 

timely manner. 

Our prior work and work by Labor’s OIG also shows that some UI overpayments 

result from identity-related violations. For example, our prior work shows that in 

2001, Labor identified about $1.4 million in UI overpayments resulting from Social 

Security violations.6 Labor determined these overpayments to be the result of fraud. 

More recently, in its fiscal year 2007 budget justification, Labor estimated that approximately $313 million in overpayments results from identity theft each year. Labor’s OIG has documented identity theft schemes as a major management challenge. 

For example, in its semiannual report to Congress, the OIG reported on a case in 

which individuals used more than 200 stolen identities to file 222 UI claims and 

obtain more than $693,000 in UI benefits from February 2001 through February 

2005.7

Labor is Taking Actions to Help States Detect and Prevent Overpayments 

Labor has introduced several initiatives to help states improve their ability to detect and prevent overpayments in the UI program. First, Labor has initiated a pilot 

using the National Directory of New Hires (NDNH) to further assist in identifying 

and preventing improper payments, including overpayments. The NDNH is a database, maintained by the Department of Health and Human Services’ Office of Child 


31492a.001
31 

8These interviews would also promote use of reemployment services available in One-Stop Career Centers to assist claimants to become reemployed more quickly. 9 According to Labor, this proposal will be similar to the 2005 legislative proposal (the Unemployment Compensation Program Integrity Act of 2005). 

Support Enforcement, that contains information on all newly hired employees, quarterly wage reports for all employees, and UI claims nationwide. The NDNH enhances states’ ability to detect unreported work violations by UI claimants working 

in other states or for certain employers that operate in multiple states. In addition, 

the NDNH can help improve the accuracy of Labor’s error estimates. Information 

from the NDNH cross-match can be readily integrated into Labor’s BAM program 

by cross-matching the SSNs of the claimants against the NDNH. In fiscal year 2005, 

three states (Texas, Utah, and Virginia) participated in the pilot. According to 

Labor, initial results of the pilot show that overpayment detections increased 114 

percent in Texas, 41 percent in Utah, and 73 percent in Virginia. The Texas Workforce Commission also reported that using the national cross-match in combination 

with the existing statewide cross-match helped detect 50 percent more cases of potential fraud in one quarter than it would have detected otherwise. In addition, on 

the basis of its NDNH pilot results, Labor reported in its fiscal year 2005 performance and accountability report that a substantial amount of additional overpayments could be detected using the database. Labor reported that it is moving ahead 

with full implementation of the NDNH cross-match with 5 states (Connecticut, 

Texas, Utah, Virginia, and Washington), and expects 29 states to use the NDNH 

by the end of fiscal year 2006. 

In addition to its NDNH pilot, Labor is also pursuing the use of other data 

sources to improve UI program integrity. In particular, Labor continues to promote 

states’ data sharing with other agencies, such as the Social Security Administration 

(SSA), to identify and prevent overpayments. According to Labor’s fiscal year 2005 

performance and accountability report, the department has funded states to exchange data with SSA on a real-time basis, giving states the ability to verify claimants’ identity and prevent most overpayments due to fraudulent or mistaken use of 

SSNs. Labor’s fiscal year 2007 budget request includes $10 million in funding to detect and prevent fraudulent UI benefit claims that use personal information stolen 

from workers. Labor estimates that the requested funds could generate savings of 

at least $77 million to the UI Trust Fund by preventing erroneous payments caused 

by the use of stolen identities. 

Along with efforts to enhance states’ use of data sharing to detect and prevent 

overpayments, Labor has taken other steps to enhance UI program integrity, including the development of a new core performance measure for overpayment detection 

at the state level. More specifically, Labor has announced that states will be given 

an additional incentive to prevent and detect overpayments by implementing core 

measures in states’ performance budget plans based on the level of overpayments 

the states have detected. While Labor has established overpayment detection as one 

of its core measures, it has not yet specified the level of performance that states 

will be required to meet under this measure. In addition, Labor’s fiscal year 2006 

budget request contained a legislative proposal designed to give states the means 

to obtain funding for program integrity activities, including additional staff to enhance recoveries and prevent overpayments. Moreover, to reduce overpayments, 

Labor awarded Reemployment and Eligibility Assessments grants to 21 states during fiscal year 2005. The grants have been used to conduct in-person claimant interviews to assess claimants’ continued eligibility for benefits and to ensure that individuals understand that they must stop claiming benefits upon their return to 

work.8 Labor’s fiscal year 2007 budget request includes $30 million in additional 

funding to continue this effort. Labor estimates that these funds could be used to 

conduct an additional 539,000 interviews and could save the UI Trust Fund as 

much as $151 million by reducing the average duration of UI benefits for claimants 

who are interviewed. 

In addition to the initiatives contained in its budget request, Labor plans to submit a legislative proposal in the near future that includes several initiatives to further help states detect and recover overpayments.9 Among other things, this proposal may include suggestions to allow the Department of the Treasury to garnish 

federal income tax refunds to recover UI overpayments as a means of improving 

overpayment recoveries. The proposal may also allow states to use a small percentage of recovered overpayments to fund their benefit payment control and program 

integrity activities as an incentive to focus their efforts on those activities. In addition, the proposal may seek to provide employers with a stronger incentive to inform 

the state when inappropriate UI claims are made. More specifically, the proposal 

could require states to charge employers a higher UI tax rate when claimants are 

32 

overpaid, if it is determined that the overpayment was the employer’s fault (such 

as when an employer fails to provide wage information to the state in a timely manner). Such additional charges could lead to an increase in the UI tax rate for affected employers. 

States Make Use of Federal Requirements to Help Speed Reemployment of 

UI Claimants, but Knowing More about Outcomes Could Enhance Program Performance 

In our review of states’ efforts to help UI claimants quickly return to work, we 

found that states most often make use of federal UI program requirements to help 

connect claimants with reemployment services at various points in their claims, usually beginning at the time their initial claim is filed. All federally approved state 

UI programs must include able-to-work and available-for-work requirements that 

claimants must meet in order to receive benefits. In many states, these requirements also serve to link claimants to reemployment opportunities and services. In 

addition, states provide targeted reemployment services to particular groups of UI 

claimants. The federal requirement of claimant profiling is typically the primary 

mechanism for targeting reemployment services to specific claimants. Despite states’ 

efforts to design systems that link UI claimants to reemployment services, few data 

are available to gauge the extent to which their efforts are having the intended result. Moreover, Labor’s fiscal year 2007 budget request does not include funding specifically designated for conducting evaluations of federally required efforts to target 

reemployment services. 

States Use Compliance with Work Requirements and Target Services to 

Particular Groups of Claimants to Help Speed Reemployment 

Although all UI claimants can access the range of reemployment services through 

the one-stop system at any time, UI program requirements often provide the context 

for states’ efforts to link claimants to reemployment services. Specifically, all federally approved state UI programs require that claimants be able and available to 

work. To meet these conditions, 44 states require that UI claimants register with 

the state’s labor exchange—that is, job-matching services provided through the 

Wagner-Peyser-funded Employment Service—in order to be eligible for UI benefits. 

In addition, 49 states impose a work search requirement as a condition for continuing UI eligibility, and claimants must document that they are meeting their 

state’s work search requirement in a number of ways. Most commonly, claimants 

are required to keep a log of work search activities that may be subject to review, 

or they must certify that they are able and available to work through the process 

of filing for a continuing claim. 

These work registration and work search requirements often serve to link claimants to reemployment services. The process of registering for work with the state’s 

labor exchange, for example, may bring claimants into an Employment Service office 

or one-stop center where reemployment services are delivered. 

Some states also use their processes for monitoring compliance with the work 

search requirement to direct claimants to reemployment services. Officials in 39 of 

the 49 states that require claimants to actively seek employment told us that telephone or in-person interviews with claimants may be used to monitor compliance 

with this requirement. In over two-thirds of these states, officials told us that some 

information on job search strategies or reemployment services is provided during 

the interview. 

States also engage some claimants in reemployment services directly through programs that identify certain groups for more targeted assistance. States primarily 

target reemployment services to claimants identified through federally required 

claimant-profiling systems—a process that uses a statistical model or characteristics 

screen to identify claimants who are most likely to exhaust their UI benefits before 

finding work. While claimants identified and referred to services through profiling 

can access the services available to all job seekers through the one-stop system, participation in the services they are referred to—most often orientation and assessment services—is mandatory for profiled claimants. In addition, many officials told 

us that the services profiled claimants received depended on their individual needs 

following an assessment, the development of an individual plan, or the guidance of 

staff at a one-stop center. While failure to report to required reemployment services 

can result in benefits being denied, states vary in the conditions that prompt denying benefits. 

Maryland, for example, targets reemployment services to profiled claimants 

through its Early Intervention program. This program, which began in 1994, offers 

an interactive, 2-day workshop, addressing self-assessment, job search resources, resume writing and interviewing skills, and other community resources available to 

33 

job seekers. Profiled claimants selected for the workshop who fail to attend are 

given one opportunity to reschedule; after that, their failure to participate is reported to the UI program and their benefits may be suspended. When claimants 

complete the workshop, they are registered with the Maryland Job Service, they receive an individual employment plan, and the workshop facilitator may refer them 

to additional services. Officials told us that although they currently do not have 

data to show the impact of this program, they have received very positive feedback 

about the quality and effectiveness of the workshops. 

Some states have developed additional methods to target reemployment services 

to particular groups of UI claimants. For example, one-stop staff in Washington 

have the ability to identify various subgroups of claimants using a tracking device 

called the Claimant Progress Tool. Officials told us that one-stop staff typically use 

this tool to identify claimants who are about 100 days into their claim, and then 

contact them for targeted job search assistance and job referrals. This process was 

developed to help the state achieve a goal of reducing the portion of its UI benefits 

that unemployed workers claim. Georgia’s state-funded Claimant Assistance Program identifies claimants who are seen to be ready for employment and requires 

them to participate in the same services required of profiled claimants. This program is designed to help the state achieve its goal of generating savings for the UI 

Trust Fund. 

During fiscal years 2001 through 2005, states often made use of Labor’s Reemployment Services Grants—totaling $35 million per year—to fund some of the targeted services. Officials in the majority of the states we interviewed told us their 

states had used the Reemployment Services Grant funds to hire staff to provide reemployment services to UI claimants. For example, Maryland state officials said 

they used their funds to hire staff for the Early Intervention program, enabling 

them to run more workshops in areas that needed them and to make further improvements in the program. Some states also used these grants to direct reemployment services to claimants beyond those who have been profiled and to support 

other enhancements in the provision of reemployment services to claimants. For example, Washington state officials told us they used funds from these grants to support the development of the Claimant Progress Tool. Beginning in fiscal year 2005, 

Labor began shifting its focus away from these grants that funded direct reemployment services for UI claimants toward the Reemployment and Eligibility Assessment Grants. These new grants focus states’ efforts on providing face-to-face eligibility interviews with claimants as a way to ensure compliance with work search 

requirements. As part of these interviews, eligibility workers may refer claimants 

to reemployment services funded by Employment Services, the Workforce Investment Act (WIA), or the Trade Adjustment Assistance (TAA) program. 

Little Information Exists to Assess whether States’ Efforts Are Achieving 

the Intended Outcomes 

Despite states’ efforts to design systems that link UI claimants to reemployment 

services, little is known about the extent to which claimants receive reemployment 

services or about the outcomes they achieve. Although states must meet a number 

of federal reporting requirements for their UI and employment and training programs, including reporting on the outcomes of profiled claimants, none of these reports provide a complete picture of the services received or the outcomes obtained 

by UI claimants. Labor only recently began to require that states provide information on the reemployment outcomes of UI claimants, and the ongoing evaluations 

of claimant profiling are limited. 

States must track and report annually on several performance measures considered key indicators of UI program performance, but these measures largely focus 

on benefit and tax accuracy, quality, and timeliness. In addition, states must also 

report to Labor on their claimant-profiling process, but information in these reports 

represent only a portion of all UI claimants the state has served, a proportion that 

can vary from place to place and from month to month depending on available resources. 

UI claimants may access other federally funded reemployment assistance through 

the Wagner-Peyser Employment Service, WIA Adult or Dislocated Worker programs, and, if they are laid off because of trade, the Trade Adjustment Assistance 

program. To monitor the performance of these programs, Labor requires states to 

meet a number of reporting requirements, but these reports are submitted on a program-by-program basis, and none provide a complete picture of the services received 

or the outcomes obtained by all UI claimants. 

Having data that show the degree to which reemployment services are reaching 

UI claimants is key to good program management and provides a first step toward 

understanding the impact of these programs. However, knowing how many claimVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
34 

ants may be accessing reemployment services and the type of outcomes they may 

be achieving has proven difficult for state and local officials. We found that only 14 

states go beyond the federal reporting requirements to routinely track the extent to 

which UI claimants receive services from the broad array of federally funded programs that are designed to assist them, and only 6 states routinely monitor outcomes for UI claimants who receive reemployment services. States most often told 

us that tracking claimant services across multiple programs was made difficult by 

the fact that reemployment services and UI claimant data were maintained in separate data systems—systems that were either incompatible or difficult to link. 

Labor has some initiatives that may begin to shed light on claimant outcomes, but 

these efforts may not go far enough. Labor recently modified its UI performance 

measures to require states to track a reemployment rate for their UI claimants— 

defined as the percentage of UI claimants who are reemployed within the quarter 

following their first UI payment. This change will help focus efforts on speeding reemployment and will improve the understanding of how many UI claimants are 

quickly reemployed nationwide, but it will not allow for an assessment of the outcomes of claimants who access reemployment services compared to those who do 

not. Furthermore, states must meet federal requirements to target reemployment 

services using the claimant-profiling process, but little is known about the effectiveness of their efforts. Labor funded an evaluation of the claimant profiling system 

in 8 states beginning in 1996, including an assessment of UI benefit duration, employment, and earnings. The current evaluation of the profiling process focuses exclusively on how well the models are able to predict whether a claimant will exhaust 

UI benefits, not on whether the process results in shorter benefit duration or better 

employment outcomes for claimants. Budget authority to conduct the current evaluation expires at the end of fiscal year 2006, and no additional funds have been requested in the fiscal year 2007 budget specifically to conduct further evaluations on 

profiling. 

Labor is also developing a system to consolidate performance reporting for Labor’s 

Employment and Training Administration (ETA) programs. This system—ETA’s 

Management Information and Longitudinal Evaluation (EMILE) system—would 

consolidate reporting across a range of Labor programs including WIA, Employment 

Service, and TAA. Current plans do not include incorporating UI reporting into 

EMILE. Last year, we recommended that Labor work with states to explore the feasibility of collecting more comprehensive information on UI claimants’ services and 

outcomes. Although Labor generally agreed with our findings, Labor commented 

that current and planned data collection efforts would provide sufficient information 

to policy makers. While Labor’s new initiatives, in combination with current reporting requirements, will provide valuable information on the reemployment activities 

of some UI claimants, these efforts will not allow for a comprehensive, nationwide 

understanding of claimants’ participation in the broad range of reemployment services designed to assist them. Furthermore, these efforts will not move states in the 

direction of having the data they need to better manage their systems. 

Concluding Observations 

UI’s size and importance make it critical that the program is performing at a peak 

level. With annual overpayments reaching the billions, it will be important for federal and state stakeholders to take the necessary action to address this issue. Labor’s current initiatives and its proposed action contained in the fiscal year 2007 

budget request could help, but work remains. In the long run, program performance 

can be enhanced by avoiding improper payments rather than trying to detect and 

collect them. Labor’s initiatives to help states detect and prevent overpayments represent a positive step toward improving UI program integrity. In particular, Labor’s 

initiative to promote states’ use of the NDNH database and its continued effort to 

encourage states’ use of SSA’s data for verifying the identity of claimants appear 

promising. However, to maximize the effectiveness of these initiatives, it is important for as many states as possible to participate. In addition, while Labor’s development of a new core performance measure on payment accuracy has the potential to 

facilitate states’ focus on detecting and preventing overpayments, it is premature to 

evaluate the effectiveness of this effort. Moreover, although Labor continues to fund 

grants for states to conduct in-person reemployment and eligibility assessments, 

more time is needed to fully assess how effective these initiatives will ultimately be. 

Finally, while Labor’s June 2005 legislative proposal to charge employers for UI 

payments to ineligible individuals could result in UI tax rate increases for those employers, such a change merits further consideration. 

To help claimants get the reemployment services they need, states have often designed their processes to make use of federal UI program requirements in linking 

claimants with services. However, knowing whether their efforts are actually resultVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00038 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
35 

ing in better employment outcomes and reduced UI benefit payments has proven 

difficult for federal, state, and local officials. Findings from evaluations are limited, 

and most states lack much of this information, arguably critical for good program 

management—often because data reside in separate systems that cannot be easily 

linked. In the new environment created under the Workforce Investment Act, where 

claimants may be served by a range of programs that go beyond UI and ES, it becomes increasingly important to find new ways to link program data across a broader range of programs. Doing so is an essential step in understanding what’s working 

and what’s not. Labor’s current and planned initiatives may help fill the information 

gap, but they fall short of providing a comprehensive understanding of services and 

outcomes for UI claimants. 

Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the subcommittee may have at this 

time. 

f 

Chairman HERGER. Thank you, Dr. Nilsen. Mr. Halley? 

STATEMENT OF ROOSEVELT HALLEY, PRESIDENT-ELECT, NATIONAL ASSOCIATION OF STATE WORKFORCE AGENCIES, 

COLUMBIA, SOUTH CAROLINA 

Mr. HALLEY. Good morning, Chairman Herger, Ranking Member McDermott, and Members of the Subcommittee. On behalf of 

the National Association of State Workforce Agencies, I thank the 

Subcommittee for the opportunity to comment on the President’s 

FY2007 budget as it relates to the UI system. Mr. Chairman, 

NASWA supports initiatives by the Federal Government to improve 

the administrative efficiency, integrity, and overall performance of 

our Nation’s Federal-State UI system. However, Federal grants to 

States for the administration of UI programs are inadequate. Without sufficient Federal funding, NASWA believes proposals to improve the UI system will not have the desired positive effect on 

performance. NASWA submitted testimony recently to the Subcommittee on States’ extensive use of technology to increase program efficiency. It highlighted improvements to customer service 

and barriers to full modernization due to Federal underfunding. 

States are more efficient at operating their UI programs today 

than they have ever been. But further improvements in program 

integrity and productivity are increasingly difficult to attain. Additional UI system appropriations for administrative funding are necessary for further UI system improvement. The remainder of my 

statement focuses on selected proposals of the Administration’s 

FY2007 budget. NASWA’s full statement on the FY2007 budget 

has been submitted for the hearing record. With substantial balances in the Federal accounts of the UI trust fund, NASWA believes there are sufficient funds available to support States’ UI operations without extending the Federal Unemployment Tax Act 0.2 

percent surtax beyond 2007 as proposed by the Administration. 

NASWA supports the Administration’s proposal that would authorize the U.S. Treasury Department to recover UI benefit overpayments and certain delinquent UI taxes from Federal income tax refunds. NASWA supports the Administration’s proposal that would 

require employers to include a ‘‘start work’’ date on new hire reports to help identify persons who have gone back to work, but continue to claim benefits. 

36 

NASWA recommends modifying the Administration’s proposal 

that would prohibit States from not charging employers for overpayments due to their inadequate or untimely response to requests 

for information. NASWA recommends requiring States to treat employers no longer as interested parties if they respond inadequately 

or untimely and to require charging these employers even if an appeal denies UI benefits to claimants. This modified proposal would 

provide employers a strong incentive to respond to State requests 

for information on UI separation issues. The Administration includes proposals that would permit States to use up to 5 percent 

of UI overpayment recoveries to augment their Benefit Payment 

Control administrative funding and up to 5 percent of State unemployment tax, or so-called SUTA dumping collections, to augment 

funds aimed at reducing employer tax evasion and fraud. 

NASWA is concerned about the potential precedent this would 

authorize by allowing State-collected UI revenues to be used for 

purposes other than the payment of benefits. Despite this concern, 

NASWA would support these proposals if funds collected are limited to Benefit Payment Control and activities to combat employer 

evasion and fraud. NASWA believes the Administration’s proposed 

minimum 15 percent penalty assessment on overpayments due to 

claimant fraud is too low. Many States already have implemented 

larger penalties for UI fraud. NASWA recommends modifying this 

proposal by raising the penalty to at least 25 percent and also applying it to employer fraud. We agree States should penalize individuals for wrongfully receiving UI benefits and also believe States 

should require an identical penalty of 25 percent on employer underpayments of taxes due to employer tax evasion and fraud. 

NASWA supports the Administration’s request of $30 million to expand Reemployment and Eligibility Assessments. However, 

NASWA is concerned about the recent elimination of the $35 million reemployment service grants to the States in FY2006. This cut 

and continued underfunding of ES hamper States’ ability to help 

unemployed workers return to work quickly. Mr. Chairman, we 

look forward to working with the Subcommittee on this vital Federal-State program. 

[The prepared statement of Mr. Halley follows:] 

Statement of Roosevelt Halley, President-Elect, National Association of 

State Workforce Agencies, Columbia, South Carolina 

Mr. Chairman and Members of the Subcommittee thank you for the opportunity 

to comment on the President’s FY 2007 Budget. The National Association of State 

Workforce Agencies (NASWA) respectfully submits this testimony for the record. 

The mission of NASWA is to serve as an advocate for state workforce programs 

and policies, a liaison to federal workforce system partners, and a forum for the exchange of information and practices. Our organization was founded in 1937. Since 

1973, it has been a private, non-profit corporation financed by annual dues from 

member state agencies. NASWA members are the administrators of the Unemployment Insurance (UI) and Employment Service (ES) programs, and other workforce 

investment programs. 

NASWA supports initiatives by the Administration and Congress to improve the 

administrative efficiency, integrity and overall performance of our nation’s UI system. This statement in large part is an endorsement of many of the Administration’s UI proposals included as part of its FY 2007 Budget and reflects NASWA’s 

longstanding and ongoing work with U.S. Department of Labor (USDOL) to improve 

the UI system. However, NASWA believes proposals to improve the UI system will 

not have their desired positive effect on performance without a sufficient commitVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
37 

ment by Congress and the Administration to appropriate necessary funding for the 

program’s administration. NASWA believes improvements to the UI system and UI 

system administrative funding are inseparable and encourages the Subcommittee to 

consider both as it pursues improvements. 

PROMOTING UI PAYMENTS AND TAX INTEGRITY 

NASWA formed an eight-state (AL, CA, GA, IL, MI, NJ, OK, and TX) workgroup 

to review and work with the USDOL on its Unemployment Compensation Program 

Integrity Act of 2005. The NASWA workgroup agrees amendments to federal law 

that would help states reduce overpayments of UI benefits and increase collections 

of overpayments and taxes are needed. However, the workgroup is concerned with 

the precedent set by several of the proposals to permit use of state unemployment 

funds for administration in lieu of federal administrative grants. Spending state unemployment tax revenues on administrative costs, instead of benefits exclusively, 

would further undermine the federal commitment to funding UI administration. 

USDOL’s proposal would permit states to use up to five percent of UI overpayment recoveries to augment their benefit-payment-control administrative funding. 

USDOL also proposes permitting states to use up to five percent of State Unemployment Tax Act (SUTA) dumping collections to augment funds aimed at reducing employer tax evasion and fraud. NASWA recommends the use of funds collected under 

these programs be limited to benefit-payment-control and employer tax evasion and 

fraud activities. NASWA is concerned about the precedent these two proposals set 

by modifying the standard that state trust funds be used only for the payment of 

benefits. 

USDOL’s proposal to require states impose at least a 15 percent penalty on benefits individuals obtain by defrauding the UI system is problematic because some 

state laws do not permit collection of a penalty until the benefit overpayment is collected. The USDOL proposal would require penalties be collected first. The collected 

penalties would be used only for benefit payment control and tax enforcement activities. Further, NASWA believes the proposed 15 percent penalty is too low. Many 

states already have implemented larger penalties for UI fraud. NASWA recommends modifying this proposal by raising the penalty to at least 25 percent and 

also, applying it to employer fraud. We agree states should penalize individuals for 

wrongfully receiving UI benefits, but also believe states should require an identical 

penalty of 25 percent on employer underpayments of taxes because of employer tax 

evasion and fraud. 

NASWA supports USDOL’s proposal that would authorize the U.S. Treasury Department to recover UI benefit overpayments and certain delinquent UI taxes from 

federal income tax funds. NASWA also supports the USDOL proposal that would 

allow states to make individuals liable for the processing fee and give states discretion to the U.S. Treasury to recover the debt. 

NASWA supports USDOL’s proposal that would require employers to include a 

‘‘start work’’ date on new hire reports to help identify persons who have gone back 

to work, but continue to claim benefits. NASWA believes this requirement will help 

states accurately identify when an individual has begun employment, but still is 

claiming UI benefits, and identify overpayments for recovery. 

NASWA supports USDOL’s request of $10 million to prevent and detect fraudulent unemployment benefit claims filed using personal information stolen from 

unsuspecting workers. 

PROMOTING RE-EMPLOYMENT 

NASWA supports USDOL’s request of $30 million to expand re-employment and 

eligibility assessments (REAs) used to review UI beneficiaries’ need for re-employment services and their continuing eligibility for benefits through in-person interviews in one-stop career centers. However, we must point out the disparity between 

this $30 million request by USDOL and recent elimination of the $35 million ReEmployment Services (RES) grants to states in FY 2006. The elimination of RES 

combined with a $30 million cut to the Employment Service (ES) program totals an 

eight-percent reduction to services used to help accelerate unemployed workers transition back to work. The Administration proposes an additional 4 percent cut to the 

ES program in FY 2007. 

NASWA supports the proposed Government Performance and Results Act (GPRA) 

goals for reemployment and UI Performs Core reemployment measure to assess UI 

reemployment services and outcomes. The GPRA goal proposed for reemployment 

requires states to compile data on those individuals receiving UI benefits for this 

measure. The measurement indicates if a person who received UI benefits in one 

quarter has earned wages reported in the subsequent quarter. States would submit 

data for the most recent four quarters in March 2006 and these data would be used 

38 

to establish a baseline and set performance targets for FY 2007. USDOL also would 

use this GPRA outcome as a state-specific measure for UI Performs. This reemployment measure is one of the core measures states must meet or provide corrective 

action plans to meet or exceed the goal the following fiscal year. 

NASWA is concerned USDOL’s recent decision to dismantle America’s Job Bank 

(AJB) system will lengthen the duration it takes employers to find qualified workers 

and job seekers to find jobs. AJB complements other resources available in the private sector. The Employment and Training Administration (ETA) has assured states 

it will try to resolve their concerns. NASWA plans to work with these states to assist them and ETA in resolving these concerns. 

NASWA supports USDOL’s proposal that would permit waivers of certain federal 

requirements allowing states to experiment with innovative projects aimed at early 

re-employment of UI beneficiaries. NASWA supports this proposal because it allows 

opportunities for state flexibility in providing re-employment services. We look forward to working with the USDOL on this concept. 

OTHER UI PROPOSALS IN USDOL’S FY 2007 BUDGET 

NASWA does not support USDOL’s proposal that would permit states to allow collection agencies to keep up to 25 percent of the amount collected on ‘‘uncollectible’’ 

fraud overpayments or delinquent taxes. NASWA recommends this collection tool be 

available as an option under the recovered overpayments proposal and under the 

fraud penalty proposal if states have exhausted efficient state means to collect the 

outstanding debt. 

NASWA recommends modification of USDOL’s proposal that would prohibit states 

from non-charging benefit costs to employers if an overpayment is due to an employer’s pattern of inadequate or untimely responses to requests for information made 

by the state. NASWA recommends modifying this proposal by requiring states to 

treat employers as no longer an ‘‘interested party’’ if they respond inadequately or 

untimely to separation notices and require charging of these employers even if an 

appeal denies UI benefits to a claimant. We believe this modified proposal provides 

an employer incentive to respond to state requests for information on UI separation 

issues. It would reduce state administrative collection costs by limiting overpayments and all employers would not have to share the costs born by employers who 

respond inadequately or untimely to state requests for information. NASWA also 

recommends additional state administrative funding to help implement this proposal. 

NASWA supports USDOL’s proposal that would permit states to use compensating balances and interest earned on clearing account balances to pay associated 

banking costs. States use a variety of other banking services, including the maintenance of lock boxes and aggressive clearance schedules, which can speed the transfer of tax deposits to the trust fund, but cost more than basic banking services. To 

pay the cost of these additional services, some states hold a balance in the clearing 

account to generate enough interest to pay the costs of the services. USDOL has 

said this is inconsistent with the ‘‘immediate deposit’’ and ‘‘withdrawal’’ requirements of federal UI law. These ‘‘compensating balance’’ arrangements permit states 

to pay for state-of-the-art banking services that speed the deposit of taxes in the 

trust fund that they would be unable to afford otherwise. As some states already 

use this practice, an amendment would authorize an ongoing and effective practice. 

NASWA supports USDOL’s proposal that would require state UI agencies to disclose information to child support enforcement agencies about UI claimants owing 

support to custodial parents and to deduct such obligations from UI benefits. We 

understand this proposal will clarify federal UI law. 

USDOL’s proposal would amend the Advisory Council on Unemployment Compensation (ACUC) provision to permit, rather than require, the Secretary of Labor 

to convene periodically a council. The proposal also would reduce council size to 

nine. NASWA believes another ACUC is not needed now and supports granting the 

Secretary of Labor the flexibility to convene a council when necessary. We look forward to working with the Secretary, and employer and worker groups, to improve 

this system on an ongoing basis. 

NASWA supports USDOL’s proposal to repeal a provision denying unemployment 

compensation to certain federal workers performing federal service under contract. 

Even though this is a federal program, as a general rule, we believe nearly all employees should be covered under UI as the states’ do under state law. 

THE FUTA 0.2 PERCENT SURTAX 

In the U.S. Department of Treasury budget, the Administration proposed extending the Federal Unemployment Tax Act (FUTA) 0.2 percent surtax for five years beyond 2007. In the past, NASWA has testified in favor of repealing this surtax as 

39 

an unwarranted burden on employment. NASWA believes the revenue collected by 

this surtax currently is unjustifiable to meet the nearly nonexistent demand for federal loans to states with trust fund balances insufficient to cover benefits. Moreover, 

NASWA notes the National Governors Association not only supports the repeal of 

this surtax, but also supports substantially lowering the unnecessarily high balances in the loan account (Federal Unemployment Account) and using these funds 

to shore up other parts of the system, such as grants to states for administration 

of unemployment insurance, employment services, and labor market information, 

and information technology and performance investments. 

UI ADMINISTRATIVE FUNDING CONCERNS 

Secretary of Labor Elaine Chao testified recently before the House Labor, Health 

and Human Services and Education Appropriations Subcommittee and stressed her 

desire to improve the financial integrity of the UI system. NASWA supports this 

goal, but states are finding it increasingly difficult to accomplish. We believe grants 

to states for the administration of state UI programs are inadequate since USDOL’s 

resource justification model (RJM) demonstrates states need more UI administrative 

funding than what is appropriated and allocated. Although it is true states are more 

efficient at operating their UI programs today than they were ten years ago, further 

improvements in program integrity and productivity are increasingly difficult to attain. 

We are concerned future policies might impose financial penalties on states for 

failing to meet performance standards, further eroding states’ ability to administer 

UI. Rising personnel and service costs without corresponding increases to federal 

appropriations are forcing states to cut staffing levels, reduce integrity efforts, delay 

technology upgrades, and seek other funding sources. With the federal account balances in the UI Trust Fund projected to be $3.4 billion for the Employment Security 

Administration Account (ESAA), $16.6 billion for the Extended Benefit Account 

(EUCA), and $14.2 billion for the loan account (FUA) at the end of FY 2007, 

NASWA believes there are sufficient funds to support UI administrative operations 

without imposing additional state taxes to supplement the lack of adequate federal 

administrative funding. 

Mr. Chairman, thank you for the opportunity to testify today. NASWA looks forward to working with you and your colleagues and USDOL on this vital federalstate program. 

f 

Chairman HERGER. Thank you, Mr. HALLEY. Mr. Devereux to 

testify. 

STATEMENT OF GREG DEVEREUX, EXECUTIVE DIRECTOR, 

COUNCIL 28, AMERICAN FEDERATION OF STATE, COUNTY, 

AND MUNICIPAL EMPLOYEES, SEATTLE, WASHINGTON 

Mr. DEVEREUX. Good morning, Chairman Herger, Ranking 

Member McDermott, and other Members of the Committee. For the 

record, I am Greg Devereux, the executive director of the Washington Federation of State Employees, Council 28 of AFSCME. I 

am testifying on behalf of AFSCME’s 1.4 million members, including the many thousands in the employment security system across 

the State. In my State, we represent 2,400 of these workers. I appreciate being here and ask that my written statement be made 

part of the record. 

Chairman HERGER. Without objection. 

Mr. DEVEREUX. We believe the Labor Department’s FY2007 

budget is penny wise and pound foolish. It will further undermine 

the UI work test by impairing the ability of UI claimants to receive 

in person reemployment services and help finding employment. As 

you know, UI claimants must register for work with State ES offices. Like UI, the ES is State administered and financed with revenue from the Federal unemployment trust fund. The ES is a free 

Nation-wide public labor exchange, offering such services as job 

40 

search assistance, referral of workers to job openings, screening of 

job applicants for employers, career counseling, skills assessment, 

and resume writing assistance. State ES offices are a major provider of labor exchange and reemployment services for UI claimants. Nation wide, in 2004, 40 percent of the 14 million job seekers 

who registered with ES offices were UI claimants. In Washington 

State, it was 49 percent. Seventy-nine percent of them received 

staff assistance, and over half were referred to employment. Numerous analyses have documented the cost effectiveness of the ES 

labor exchange services. For example, in a 2002 paper, researcher 

Lou Jacobson found public labor exchange services spend only 

about $330 per job placement. 

Reemployment services also speed up return to work. In 2000, 

DOL estimated that every dollar spent on reemployment services 

for UI claimants produces two dollars of trust fund savings. Despite this, DOL proposes a $34 million cut in State employment 

service grants after last year’s $58 million cut. This would be very 

destructive to employment security. If absorbed entirely by staff reductions, at least 1,500 State workers would have to be laid off, 

and in-person services in many rural areas would have to be eliminated. However, the damage is actually much worse because the 

cuts come on top of decades of financial neglect. The FY2007 request is actually $88.6 million less than the 1985 appropriation. To 

match the 1985 appropriation in value, the Administration would 

have to ask for $1.4 billion. In addition, DOL proposes to end the 

employment service as part of a strategy to aggressively decentralize workforce programs. Its block grant plan and career advancement accounts treat the unique role of the ES in relation to 

the UI system almost as an afterthought. The Administration also 

plans to end the Nation’s job bank service. America’s job bank is 

now the largest electronic listing of job openings in the world and 

is an important tool for local ES and other workforce labor exchange activities in Washington State and elsewhere. It is invaluable. 

Finally, I also want to mention our concern with the failure to 

provide adequate funding for State UI operations. Strengthening 

reemployment services and providing adequate administrative 

funding is a better solution to benefit overpayments and collecting 

delinquent employer taxes than DOL’s approach. Most UI overpayments occur when someone works and collects UI at the same time. 

Reliance on automated UI filing and work certification makes such 

fraud far easier. Earlier in-person contact by ES staff would reduce 

overpayments while also providing workers with valuable job 

search assistance. In addition, we oppose using private collection 

agencies to recover overpayments and delinquent taxes. We are 

particularly concerned about the privacy of both worker and employer data and the reputation of this industry to engage in 

harassing, threatening, and illegal actions, even when the Fair 

Debt Collection Practices Act (P.L. 104–208) applies. I want to 

thank you again very much for giving me the opportunity to testify 

today. I would be pleased to answer any questions you might have. 

Thank you. 

[The prepared statement of Mr. Devereux follows:] 

41 

Statement of Greg Devereux, Executive Director, Council 28, American 

Federation of State, County, and Municipal Employees, Seattle, Washington 

Good morning, Mr. Chairman and members of the Subcommittee. My name is 

Greg Devereux, and I am Executive Director of Council 28 of the American Federation of State, County and Municipal Employees (AFSCME) in the State of Washington. 

I am testifying today on behalf of the 1.4 million AFSCME members who work 

in state and local government, health care, and nonprofit organizations across the 

country, including many thousands in the employment security system. We appreciate the opportunity to present our views on the Department of Labor’s (DOL) 

budget request for 2007. 

My testimony today will focus primarily on the implications of the DOL budget 

on the reemployment of unemployment insurance (UI) claimants. In brief, we believe that the budget request will further undermine administration of the UI work 

test and impair the ability of unemployment insurance claimants to receive reemployment services and find employment as soon as possible. 

As you know, the employment security system is the product of a political agreement struck among business, labor and the government in the 1930s. Employers 

would pay taxes into state and federal trust funds, jobless workers would receive 

unemployment benefits and meet a ‘‘work test’’ by looking for work, and the federal 

government would provide the states with the funds to operate the system. 

Workers receiving state unemployment benefits are required to register for work 

with state Employment Service (ES) offices which are authorized under the WagnerPeyser Act and financed with revenue from the Federal Unemployment Trust Fund 

(FUTA). While both programs are administered by the state employment security 

agencies, at various times state UI and ES employees have worked separately in 

the same or different locations. They also have been cross-trained to perform both 

functions so that they could be shifted from one responsibility to the other as economic conditions changed. 

Two developments over the last 10 years have influenced the connections between 

the state UI and ES operations. With the shift to electronic and telephone claims 

for benefits, the states have centralized UI benefit processing functions and set up 

call centers, thus for the most part ending in-person filings and simultaneous inperson registration for work with the employment service. Second, the Workforce Investment Act (WIA) now requires that employment service operations be offered as 

part of local one-stop systems. In many states the ES is the backbone of these locally governed systems, thus adding a local mission and orientation to this state 

agency program. 

The state ES offices are a major provider of labor exchange and reemployment 

services for UI claimants. Nationwide, in Program Year (PY) 2004, 40% of the 14 

million job seekers registered with ES offices were unemployment insurance claimants. The number in Washington State was even higher: 49% of 381,582 registered 

jobseekers were UI claimants, and 79% of them received staff-assisted services while 

over half were referred to employment. 

Numerous analyses have documented the cost effectiveness of the labor exchange 

services and their effectiveness in reducing outlays from the UI Trust Fund. According to a 2003 U.S. General Accounting Office report, in FY 2002 the ES was the 

employment and training program serving the largest number of workers (seven 

times the next largest number of participants) while ranking eighth in funding. 

Based simply on the number of people registered by the PY 2004 appropriation, the 

ES spent $56 federal dollars on each person served. In a 2002 paper entitled ‘‘Evaluation of Public Labor Exchange (PLX) Services in a One-Stop Environment: New 

Evidence from North Carolina,’’ Lou Jacobson, a researcher at Westat, found that 

public labor exchange services spend about $330 per job placement. ‘‘What is particularly remarkable,’’ he states, ‘‘is that virtually every rigorous analysis of PLXs 

(sic) indicates that they are highly cost effective.’’ 

Reemployment services also speed up return to work by UI claimants. In support 

of its FY 2001 budget request for $50 million for Wagner-Peyser Reemployment 

Services Grants for UI claimants, a DOL fact sheet noted that $1 spent on reemployment services would produce $2 of UI Trust Fund savings. This estimate was 

based on previous experiments and analyses which also demonstrated the advantages of close cooperation between UI and ES operations. 

Yet despite this evidence, the Department of Labor proposes to cut spending for 

state employment service grants by $34 million in FY 2007. This reduction would 

come on top of last year’s cut of $58 million, which included the elimination of the 

Wagner-Peyser reemployment services grants for UI claimants created in the FY 

2001 budget. While DOL requests $30 million in UI funds for in-person reemployVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
42 

ment and eligibility assessments of UI claimants, we anticipate that the emphasis 

of these grants will be on enforcement instead of reemployment services. 

The two-year cuts to the Employment Service are very destructive. If absorbed entirely by reductions in staff, we estimate that, based on the average cost per employee, at least 1,500 state workers would have to be laid off with in-person services 

in many rural areas eliminated. 

However, the damage is actually much worse because the cuts come on top of decades of financial neglect by the Congress and executive branch. 

Below are funding levels for State Employment Service allotments since 1985. As 

you can see, the $688,769,000 requested for FY 2007 is actually $88.6 million less 

than the 1985 appropriation. To match the 1985 appropriation in value, the Administration’s budget request would have to be $1.4 billion or more than twice as much. 

Fiscal 

Year 

Allotment to 

States 

Fiscal 

Year Allotment to States 

1985 $777,398,000 1997 761,735,000 

1986 758,135,000 1998 761,735,000 

1987 755,200,000 1999 761,735,000 

1988 738,029,000 2000 761,735,000 

1989 763,752,000 2001 761,735,000 (plus $35 million for UI claimants) 

1990 779,039,000 2002 786,608,000 (plus $35 million for UI claimants) 

1991 805,107,000 2003 756,784,000 (plus $35 million for UI claimants) 

1992 821,608,000 2004 752,302,000 (plus $35 million for UI claimants) 

1993 810,960,000 2005 746,301,000 (plus $34 million for UI claimants) 

1994 832,856,000 2006 715,883,000 (-0-) 

1995 838,912,000 2007 688,769,000 (-0-) 

1996 761,735,000 

With this steady decline in resources in real terms, it should come as little surprise that services also have declined even though technology has added many efficiencies to the ES. For example, in 1995 when the unemployment rate was 5.5%, 

the Employment Service registered 18.3 million job seekers. By 2004, when the unemployment rate again was 5.5%, it registered 14 million job seekers. 

In addition, the Administration has made policy proposals to repeal the WagnerPeyser Act and end the Employment Service as part of an aggressive strategy to 

decentralize workforce programs. Its original WIA reauthorization plan would have 

block granted the ES with the WIA adult and dislocated worker program and 

transfered responsibility for the UI work test to the local workforce system. This 

year’s budget proposes ending both ES and WIA and replacing them with a block 

grant to governors who would have to use 75% of the funds for job training and education vouchers, called ‘‘career advancement accounts’’. While both proposals would 

retain some funding for state labor exchange services, the amount would continue 

to decline and few, if any, requirements would exist. 

The cumulative effect of these proposals is to eliminate federal leadership and accountability and to weaken the core elements of the political agreement that has 

supported the UI/ES system over the years. The unique role of the Employment 

Service in relation to the unemployment insurance system is almost an afterthought 

in these ‘‘reform’’ plans. 

Effective administration of the UI work test requires close cooperation between 

state UI and ES staff and adequate resources to ensure that UI claimants look for 

work and receive the assistance they need. Such cooperation will be even harder to 

achieve if administration of the work test is transferred from the state agency to 

locally administered programs which have to meet separate and locally oriented performance standards. 

Furthermore, repealing the Wagner-Peyser Act would end existing requirements 

that UI claimants receive reemployment services. This requirement is especially important as a companion to the worker profiling and reemployment service system 

for UI claimants that Congress approved in 1993. Under this program, UI claimants 

referred to reemployment services by UI agencies must participate as a condition 

of continuing eligibility for UI benefits. However, these services will not necessarily 

be available under the career advancement accounts proposal. 

The Administration also intends to end America’s Job Bank (AJB) which is financed through the Employment Service. Without AJB, there would be no effective 

mechanism to comply with the Wagner-Peyser Act’s longstanding requirement to 

‘‘maintain a system of clearing labor between the States’’. AJB is now the largest 

electronic listing of job openings in the world and has links to the job banks of all 

43 

the states and the web sites of private placement agencies and job postings of numerous corporations. 

AJB is a critical tool in supporting ES operations and other workforce labor exchange activities in Washington State and nationally. It played a critical role in the 

aftermath of Hurricanes Katrina and Rita in creating the Hurricane Recovery Job 

Connection Website when Louisiana’s systems shut down entirely. DOL has suggested that the widespread development of internet sites such as Monster.com 

would be available, but we can think of no effective way private agencies and 

websites could even begin to replace the value provided by AJB. For example, it is 

not clear how requirements for federal contractors to list their job openings and for 

veterans to receive hiring preferences could be implemented without this universally 

available labor exchange tool. 

While my statement has focused on the implications of DOL’s budget on reemployment services for UI claimants, I also want to address our concern with the failure 

to provide adequate funding for state UI operations. These functions include determining eligibility for and paying UI benefits to jobless workers, adjudicating claims, 

and collecting employer taxes. 

Appropriations for state UI operations have not been adjusted for inflation, including personnel and service costs, since 1995. While efficiencies have been 

achieved during that time, this situation, if allowed to continue, will lead to staff 

layoffs, reduced services to claimants and reduced integrity efforts. 

DOL has made a number of integrity proposals to recover benefit overpayments 

and improve tax collections. However, they are limited and rely in part on reinvesting recovered benefit overpayments and employer tax penalties in these administrative functions. 

In addition to having limited financial impact, the reinvestment approach would 

break down the historical structure of the UI system under which the federal government is responsible for administrative financing and state trust fund resources 

are used only for paying UI benefits. For this reason we oppose this policy. 

DOL’s integrity proposals also do not fundamentally address the deterioration in 

UI administrative funding, which has reduced state recovery activities, and in ES 

funding, which has hampered state enforcement of the UI work test. Most UI overpayments occur when someone works and collects UI at the same time. Funding 

cuts have forced states to rely on internet or automated UI filing and certification 

of work which makes such fraud far easier. Early, in-person contact by employment 

service staff would reduce overpayments in these cases. While the Administration’s 

funding request for periodic eligibility reviews may be helpful, it is not the same 

as a sustained commitment to rebuilding the system and providing an adequate 

level of reemployment services. 

AFSCME also strongly opposes using state benefit trust fund money to pay private collection agencies to recover benefit overpayments. We believe it violates the 

merit system requirement of the unemployment insurance program. The civil service requirement was first enacted in the 1930s to protect the program from financial 

and political abuse much like the kind we increasingly are seeing today in government contracting in a variety of contexts. We also are concerned about the privacy 

of data for both workers and employers and the reputation of this industry to engage in harassing, threatening and illegal actions even when the Fair Debt Collection Practices Act applies. 

AFSCME believes the chronic financial neglect of the employment security system 

must be addressed. Our support for proposals to increase administrative funding 

and convert it to mandatory funding is longstanding. A mandatory financing structure would allow program activities to more accurately reflect increases in employers and fluctuations in UI claims. The Administration’s request is a very poor substitute for the federal government fulfilling its responsibility to provide the necessary administrative funds. In the short term, Congress should at least follow the 

recommendation of the National Association of State Workforce Agencies and increase UI funding to $3.023 billion for UI administration, which is $283 million 

more than DOL has requested. 

In closing, Mr. Chairman, I want to thank you again for giving me the opportunity to testify today. I would be pleased to answer any questions you may have. 

f 

Chairman HERGER. Thank you, Mr. Devereux. Dr. Brough to 

testify. 

44 

STATEMENT OF WAYNE BROUGH, PH.D., ADJUNCT SCHOLAR, 

AMERICAN INSTITUTE FOR FULL EMPLOYMENT 

Dr. BROUGH. Thank you, Mr. Chairman and Members of the 

Committee. Thank you for the opportunity to testify today. My 

name is Wayne Brough. I am an adjunct scholar with the American 

Institute for Full Employment. The American Institute for Full 

Employment is a nonprofit public policy research and development 

center founded in 1994, with offices in Klamath Falls, Oregon, and 

Washington, D.C. The institute was founded with the goal of full 

employment, universal access to jobs with career potential for all 

who can work so they can avoid the many poverties of unemployment. The institute conducts leading research, studies best practices, and develops practical solutions in the areas of UI, workforce 

development, retirement income, and public assistance. Today, we 

encourage careful assessment of two issues. First is identifying and 

addressing areas where tax dollars may be wasted in the current 

program. The second is identifying and improving opportunities to 

help people find work while saving taxpayer dollars. 

On the first issue, State employment agencies, operating under DOL oversight, overpaid claimants by $3.4 billion 2004. This is 9.9 

percent of all UI payments. Now not only does this waste scarce 

tax dollars, but a portion of these overpayments are passed on to 

workers through lower wages. In total, the effect is the overpayments affect employers, honest workers, and the overall productivity of the economy. I think the problem arises because of the 

focus on swift payments as a top priority of the agencies. This, I 

think, is a holdover from a time when the DOL placed more emphasis on timeliness than on efficacy of the programs or the stewardship of public funds. The DOL budget request includes efforts 

to prevent overpayments as well as collect past overpayments. 

These are worthy goals, and we encourage the DOL to improve this 

program. 

With respect to the second point, the helping unemployed find 

work more quickly and effectively, our research has shown that 

people operating the UI system are capable of improving the job 

search process. In Arizona, we found face-to-face eligibility interviews did accelerate reemployment. The program saved $10 in benefits for every dollar spent on interviews. However, the program 

was cut because of inadequate funding. The 2007 budget request 

includes $30 million to expand the reemployment eligibility assessments. We applaud this effort because we know that this approach 

helps people get back to work, and it saves money. In another example, for 10 years, Oregon has experimented with subsidized 

wage program for low-skilled UI claimants. The program was designed to help those likely to experience a long spell of unemployment to find work rapidly through subsidized jobs. The program 

was found to save more dollars than it cost while employing the 

most disadvantaged UI claimants and allowing them to find work. 

Reforming the system to promote faster rates of reemployment 

provide significant benefits to the workers and to the economy. 

Typical claimants receive less than half of their prior wage from UI 

and spent 3 months unemployed. Most have little savings, and 

these are depleted fairly rapidly. More than one-third exhaust their 

benefits before finding a job. Allowing States to experiment with 

45 

1 U.S. Department of Labor, ‘‘UI Benefit Accuracy Measurement Report for CY 2004,’’ 

downloaded from http://workforcesecurity.doleta.gov/unemploy/bam/2004/bam-anrep.asp on April 

28, 2006. 2 Anderson, Patricia and Bruce D. Meyer, ‘‘The Effects of Firm Specific Taxes and Government 

Mandates with an Application to the U.S. Unemployment Insurance Program,’’ Journal of Public Economics, Vol. 65 (1997), pp. 119–145. 3 Arizona Department of Economic Security, ‘‘Reemployment Services Performance Report,’’ 

December 23, 2002. 

work-oriented programs can alleviate the burden on claimants 

while promoting faster reemployment. We know worker-oriented 

programs help people and save tax money. This should be a thrust 

of future DOL efforts. Finally, we would like to comment on career 

advancement accounts. We found most people collecting UI would 

like to be reemployed promptly and at a good job. Providing the 

tools to find good work is more important than simply providing a 

check and saying we don’t have high hopes of allowing you to find 

new employment. Integrating employment services and WIA funding and services provide the flexibility to each UI claimant to get 

the exact combination of support services that will provide the 

most benefits. This will improve cost effectiveness, as the unemployed weigh the cost and benefits of various options. Programs to 

assist the unemployed can be performed with improved outcomes 

and at lower cost. The key to achieving both of these benefits is to 

have a strong work orientation to the program, and we urge Congress to incorporate a pro-work attitude in its budget decisions. 

Thank you, and I would be glad to answer any questions. 

[The prepared statement of Dr. Brough follows:] 

Statement of Wayne Brough, Ph.D., Adjunct Scholar, American Institute for 

Full Employment 

Mr. Chairman and Members of the Committee, I am Wayne Brough, adjunct 

scholar with the American Institute of Full Employment. I am here today on behalf 

of the American Institute for Full Employment, a nonprofit public policy research 

and development center founded in 1994, with offices in Klamath Falls, Oregon and 

Washington, D.C. The Institute was founded with the goal of Full Employment— 

universal access to jobs with career potential for all who can work, so they can avoid 

the many poverties of unemployment. The Institute conducts leading research, studies best practices, and develops practical solutions in the areas of unemployment insurance, workforce development, retirement income, and public assistance. 

The Institute applauds the Department of Labor for recognizing needed changes 

in the administration of programs to assist the unemployed. We encourage careful 

consideration of two issues: how tax money is being wasted, and the opportunity to 

help people find work while saving tax money. 

State unemployment insurance agencies, operating under DOL oversight, overpaid 

claimants $3.4 billion in 2004, the latest year for which data are available.1 Overpayments amounted to 9.9 percent of all UI payments. Employers across the country 

are taxed to fund these overpayments. A number of economic studies have concluded 

that some or all of these taxes are actually passed on to workers through lower 

wages, so the overpayments problem affects employers and honest workers alike.2

The problem arises, we believe, from an attitude that swift payments must be the 

top priority of the agencies, an attitude adopted in years past when payment timeliness was of greater concern to the Department of Labor than program effectiveness 

or stewardship of public funds. The department’s budget request includes efforts to 

prevent overpayments, as well as to collect past overpayments, which are worthy 

goals. 

Our research has found that the people who operate the UI system are capable 

of helping the unemployed find work more quickly and effectively. We learned that 

in Arizona, face-to-face eligibility review interviews helped accelerate reemployment.3 The program saved about ten dollars in benefits for every dollar spent on 

the interviews. However, the program was discontinued because of inadequate funding. As you know, money saved from benefits payments cannot be used to fund UI 

46 

4William B. Conerly and John Courtney, ‘‘Final Report on the JOBS Plus Program,’’ American 

Institute for Full Employment, March 2001. 

administration. Thus we have a program that helped the unemployed and saved 

money, but was terminated. We applaud the budget proposal’s inclusion of $30 million to expand Re-employment and Eligibility Assessments. We know that this approach helps people get back to work and it saves money. 

In Oregon, for 10 years, that state experimented with a subsidized wage program 

for low-skilled UI recipients.4 The program helped people who were likely to experience a long spell of unemployment to find work rapidly through subsidized jobs. The 

program was funded by a state diversion tax and was found to save more dollars 

than it cost—while helping the most disadvantaged UI recipients get work. 

Reforming the current system to promote a faster rate of re-employment would 

provide significant benefits to workers and the economy. Typically, claimants receive 

less than half of their prior wage from UI and spend over three months unemployed. 

Most of these workers have very little in savings, which are depleted rapidly. More 

than one-third of claimants exhaust their benefits before getting a job. Providing 

states the flexibility to experiment can alleviate the burdens imposed on claimants 

and promote greater re-employment. The Arizona model proved successful, and 

other states, such as Oregon, have developed more effective programs as well. Yet 

the current system discourages such experimentation in favor of a system that has 

changed little over time. We know that work-oriented programs help people and 

save tax money. This needs to be the thrust of future DOL efforts. 

Finally, let us comment on the proposal for Career Advancement Accounts. We 

applaud this change. We have found that most people collecting UI would like to 

get back to work promptly, at a good job. Providing them with the tools to find good 

work is more powerful than simply handing them a check and saying that we don’t 

have high hopes for them finding work. Integrating Employment Service and Workforce Investment Act funding and services has the potential to help each UI claimant get the exact combination of support services that will provide that person the 

most benefit. It will improve cost effectiveness as the unemployed weigh the costs 

and potential benefits of various service options. 

The programs that assist unemployed people can be performed with improved outcomes and at lower cost. The key to achieving both benefits is to have a strong work 

orientation in the program. We urge Congress to incorporate a pro-work attitude 

into its budget decisions. 

f 

Chairman HERGER. Thank you, Dr. Brough. Mr. Rosen to 

testify. 

STATEMENT OF HOWARD ROSEN, VISITING FELLOW, 

INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. ROSEN. Thank you very much, Mr. Chairman and Members 

of the Committee. I am also grateful for the opportunity to testify 

today on the Administration’s budget request for UC. Before I 

begin my comments, I would like to respond to some of the earlier 

comments that were made that are very timely. This morning, the 

BLS announced that the productivity and the economy grew by 3.2 

percent in the first quarter of 2006. I once time asked a Secretary 

of Labor did we have a productivity problem in this country? He 

said to me, ‘‘Yes, you can never have enough productivity.’’ Productivity is a great thing. But we have to remember that there is also 

a cost to productivity because, in the short term, employers may 

need fewer workers. Although we applaud the increase in productivity that is going on in the economy, it also puts pressure on the 

labor market. 

The Chairman also mentioned this morning that we have had an 

incredible rate of employment growth of about 2 million jobs per 

year, close to 2 million jobs per year. We now have data that dissect that number because that number is really just a net change 

47 

in employment, and we can actually see how many jobs are actually created and how many are terminated. Snce I know that Members of Congress love numbers, let me just tell you that every day 

in this economy, we create 50,000 new jobs. But at the same time, 

45,000 people are terminated in their jobs. Now the net is still positive, which is wonderful, and we need to do what we can to celebrate that. But we can’t forget the fact that it is a net number and 

that actually people are losing their jobs even though we are creating jobs in the economy. The Administration’s budget seems to 

focus almost exclusively on recovering UI payments made in error. 

Although I think it is important to address waste, fraud, and abuse 

in the program, I think the Administration’s proposal make actually make it harder for eligible workers to receive assistance they 

so desperately need. 

At the same time, the Administration is proposing to reduce 

funding for ES, which could actually reduce in a decline in resources, making it more difficult for States to monitor compliance 

with UI eligibility requirements. In fact, I could argue that the declines in employment service spending over the last couple of years 

may actually be contributing to the increase in the amount of fraud 

going on in the system. The Administration’s budget request ignores the program’s serious long-term problems. Our Nation’s UI 

system is seriously out of date with recent developments in the 

U.S. economy. Number one, yes, the unemployment rate has fallen. 

But the duration of unemployment has risen, which suggests that 

unemployment is becoming more permanent rather than temporary. Unemployment is increasingly due to structural, not cyclical factors. Recessions are getting shorter, and the time it takes for 

employment to recover is getting longer after each recession. State 

unemployment rates are converging, suggesting that unemployment is becoming due to national factors as opposed to State or regional factors. In this current day of technological change and 

globalization, no region or industry is immune from the labor market pressures. There is, as I have already suggested, considerable 

turnover in the U.S. labor market. On average, 30 million workers, 

or about one-quarter of the workforce, either lose their job, take a 

new job, or both each year. That is an incredible amount of turnover. That means one out of four people will change their jobs in 

any given year. Contrary to the conventional wisdom, much of this 

turnover is taking place in the service sector, not manufacturing. 

Looking at our current program, only a small fraction of unemployed workers actually receive UI. Approximately one-third of UI 

recipients exhaust their benefits before finding a new job. The current benefit level is $262, which is below the poverty rate for a 

family of three. It only replaces about one-third of previous wages, 

well below the initial goal of the program of one-half. The automatic triggers for the extended benefit program are broken, making 

the program obsolete. My written statement goes into some detail 

about some reform proposals. I just want to highlight five right 

now. One, we need to expand the insurance risk pool by increasing 

the Federal role in financing and distributing UI benefits. Number 

two, we need to make the system more progressive by increasing 

the maximum taxable wage base and reducing the FUTA tax rate. 

Now we could actually remove the 0.2 surtax if we just kept the 

48 

tax base up with inflation. The tax base has not been changed in 

over 20 years, and adjusting it would allow us to significantly reduce the tax rate. Improve the linkage to reemployment. This has 

been mentioned already a couple of times before. We actually have 

some experience with that in another Federal program called the 

Trade Adjustment Assistance (TAA) Program, where we have recently introduced wage insurance and a health care tax credit. 

Given the DOL’s enthusiasm about linking to more reemployment 

programs, it is actually curious to me that they have been 

unimpressive in their implementation of these two new proposals. 

Number four, we need to improve the levels of the UI and make 

them relate to local market conditions, and we need to fix the triggers of the extended benefit program. Thank you very much. 

[The prepared statement of Mr. Rosen follows:] 

Statement of Howard Rosen, Visiting Fellow, Institute for International 

Economics 

I am grateful for the opportunity to testify before the Subcommittee on the Administration’s budget request for Unemployment Compensation. Unemployment Insurance (UI) is the centerpiece of our efforts to assist workers who lose their jobs 

at no fault of their own. 

In addition to providing income support to workers facing significant financial 

burden, recent research finds that the existence of an adequate unemployment insurance program can reduce worker anxiety and encourage more labor market flexibility, both of which are required in order to meet the challenges of technological 

change and globalization. 

The Administration’s budget request focuses on recovering UI payments to workers made in error. Although it is important to address waste, fraud and abuse in 

the program, the Administration’s proposals may actually make it harder for eligible 

workers to receive the assistance they so desperately need. At the same time, the 

Administration’s proposal to eliminate funding for Employment Services and create 

a new block grant, results in a decline of resources, thereby making it more difficult 

for states to monitor compliance with UI eligibility requirements. 

The Administration’s budget request ignores the program’s serious long-term problems. Our nation’s UI program is seriously out of date with recent developments in 

the U.S. labor market. 

There have been no major changes in the basic structure of Unemployment Insurance since it was established 70 years ago, despite significant changes in U.S. labor 

market conditions. 

• Currently, only a small percentage of unemployed workers receive assistance 

under the program and the assistance is modest at best. 

• There are vast differences in eligibility, benefit levels and tax rates between state 

unemployment insurance programs. 

• The program no longer meets its initial goal of providing counter-cyclical stimulus during periods of economic slowdowns. 

Changes in the U.S. labor market 

The U.S. labor market has undergone a significant transformation since unemployment insurance was established 70 years ago. 

• Although the unemployment rate has recently been low and falling, the duration 

of unemployment has been rising, suggesting that unemployed tends to be more 

permanent than temporary. 

• Unemployment is increasing due to structural rather than cyclical factors. With 

the exception of the early 1980s, recessions have become shorter, but the length 

of time it takes for employment to recover from the economic downturns has 

significantly increased. 

• State unemployment rates are converging, suggesting that unemployment is due 

to national rather than state or regional factors. During the late 1970s and the 

1980s a disproportionate share of the nation’s unemployment was concentrated 

in the Northeast and Midwest—regions with a high concentration of traditional 

industries, like autos, textiles and apparel and steel. One consequence of 

globalization is that no region or industry is now immune from increased doVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
49 

1The Bureau of Labor Statistics and the Census Bureau have recently begun publishing establishment data on employment creation and termination. 2 By contrast, analyses based on changes in net employment would suggest that the economy 

created 17 million jobs over the 10-year period. 3 Research funded by the Department of Labor suggests that the recent decline in the 

recipiency rate is likely due to changes in the industrial composition of employment and the way 

unemployment is measured. Others argue that the low level of assistance may discourage workers from participating in the program. 

mestic and foreign competition. Although there clearly remain differences in 

local labor market conditions, current pressures on the U.S. labor market are 

becoming more national in character. Local labor market conditions primarily 

affect the costs associated with job loss and the prospects for re-employment, 

they do not necessarily protect workers from job loss. 

There is considerable turnover in U.S. employment.1 Between 1994 and 2004, 30 

percent, or approximately 30 million workers either lost their job, took a new job, 

or both, each year. Contrary to conventional wisdom, a disproportionate amount of 

this turnover occurred in the service sector, as opposed to the manufacturing sector. 

Between 1995 and 2004, approximately 18.3 million new jobs were created and 

16.6 jobs were terminated on average each year.2 Job losses exceeded job gains by 

20 percent in the manufacturing sector. The average annual number of job losses 

in the five service industries, i.e. transportation, communication and utilities, wholesale and retail trade, finance, insurance and real estate, and services, was 121⁄2 million, almost 7 times the number of manufacturing job losses. 

The Current Unemployment Insurance Program 

The original unemployment insurance program was designed to offset involuntary 

income losses during cyclical periods of temporary unemployment. By contrast, current labor market conditions suggest that workers face short-term transitional unemployment—as they move from job to job—and long-term structural unemployment. 

The existing unemployment insurance system provides inadequate assistance in both 

cases. Those workers who voluntarily leave one job in order to take another job are 

ineligible for unemployment insurance and assistance is inadequate for those workers who experience long-term unemployment. 

Underlining these macroeconomic changes to the U.S. labor market has been a 

shift from traditional employer-based full-time employment to contingent, part-time 

and/or self-employed. The shift to non-traditional forms of employment raises additional problems for unemployment insurance. The current system is not able to cover 

contingent employment, self-employment, and part-time and low-wage employment. 

As a form of social insurance, UI has some important insurance principles built 

into it. Premiums are paid in advance through employer taxes of wages earned. Individual eligibility requires earnings (employment) above a state-specified minimum, 

and entry into unemployment must be through involuntary job loss (no voluntary 

quits or firings). With the covered earnings requirement, eligible workers are those 

with some labor force attachment, and continued receipt of benefits requires being 

able, available and actively seeking work. 

Coverage 

Coverage is the only part of unemployment insurance that has been meaningfully 

reformed since the program was established. Over the years, various changes have 

widened the net of coverage to include almost all wage and salary workers, with 

the exception of agricultural and household workers. Self-employed workers remain 

not covered under the program. 

Under current law, workers must have worked 20 weeks in a calendar year, earning at least $1,500 in 2 quarters, in order to qualify for the minimum level of assistance under the program. Workers must also have had just cause for losing their 

jobs. Most state programs provide assistance only to those workers who lost their 

jobs through no fault of their own. Almost all states disqualify workers from receiving UI benefits due to voluntary job loss and refusal to take suitable work and discharge due to misconduct. 

The percent of the total civilian workforce covered by unemployment insurance 

has been trending upward and currently stands at 74 percent of the total workforce. 

Recent problems with coverage may be due to an increase in the number of selfemployed workers. 

The percent of total unemployed workers receiving assistance, the recipiency rate, 

has also declined in recent years. Only a little more than a third of unemployed 

workers actually receive unemployment insurance.3

50 

4Washington and Massachusetts have a maximum duration of 30 weeks. 

Duration of Benefits 

Individual states set their own minimum and maximum benefits amounts, as well 

as the number of weeks workers can receive assistance. Initially, the range of UI 

duration was 12 to 20 weeks. Currently, all states except two have a maximum duration of 26 weeks.4

Over the last 30 years, the average duration for receiving unemployment insurance has ranged from a low of 13.2 weeks in 1989 to a high of 17.5 weeks in 1983 

and has hovered around 15 weeks for most of the period. 

The percent of beneficiaries who have exhausted their benefits, e.g. have remained unemployed beyond the period for which they received unemployment insurance, has ranged from a low of 26.7 in 1978 and 1979 to a high of 43.4 in 2003. 

On average, approximately one-third of UI recipients exhaust their benefits before 

finding new jobs. 

Benefit Levels 

Almost all states set their maximum weekly benefits somewhere between $200 

and $500, with the largest concentration of states falling between $300 and $400. 

(See Table 1.) Puerto Rico has the lowest maximum weekly benefit ($133). States 

with the highest maximum weekly benefits include Massachusetts ($528 to $778), 

Minnesota ($515), New Jersey ($503), Rhode Island ($477 to $596) and Washington 

($496). The average weekly benefit in 2004 ranged from $106.50 in Puerto Rico to 

$351.35 in Massachusetts. The average weekly benefit for the entire country was 

$262.50. 

Table 1—State Maximum Weekly Benefits 

Maximum Weekly Benefit Number of States 

below $200 1 

$200 to $300 12 

$300 to $400 26 

$400 to $500 10 

above $500 4 

Source: Employment and Training Administration, U.S. Department 

of Labor, Financial Handbook 

Table 2 presents the distribution of 2004 replacement ratios, the ratio of the average weekly benefit to average wages. The District of Columbia has the lowest replacement rate, less than a quarter of its average wage. Hawaii’s UI program comes 

the closest to replacing almost half of the state’s average weekly wage. Thirty-eight 

states have an average replacement rate of between one-third and one-half of their 

average weekly wages. The states with the lowest replacement ratios include Puerto 

Rico, Arizona, Alaska, Alabama, New York, Connecticut, Delaware, California, Missouri, Tennessee, Virginia, Mississippi, Maryland and Louisiana. The average replacement rate for the United States as a whole between 1975 and 2004 was 0.36 

percent, far from the initial goal of 0.5 percent. 

Table 2—Distribution of the Replacement Ratio 

Number of States 

Less than 0.25 1 

0.25 to 0.35 20 

0.35 to 0.40 18 

0.40 to 0.50 14 

Source: Employment and Training Administration, U.S. Department 

of Labor, Financial Handbook 

A recent Congressional Budget Office report found that Unemployment Insurance 

constituted an important source of income for unemployment workers and their families. (See Box 1.) 

51 

5This testimony is based on Lori Kletzer and Howard Rosen, ‘‘Extreme Makeover: Reforming 

Unemployment Insurance to Better Meet the Needs of a 21 Century Workforce,’’ draft, 2006. 

Howard Rosen also serves as Executive Director of the Trade Adjustment Assistance Coalition, 

a non-profit organization that advocates on behalf of workers, farmers, fishermen, firms and 

communities which face dislocations as a result of increased imports and international shifts in 

production. 

Box 1 

Summary of Conclusions 

Family Income of Unemployment Insurance Recipients 

• UI benefits played a significant role in maintaining the family income of recipients who experienced a long-term spell of unemployment in 2001 or early 

2002—particularly those who did not have other wage earners in their family. 

Before becoming unemployed, recipients’ average family income was about 

$4,800 per month.5 When recipients lost their job, that income—excluding UI 

benefits—dropped by almost 60 percent. With UI benefits included, the income 

loss was about 40 percent. 

• For sole earners in a family, the income loss was greater: almost 90 percent excluding UI benefits, or 65 percent including them. For such one-earner families, 

UI benefits represented two-thirds of their total income, compared with an average of about 20 percent for families with more than one worker. 

• Former UI recipients who did not find work soon after their benefits ended— 

people for whom federal extensions of UI benefits are intended—continued to 

incur substantial income losses. For the 40 percent of long-term UI recipients 

who were not working three months after their benefits ended, average family 

income was about half of what it had been before they began receiving unemployment insurance. By comparison, for long-term UI recipients who were working three months after their benefits ended, income loss was less than 10 percent. 

U.S. Congress, Congressional Budget Office, ‘‘Family Income of Unemployment Insurance Recipients,’’ Washington, DC: 2005 

Extended Benefit Programs 

From the outset, unemployment insurance has not been flexible enough to respond 

to the cyclical nature of unemployment. More than 40 percent of unemployed workers exhaust their benefits before finding new jobs during recessions. To address this 

shortcoming, Congress enacted a temporary extension of unemployment insurance 

during the 1958 recession. In 1970, Congress enacted a permanent Extended Benefit 

(EB) program with automatic triggers to provide assistance in a more orderly fashion. High rates of regular UI exhaustion, problems with the automatic triggers and 

political pressures have resulted in the need for subsequent Congressional action to 

respond to heightened levels and pro-longed duration of unemployment associated 

with periods of economic slowdown. 

Increases in the duration of unemployment during recessions have been the primary impetus for extending traditional unemployment insurance beyond its base period. In each economic slowdown since the 1950s, the average duration of unemployment has continued to rise after the economy has begun rebounding. 

Extended benefits programs were designed to provide a counter-cyclical stimulus 

to the economy. In order to achieve this goal, one would have expected the amount 

of spending on unemployment insurance to be inversely related to the economy’s 

well being, i.e. outlays on unemployment insurance would be higher during economic slowdowns and lower during economic recoveries. This does not seem to have 

been the case. 

Most extended benefits were paid during the 1970s, when the extended benefit 

program was established, and during the 1980s, when the economy experienced a 

deep recession. (See Table 3.) There was a dramatic falloff in the amount of extended benefits paid during the subsequent 15 years. One explanation for this fall 

may be that the nature of recent economic slowdowns has changed, making the 

mechanisms that were initially designed to trigger extended benefits work less automatically. 

52 

Table 3—Federal-States Extended Benefit Program 

Total Benefits Paid (in 

billions) 

Number of first payments 

(in millions) 

Average weekly benefit 

amount 

1972–1979 $8.6 13.0 $69 

1980s $7.5 7.0 $115 

1990s $0.8 0.7 $120 

2000–2004 $0.7 0.2 $262 

Source: Employment and Training Administration, U.S. Department of Labor, Financial Handbook 

Inflexibility in the ‘‘automatic’’ triggers has made the program obsolete. As a result, Congress has occasionally extended unemployment insurance. (See Table 4.) 

Far more benefits have been paid under these temporary programs than under the 

standard extended benefit program, reflecting a major weakness in the standard extended benefit program. 

Table 4—Temporary Extended Benefit Programs 

Total Benefits Paid (in 

billions) 

Number of First Payments (in millions) 

1982–1985 Federal Supplemental 

Compensation Program 

$9.6 7.7 

1991–1994 Emergency Unemployment 

Compensation Program 

$27.7 9.1 

2002–2004 Temporary Extended Unemployment Compensation Program 

$23.2 7.8 

Source: Employment and Training Administration, U.S. Department of Labor, Financial Handbook 

The standard extended benefit program has accounted for a smaller share of assistance provided unemployed workers, while emergency extensions of unemployment insurance enacted by Congress have become more important. The nation’s unemployment insurance program has become less automatic and more dependent on 

Congressional action in response to prolonged periods of economic slowdown. 

The degree to which extended benefits actually stimulate the economy during periods of slowdown is also questionable. The amount of extended benefits paid during 

the Temporary Extended Unemployment program between 2002 and 2004 was approximately $23 billion, less than 3 percent of the change in personal consumption 

over that period. It is difficult to imagine how the existing unemployment insurance 

program, with its current benefit levels and duration, could provide serious stimulus 

to a $10+ trillion economy. 

Financing Unemployment Insurance 

Unemployment insurance is financed by payroll taxes administered by federal and 

state governments. Revenue from the federal payroll tax is used to finance the costs 

incurred by both federal and state governments in administering the program. 

States are required to raise the necessary revenue to finance benefits paid to its unemployed. Federal and state governments share the costs of financing benefits 

under the automatic extended benefit program. Temporary extended unemployment 

insurance programs enacted by Congress have typically been financed by federal 

budgetary expenditures without any specific revenue offset. 

The federal tax to finance UI, established by the Federal Unemployment Tax Act 

(FUTA) is currently 6.2 percent on first $7,000 of annual salary by covered employers on behalf of covered employees. Employers must pay the tax on behalf of employees who are paid at least $1,500 during a calendar quarter. Employers in states 

with approved unemployment insurance programs—which currently include all 50 

states, the District of Columbia, Puerto Rico and the Virgin Islands—receive a 5.4 

percent credit, making the effective tax rate 0.8 percent. In 1976, Congress passed 

a temporary 0.2 percent surtax to replenish the unemployment insurance trust 

fund. The surtax remains in place and is scheduled to expire on December 31, 2007. 

The taxable wage base has not been adjusted on a regular basis, thereby seriously 

eroding its real value. (see Figure 4.) The last time the federal taxable wage base 

53 

was increased was in 1983, when it was set at $7,000. Had the taxable wage base 

been adjusted for inflation over the last 65 years, it would currently be approximately 

$45,000. At that level, the net federal tax rate, i.e. the tax rate minus the credit, 

would only have to be 0.125 percent in order to generate the same amount of revenue that is currently being collected. Although it is unrealistic to expect an adjustment of the taxable wage base of this magnitude anytime soon, any increase in the 

wage base to make up for the erosion in its real value over the last 2 decades could 

provide additional funding for providing assistance to workers in need as well as 

enable the federal government to reduce the FUTA tax rate. 

Figure 4 

Federal Taxable Wage Base 

Inflation adjusted 

Actual 

Source: Employment and Training Administration, U.S. Department of Labor, Financial Handbook and authors’ estimates. 

Currently, federal taxes only finance 17 percent of the unemployment insurance 

program. The remaining 83 percent is financed through state taxes. Thirty-one 

states set their taxable wage base below $10,000, of which 11 states set their taxable wage base at $7,000, the same as the federal taxable wage base. Ten states 

set their taxable wage base above $20,000, approximately 3 times greater than the 

taxable wage base set by the federal government. 

There is substantial variance in tax rates set by states. (See Table 5.) Forty-one 

states have an average UI tax rate between 1 and 3 percent of payroll. Average UI 

tax rates in the Virgin Islands, South Dakota and New Mexico are below 1 percent. 

By contrast, the Virgin Islands and New Mexico have relatively high taxable wage 

bases. Nine programs—California, Pennsylvania, New York, Illinois, Michigan, Massachusetts, Puerto Rico, Rhode Island and Connecticut—have the highest UI tax 

rates. The weighted average tax rate for the 53 states and territories is 2.8 percent. 

Table 5—Average State UI Tax Rates 

Average tax rate as a percent of taxable wages Number of States 

Less than 1.00 3 

1.00 to 1.99 22 

2.00 to 2.99 19 

Above 3.00 9 

Source: Employment and Training Administration, U.S. Department 

of Labor, Financial Handbook. 


31492A.002
54 

6 In general, movements in the average total UI tax rates tend to reflect the business cycle, 

i.e. the rate tends to reach a trough during economic slowdowns and reach a peak during economic recoveries. This is most likely due to changes in the amount of taxable wages, which 

tends to be cyclical, rather than to actual changes in the tax rate legislated by each state. 7 Bureau of the Census, U.S. Department of Commerce, ‘‘Incomes, Earnings and Poverty from 

the 2004 American Community Survey,’’ Government Printing Office: Washington DC, August 

2005. According to the report, the poverty rate in 2004 for a family of three, with one child 

under the age of 18 was $14,974. 

The average tax rate for the nation was a little less than 2 percent in 1975, before 

rising and finally peaking at 3.25 percent in 1984. The average tax rate declined 

over the next 17 years, dropping to 1.7 percent in 2001, before rebounding slightly 

between 2002 and 2004.6

Critique of Existing Unemployment Insurance Program 

Although the vast majority of American workers are currently covered by unemployment insurance, those groups of workers still not covered by the program, including self-employed workers, some agricultural and domestic workers, people who 

provide services for relatives, many health care providers, student interns, immigrant farm workers and all kinds of seasonal workers, are gaining prominence in 

the U.S. labor market. 

The percent of unemployed workers actually receiving assistance under unemployment insurance has been falling, at that the same time that coverage has been expanding. 

Employers are required to pay federal and state unemployment insurance tax on 

behalf of workers employed for at least 20 calendar weeks or who receive at least 

$1,500 or more during any calendar quarter. Coverage is determined by a worker’s 

relationship with a single employer, not by the employee’s own work experience. For 

example, a worker who changes jobs during a calendar year may not be covered by 

unemployment insurance, even though he or she may have worked more than 20 

weeks during the year. This may not have been a problem 40 or 50 years ago, when 

worker turnover was low. Currently workers change jobs more frequently. In addition, workers are more likely to have multiple employers due to company reorganizations. 

Unemployment insurance does not cover workers who voluntary quit their jobs, 

regardless of the reason or those workers entering or re-entering the labor market. 

As a result, workers who voluntarily leave their jobs in anticipation of a plant closing, women who decided to postpone returning to work after childbirth, and workers 

who leave their jobs in order to relocate with a spouse are all currently ineligibility 

for unemployment insurance program. 

As a result, the current unemployment insurance program provides assistance to 

only a small share of the unemployed. 

Program eligibility is only one hurdle for the unemployed: in most states, the level 

of assistance is extremely low. The current average weekly assistance under each of the state programs is $262.50—almost 10 percent less than the weekly equivalent of 

the poverty rate for a family of 3 set by the U.S. Government.7

There is no evidence that higher benefit levels result in higher unemployment 

rates. 

Assistance under the program is limited to 26 weeks in almost all states. With 

the recent increase in the duration of unemployment, the maximum period workers 

can receive unemployment insurance has declined from twice to a little more than 

11⁄2 times the average duration of unemployment. 

The current unemployment insurance system is extremely regulated and rigid. 

Changes in coverage, eligibility and benefits must be legislated by individual states 

and must be consistent with federally mandated standards. This makes it extremely 

difficult for individual state programs to easily respond to changes in local labor 

market conditions and crisis situations. 

The Extended Benefit triggers are no longer automatic, as they were initially intended to be, thus undermining the overall effectiveness of the program, and making it virtually obsolete. 

Inadequacies in the extended benefit program have resulted in a need for Congress 

to periodically enact legislation to temporarily extend unemployment insurance benefits, thereby politicizing unemployment insurance. These temporary programs have 

proven to be clumsy, typically being enacted after millions have already exhausted 

their unemployment insurance. In addition, the sunset provisions are arbitrarily set 

and usually fall before employment has picked up. 

The current UI system has only a limited relationship with re-employment. Workers receiving unemployment insurance are required to show that they are seeking 

employment by documenting job inquiries and interviews. There is no requirement 

55 

8States are required to maintain an unemployment insurance system that meets federal 

standards in order to receive the offsetting FUTA tax credit. The provision of training and other 

employment services, like job search assistance, is left almost entirely up to the states, for which 

they receive some federal funding. As a result, the availability and quality of employment services varies by state. 

on workers to undertake training. Even if workers wanted to enroll in training, limitation in federal funding would prevent them in doing so.8

The current federal-state structure undermines the program’s ability to pool risk, 

protecting any one state from incurring more than its share of costs associated with 

unemployment. The current program produces the exact opposite outcome, i.e. those 

states with less unemployed workers have lower costs and those states with more 

unemployed workers face higher costs. 

Individual states have been forced to revise their tax rates and minimum taxable 

wage bases in order to finance their unemployment insurance programs. By contrast, 

the federal government has not revised its tax rate or taxable wage base in more than 

20 years. Adjusting for inflation alone, as many states have done, would have resulted in increasing the federal taxable wage base five-fold. 

Extreme Makeover for Unemployment Insurance 

Recent calls for special unemployment insurance programs to assist the victims 

of hurricanes Katrina and Rita are the latest evidence that the current program is 

not flexible or adequate enough to our workers’ needs in a timely fashion. Strict eligibility requirements and limited resources have restricted the ability of existing 

programs to provide meaningful assistance to people in need. 

In general, U.S. labor market programs have been designed to fight ‘‘the last battle,’’ thereby limiting their ability to respond to new and changing labor market conditions. For example, Unemployment Insurance was established in 1935 in response 

to prolonged and large-scale unemployment that was associated with the Great Depression, labor market conditions which have not occurred since then. Instead, over 

the last few decades, the labor market has been characterized by more limited periods of unemployment, experienced more widely throughout the economy. Fewer people may be experiencing unemployment, but for those who are, it is quite costly. 

In recent years the U.S. labor market has come under increased pressure from 

intensified domestic and international competition. This pressure has changed the 

nature of job turnover in the United States. Workers no longer just change jobs but 

often also change occupations throughout their working lives. 

The following are some recommendations for reforming the current Unemployment Insurance program: 

1. Increase the federal role in unemployment insurance 

The federal-state structure of unemployment insurance is a relic of its 1935 establishment, and a Depression-era concern over the constitutionality of plans for the 

federal government to levy taxes for unemployment assistance. Although referred to 

as a partnership, states currently bear the overwhelming responsibility of financing 

and administering the unemployment insurance system. Changes in the labor market suggest that, at least substantively, unemployment insurance would better meet 

its stated objectives if the federal government played a more prominent role in this 

partnership. 

At one extreme, transforming unemployment insurance into a federal program 

would significantly reduce the current administrative burden being placed the 

states. There would be a single tax rate and maximum taxable wage base for the 

entire country. Like Social Security, the federal government would collect all unemployment insurance taxes. All workers, regardless of where they lived and worked, 

would be treated equally under this new federal program, thereby removing all the 

bureaucratic discrimination that currently exists. Workers would continue to apply 

for assistance at local offices and local officials would monitor eligibility requirements. The federal government would make payments directly to workers, removing 

the middle step of transferring funds to State agencies. These changes would result 

in substantial cost savings. 

The convergence of state unemployment rates suggests that unemployment is becoming a more national phenomenon, rather than a state or regional phenomenon. 

This provides another reason for moving toward a single national unemployment insurance system. 

As a federal program, it would much easier for the government to extend assistance during periods of prolonged economic slowdown, as well as provide assistance 

during periods of national emergency, like natural disasters and economic disruptions resulting from terrorist attacks. 

56 

Most importantly, making unemployment insurance a single federal program 

would create a national risk pool, and thereby bring the program closer to achieving 

its original objective of being an insurance program. 

Reinventing UI as a federal program would have the following benefits: 

• Bring unemployment insurance closer to serving as a true insurance program 

• Remove the implicit discrimination by state in the amount of assistance 

• Reduce administrative burden of tax collection and program administration 

• Enable the program to be more flexible in responding to changes in national 

labor market conditions 

• Make more resources available to workers undergoing a costly transition 

Opponents of this option argue that strengthening the federal role in unemployment insurance it will further increase the size of the federal government. The current system may help reduce the size of the federal government, but it is contributing to increasing the size of state governments. 

Regional variation in earnings/assistance could be maintained, with the federal 

role establishing a minimum percentage of wages replaced. 

2. Increase the maximum taxable wage base and reduce the FUTA tax rate 

Increasing tax taxable wage base would make the unemployment insurance payroll tax more progressive. By increasing the taxable wage base to $50,000, which 

is closer to the taxable wage base currently in place under Social Security, the tax 

rate could be significantly reduced yet still generate the same amount of revenue 

that is currently collected. A large reduction in the tax rate could result in significant job growth. 

3. Improve the linkage to re-employment by expanding assistance to include recent 

innovations in labor market policies, i.e. ‘‘wage insurance’’ and a health care tax 

credit 

In 2002 the Trade Adjustment Assistance (TAA) program was expanded to include 

‘‘wage insurance’’ and a Health Care Tax Credit (HCTC). Under wage insurance, unemployed workers who find a job that pays less than their previous job are eligible 

to receive half of the difference between their new and old wages for up to 2 years, 

subject to a cap of $10,000. Wage insurance is specifically designed to encourage 

people to return to work sooner than they might have otherwise. In addition, it is 

hoped that the new employer will provide on-the-job training, which has proven to 

be the most effective form of training. Wage insurance is also a less expensive form 

of assistance than unemployment insurance. Under the refundable Health Care Tax 

Credit, eligible workers can receive 65 percent of the cost of their health insurance 

premium for up to 2 years. According to recipients, both programs have already 

proven to meet pressing needs of workers and their families. 

4. Enable individuals, and employers on behalf of individuals, to voluntarily contribute to unemployment insurance and receive coverage 

One of the difficulties in achieving universal coverage is that many of those workers who are currently not covered do not have traditional relationships with employers. In order to address this problem, individuals would be able to voluntarily contribute to the unemployment insurance program, as is currently the case under Social Security. With voluntary contributions, more workers would be eligible for assistance. Workers who leave their jobs voluntarily could receive assistance, as could 

the self-employed. 

It is easier to collect taxes and cover these workers than it is to provide them with 

assistance. Most importantly, there are problems with measuring ‘‘job loss’’ for many 

of these workers. It would also be difficult to determine the amount of assistance 

they should receive. One way to address these problems would be to encourage individuals to establish saving programs to help offset income losses. 

5. Tailor benefits to work experience and local labor market conditions 

Benefit levels would be set according to a formula based on work experience, i.e. 

number of contributions to the trust fund, wage history, local labor market conditions and reason for separation. In order to cover low-wage, part-time and part-year 

workers, eligibility would be based on hours worked and earnings levels, rather 

than exclusively on earnings levels. Workers losing their jobs in regions with poor 

labor market conditions might receive a higher level of assistance, and/or get assistance for longer periods of time. Workers leaving their jobs voluntarily might be eligible for less assistance than those workers who lose their jobs because of 

downsizing or plant-closings. 

57 

9Despite concern over future liquidity of its trust fund, the SSI program has served millions 

of Americans extremely well since its creation. 10For a more detailed description of this proposal see Feldstein, Martin, ‘‘Rethinking Social 

Insurance,’’ 2005, American Economic Review, Volume 95 Number 1, American Economic Association, March. 

6. Explore consolidating tax collection and benefit payment with Social Security in 

order to seriously reduce administrative costs 

Federal and state governments currently maintain duplicate payment systems to 

administer Social Security and Unemployment Insurance. Both the federal and 

state governments collect taxes for Unemployment Insurance. Federal and state revenues are placed in a trust fund and the federal government transfers the funds 

back to the states. This cumbersome process could be replaced by having the federal 

government collect the tax and make payments, as is currently the practice under 

Social Security. 

The FUTA tax could be withheld from wages together with the Social Security 

tax.9 Employers and employees could both pay the FUTA tax, as is currently the 

practice with Social Security. The current practice of ‘‘experience rating,’’ which 

serves as a factor in calculating the employer’s tax rate, would continue. 

7. Create a 401(k)-like saving program for workers, which they could use to supplement unemployment insurance. Employers and the government could match individual contributions. 

Encourage workers to establish a fund to help offset costs associated with unemployment and job change. Workers could make contributions to a fund, matched dollar-for-dollar by their employers and the federal government. Contributions would 

be tax deductible and any interest generated by the fund would be exempt from tax. 

Individuals would manage their own funds. Distributions from the fund to pay cover 

the costs for worker training, job search, job relocation and other expenses associated with unemployment and job change would be tax free. Self-employed, part-time 

and temporary workers could withdrawal funds to offset drops in income. All other 

distributions would be taxed as income. All funds remaining at age 57 would automatically become part of the worker’s retirement savings.10

Conclusion 

Unemployment Insurance provides needed assistance to workers and their families during times of great financial hardship associated with job loss. 

The Administration’s budget request for FY 2007 focuses on recouping payments 

considered to be made in error. While addressing waste, fraud and abuse in the program, the Administration’s proposals may actually increase the administrative burden placed on states, as well as on workers, thereby making it more difficult for 

them to receive the assistance they so desperately need in a timely fashion. 

The Administration’s budget request ignores the program’s serious long-term 

problems. Our nation’s Unemployment Insurance program is seriously out of date 

with recent developments in the U.S. labor market. 

American workers are currently facing considerable pressure due to continued 

technological change and intensified competition resulting from globalization. Despite significant changes in U.S. labor market conditions there have been no major 

changes in the basic structure of Unemployment Insurance since it was established 

70 years ago. Reform of the nation’s Unemployment Insurance programs is necessary in order to make it relevant to the labor market of the 21st century. 

f 

Chairman HERGER. Thank you, Mr. Rosen. Dr. Kane to testify. 

STATEMENT OF TIM KANE, PH.D., DIRECTOR, CENTER FOR 

INTERNATIONAL TRADE AND ECONOMICS, HERITAGE FOUNDATION 

Dr. KANE. Thanks very much, Mr. Chairman and Members, for 

this opportunity to testify. I am actually speaking on behalf of myself, not the Heritage Foundation, where I work. I have learned a 

lot there, but this is my own testimony. In fact, it is my first time, 

first opportunity to testify before Congress. My wife reminded me 

if I don’t behave, it may be my last. I really do appreciate this. But 

58 

because this is my first opportunity, I take what I say in these 5 

minutes very seriously. It may be my last opportunity to have an 

influence on public policy. To set the context, I want to begin by 

emphasizing the strength of the U.S. economy. As an economist, 

having looked at this recession and recovery period, I think I share 

Mr. Greenspan and others’ feelings that we live in an amazing 

economy. With an unemployment rate of 4.7 percent, lower than 

the last 3 decades, as you mentioned, Mr. Chairman, with the 

growth rate coming out at 4.8 percent, it is a real puzzle why there 

is so much concern and fear. I know there are some other explanations, but I think there have been plenty of folks in the policymaking community who are fanning the flames of fear right now 

of a bad economy when we have a good economy. That leads to repercussions and hostility sometimes to illegal immigrants or immigrants of any color, from any nation, any creed, and I think that 

is an unhealthy environment. 

We need to carefully consider creating fear where there shouldn’t 

be fear, where there should be hope and promise. On the notion of 

turnover that was already emphasized this morning, the UI Program has a tremendous impact on that turnover, and I would like 

to emphasize job turnover. Industrial turnover is a good thing. We 

don’t all want to be back in ancient times building pyramids. We 

want to have an economy where people move into new sectors. Job 

loss, job turnover, job gain—those are right, and we shouldn’t characterize every time a person leaves a job as a termination because, 

mostly, those are voluntary. Mostly, in this economy, people choose 

to have, in this day and age, shorter work tenures rather than 

longer. It is not forced by duress. It is not forced by employers. 

With the nature of the strong economy in mind, let me turn briefly 

to the goals of the UI Program. The goal originally was to help people transition to another job, to actually help lower the unemployment rate. But what has happened—through international research and through national research—because we do have State 

diversity, we know that programs that provide more labor protectionism, longer replacement periods for income and higher replacement rates actually lead to higher unemployment rates. If you all 

want to get the lowest unemployment rate possible in this country, 

you might consider scrapping the program altogether or turning it 

back to the private sector. When we question why we have such a 

low savings rate in this country, you may think also that we have 

one of the highest insurance rates. Why would Americans need to 

save if they are already insured against everything by a paternalistic government? 

When you start thinking about ways to reform the system, consider allowing the States to reform it on their own, not to impose 

on them ways that you think is best. Let me propose one thing in 

particular because I won’t have the opportunity to go through my 

entire written testimony. It often puzzles me why we have a strict 

26-week limit on the UI program. I don’t particularly understand 

why you pay someone when they have only been unemployed 3 

weeks or 4 weeks. Why not start the program at 5 weeks or 8 

weeks, when you know someone is in duress, and that would give 

you an opportunity to maybe pay them longer or maybe pay them 

more? This is perhaps exactly the thing that you should consider 

59 

1The Heritage Foundation is a public policy, research, and educational organization operating 

under Section 501(C)(3). It is privately supported, and receives no funds from any government 

at any level, nor does it perform any government or other contract work. The Heritage Foundation is the most broadly supported think tank in the United States. During 2005, it had more 

than 275,000 individual, foundation, and corporate supporters representing every state in the 

U.S. Its 2005 income came from the following sources: 

Individuals; 63% 

Foundations; 21% 

Corporations; 4% 

Investment Income; 9% 

Publication Sales and Other; 3% 

The top five corporate givers provided The Heritage Foundation with 2% of its 2005 income. 

The Heritage Foundation’s books are audited annually by the national accounting firm of 

Deloitte & Touche. A list of major donors is available from The Heritage Foundation upon request. 

Members of The Heritage Foundation staff testify as individuals discussing their own independent research. The views expressed are their own, and do not reflect an institutional position 

for The Heritage Foundation or its board of trustees. 

freeing the reins on the States to experiment with, rather than 

having one strict 26-week system. Because Nobel Prize economist 

Gary Becker has pointed out, the bulk of the payments go to those 

first 4 weeks, when people aren’t in duress. I think your concern 

rightly is the folks that are still unemployed a half year into an unemployment spell. 

Let me close in the brief time I have with a few questions. One 

is just based on personal experience as an employer. I know that 

when we think smoking is bad, we tax cigarettes. We tax smokers. 

But when we think unemployment is a bad thing, why is the Congress taxing employers? It was very unnerving when I hired my 

first worker, and I was instantly hit with a tax to pay for unemployment when I was actually trying to be part of the solution, not 

part of the problem. I think that concludes my testimony, and I do 

appreciate the honor, sir, and would be happy to answer questions 

afterward. 

[The prepared statement of Mr. Kane follows:] 

Statement of Tim Kane, Ph.D., Director, Center for International Trade and 

Economics, Heritage Foundation 

Mr. Chairman and other distinguished Members, I am honored to testify before 

you today.1 In my testimony, I would like to (1) emphasize the strong employment 

health of the current U.S. economy; (2) describe new research showing that overly 

generous unemployment insurance programs lead to higher levels of unemployment 

and slower economic growth due to the dynamic nature of labor markets; and (3) 

propose steps for reforming U.S. law on unemployment insurance. 

The Nature of American Prosperity in this Decade 

As obvious is this may seem, every analysis of economic policy at the federal level 

in the United States must begin with a recognition of its comprehensive, record-setting strength. By almost every indicator, the American economy is prosperous. 

• More Working Americans than Ever. In the latest Employment Situation report 

from the Labor Department, it is reported that there are 150.65 million Americans in the labor force, and 143.64 million employed, both record highs. 

• Very Low Unemployment. The rate of unemployment is just 4.7 percent nationally. In most introductory economics courses, this is considered a rate that is 

below the natural rate of unemployment, and a sign of possible overheating. By 

any measure, it is a low rate, far below the average of the 1990s, which itself 

was a healthy decade economically. 

• Growth in Output and Productivity continues to surge. The high growth rates 

in GDP every quarter since that attacks of 9/11 are a very powerful symbol of 

the resilience of the American economy. But a more important measure, as you 

know, is the high GDP per capita Americans enjoy. By comparison, U.S. GDP 

per capita is 20% or higher that equivalent income levels in nearly every other 

60 

country in the world, particularly the advanced industrial economies of Europe, 

as well as Japan. 

What are the Goals of Unemployment Insurance? 

Established in 1935 with the Social Security Act of 1935, and financed by a tax 

on worker’s wages according to the Federal Unemployment Tax Act of 1939 (FUTA), 

the general goal of UI is to alleviate economic hardship caused by involuntary unemployment. 

The program is a complex blend of state and federal authority, funded at the federal level with a 6.2 percent tax (though all but 0.8 percent is refunded) on the initial $7000 of each worker’s wages, primarily used for administration. The state tax 

(SUTA) varies; some states use a high rate and low base (New York’s is 4.2 percent 

on the first $8500), and others use a low rate and high base (Utah’s is 0.5 percent 

on the first $22,000). States collect roughly $20 billion per year in tax revenues, 

while the federal government collects roughly $7 billion. During most years, total 

benefits paid out are $20 billion, but during the recent recessionary years, regular 

benefits paid amounted to over $40 billion per year. 

Specific goals of the program are to (1) provide income support, (2) help increase 

the job-search opportunities of UI recipients. The trade-offs of UI are (1) lengthening 

the duration of individual unemployment spells, (2) decreasing aggregate labor force 

utilization in the macro economy, which restricts aggregate supply and growth. Research over the years has found that the program is not effectively meeting its intended objectives to diminish unemployment levels or to enhance employment prospects. That should weigh heavily on the minds of policy-makers when they consider 

the budget for the program. 

If the goal is to minimize the unemployment rate, then UI is counter-productive. 

If the goal is to alleviate natural job-loss transitions, then it may be working well. 

But policy-makers should still question why only about half of qualifying citizens 

use the program, and what the equity considerations are. I think that offhand there 

are two very clear policy lessons from this basic data. 

1. UI payments should made only to citizens in employment duress. That means 

that a qualifying test should be utilized, and screening should be done carefully. 

2. More importantly, in my mind, Congress should restrict UI payment to citizens 

who have been jobless for more than 4 weeks. This could potentially allow the 

program to be extended by many months, while focusing payments on those 

truly in need. 

Labor Protectionism and Unemployment 

The Summer 1997 issue of the Journal of Economic Perspectives published two 

articles discussing labor rigidity in Europe. Horst Siebert emphasized that the concert of rigid labor institutions in Europe was clearly driving higher unemployment 

rates there, emphasizing the tightening of policies during 1960s and 1970s. While 

he observed differences among European states, he concluded by focusing on one 

common feature: ‘‘Job protection rules can be considered to be at the core of continental Europe’s policy toward the unemployment problem: protecting those who 

have a job is reducing the incentives to create new jobs.’’ A contrasting opinion was 

provided in Stephen Nickell’s econometric overview, which reported, ‘‘there is no evidence in our data that high labor standards overall have any impact on unemployment whatever.’’ 

Table 1 presents unemployment rate averages by decade for ten countries reported by BLS. 

Table 1. Unemployment Rates on the rise 

1960–1979 1980–2004 Change 

USA 5.5 6.2 0.8 

Japan 1.5 3.3 1.7 

Netherlands 4.6 6.5 1.9 

Canada 5.7 8.5 2.8 

Sweden 1.9 5.1 3.2 

UK 3.6 8.3 4.7 

Australia 2.9 7.7 4.8 

Italy 3.5 8.3 4.8 

Germany 1.4 7.2 5.9 

France 2.8 9.8 7.0 

Source: Author calculations using U.S. BLS data. 

61 

To summarize, the old caricature that ‘‘America is richer but less humane to its 

lower classes’’ can be squared with some data up to 1980, when per capita GDP was 

higher in America but unemployment was too. However, post-1980 it is clear that 

America has continued its productivity leadership (with higher income distribution 

generally), while European countries suffer high unemployment rates. The ‘‘humane’’ policies of labor protectionism appear to have backfired, creating a less humane social arrangement. 

Nickell (1997) emphasized the diversity of European unemployment rate experiences (‘‘from 1.8 percent in Switzerland to 19.7 percent in Spain’’) and policies. 

Nickell’s approach is a good one—he assembles macroeconomic performance data for 

20 OECD countries, measured over two periods (1983—88 and 1989—94), and assembles an impressive array of labor policy measures, which he uses as explanatory 

variables. Nickell says at one point that ‘‘roughly speaking, labor market institutions were the same’’ in the 1960s and 1990s. He concludes that unemployment 

rates are dependent on some policies (e.g., generous unemployment benefits, high 

taxes, high minimum wages, and weak universal education), but not the conventional culprit: labor market rigidity. 

Nickell’s assessment has changed in less than ten years, however, as expressed 

in his recent paper with Luca Nonziata and Wolfgang Ochel (2005). The authors 

find that ‘‘changes in labor market institutions’’ and rigidities since 1960 have indeed occurred, and these are the root causes, with employment protection accounting for 19 percent of the rise of unemployment. I think it is fair to say that the consensus view of economists today has evolved along the same lines. 

A deep new data set published by the World Bank in 2003 and published in the 

Quarterly Journal of Economics (Djankov et al. 2004) makes a definitive case that 

the ‘‘Regulation of Labor’’ (the title of the paper) can be harmful to macroeconomic 

outcomes. The Djankov labor data cover 85 countries over dozens of labor categories, 

including the size of the minimum wage, strike laws, protections from dismissal, 

generosity of social benefits, and so on. The data are coded so that a maximum score 

of 1 represents the most rigid labor rule, while zero represents perfect flexibility. 

Importantly, this very deep data set represents laws during a single year, 1997, 

which precludes some uses that would be available with a time series. 

Nevertheless, Djankov et al. (2004) find that an increase in the employment laws 

index is associated with an increase in black market activity, a reduction in labor 

force participation, and an increase in unemployment rates (averaged over the decade). The econometric tests are not robust and report an R2 of 0.13, with the labor 

regulation variable significant at the 5 percent level. 

I am hopeful that the excellent new data sets in place will be improved in years 

ahead and that, with greater knowledge of how institutions and outcomes relate to 

one another, countries will be even better armed to lower the barriers to riches. 

For our discussion of Unemployment Insurance, the point to emphasize is that 

higher replacement rates and durations of UI are related to longer unemployment 

spells and higher unemployment rates. 

One Model of Unemployment Insurance Reform 

Now I would like to share with you the results of rough analysis of a reform proposal of the U.S. Unemployment Insurance (UI) system by the Heritage Foundation. 

This research was done out of personal interest, and has not been peer-reviewed, 

but I would like to share some of the insights with the Members on this occasion. 

The basic reform considered is a conversion of UI tax payments toward personal 

employment insurance savings accounts (PESA) that can be drawn down in the 

event of an unemployment spell. This reform holds the promise of creating incentives that will limit rather than encourage the duration of unemployment spells. 

Upon retirement, accrued funds will be paid to the individual. 

Cash paid into the system would not flow out as insurance to others, but would 

instead build up individual accounts. If the individual PESA becomes exhausted 

during an unemployment spell, benefits could still be drawn out in the form of a 

non-recourse loan from the PESA trust fund (aggregate pool of PESA savings). The 

system itself would need additional inflow revenues to maintain solvency, making 

it more expensive than the current UI system. The feasibility of the reform rests 

entirely on the sensitivity of behavior to different incentives, which current economic studies are unable to specify with much accuracy. 

Executive Summary of our Model 

We created a model for reform of the U.S. Unemployment Insurance (UI) which 

would create personal employment insurance savings accounts (PESA) that can be 

drawn down in the event of an unemployment spell—with the key distinction that 

PESAs are personal property. Unutilized PESA savings are paid to the individual 

62 

3From Tom Stengle (July 1998), U.S. Department of Labor, ‘‘Dynamic Models of Unemployment Inusrance Receipt,’’ page 22. 

upon retirement. The goal is to change incentives for utilizing UI, which economists 

widely believe extends the duration of unemployment spells. 

Results from our multiple agent model: 

• A PESA would provide positive retirement savings for about 94 percent of workers, even if existing UI usage behaviors do not change. The additional cost of 

transitioning to the program amounts to $88.8 billion for the first 50 years of 

the program. The typical PESA at retirement would amount to $20,000 per 

worker. 

• Our best approximation of incentive effects on UI usage imply the costs will be 

much lower—$21.5 billion for the first 50 years of the program. Further, up to 

97 percent of workers would retire with positive PESA savings. The typical 

PESA savings at retirement stays at $20,000 per worker. 

When we allow for incentive changes induced by a PESA, we assume the duration 

of benefit usage is cut in half, lowering overall unemployment and raising aggregate 

supply and economic output. However, with PESAs, people are also more likely to 

use their benefits more frequently. 

Design of the Model 

The model considers a set of simulated agents over their work life, and runs them 

through the current program and its established parameters. We then modify the 

incentive parameters to simulate reform options. A representative agent is defined 

by work-life characteristics including an annual income vector, and a weekly unemployment spell vector. Dollars are expressed in 2003 terms, so funds available upon 

retirement do not include the effect of inflation, nor do benefit levels and tax payments. 

The model uses a representative state since each of the 50 states uses different 

parameters for maximum and minimum weekly benefits, taxable wage base, tax 

rate, and so forth. The model uses the following parameters: 

$10,750; Taxable wage base (for benefits, not administrative) 

2.1 %; Tax rate (for benefits) 

50.0 %; Replacement rate (% of total wages paid as benefit) 2

$400; Maximum weekly benefit 

3.0 %; Real rate of return on PESA savings 

3.0 %; Interest rate charged on PESA loans 

2The average replacement rate of covered employees is roughly 37.5% (weekly total wages divided by 

weekly average benefit), but 50% is the typical legal replacement rate before placing a maximum weekly 

benefit that averages roughly $400. 

Reform Option 1 introduces PESAs, which we assume cuts UI durations in half, 

but also increases utilization by half. 

Many research studies confirm that a 10 percent increase in the replacement ratio 

(percent of employment income replace) results in an increase in UI duration ‘‘between 1.0 week and 1.8 weeks.’’ 3 One labor textbook notes that a consensus estimate is that 25% reduction reduces average duration by 3–4 weeks. The theoretical 

question is how much would UI durations fall if replacement ratios were essentially 

zero? Under a PESA, the recipient would not have benefits as income, but would 

instead be drawing down wealth. The mind-set of ‘‘free’’ money from the government 

would be replaced the ideal personalized incentive to preserve wealth. The introduction of PESAs would act like a 100 percent reduction in replacement ratio, resulting 

in a 10-week reduction in UI durations under conservative assumptions, or a twothirds decline from the typical UI duration of 15–16 weeks. We used an even more 

conservative assumption that all UI durations would be reduced by half, not by twothird (or ten weeks). 

However, the introduction of PESAs may also incent more participation. We know 

that more than half of eligible people do not utilize UI benefits currently. Take-up 

may increase if PESAs were implemented, for a variety of reasons. There would be 

less stigma (personal and social), eligibility hurdles would probably be lowered, bureaucratic access to funds might be simplified, and so on. Ultimately, it would be 

a rational decision for an unemployed worker to draw down a PESA before all other 

forms of saving during an unemployment spell. When faced with unemployment, 

why take money out of your mutual fund before taking it out of your PESA? We 

assume these factors would increase PESA usage rates by 50 percent. 

63 

4 Empirically, 2.42 percent of the workforce is on UI in the typical month. A typical insured 

unemployment spell lasts 15–16 weeks. With 49 working years (18 to 66), there are 588 working 

months. 

Simulation using a Single Representative Agent 

This model assumes a single representative agent, who is on UI once for 4 months 

at age 32.4 His lifetime income profile is based on Department of Labor (DOL) income average data for each age group. 

The agent draws unemployment benefits from his PESA for each of the 16 weeks, 

which replaces 50 percent of his total wages at that time. His PESA fund builds 

up to a positive balance of $3,960 by the time when the unemployment spell begins, 

then it falls to a negative balance of $1,825 by the end of the unemployment spell, 

which is treated as a non-recourse loan. The net cost to the government of the 

agent’s UI spell is $5,785. Further PESA payments initially go towards paying off 

the loan, then begin building up as positive savings. Upon retirement at age 66, the 

agent’s savings are a positive balance of $9,154. If the PESA is seeded with $100, 

the individual spends 9 fewer months under the loan deficit, and the final PESA 

savings are $9,497. 

When we allow for incentive changes induced by a PESA, the agent is more likely 

to resume work faster, and also is likely to draw down his PESA more often. This 

is ambiguous to model using a single representative agent, but we assume a second 

UI spell—later in life at age 42, and briefer (one month). We also cut the first spell 

by half (two rather than four months). Under these assumptions, and the $100 seeding, the PESA never goes into deficit during the first spell, and ends with positive 

savings of $13,000. 

If we further assume that the first month of any unemployment spell was not eligible for PESA draw down, the PESA would grow to $21,000 upon retirement. 

Simulation using Multiple Agents 

Fifteen representative agents—representing three income profiles weighted by five 

benefit usage patterns—are the basis of this model. The following table illustrates 

various cases, run without changing behavior, seeding each PESA with $200. 

Table 1. PESA Savings at Retirement in 2003 dollars 

(without behavioral change) 

Income Profiles 

Number of Lifetime UI Spells 

(Percent of insured covered employment) 

0 1 2 3 4+ 

(Yearly Average) (61.1%) (24.9%) (7.9%) (3.5%) (2.6%) 

Low Income 

($14,296) 

$21,941 $19,514 $10,837 $5,768 $(4,979) 

Average Income 

($25,168) 

$24,344 $19,324 $4,758 $(3,238) $(18,983) 

Higher Income 

($39,649) 

$26,074 $16,254 $246 $(11,960) $(34,362) 

This multiple-agent model implies that even under current usage parameters, a 

PESA would provide positive retirement savings for about 94 percent of workers. 

The PESA system would generate an additional cost above what the existing UI system costs today, mainly by paying out individual PESAs upon retirement. In the 

first run of this model without changing behavioral assumptions, the ‘‘overhang’’ of 

the PESA fund amounts to $88.8 billion for the first 50 years of the program. 

A second version of the model includes assumptions about behavioral change 

among the workforce, presented in Table 2. In this case, up to 97 percent of workers 

would retire with positive PESA savings, and the overhang amounts to just $21.5 

billion. 

64 

Table 2. PESA Savings at Retirement with behavioral change 

Income Profiles 

Number of Lifetime UI Spells 

(Percent of insured covered employment) 

1 2 3 4 5+ 

(Yearly Average) (61.1%) (24.9%) (7.9%) (3.5%) (2.6%) 

Low Income 

($14,296) 

$19,554 $15,706 $10,663 $9,608 $5,471 

Average Income 

($25,168) 

$20,085 $13,575 $5,642 $3,047 $(1,879) 

Higher Income 

($39,649) 

$20,705 $10,856 $120 $(3,019) $(13,064) 

Those few workers who had negative PESA balances upon retirement would not 

have to pay back PESA loans, just as UI recipients today are not expected to settle 

their UI account with the government. 

There is one major limitation to the current model: agents are all in the labor 

force, and this is not a realistic assumption. A future run of the model will include 

more realistic agents who are out of the labor force during different periods of time, 

and also agents who are unemployed and neither adding to or drawing from their 

PESA. 

For discussion, the introduction of the PESA system would be scrutinized immediately for any changes in unemployment behavior or financial effects. Long-range 

incentives can be very difficult to introduce, especially if the term is four or five decades. Therefore, the incentive to maintain a positive PESA balance may be enhanced if some percentage of positive PESA balances were paid out periodically. For 

example, if annual PESA ‘‘dividends’’ were 10%, paid out every year on December 

1st, then the poorer workers in our model would get check for $37.20 in the very 

first year. 

Conclusion 

Again, let me thank you for the honor of testifying today. America can retain its 

economic leadership in the world by continuing successful free market policies of the 

last two centuries. Labor freedom is one of the most important freedoms of all, and 

a more effective UI program will help balance economic justice with higher growth. 

f 

Chairman HERGER. Thank you, Dr. Kane. The gentleman from 

Washington to inquire. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Let me start with 

Mr. Halley and Mr. Devereux. Mr. Devereux and Mr. Halley, we 

just heard testimony from the department, from Ms. Chao’s operation, that the ES Program is redundant, and it serves little purpose. Can you respond to that suggestion? I mean, what specific 

services are provided? Why have the two programs? It sounded 

there for a moment like we had two programs doing absolutely the 

same thing, just in different offices, the way it was described by 

Mr. Mason. Would you explain, is there any reason for having the 

two different programs? 

Mr. HALLEY. Thank you, Congressman. Let me respond to that 

from the State of South Carolina perspective. Whereas we do have 

an employment service and we do have the WIA in 12 workforce 

investment areas, the employment service is a State-wide labor exchange agency. It has a State-wide job bank, which the workforce 

investment areas do not have. Fortunately, in the State of South 

Carolina, the workforce investment areas, the One-Stop Careers 

are located, in 98 percent of the cases, within the Employment Security Commission. Let me assure you that the integration of servVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 E:\HR\OC\31492.XXX 31492
65 

ice is very obvious when you walk into one of our One-Stops in 

terms of the services that are provided from the employment service to the—which are basically core services and, in addition, to the 

intensive services. But in terms of partners that operate out of that 

One-Stop, it is an integrated process that we exercise. I also have 

to reference the fact that in the State of South Carolina, the Wagner-Peyser budget to provide labor exchange activities is $10 million. We served over 400,000 people last program year. We placed 

65,000 people in employment. The WIA budget in the State of 

South Carolina is $45 million. They served a little over 200 people 

in this agency as far as people graduating, actually graduating 

from an institution. I think that the Wagner-Peyser, the employment service, the labor exchange service is essential. I think that 

you have to have a State-wide labor exchange program in place, 

which is the Wagner-Peyser State-wide labor exchange program, in 

order to give the applicants, I think, the right to apply and the convenience of looking for jobs on a State-wide basis. 

Mr. MCDERMOTT. Mr. Devereux? 

Mr. DEVEREUX. I would echo some of those comments. I think 

it is incredibly important to have a State-wide system where UI 

and ES is tied together in a very coordinated fashion. The OneStop programs under WIA are governed by local boards and have 

a very different set of priorities than the ES system. I think it is 

far more important to have that State-wide coordinated system 

under the employment—— 

Mr. MCDERMOTT. The one that is locally controlled has to do 

with what the jobs that they are looking in the local area, and so 

they design what they are doing locally? 

Mr. DEVEREUX. That is correct. Correct. 

Mr. MCDERMOTT. The other one is a State-wide system? 

Mr. DEVEREUX. State-wide integrated system. 

Mr. MCDERMOTT. It is not correct then, in your view, to say 

that if you combine these systems you will get more for less, and 

we can save $2 billion, as the President’s budget tries? 

Mr. DEVEREUX. That is my belief, yes. 

Mr. MCDERMOTT. Also your—— 

Mr. HALLEY. I agree with that, Congressman. 

Mr. MCDERMOTT. That would be your organizational assessment from a national board that you sit on and you are here representing? Or you are just speaking for South Carolina at the moment? 

Mr. HALLEY. I am speaking from South Carolina. As an administrator of the Employment Service Program for the State of South 

Carolina. 

Mr. MCDERMOTT. Is there any State that has yet received a 

waiver to let some outside agency decide who is eligible for UI? 

Mr. HALLEY. I am not familiar with any. 

Mr. DEVEREUX. I am not either. 

Mr. MCDERMOTT. You don’t know whether this bill that has 

these new waivers in it would give States that option of letting 

some—I know about this from workers’ compensation, where workers’ comp has now been, in some States, put out to private agencies 

to decide if somebody is able to go back to work on a physical basis. 

66 

I wondered if this kind of thing had happened at the administrative level. But you know nothing about anything like that? 

Mr. HALLEY. I have no concept of that, Congressman. 

Mr. MCDERMOTT. Mr. Rosen, we hear a lot of good numbers 

here. We are getting 175,000 new jobs a month. My remembrance 

from a previous Administration was that it took at least 250,000 

jobs a month simply to keep up with the new people coming into 

the employment base. Now I see your head going ‘‘yes,’’ and I see 

Mr. Kane’s head going ‘‘no.’’ I would like to hear some discussion 

about the wagging heads here. 

Mr. ROSEN. Well, I was saying yes because I think you have 

identified an important issue. But you know, it is conventional wisdom that somewhere around 200,000, 250,000 a month is the number we are looking for. It is curious. The markets wait—you know, 

bated breath—for that number to come out, and then we are told 

that the markets respond to that number, if it is above or below, 

and then we know how healthy the economy is. Well, one of the 

factors is that we actually are not, our labor force is not growing 

as fast as it was before because of demographic factors. In terms 

of bringing people into the market, that number is less important. 

As I pointed out before, I wish that the Government would stop reporting that number because I think it is incredibly misleading. 

That really what we want to know is not the net number, but the 

total. Because it is possible, let us say, for example, during a recession, we will have job creation, some—it will be a lot lower than 

usual—and very high job termination. But during recoveries, we 

will have higher job creation, but we could also have higher job termination. But just the net might be positive. The net is, I think, 

a very misleading number. Only a couple of years ago has the BLS 

and the Bureau of Census begun collecting data from establishments on actual numbers of people who are employed and jobs that 

are terminated. We have the ability now to start looking at those 

numbers, and that is what we really need to look at in terms of 

really understanding the health of the economy. 

Dr. KANE. I would agree with some of that. I am sorry. 

Chairman HERGER. On my time. The time has expired. But, Dr. 

Kane, why don’t you answer the question also? 

Dr. KANE. Yes, sir. I will be brief. I think the conventional wisdom has varied quite a bit. But if it were as high as 250,000 a 

month, that would be about 3 million workers a year. If you assume half are employed, that is 6 million people you are adding a 

year. That is way too high. I think a study done by the Federal Reserve in Atlanta pointed out that because of the demographic 

changes, it is about 100,000 a month now. If you get 175,000 job 

creation a month, you are way above what you need to replace. The 

best measure is the unemployment rate. That is where you see utilization of labor, and it is incredibly strong right now. 

Mr. MCDERMOTT. Even when you are considering a number of 

people who have given up looking? 

Dr. KANE. Yes, sir. There is this theory of discouragement, 

which is, frankly, a real canard. 

Mr. MCDERMOTT. You don’t believe that happens? 

Dr. KANE. It is not that I don’t believe it. It is that the data say 

it is not true. This story was put out, and I think it was a good 

67 

story in the 1991 recession. The Labor Department—I had nothing 

to do with it. I would love to take credit—they responded, and they 

started to ask people why they were not looking for work. One of 

the choices is if they are discouraged, and they take great care to 

find that out. We know since 1992 how many discouraged workers 

there are, and there is not a growth of them in this last recession. 

We have the same amount of discouraged workers today as we did 

in some of the best years in the 1990s. You go back to that unemployment rate. It is a great statistic, and 4.7 percent, you are not 

going to find a way to explain that away. 

Chairman HERGER. I thank you. 

Mr. MCDERMOTT. Thank you for extending my time a little. 

Chairman HERGER. A lot. 

[Laughter.] 

Mr. MCDERMOTT. It is all in the eye of the beholder. 

Chairman HERGER. Right. Dr. Nilsen, what do you know about 

the effect of profiling programs which were created in the 1990s 

with the intent of better targeting services to people most likely to 

exhaust unemployment benefits before finding a new job? Should 

we be surprised that after this many years, we still have such limited data on the effect of worker profiling efforts? 

Dr. NILSEN. Mr. Chairman, it is unfortunate that we don’t have 

a lot of good information on the effectiveness of profiling. I know 

it was started in the 1990s based on some research that said if we 

identify those people most likely to exhaust their benefits and focus 

assistance on them, we should get shorter durations of unemployment for those. There hasn’t been good research funded by Labor 

to look at this program to see if, in fact, it is operating the way 

it was conceived to operate. As I covered in my statement, the current research right now that Labor is funding is just seeing how 

good the models are on predicting exhaustion. They are not looking 

at how good the assistance is to shorten the duration of unemployment. Right now, I agree with your statement. We don’t know 

enough about how successful this profiling experiment has been. I 

know in Washington State, where Mr. McDermott is from, they 

have a program that also targets people who are more or less the 

most job ready and says let us help you get into the workforce, get 

back to work quicker. Those are the kinds of things that I think 

also should be tried. But we need the research to show that these 

efforts are effective. Right now, we don’t know enough about 

profiling. We don’t know how much each State profiles its unemployment recipients. We don’t know what proportion are being provided assistance. I would hope that the Labor Department would 

fund more research. When we looked at its research budget over 

time or the last 5 years, this is all of the Employment and Training 

Administration programs. The research budget has gone down from 

about $86 million to in 2007 they are requesting about $17 million. 

That has got to be spread not only for UI research, but for all the 

research on the programs. If I just might add something to Mr. 

McDermott’s question from before? Looking at the UI system and 

its relation to the workforce investment system, this is a big, broad 

system. When Mr. Bishop was talking about the amount of training 

in the workforce investment system, we did a study that said 40 

percent of the dollars are spent on training. That 60 percent that 

68 

is left over is not administrative funding. That is helping people get 

jobs. Many more people are placed in jobs as a result of that assistance than the training. Basically, the training is people in training 

are barely 10 percent of the people going through the system, and 

we have seen many examples across the country in our work of systems that are integrated with ES and the workforce system. That 

is the model. That is the way it should be. It is not that way everywhere, as Mr. Bishop pointed out. 

Mr. MCDERMOTT. It is in Washington. 

Chairman HERGER. Thank you, Dr. Nilsen. Mr. Halley, could 

you please give us an update on how many States are using the 

authority Congress provided in the SUTA Dumping Prevention Act 

of 2004 to compare unemployment rolls with the NDNH? Do you 

have any sense of the savings to the State unemployment trust 

fund due to State use of this new authority? 

Mr. HALLEY. Thank you, Mr. Chairman. To the best of my 

knowledge, I have no concept as to the number of States involved 

in the North Carolina model. In terms of savings, there have been 

projected savings. But in terms of actual savings that have occurred, I cannot tell you. 

Chairman HERGER. Okay. Thank you. The gentleman from 

California, Mr. Becerra, to inquire. 

Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for 

your testimony. If I could begin with is it Mr. Halley or—— 

Mr. HALLEY. Halley. Like the Halley Comet. 

Mr. BECERRA. Halley. Let me ask you something and also to 

Mr. Devereux, as folks who work in the system. Were you consulted by the DOL on these proposals to consolidate some of these 

employment service programs and combine them so we could have 

some savings? 

Mr. HALLEY. No, I was not. The State was not. The State of 

South Carolina was not. 

Mr. BECERRA. You are the president-elect of the—— 

Mr. HALLEY. National Association of State Workforce Agencies. 

Mr. BECERRA. You would represent all those various State 

agencies that deal with workforce employment and the efforts that 

are being done by the various States? 

Mr. HALLEY. Yes. 

Mr. BECERRA. Okay. Mr. Devereux? 

Mr. DEVEREUX. I represent 2,400 members who are in employment security. I, myself, was not consulted. They may have been. 

I am not sure whether they were or not. 

Mr. BECERRA. Mr. Halley, I think you mentioned that you 

know of some programs that had to be eliminated that were having 

some success in reemploying individuals because of lack of funding? 

Mr. HALLEY. Basically, I did not mention. I think that is one 

of the other panelists. 

Mr. BECERRA. Oh, okay. I am sorry. Thank you. I apologize for 

that. Let me ask a question of Mr. Rosen. You talked about the employment figures and job creation/job loss. My sense is that over 

the last several years, we have seen a lot of jobs lost in manufacturing and a lot of jobs gained in the service sector. A lot of jobs 

lost that had benefits attached to them, a lot of jobs gained that 

come without benefits. A lot of jobs lost that had large or lengthy 

69 

security attached to them, a lot of jobs gained that are very insecure. Tell me if my gut and some of the data which I have seen 

reflects what I have just said. 

Mr. ROSEN. What you said is exactly the conventional wisdom, 

and it is the story that we are being fed by the press constantly. 

But, in fact, if you look at this new database that I have mentioned, it actually suggests—I mean, you are correct that there are 

large numbers of manufacturing job losses and very few job creation in manufacturing. Therefore, the net in manufacturing is 

negative. The contrast is true in services, which is that the job creation is high. But there is also a lot of job termination in services. 

Mr. BECERRA. ower paying jobs in the service area. 

Mr. ROSEN. Correct. Correct. 

Mr. BECERRA. We are not talking about just computer jobs 

service area. 

Mr. ROSEN. Correct. 

Mr. BECERRA. We are talking a lot about the hospitality industry. 

Mr. ROSEN. Finance industry. 

Mr. BECERRA. Yes. 

Mr. ROSEN. Okay. The net may be greater in services than it 

is in manufacturing. But in fact, when you correct for the size of 

those two sectors—i.e., service is now 80 percent of the workforce, 

and manufacturing is less than 20 percent—in fact, the relative 

size of job termination in services is much greater than it is in 

manufacturing because manufacturing is a small base in the economy. 

Mr. BECERRA. Which I think, to some degree, to Dr. Kane’s 

point, I think addresses why so many Americans still feel so insecure. Because while they may be working, it is no longer the same 

job that their parents had, where they knew for 40 years they 

would be there, and they would have a pension at the end of the 

time that they were there. They had their benefits. Like my father, 

who was a laborer all of his life, he at least knew through his 

union job that he was going to have some health benefits for his 

family. He has a small pension through his work and also through 

Social Security. I think most people today are saying I better work 

very hard because I don’t know how long I will keep this job, and 

I don’t have any benefits that will be attached to it. I am sorry. 

Did you want to—— 

Mr. ROSEN. Mr. Congressman, could I just add that in addition 

to your point about the fact that these new jobs may not have benefits associated with it, they also are putting a strain on our UI system because many of these people are not covered. 

Mr. BECERRA. That is right. 

Mr. ROSEN. That is why we are seeing a decline in the number 

of people who are unemployed actually getting assistance. That is 

why we need to rethink our system to try to cover some of those 

people. 

Mr. BECERRA. In the remaining time I have, I would like to engage the two of you, and Dr. Kane as well, on this issue. Because, 

Dr. Kane, I know a lot of folks who have come to me and said, ‘‘I 

am working at a job that, if I could, I would leave. But I don’t have 

anything else that I can turn to. I am working part time, but I 

70 

would love desperately to work full time.’’ A lot of part timers—my 

understanding is somewhere around 4 million or so Americans are 

working part time, and they are considered part of that full-time 

employment number that reduces the unemployment rate, but are 

barely making ends meet. I know a lot of folks who are discouraged 

and have not had success. These are folks who have some skills. 

The 4 or 5 million people that we consider discouraged are no 

longer even counted in the unemployment rate. I am surprised that 

you say it is a fiction that there are these folks out there because 

my understanding is there are a lot of folks who have tried very 

hard. There are lot of folks who are working part time but are considered part of the full-time employment number, and that reduces 

the unemployment rate. Just, I know I am running out of time, but 

any quick comments. First let me turn to Dr. Kane, since I have 

already asked Mr. Rosen for some comment. 

Dr. KANE. Thank you, sir. No, I think you are right that there 

is—I don’t mean to say that it is a fiction that there are discouraged workers that have skills that can’t find work. My point is that 

they are not in greater number than they have been. It is pretty 

much a permanent feature of an economy that goes through 

change. If we want to have change and higher productive jobs in 

the future, that is part of the process. The issue today is does the 

UI help or does it protract that experience? I think you and both 

want to solve it. I would caution that we don’t know all of the answers, and State experimentation is the best way to get there. On 

the part-time issue, I think you are right as well. I have looked at 

the data on that. There are more part-time workers. Some don’t 

want to be. But a greater proportion are voluntarily part time. 

Mothers, for example—is a great story—that want to stay involved, 

and our economy now lets them on a part-time basis, professional 

women. I would also just briefly challenge, I don’t think the loss 

of manufacturing, which is about 14 million workers now in an 

economy—that is only 10 percent—the loss of those jobs, they are 

not replaced by bad jobs. Most of us, over 80 percent, are in the 

service sector. I would suspect every person in this room is in the 

service sector. Many of those jobs have benefits. If we look at the 

average data, pay and benefits on average is higher today than it 

was last year and the year before and in the 1950s, when there 

was all this supposed security. I do think it is fiction that we are 

losing benefits and that we are losing job security. 

Mr. BECERRA. But my understanding is that real wages, what 

you take home and what you can use to buy with that money, has 

actually gone down? 

Dr. KANE. Yes, sir. 

Mr. BECERRA. Your pay may have gone up, but relative to inflation, the cost of everything you have to buy, it has gone down. 

Dr. KANE. It is higher today. Cash payment earnings are higher 

today than during the dot-com boom. It has maybe gone down in 

the last year or two. But that points out again to the real rise that 

we have seen is in benefits. To your point, things like health, 

things like fringe benefits of other kinds. Those are even higher 

than they were. 

Chairman HERGER. The gentleman’s time has expired. The gentleman from Pennsylvania, Mr. English, to inquire. 

71 

Mr. ENGLISH. I want to thank the Chairman, and I want to 

thank the panelists for their contributions to our debates. I particularly want to thank you, Mr. Rosen, for raising the issue of wage 

insurance. I realize at a time when we are talking about retrenching at the Federal level, it may be unfashionable to talk about 

something that might prove to be an increment to the safety net. 

But at the same time, we are at a moment where it is very difficult 

for us, particularly in a district like mine, to rationalize some of 

our trade policies and recognize that some of the job displacement 

that is occurring may lead to higher incomes. But at the same 

time, there are many people who are losing their jobs and are facing a great deal of uncertainty. On that point, I know there is always a concern about the cost of entitlements. If we were to consider a system of wage insurance added to the current unemployment benefit system, what would it cost? Relative to the potential 

benefits in the economy that would accrue from our continued commitment to a rules-based globalization, are there potential savings 

as well from putting in this kind of a system? 

Mr. ROSEN. Well, thank you very much, Congressman. Actually, 

wage insurance is the extension of the discussion that we have 

been having here. The discussion about the difficulty people have 

in finding new jobs, the problem with training and those kinds of 

things. If I could just very quickly, just to say what wage insurance 

is? Under TAA, this program has just been implemented by your 

leadership. That if a worker takes a new job which pays less than 

the previous job, the Government will subsidize 50 percent of the 

difference up to 2 years with a cap of $10,000. Right now, it is 

structured for older workers, but there is no reason why it would 

have to be limited just to older workers. What is the reason for 

wage insurance? Number one, it is to encourage people to take jobs 

quicker. That would get them off the UI rolls quicker. Also, it 

would also have them go into work, and hopefully, the new employer would provide on-the-job training. We don’t know a lot about 

the effectiveness of training. But the one thing we do know is that 

on-the-job training is always more effective than classroom training. If we can encourage more on-the-job training, that is a good 

thing. Now, to answer your question directly—I am sorry for the 

introduction—the estimates are somewhere between $4 billion and 

$6 billion to cover all dislocated workers. That is not everyone on 

UI. That is just—I shouldn’t say just—it is the number of people 

that are permanently displaced from their jobs because those are 

the people that are most seriously in need. In fact, as you suggest, 

getting these people back to work quicker would save money on the 

UI rolls and would also, you know, help the macro economy. In all 

sense, I mean, it is a kind of a positive all around. As I mentioned 

in my opening statement, it is, therefore, curious to me that the 

Labor Department has been rather slow in implementing this program under the TAA program because of all of the benefits to it, 

both to the fiscal budget and also to the economy as a whole. We 

are hoping that that will change relatively soon. 

Mr. ENGLISH. Dr. Kane, I think Heritage brings in sometimes, 

you know, a very formidable experience on these issues and also a 

solid track record of questioning entitlements. Looking at wage insurance as something that would be potentially part of a bigger picVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 E:\HR\OC\31492.XXX 31492
72 

ture of rationalizing some of existing entitlements, saving money in 

some places, and also committing us to continued involvement in 

the global economy, from a Heritage perspective, what questions 

should we be asking about a new entitlement like this? 

Dr. KANE. I appreciate the opportunity, sir. I have to say I am 

not very steeped in wage insurance, but I am little suspicious of it. 

I like the idea of thinking creatively about ways to address some 

of the concerns that we have with the loss of manufacturing jobs. 

But off the top, I think it sounds a little bit like it gets in the way 

of the free market. If someone goes to a job or if they can’t compensate for the past job, I don’t know if the Federal Government 

has a role there. I do like some of the ideas that I have heard out 

of the Republican Party to build skills at a very fundamental level 

by bringing choice into education, you know, at a very intro. But 

that is not really what you want. 

Mr. ENGLISH. Yes. Is there a scruple you would have against 

this that you wouldn’t also apply to, say, UI? 

Dr. KANE. Well, I think I presented some strong scruples earlier 

to UI. 

Mr. ENGLISH. Ready to give it up. People will get back to work 

quicker. 

Dr. KANE. That is one way to think about it. I would want to 

encourage the States to experiment with radical freedom on how 

they do UI and wage insurance, which should be part of that. Let 

me say that. 

Mr. ENGLISH. Well, and let me say I would encourage Heritage, 

coming at this again with a lot of expertise, to maybe team up with 

the Institute for International Economics because certainly you end 

up in the same place on a lot of trade issues, and this might be, 

granted, an interventionist approach, but one that I think is worth 

reviewing. Mr. Chairman, I realize actually wage insurance is more 

in the jurisdiction of the Trade Subcommittee. But I am grateful 

that, as always, you have given us a forum to consider the bigger 

picture, and I thank you for it. 

Chairman HERGER. I thank the gentleman from Pennsylvania. 

On that note, I might mention we have been talking about some 

reductions here, several of you have. These reductions really are 

not under our jurisdiction. They are really under the jurisdiction of 

the Education and Workforce Committee. But Dr. Brough, could 

you tell us more about your research that has found that people 

who operate the UI system are capable of helping the unemployed 

find work more quickly and effectively? What States are doing the 

best job of that? 

Dr. BROUGH. Just briefly, the work that I am referring to there 

is actually done by a colleague of mine, Bill Connelly, who has done 

work looking in Arizona, in particular, where you did have these 

interviews. What they did find was, you know, a $10 savings for 

every dollar put into this system. As I mentioned in the testimony, 

Oregon is another State that has done these things. I think, looking at the system as a whole, getting that kind of experimentation 

at the State level and allowing them to come up with a package 

that meets the individual claimant’s needs is probably the best way 

to move forward. I think we do have a study that Dr. Connelly did 

73 

that I would be glad to forward to the Committee that talks about 

some of those things. 

Chairman HERGER. I would appreciate you doing that, if you 

would? Do you know specifically what those States do to help laidoff workers more quickly? 

Dr. BROUGH. Off the top of my head, I am not. Again, it is research that he did, and I will be able to pull that together for you. 

Chairman HERGER. I appreciate that. Thank you very much. 

Again, I would like to thank all of our witnesses this morning for 

your testimony and ask that you also answer any additional questions for the record that may be sent in writing. As we continue 

to look at ways to improve the Nation’s unemployment system, the 

information you provided today will be very helpful. With that, the 

Committee stands adjourned. 

[Whereupon, at 11:48 a.m., the hearing was adjourned.] 

[Questions submitted from Chairman Herger to Mr. Bishop, Dr. 

Nilsen, Mr. Halley and Dr. Kane, and their responses follow:] 

Questions from Chairman Wally Herger to Mr. Mason Bishop 

Question: Written testimony submitted by UWC, a trade association representing employers, suggests that states provide employers with ‘‘charge 

notices’’—a list of all employees collecting unemployment benefits based on 

work with that employer—no less frequently than quarterly. Some states, 

like California, provide these notices to employers only annually, limiting 

the ability of employers to contest benefit payments to individuals who 

may not have worked for them, or who were fired for cause and may not 

be due unemployment benefits. Have you examined this issue, and whether 

states that provide more frequent charge notices in effect better prevent 

overpayments by allowing employers time to contest improper payments in 

time to do something about it? 

Answer: The Department of Labor (DOL) has not conducted specific studies to 

determine whether more frequent notices prevent overpayments. However, we agree 

that these notices allow employers to know about claims that have been filed and 

allow them to respond and alert state unemployment insurance (VI) agencies about 

potential problems or potential fraud. Most state VI agencies issue a notice of claim 

immediately to the last employer when a claim is filed, and many states also immediately issue a notice of claim to each employer whose wages are used to establish 

the monetary determination for the VI claim—i.e., those employers for whom the 

individual worked during the recent 1-year period, or the base period, which is used 

to determine the monetary entitlement and the weekly benefit amount. This notice 

of claim serves as a systematic internal control to help prevent and detect fraud. 

Most states also then issue quarterly ‘‘charge notices,’’ which also serve as an internal control or check and balance in the system to prevent fraud and abuse. Only 

five states issue a charge notice to employers less frequently than quarterly; however, all of these states advise employers of their possible liability at the time a 

claim is being processed. 

Question: Please explain why DOL estimates that only about half of the 

estimated $3 billion overpayments in the unemployment program are potentially recoverable. Is this percentage similar to potential overpayment 

recoveries in other Federal programs? 

Answer: Operational overpayments (those that the states can reasonably be expected to detect and recover) tend to be about one-half of the total estimated overpayments. Certain types of overpayments are excluded from the definition of operational overpayments because it is not cost effective for the state VI agencies to pursue them, they are not detectible through normal operations, or they are deemed 

not recoverable under state law. Examples of excluded overpayments are those 

caused by improper work search, failure to register with the employment service, 

and issues related to the monetary determination process. 

74 

Because of the unique nature of the VI program, which is a Federal-State partnership, it is difficult to make an ‘‘apples to apples’’ comparison of overpayment recoveries in other Federal benefit programs. 

Question: Several witnesses express concern about DOL’s decision to end 

‘‘America’s Job Bank.’’ Please provide the Committee with additional information that would explain DOL’s decision to suggest such action. 

Answer: America’s Job Bank (AJB) was the first national electronic job board on 

the Internet and served an important role when it was first developed in 1995. During the past 2 years, the U.S. Department of Labor’s Employment and Training Administration (ETA) has extensively reviewed and evaluated the ongoing viability of 

maintaining a national job site. Due to a number of factors, the benefits of AJB no 

longer outweigh the costs of operating and maintaining this national system and it 

will cease to be operational on June 30, 2007. The 2007 Budget requests no funds 

to support AJB. 

Numerous factors were weighed in coming to the decision to end AJB, most of 

which fell into two broad categories: 1) changes in the broader environment AJB is 

operating in, and 2) the costs associated with running the system. 

1) Changes in the Operating Environment: Since the launch of AJB, the number 

of private-sector Internet-based job boards (Career Builder, Monster, Yahoo! Hot 

Jobs, and so forth.) has proliferated. This development calls into question the need 

for a Federal government-sponsored job board. 

• The numerous private-sector electronic labor exchange systems are continuously 

improving and most, if not all, of these sites offer free services to job seekers. 

Current trends in the industry suggest that some level of free service will also 

be offered to businesses/employers in the future. • Most of the employers who currently use AJB also use other job boards simultaneously to advertise their openings. • As Internet technology and technical resources have become widespread and the 

costs associated with them have declined, states and local areas that used to 

depend on AJB for their Internet self-service labor exchange presence have built 

and operate job banks of their own that are not based on AJB. 

2) The Cost of Operating AJE: The cost of operating AJB has been as high as $27 million per year, with a current operating budget for systems maintenance of $12 

million per year. Even with this sizable investment, AJB has not been able to keep 

up with private sector job boards or industry standards regarding up-to-date technology. Additionally, the technology platform on which AJB is built is outdated. 

Therefore, the cost to maintain AJB and constantly upgrade the foundational technology and make improvements to the site is no longer justifiable given that AJB 

duplicates what is already available in the private sector. 

Question: One of the DOL proposals would to require states to impose at 

least a 15 percent penalty on improper payments due to fraud. Savings 

from that penalty would be deposited in a special fund, which in turn could 

only be used to further program integrity activities. Overall, this proposal 

is estimated to save $314 million over 5 years. How much of that $314 million in savings is from the initial penalty, and how much from your estimate of the secondary effect of states’ performing more program integrity 

activities using those penalty savings? 

Answer: The entire $314 million estimated savings is derived from additional integrity activities funded by the penalty. We estimate that collections from the penalty will be $116 million over 5 years and assume that the entire amount will be 

spent. 

Question: Why is it taking so long for all states to start using data in the 

National Directory of New Hires to help ensure unemployment benefits are 

paid to the right people? 

Answer: In early 2005, DOL and the Department of Health and Human Services 

(HHS) conducted a pilot test with three states to determine the procedures and 

technical specifications/requirements that would be used for the National Directory 

of New Hires (NDNH) data matching. The pilot was completed successfully and 

after some modifications by HHS, the NDNH was accessible to all states by October 

2005. In order to begin matching data against the NDNH, states must execute a 

Computer Matching Act (CMA) agreement with HHS, modify their automated systems to meet the HHS CMA system security requirements, and implement data 

transmission protocols. These automated systems changes are time consuming, and 

the programming and implementation are subject to state priorities. This has 

75 

caused delays in implementation. Currently, 14 of the 27 states with signed CMA 

agreements are matching state data against one or more of the NDNH databases. 

The remaining 13 states, as well as several states with agreements pending, have 

indicated to DOL that they intend to begin matching in 2006. DOL provided funds 

requested by 37 states in 2005 to implement the NDNH data matching. DOL will 

continue to monitor state implementation. In addition, DOL is issuing guidance promoting the use of the NDNH and disseminating information about the pilot and the 

benefits of accelerating implementation. 

Question: Some other witnesses expressed concerns about mixing administrative and benefit funds, as the DOL budget proposals would do. For example, allowing states to use a share of recoveries of improper unemployment benefit payments to support administrative costs has drawn the objection of state agencies and employers. Do you agree these are valid concerns? If so, are there ways to address such concerns within the context 

of the DOL budget proposals? 

Answer: We are aware that some UI stakeholders have this concern regarding 

our integrity proposals. While we understand the historic origins of this concern, we 

believe that addressing the integrity of the VI system is critical at this juncture. 

There is precedent permitting limited amounts of state unemployment funds to be 

used for administration. Under the Reed Act—in place for 50 years—states have received funds that must be used for the payment of UI benefit payments unless the 

state legislature authorizes use for administrative purposes. Our proposal follows 

this approach—recovered moneys must be used for the payment ofUI unless the 

state legislature authorizes use of up to 5% for UI integrity activities. In the context 

of our proposals, it is important to remember that these proposed provisions are optional on the part of states—they simply provide another source of funds states can 

use to improve prevention, detection, and collection of overpayments and reduce 

SUT A dumping if they so choose. (SUTA stands for state unemployment tax act.) 

As does the Reed Act, our approach gives state legislatures the flexibility to determine the best use of the funds. Under the integrity proposal, state legislatures will 

decide whether those funds can best be spent for benefits or for improper payment 

reduction, because the legislature will be interested in assuring that use for administrative purposes really is promoting trust fund solvency by saving the state’s unemployment fund money. 

Question: The DOL FY 2007 budget request for the Trade Adjustment As- sistance program is $938.6 million. This is down almost $28 million from 

last year. Please explain why. 

Answer: The Department’s FY 2007 request for TAA is $938.6 million. Of that amount, $259.6 million is requested for training, job search and relocation allowances, and administration and represents an increase of about $200,000 over FY 

2006. The Department estimates that it will need $654 million in Trade Readjustment Allowance (TRA) benefits in FY 2007, one million less than in FY 2006. The 

reduction in the Department’s request is a result of our estimate for the funding 

level expected to be needed for the Alternative TAA pilot program, also known as 

Wage Insurance. In FY 2006, the Department estimated that it would need $52 million. The Department’s estimate for FY 2007 for Wage Insurance is $25 million, $27 

million below FY 2006. It is important to note that this is not a reduction in services; rather, it is our best projection of the funds needed by those who access the 

program. It is also important to note that if our projections of Trade Readjustment 

Allowances or Wage Insurance are too low, the appropriators have provided a ready 

means for the T AA program to obtain additional resources without the need for a 

supplemental appropriation. The appropriators have provided authority for another 

DOL account (the Advances to the Unemployment Trust Fund and Other Funds account) to provide non-repayable advances to TAA. 

Question: DOL collects a wide variety of detailed weekly, monthly, quarterly, and annual information related to performance in the unemployment 

program. What does this data tell us? How has state performance improved 

since this detailed information has been collected? How wil DOL budget 

proposals ensure that state unemployment program performance improves? 

Answer: DOL collects both macro- and micro-level data that can be used to measure the performance of the UI program at both the state and national levels. The 

data tell us how quickly and accurately payments are made to beneficiaries, how 

quickly and accurately employer tax accounts are established and, generally, how 

well states operate their UI programs. State performance has varied over the years 

76 

1GAO, Supplemental Security Income: Action Needed on Long-Standing Problems Affecting 

Program Integrity, GAO/HEHS–98–158 (Washington, D.C.: Sept. 14, 1998) and GAO, Supplemental Security Income: Progress Made in Detecting and Recovering Overpayments, but Management Attention Should Continue, GAO–02–849 (Washington, D.C.: Sept. 16, 2002). 2GAO, Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions 

in Overpayments, GAO–02–697 (Washington, D.C.: July 12, 2002). 

as states have implemented new technologies and methodologies for processing 

claims and dealt with fluctuations in claims workloads. 

Data have been collected for many years—payment and benefit timeliness since 

the 1970s and payment accuracy since the late 1980s. Except for a brief period of 

improvement during the mid-1990s, the rate of payment timeliness has been relatively stable at about 89%. When first measured, the overpayment rate was 

10.05%. The overpayment rate then leveled off at about 8.5% for several years. 

Since 2002, overpayments have exceeded 9%. We anticipate that enactment of our 

proposed UC Integrity Act will help lower these numbers. 

DOL is committed to promoting proper and efficient administration of state UI 

programs. Additional budget requests are targeted to specific needs. For example, 

the Administration’s Fiscal Year 2007 budget request includes funding to prevent 

overpayments caused by identity theft and funding for states to review the continued eligibility of beneficiaries and provide job search assistance in person. 

Questions from Chairman Wally Herger to Dr. Sigurd Nilsen 

Question: What are your views on DOL’s proposal to enhance unemployment program integrity, particularly with respect to allowing the Department of Treasury to garnish Federal tax refunds to recover unemployment 

insurance overpayments? 

Answer: Our work has highlighted the value of using this tool to help Federal 

and state-administered benefit programs recover overpayments. For example, in 

prior reports,1 we noted that the Social Security Administration (SSA) uses the tax 

refund offset as a means of improving overpayment collection in the Supplemental 

Security Income (SSI) program, which has yielded hundreds of million of dollars in 

recoveries. Similarly, SSA uses the tax refund offset to collect overpayments in the 

Disability Insurance (DI) program. Other programs, such as the Department of Agriculture’s Food Stamp Program also use this tool for recovering overpayments. Thus, 

it would seem that using this tool to recover UI overpayments would be appropriate 

to consider. 

Question: What are your views about the effectiveness of the National Directory of New Hires match pilot that DOL is conducting? 

Answer: We have not performed an independent assessment of DOL’s National 

Directory of New Hires (NDNH) pilot, and thus cannot comment on the effectiveness 

of this initiative. However, our prior work has shown that use of the NDNH can 

help Federal agencies verify eligibility for individuals in means tested programs. For 

example, SSA uses the NDNH to verify the employment status and income of SSI 

recipients, and it estimated that access to this database has saved almost $800 million over 5 years. More recently, we also recommended that SSA obtain authority 

to match its DI program with the NDNH to help the agency more effectively verify 

beneficiaries’ income. 

Question: What are your views on DOL’s FY 2007 budget request for $10 

million in additional funding for identity theft prevention activities, and 

$30 million for more reemployment and eligibility assessments? 

Answer: Because we have not performed a study of these proposals, it is difficult 

to comment on their merit. However, in a prior report, we noted that states were 

vulnerable to fraud and overpayments resulting from individuals who use Social Security numbers that do not exist or belong to deceased individuals.2 DOL estimates 

that $313 million in overpayments are caused by identity theft each year. In its fiscal year 2005 Performance and Accountability report, DOL notes that is has funded 

states to provide them with the ability to exchange data with SSA on a realtime 

basis. The Department believes that this will help the states prevent many, if not 

most, overpayments due to fraudulent or mistaken use of Social Security numbers. 

On March 5, 2004, DOL and SSA signed a memorandum of understanding formalizing the data exchange agreement. DOL estimates that the $10 million in additional funding for identity theft prevention activities in its fiscal year 2007 budget 

request will result in $77 million in savings by preventing erroneous payments 

77 

3 Ibid. 

4On May 3, 2006, DOL submitted a bill entitled the ‘‘Unemployment Compensation Program 

Integrity Act of 2006’’. 

caused by the use of stolen identities. However, we have no basis to assess the accuracy of this estimate. 

With respect to the Reemployment and Eligibility Assessments grants, it is too 

soon to know whether these will be effective in helping to improve efforts to connect 

claimants with reemployment services, or in reducing UI duration or improving employment outcomes. DOL is conducting an evaluation of these grants and initial results should be available in March of 2007. DOL has estimated that the $30 million 

requested in its fiscal year 2007 budget could be used to conduct an additional 

539,000 interviews and could save the UI Trust Fund as much as $151 million by 

reducing the average duration of UI benefits for claimants who are interviewed. 

However, it would be important to know how much is actually saved. 

Question: An April 2006 GAO report on improper payments includes information indicating that unemployment overpayments are rising. Do you 

have any explanation for why this is happening? 

Answer: Although we have not performed an independent analysis of this trend, 

DOL attributes the rise in overpayment error rates to an increase in payments to 

claimants who improperly continue to claim benefits despite having returned to 

work. While use of the NDNH would help states determine when UI beneficiaries 

are reemployed, it appears that all states are not yet using it to its full potential. 

Question: Are there any penalties or rewards for states that meet certain 

overpayment prevention goals for program improvement? If not, do you 

think an incentive or penalty-based approach would help motivate states 

to improve their unemployment payment accuracy? 

Answer: Our prior work on unemployment insurance program integrity3 concluded that DOL could enhance states’ emphasis on payment accuracy by using its 

performance measurement system to encourage states to focus on payment accuracy. 

We also recommended that DOL revise its performance measures to ensure increased emphasis on this activity. In response, DOL has established a new core performance measure for overpayment detection at the state level. DOL believes that 

this measure will provide states with an added incentive to prevent and detect overpayments by implementing core measures in states’ performance budget plans based 

on the level of overpayments the states have detected. While DOL has established 

overpayment detection as one of its core measures, it has not yet specified the level 

of performance that states will be required to meet under this measure. In addition 

to establishing performance measures that ensure increased emphasis on payment 

accuracy, we also recommended that DOL use the annual administrative funding 

process or other funding mechanisms to develop incentives and sanctions that will 

encourage state compliance with payment accuracy performance measures. DOL’s 

current legislative proposal4 contains a provision that would allow states to retain 

a small proportion of recovered overpayments to reduce fraud and errors by enhancing states’ benefit payment control activities. However, the proposal does not provide for sanctions for states that do not meet the specified level of performance. 

Question: Has any research been done to explain why average durations 

on unemployment benefits have been rising in the past decade, even when 

unemployment rates have remained low? 

Answer: We did not review the research literature on the trend in the duration 

of unemployment benefits, and its interaction with unemployment rates, for our recent report (GAO–06–341). As you are aware, we used data from a nationally representative sample of workers born between 1957 and 1964 and spanning the years 

1979 through 2002. We used the data to help build a model that allowed us to simulate, for example, how changes in characteristics of UI eligible workers—such as UI 

receipt—affected the likelihood of unemployment duration. We did not conduct a 

trend analysis. Nevertheless, in explaining the associations in our report, we discuss 

some research related to this question, such as: Karen E. Needels and Walter Nicholson, An Analysis of Unemployment Durations Since the 1990–1992 Recession, UI 

Occasional Paper 99–6, prepared for the Department of Labor, 1999 and Bruce D. 

Meyer, ‘‘Unemployment Insurance and Unemployment Spells,’’ Econometrica, vol. 

58, no. 4 (1990), p.771. Notably, in the former, the researchers point out that while 

labor markets appeared to be quite healthy in the post-1992 period, the lengths of 

unemployment spells were longer than have usually been associated with such low 

unemployment rates. Further, they note several factors related to the labor market 

78 

which appear to be the most likely explanations for the observed increase in average 

UI durations: (1) increases in the fraction of claimants in demographic groups who 

are likely to experience long unemployment spells (older workers, females, African 

Americans) and (2) changes in the industrial composition of the labor force, most 

notably the decline in manufacturing jobs. 

Questions from Chairman Wally Herger to Mr. Roosevelt Halley 

Question: Please provide the Committee with information about which 

states supplement Federal funding for unemployment administrative funding with state general funds. 

[Answer continues on next page.] 

79 

Question: What does NASWA view as the positives and negatives of the 

use of ‘‘corrective action plans’’ that states put in place to help them meet 

DOL performance goals in the unemployment benefits program? 

Answer: 

• Positives—NASWA members believe corrective action plans are beneficial for 

identifying problems and solutions within state UI programs. They serve to 

bring problems to the forefront for resolution. Emphasis and focus are applied 

to specific areas that need attention. States develop strategic approaches and 

timelines to measure improvement in deficient areas. Focusing efforts on improving performance where performance is below minimum criteria helps promote proper and efficient administration. 


31492A.003
80 

• Negatives—Many deficiencies identified through corrective action plans result 

from Federal underfunding. Underfunding leads to understaffing, and it impedes corrective actions. States also have out-of-date and inefficient computer 

systems. Given these problems, corrective action planning can become a paper 

exercise. At times states are compelled to reduce staffing or other resources in 

areas that show acceptable levels of performance in order to raise performance 

in areas identified for improvement by corrective action plans. This creates a 

‘‘roller coaster’’ performance cycle without addressing the fundamental performance issues. In like manner, states also may not invest as much effort in improving performance levels in areas that do not fall below the minimum required level, but could be improved. Finally, some performance issues are beyond the control of state UI programs. General economic conditions and the 

number of job openings affect reemployment prospects of individuals receiving 

UI benefits. Corrective action plans have little effect on these exogenous factors. 

Question: The Department of Labor has developed goals to promote reemployment of people receiving unemployment benefits and has a number 

of unemployment program performance goals. What happens under current 

law if a state fails to meet those standards? 

Answer: States are required by law to administer state UI programs in a proper 

and efficient manner. U.S. Department of Labor (USDOL) regional offices monitor 

state performance on a quarterly basis and attempt to work with the states in identifying and addressing potentially negative trends before they become problems. 

However, if a state fails to meet USDOL-set standards for reemployment of workers 

receiving unemployment compensation, a corrective action plan would be submitted 

by the state and updated quarterly. Consistent failure to meet standards would lead 

to a conformity or compliance hearing, which could result in sanctions, including the 

loss of administrative funding. A major concern with a sanction that includes a reduction in funding is it becomes more difficult for states to achieve the performance 

standards. NASWA members believe monetary penalties for failure to meet performance standards tend to be counter-productive. Scarce resources are primary reasons 

for failure to meet standards in the first place. Depriving a state of funds is more 

likely to exacerbate the problem, not correct it. NASWA suggests a better alternative would be additional funds provided to states with appropriate monitoring, 

support, technical assistance and oversight. In fiscal year 2007 testimony to the 

House Committee on Appropriations, NASWA requested an additional $283 million 

for UI administration and $100 million for updating computer systems above the 

Administration’s request. 

Question: Your testimony mentions the use of the Government Performance and Results Act and UI Performs Core measures to assess unemployment program reemployment services and outcomes. The Department of 

Labor is in the process of establishing a baseline and setting performance 

targets for reemployment in FY 2007. What new or effective approaches are 

states taking to help unemployed workers find new jobs? What can Congress do to help in this effort? 

Answer: Many states have enjoyed success in reducing UI benefit duration and 

expediting reemployment through enhanced Reemployment Eligibility Assistance 

(REA) and employment services. While unemployment insurance administrators encourage its claimants to find work, the responsibility and expertise in reemployment 

services lies with staff of One-Stop Career Centers and the Employment Service 

(ES). The goal of REA focuses on early intervention (e.g., between the eighth and 

twelfth week of an active UI claim) to shorten the benefit period for UI recipients. 

Virtually all of the strategies for increasing reemployment of UI recipients involve 

the use of additional personnel to provide more intensive services in the form of 

labor exchange services and training if necessary. Few states afford to provide these 

services on their own; likewise, reemployment services are staff intensive and extremely difficult to maintain without adequate funding. For many states, funding 

for ES is the primary state support for assisting UI claimants with their work test 

requirements outlined in federal legislation. NASWA members believe additional 

funding is necessary to support the efforts of states and allow for expansion of those 

efforts. As less funding is appropriated for ES activities, the ability to be successful 

in reemployment of UI recipients probably will diminish. In fiscal year 2007 testimony to the House Committee on Appropriations, NASWA requested the federal 

government restore the fiscal year 2005 appropriations levels for labor exchange 

services of $781 million for the ES and $35 million for Reemployment Services 

(RES) for UI claimants. 

81 

Question from Chairman Wally Herger to Dr. Tim Kane 

Question: The Department of Labor proposes allowing states to operate 

waiver programs to test various new approaches to improve unemployment 

benefits and how they help workers. Could you envision one or more states 

operating a savings-based unemployment benefit system like the one you 

outlined in your testimony? Is that the only way to test how individuals actually respond to such a system? Do any other countries operate such a system, offering lessons for us in how workers react when faced with these 

new choices? 

[Answer not received at time of printing.] 

f 

[Submissions for the record follow.] 

Statement of Greg Devereux, Washington State Federation of Employees, 

Olympia, Washington 

Despite efforts to fill in the gap with other sources of funds, the decline in employment service funding since the mid 1980s has had a significant impact on the services that the Spokane, Washington employment service office can provide workers 

and employers. 

In the early 1980s, the Spokane office had 25 employment specialists who provided placement services to unemployed workers that included job search assistance 

and referral to job openings. The number of staff has declined by 75 percent to only 

five employees. In addition, the number of veterans employment specialists who 

work exclusively with unemployed veterans has declined from five to two. 

The establishment of the computer center in the employment office self-help area 

has created some efficiencies since many jobseekers are adept at using the electronic 

job bank. However, most people need some in-person assistance to learn how to perform online job searches. Workers with limited education who have lost their jobs, 

when employers such as Columbia Lighting have moved their operations to other 

countries, are in particular need of help. Many are not computer literate and have 

to be taught not only how to search the database of job listings but also how to submit job applications online since many employers want jobseekers to submit their 

job applications electronically. Unless they can master these skills, these workers 

cannot reach a whole group of employers. 

With only five employment specialists, the office has been forced to depend in part 

on volunteers from the AARP to help in the computer center, but this help is of uneven quality and not always reliable. In addition, some staff from other programs, 

such as the TAA program, now spends part of their time away from their primary 

work working in the self-help area. 

The Spokane employment service office has an effective reemployment program 

that provides early intervention with unemployment insurance claimants within 

their first few weeks of filing a claim. Claimants receive referrals to job openings 

and training in how to write their resumes and in interview techniques. They also 

receive help with other services such as skills assessments and the use of the electronic job bank. 

These services are likely to be eliminated beginning in July when the $35 million 

in federal state reemployment grants end. 

The Spokane office also provides work search verification for the unemployment 

insurance program. To the extent they are able, when the staff calls claimants into 

the office for verification, they also provide job search assistance, skills analysis and 

other services the claimants might need. The availability and quality of these services will be affected by a continued contraction in resources. 

Services to employers have deteriorated considerably. In the mid 1980s, the office 

had industry specialists who had expertise in particular sectors, such as industrial, 

clerical, and construction occupations. These employer specialists developed and 

maintained ongoing relationships with employers for the purpose of serving their 

needs and also building their listings of employment opportunities. This in-person 

proactive approach to working with employers has been abandoned entirely. Now 

employers simply call and register jobs with whoever takes the phone call. In addition, some discussion has occurred about charging employers modest fees in order 

to support services for them. 

While the Administration has claimed that private agencies can replicate the 

work of the local employment offices, the primary private agencies in Spokane are 

temporary service agencies that largely provide temporary placement to low paying 

82 

jobs with no benefits. This is a very different orientation than the local employment 

service office that attempts to find ways to upgrade workers skills and find good 

jobs with benefits, especially for the many workers who have been displaced by off 

shoring and other economic dislocations. 

f 

Statement of Eric J. Oxfeld, Strategic Services on Unemployment and 

Workers’ Compensation 

Thank you for the opportunity to comment on the unemployment compensation 

aspects of the Department of Labor (DOL) proposed Fiscal Year 2007 budget. Because there are integrally related unemployment compensation aspects of the Treasury proposed budget, this statement addresses both agencies’ proposals. UWC applauds the increased attention to UI payment and tax accuracy (‘‘integrity’’) in the 

DOL and Treasury proposed budgets. The improper payment rate for the UI system 

is a shocking 9.9%, according to the latest statistics from the DOL Benefit Accuracy 

Measurement (BAM) report. Addressing this problem should be a priority for federal 

and state officials, as well as employers. Unfortunately many of the specific strategies in the form proposed by DOL and Treasury raise significant policy concerns. 

UWC cannot support, and urges Congress not to approve, the following proposals: 

1. Mandate that states penalize an employer for a response the state deems ‘‘late’’ 

or ‘‘incomplete’’ after sending a separation notice. 

2. Increase the Federal Unemployment Tax Act (FUTA) through a 5-year extension of the ‘‘temporary’’ surtax. 

3. Finance administrative costs for integrity activities with state unemployment 

tax revenue, which federal law has always required be dedicated to financing 

benefits. 

4. Use a ‘‘bounty hunter’’ contingency fee method of reimbursing contractors hired 

to recover improper benefit payments or tax underpayments states deem 

‘‘uncollectible.’’ 

5. Mandate that states impose a fraud penalty of at least 15%. 

UWC supports the proposal to recover improper payments out of federal income 

tax refunds. We also support the DOL request for Congress to appropriate an additional $10 million to combat UI identity theft and $30 million to expand re-employment and eligibility review initiatives. 

We are reviewing three additional proposals. Although we have not finalized our 

position, we see merit in the Treasury proposal allowing a professional employer organization (PEO) to remit FUTA for its clients, when the PEO is certified by the 

Treasury as meeting stringent financial standards, along the lines of H.R. 4985. We 

are also reviewing the DOL proposal mandating that employers report start work 

dates on their new hire reports. We understand the value of obtaining this information but must also weigh the economic and practical burden of re-designing established employer reporting systems to capture this information. Finally, we are 

awaiting additional information needed to evaluate the DOL proposal to facilitate 

a claimant’s return to work by allowing state waivers of unspecified federal requirements (for demonstration projects). 

UWC—The Voice Of Business On Unemployment And Workers’ Compensation 

UWC is the only national association exclusively devoted to providing legislative/ 

regulatory representation for the business community in connection with unemployment insurance (UI) and workers’ compensation (WC) public policy. UWC’s members 

include employers, national and state business associations, third party claims and 

tax administrators, accounting and law firms, and other service providers, all of 

whom support and advocate sound, cost-effective UI and WC programs. UWC members, and their clients, policyholders and members, collectively represent a major 

share of the business community in the United States. UWC is intimately acquainted with unemployment insurance law and best practices. In addition to 

UWC’s advocacy efforts on behalf of business, we manage the National Foundation 

for Unemployment Compensation & Workers’ Compensation, which conducts educational activities such as the annual National UI Issues Conference, as well as reference materials on UI, including the annual Highlights of State Unemployment 

Compensation Laws book, the annual RESEARCH BULLETIN: Fiscal Data for 

State Unemployment Insurance Systems, and the Employer’s Unemployment Compensation Cost Control Handbook. 

83 

Analysis of UI proposals in the Administration’s FY 2007 proposed budget 

UWC strongly supports the state UI program, through which employers provide 

benefits for a temporary period of time to insured workers with a strong attachment 

to work who become temporarily and involuntarily jobless when their employer no 

longer has suitable work available. We advocate greater efforts by states to prevent 

and recover improper payments, and it is very refreshing that DOL has given greater emphasis to payment accuracy. However, many of the specific strategies embodied in the Administration proposals raise significant policy concerns for employers. 

Of greatest concern are (1) the DOL proposal to prohibit non-charging for improper payments attributed, even unfairly, to an employer’s fault and (2) the Treasury proposal to extend the FUTA surtax. 

Non-charging proposal 

UWC opposes the federal mandate in the form proposed last year, which requires 

state UI laws to charge an employer’s unemployment tax account for erroneous UI 

payments due to the ‘‘fault’’ of the employer or its agent. Employer fault was defined 

in last year’s UI integrity proposal as ‘‘failure to respond timely and in good faith 

to a state request for information’’ relating to a UI claim. However, what is timely 

or complete or a good faith response was not defined. 

This proposal will significantly increase payroll taxes for employers who have 

done nothing wrong. For example, there is no assurance that an employer will not 

be charged even though it did not receive the notice in time to respond before the 

deadline or the state subjectively determines that the employer’s response was ‘‘incomplete.’’ 

Employers support procedures for processing unemployment claims promptly, but 

it is also important that speedy benefit delivery should not result in erroneous payments. Claimants may be adversely affected by the requirement to repay improperly 

paid benefits, and these amounts are rarely fully recovered because, the claimant 

has often spent the money by the time the error is discovered. Improper payments 

also reduce state unemployment trust fund balances and therefore result in higher 

taxes for employers. And they add to the workload of state workforce agencies. 

When a claim for unemployment benefits is filed, most states conduct an initial 

review and make an initial determination relying solely on information supplied by 

the claimant and the employer’s response to the state ‘‘separation notice’’ advising 

them that the claim was filed. DOL rules require that states begin paying benefits, 

even if the employer protests the determination and asks for a re-determination or 

a hearing. When an initial determination favoring the claimant is overturned, benefits already paid are not charged to the employer’s unemployment tax account. This 

practice is appropriate and represents a very small cost to the system. Only a minuscule amount of non-charging results from reversals where the employer did not 

provide timely or complete information at the initial proceeding. DOL’s own figures 

show that improper payments are rarely the fault of the employer. The DOL Benefit 

Accuracy Measurement (BAM) report shows that claimants are responsible for 73% 

of overpayments, administrative agencies are responsible for 24% of overpayments, 

and employer error is responsible for only 11% of overpayments. (These figures add 

up to more than 100% because they include overpayments where there is dual responsibility.) DOL estimated that its proposal will save less than .1% of all benefits 

paid (an average of just $22.7 million a year). 

84 

Employers already have strong financial incentive to file timely and complete responses to state separation notices. The odds of prevailing on a contested claim are 

much reduced if the employer must overturn an initial determination favoring the 

claimant. Furthermore, employers who do not submit timely information for the initial determination will incur considerable business cost if they must participate in 

a formal hearing or an appeal. Hearings are costly for the employer, because it must 

send members of its staff to participate, including witnesses and the claimant’s the 

supervisor, as well as a hearing representative. The lost productivity and time away 

from work required to prepare for and participate in a hearing are very expensive. 

The proposed mandate against non-charging is also objectionable because it creates an unworkable and unfair federal standard governing state charging requirements. Unemployment taxes, benefits, and eligibility are areas of regulation traditionally left to the states in designing and administering their UI programs. Federal 

law is ill-equipped to address non-charging for failure to respond to a separation notice, because there are many inextricably related issues which the DOL proposal 

does not address. 

As noted, prompt payment is a critical objective for a program designed to provide 

insurance against loss of work. Federal regulations hold state UI administrators to 

stringent performance standards governing prompt payment. To comply with these 

standards, many states provide short—and often completely unrealistic—timeframes 

for employers to respond to separation notices. In these states, the DOL proposal 

will significantly, and unfairly, increase unemployment tax costs for responsible employers because of circumstances that beyond their control. The deadlines vary by 

state, and usually are 10 days or less, including weekends and holidays. Typically 

these deadlines run from the date when the state mails out the notice, rather than 

the date when the employer actually receives it. 

The brief time allowed for a response often does not allow for the vagaries in mail 

delivery or state practices which contribute to the delay in the employer’s actual receipt of the notice. For example, it is not unusual for the state to mail the separation notice to the address provided by the claimant rather than to the address of 

record provided by the employer. This practice causes a delay in delivery to employers who have multiple locations or have designated a third party representative to 

receive their notices. Furthermore, in some states the form and envelope do not 

have an ‘‘attention line’’ or sufficient room to display the full name and address. At 

least 5 or 6 lines may actually be needed for a proper address (in fact, many state 

UI agencies themselves have addresses containing this many lines). When the state 

mails the notice to a wrong or incomplete address, it is likely to be lost in the mail 

or received at the main employer address, where it may be indistinguishable from 

the rest of the mail from that state. Delivery is delayed until the envelope can be 

opened and routed to the appropriate location. The employer thus receives the claim 

form well past the due date. Many companies experience this problem, and the 

states have traditionally ruled against them when they appeal the timeliness of 

their responses. 


31492A.004
85 

Many employers now third party agents to assist with UI claims. However, some 

states do not allow employers to designate a third party administrator as the recipient of state notices to their clients. This situation further delays response to the notice. 

Due process must be applied to employers as well as claimants. Due process requires that states give an employer a reasonable amount of time to learn of a claim, 

investigate it, and respond when appropriate. Charging an employer’s tax account 

when the employer was not given sufficient time to respond is a denial of due process. A deadline for response which allows the employer less than 10 calendar days 

after the notice is mailed out before the response is due often puts the employer 

in a Catch 22 situation. 

If federal law mandates that states amend their laws to prohibit non-charging for 

failure to submit a timely or complete response, then fairness dictates that it also 

must require states to provide adequate time to submit their response. Any federal 

legislation prohibiting non-charging for failure to submit timely and complete responses should also pre-empt state laws that have taken a different approach in trying to encourage prompt submissions. Some states now assess monetary civil penalties against an employer for failure to respond to a separation notice. Such penalties are unfair. An employer may have legitimate reasons not to respond to a UI 

separation notice. The circumstances surrounding the separation from employment 

claim may entail a potential risk of separate litigation over employment law issues 

related to the reasons for separation. An employer which is at risk of litigation in 

another legal venue may not wish to provide the claimant’s legal representative 

with an opportunity for discovery prior to the case going to court. In many states, 

the law and facts are construed in favor of the claimant. Consequently, the employer 

may not contest a UI claim because it wishes to avoid a potential legal problem 

down the road. In such cases, benefits are then charged to the employer’s account. 

If federal policymakers are going to address the consequences of not responding to 

separation notices, it is unfair to allow states to enforce laws imposing monetary 

penalties, too. 

States are actively debating how to encourage prompt response to separation notices. Federal mandates may make sense where the need for uniformity among the 

states is compelling, but no such need has been demonstrated for federal law to require that states charge benefits to the employer’s tax account for failing to respond 

to separation notices. 

It is true that the DOL proposal recognizes that charging is not appropriate in 

all circumstances. The DOL proposal includes an exemption for ‘‘good faith’’ error. 

But ‘‘good faith’’ is not defined, and what is considered either ‘‘good faith’’ or an employer’s ‘‘fault’’ in one state may not be the same in others. Even greater variability 

is likely with respect to what is considered ‘‘sufficient’’ information to avoid being 

charged for an ‘‘incomplete’’ response. What is ‘‘sufficient’’ is a very complex issue. 

A determination of what is complete will not only vary among the states, it will vary 

from claim to claim and from adjudicator to adjudicator within a state. Furthermore, employers will be burdened with fifty different definitions, thereby making 

compliance and avoidance of punitive charging nearly impossible. 

FUTA surtax extension proposal 

UWC opposes the 5 year extension of the FUTA surtax. Over 10 years, extending 

the FUTA surtax will cost employers more than $17 billion extra yet will make just 

a $710 million dent in the federal budget deficit. 

The FUTA surtax directly punishes employers $14 for each worker, every year, 

and the indirect costs are even greater. At a time when the Treasury has asked 

Congress to extend expiring tax cuts to continue promoting a healthy economy and 

employment growth, this payroll tax increase makes no sense. 

Congress originally imposed the FUTA surtax in 1976 to retire a deficit created 

by a temporary ad hoc supplemental extended unemployment program. Business accepted it, subject to agreement that the surtax would expire when the debt was repaid. The debt was retired in 1987. Nevertheless, the surtax has already been extended four times. 

FUTA revenue may be expended for only three purposes: the administration of 

the state unemployment insurance (UI) and employment services program, the federal share of Extended Benefits (EB), and interest-bearing loans to states which 

temporarily deplete their unemployment trust accounts. Yet the FUTA trust fund 

is already over funded. Over the past 24 years, less than 57% of FUTA revenue has 

been used for administration and EB, and there is no need for more revenue just 

to provide loans. 

There is no UI policy reason to extend the surtax, but there are strong policy reasons to let the surtax expire. The accumulation of unneeded FUTA revenue by exVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00089 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
86 

tending the surtax will create significant problems for the UI system. FUTA balances over a statutory ceiling are automatically distributed to the state accounts 

used to pay basic UI benefits. Extending the surtax will cause the federal accounts 

to hit the ceiling and trigger a large distribution to the state unemployment funds. 

The expectation of federal funding for basic unemployment benefits will discourage 

state fiscal discipline in financing their UI programs. It also weakens the positive 

effect of using experience rated state unemployment taxes to finance UI benefits. 

Consequently, employers will have less incentive to avoid lay-offs and to protest improper claims. 

Raising the FUTA ceiling would prevent a distribution to the states—but that also 

is poor public policy. The accumulation of unneeded funds will make the Unemployment Trust Fund an inviting target for proponents of new federal spending programs. For example, former HHS Secretary Donna Shalala once referred to the Unemployment Trust Fund as ‘‘unused pots of money’’ that could be re-programmed 

to transform UI into paid family leave (‘‘Baby UI’’). It will also make it more difficult for states still in debt from the last recession to raise the money needed to 

restore solvency. 

The reason for the FUTA surtax expired almost 20 years ago. The Department 

of Labor got it right in 2002 when it proposed ‘‘reducing employers’ federal unemployment taxes.’’ The cost to employers will add up over time—not to mention the 

indirect cost of weakening experience rating, encouraging states to depend on federal financing for basic UI benefits, and accumulating paper balances which will be 

used to justify expanded government spending in the future. All these adverse consequences in exchange for a negligible impact on the federal budget makes extending the FUTA surtax too high a price. Congress should allow the surtax to expire 

on schedule at the end of 2007. 

Other DOL integrity proposals 

UWC agrees that additional financial resources are needed to enhance state efforts to prevent and recover overpayments and underpaid taxes. Because state budget dollars for UI administration are very limited, integrity often gets little emphasis. 

However, the specific financing mechanism proposed by DOL raises significant policy concerns. Allowing states to retain a portion of recovered overpayments or underpaid taxes creates an exception to the federal law known as the ‘‘withdrawal 

standard.’’ This standard prohibits the expenditure of payroll taxes deposited in 

state unemployment trust funds for any purpose other than payment of unemployment benefits. This stricture provides a firewall against the use of benefits funds 

for various other purposes, including system administration. Maintaining the withdrawal standard, including the firewall between funding for benefits and administration, is important, because paying for administrative costs using benefits revenue 

will ultimately lead to higher state payroll taxes for employers. State unemployment 

payroll tax rates are closely—and automatically—tied to unemployment trust fund 

balances. Expenditures to cover administrative costs will reduce these balances and 

trigger higher tax rates, with virtually no accountability on the part of state or federal elected officials. 

Although the DOL proposals seemingly do not create the risk of payroll tax increases because they have the potential to recover that presumably would have been 

lost to the system, they open the door to additional proposals to expend state unemployment revenue on other administrative functions, all of which arguably will also 

improve trust fund solvency. For example, hiring more hearing officers and adjudicators, who have more training and are paid higher salaries, is likely to result in 

fewer errors on claim determinations and appeals. Establishing more ‘‘job clubs’’ 

may result in more disqualifications of claimants who were not able to work or 

available for work. Maintaining more unemployment offices may foster more referrals of claimants to suitable work. Automating communications between agencies 

and employers will unquestionably result in fewer improper payments. Greater enforcement of work search requirements will also produce significant reductions in 

improper payments. All of these functions are administrative, and all would benefit 

from more money. Opening the firewall to allow funding for overpayment recovery 

efforts will undoubtedly trigger a myriad of other ideas which ‘‘require’’ reaching 

into the state trust funds. 

Moreover, reaching into the state benefits trust funds to pay for any administrative expenses is totally unnecessary. The FUTA tax paid by employers is levied for 

the specific purpose of financing state UI administration, and it produces far more 

revenue than is needed for this purpose, even after allowing for ‘‘beefed up’’ state 

efforts to increase recoveries of overpayments. Since 1981, the federal government 

has returned less than 57% of FUTA revenue to the states for program administration and the state share of extended benefits, the sole purposes allowed by law for 

87 

expenditure of FUTA revenue. There is more than enough revenue in the FUTA accounts in the Unemployment Trust Fund to finance additional integrity activities, 

even if the ‘‘temporary’’ surtax is allowed to expire at the end of 2007. If Congress 

agrees that the return on these proposals will more than offset the cost—and we 

believe that is the case, at least initially—then it should allow states to tap FUTA 

revenue already paid by employers for UI administration rather than looking to alternative state funding sources. 

A net gain from the collection agency proposal is more speculative. State UI agencies should be expected to use the resources of their own office in performing their 

public duty—including recoveries of overpayments and delinquent taxes—and they 

should be provided sufficient financial resources to accomplish this purpose. Because 

federal grants for UI administration are chronically inadequate, there will be strong 

temptation for states to write off as much as possible as ‘‘uncollectible’’ and thereby 

obtain supplemental financial resources. If this dynamic occurs, the use of collection 

agencies will appear to pay off, while actually doing little to increase real net recoveries. 

The collection agency proposal also raises another public policy issue because a 

contingency fee is used to pay for the collection services. Contingency fee agreements were not meant for state governments—they were designed to increase access 

to courts for individuals without the resources to pay an hourly attorney fee. Delegating state authority to collection agencies on a contingency fee basis can lead to 

government enforcement activity on the basis of profitability, not public interest. 

State UI administrators serve to protect the public interest—not enrich private collection agencies. And there is a danger that contracts will be granted to firms that 

contributed to a political campaign, creating an appearance of impropriety. 

Our policy opposing federal standards also compels us to oppose the proposed 

mandate that states impose a 15% fine on overpayments due to fraud. UWC advocates that states impose such fines, but there is no compelling need for federal uniformity. Unnecessary federal standards, even those favoring employer interests, will 

create precedent for additional unnecessary federal standards that will hurt employers, workers and the UI system. Furthermore, as a practical matter, the 15% fraud 

penalty may be counter-productive. Many states are reluctant to impose fraud penalties, and the greater the penalty, the more likely the state will not find that fraud 

occurred. 

Better ways to improve UI integrity 

We would like to suggest other ways to improve system integrity that were not 

included in the DOL integrity proposal. This is not a complete list of our suggestions, but these proposals will have a measurable positive impact: 

• Administrative financing reform 

The root cause of many of the systemic problems in the UI system which are responsible for the high error rate is the chronic under funding of the state workforce 

agencies which administer the UI program. UWC has gone on record on many occasions, including hearings before this subcommittee, regarding the need for permanent administrative financing reform to assure that workers receive necessary services, states receive adequate funds for administration, and employers are not taxed 

excessively. The problem is not inadequate revenue. As noted above, employers pay 

far more in FUTA than Congress appropriates for state administration. The problem 

arises primarily because federal appropriations are chronically inadequate because 

federal budget rules create incentive for the federal government to hold onto FUTA 

receipts and maintain an excessive FUTA tax rate. Past proposals for administrative financing reform, designed to return a greater share of FUTA revenue to the 

states, have not advanced in Congress but the problem is no less acute than it was 

previously. We urge Congress to step up to the plate and assure that states receive 

adequate administrative funding. But rather than just ‘‘throwing money at the problem’’ and trusting the states to spend it wisely, we would like to explore a ‘‘pay for 

performance’’ approach that will provide supplementary administrative funding for 

states that demonstrate they meet reasonable administrative standards and goals. 

• More frequent charge reporting and automation 

States should send employers their charge notices at least quarterly, and distribute them promptly at the end of the reporting period covered. These notices, 

similar to credit card statements, list all benefits charged against an employer’s unemployment tax account. Employers check these notices for errors and often detect 

mistakes in time to stop payment of additional benefits to claimants who were not 

eligible. However, 6 states, including California, send these notices only once a year. 

By the time the employer has a chance to alert the state to an improper payment, 

88 

there is virtually no chance of stopping future erroneous payments or recovering 

past overpayments. DOL should encourage these states to send quarterly notices, 

and Congress should provide funding for the states to make the adjustment. 

In addition, efforts should be expedited to develop automated systems for sending 

employers separation notices, charge notices, and similar communications. The 

states have established more efficient procedures for claimants to submit claims— 

e.g., by phone and by Internet—but automation of employer communications in most 

states has lagged far behind. The paper forms sent through the mail and the few 

‘‘one size fits all’’ web applications do not lend themselves to the breadth of today’s 

employers, many of which operate in multiple states and have centralized in-house 

UI management programs or outsource this function to authorized agents. Such a 

system could be established nationwide and used on a voluntary basis, giving the 

employer the opportunity to provide separation information at the time of discharge 

and not have to worry about receiving notice in the mail at a later time and missing 

deadlines or providing ‘‘incomplete’’ information. Such a system could also retain 

separation information to be used for benefit charge issues in subsequent separations that might involve base period wages. The potential for reducing fraud and 

administrative overpayments is tremendous. Again, federal funding to design and 

implement the system would be helpful. 

Conclusion 

UI overpayments are a serious problem. The root cause is tied directly to inadequate administrative funding that results from the hopelessly broken administrative financing mechanism for the state workforce agencies. The Administration proposals are a sincere and well-intentioned effort to focus attention on payment and 

tax accuracy but generally fall short of what’s needed for an effective solution. A 

few, such as the recovery of overpayments out of tax refunds, have merit and should 

be enacted as soon as possible. Unfortunately, many of the others are misguided in 

various respects and should be rejected or modified. 

Of greatest concern is the proposed federal standard requiring states to amend 

their laws to prohibit non-charging of benefits paid because of employer fault. This 

proposal will not result in a material reduction in overpayments. Few overpayments 

result from an employer’s failure to provide timely and complete information. Often, 

the employer cannot respond any sooner because the principal reason for the late 

or incomplete response is that the state does not provide a realistic deadline or procedures which make it possible to submit timely and complete information. In some 

cases, the employer has legitimate reasons for choosing not to respond or not providing more detail. State systems, deadlines and procedures for responding to separation notices and adjudication of UI disputes vary widely. Employer cooperation in 

the UI claims process is essential, but a federal standard requiring that benefits be 

charged to the employer’s account for failure to make timely or complete submissions will not only be ineffective, it will compound existing procedural problems and 

make the UI system more costly and frustrating for responsible employers. 

Instead of charging benefits to the employer, the federal government should foster 

expedited development of more efficient processes to automate communications between states and employers. States should change their notification procedures to 

improve the timeliness of employer receipt of charge notices—and now is the best 

time to act on these changes because many states are in the process of re-engineering their UI systems. In addition, states should send charge notices to employers 

at least quarterly. 

More funding for integrity functions and automation is urgently needed. The DOL 

proposals move in the right direction, but the proposed funding source, driven by 

federal budget rules, is objectionable. It is not appropriate to tap payroll taxes contributed to finance benefit costs or impose additional payroll taxes at the federal or 

state level when more than enough FUTA revenue is available. The principal purpose of FUTA revenue, by law, is administrative financing. Breaking down the firewall between benefits and administrative taxes is a mistake that will increase payroll taxes on employers. Proposals to allow use of recovered overpayments for enhanced benefit payment controls and collections, and enhanced IT upgrades, should 

be financed out of existing FUTA revenue, not additional taxes. 

There is no compelling reason for uniformity of state laws imposing penalties for 

overpayments and some doubt as to whether a minimum 15% fraud penalty will be 

effective. We therefore do not support a federal mandate for this purpose. Federal 

mandates, even when helpful to employers, will simply invite additional federal 

mandates that ultimately will make the UI program more costly. 

Of equal concern, there is absolutely no sound reason to raise payroll taxes on 

employers by extending the FUTA surtax past the end of 2007. The FUTA tax rate 

should be established based on UI program needs, not federal budget rules. The acVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00092 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
89 

cumulation of unnecessary FUTA revenue is detrimental to a sound unemployment 

insurance system. 

We appreciate your inclusion of these comments in the hearings record. We would 

be pleased to answer any questions or provide additional information. Please feel 

free to contact me by telephone or by email. 

STATEMENT OF CLIENTS, PERSONS, OR ORGANIZATIONS ON WHOSE 

BEHALF THE STATEMENT IS SUBMITTED 

This statement is submitted on behalf of UWC—Strategic Services on Unemployment & Workers’ Compensation (UWC). UWC is a 501(c)(6) association incorporated 

under the laws of Wisconsin. UWC offices are located in the District of Columbia. 

f 

Statement of William Samuel, American Federation of Labor and Congress 

of Industrial Organizations (AFL–CIO) 

On behalf of the more than 9 million working men and women of the AFL–CIO, 

I appreciate the opportunity to submit written testimony on the Bush Administration’s FY 2007 budget request for the Department of Labor (DOL), with special emphasis on the Unemployment Insurance (UI) system, the Employment Service (ES), 

and the workforce development (job training) system. 

On February 6, 2006 the Bush Administration released its FY 2007 budget request for DOL programs, and on May 3, 2006 the Administration submitted legislative language—called the ‘‘Unemployment Compensation Program Integrity Act of 

2006’’—to implement several of its budget proposals. Notwithstanding the modest 

title of this legislation, the Bush Administration is proposing nothing less than a 

radical restructuring of the U.S. employment security system. 

The most far-reaching and harmful of the Administration’s proposals would allow 

the entire balance of state UI trust funds to be diverted to purposes other than paying UI benefits—and specifically to pay for tax subsidies for low-wage employers, 

personal reemployment accounts (PRAs) to induce displaced workers to forego job 

training, and wage supplements to induce displaced workers to take lower-paying 

jobs with subsidized low-wage employers. 

The Administration’s sweeping agenda poses serious questions for the future of 

the U.S. employment security system. Bush Administration policies and proposals 

are taking us in the direction of lower-quality jobs with lower wages and reduced 

benefits; a shift in the mission of our economic security system from helping workers find good jobs towards inducing them to accept ‘‘rapid reemployment’’ at lowerquality jobs; and under-funding and neglect of the federal programs that help displaced workers find and qualify for good jobs. We propose a very different agenda 

that puts a priority on helping displaced workers find reemployment at good jobs 

with good wages and good benefits. 

Four Principles for Reform 

We believe the urgent task of reforming and improving our economic security system should be guided by the following four principles: 

1. Reform should improve the effectiveness of our employment security system in 

preventing economic hardship for workers who lose their jobs; 

2. Reform should improve the effectiveness of our economic security system in 

helping displaced workers find reemployment at good jobs with good wages and 

good benefits, and keeping workers on a career path of higher wages and higher benefits; 

3. Reform proposals should recognize the role played by the U.S. economic security system as an economic stabilizer, providing countercyclical economic stimulus to depressed areas of the country during periods of high unemployment; 

and 

4. Reform should promote fairness and efficiency in the administration of our economic security system, and promote compliance with the law by both employers and workers. 

In our testimony below, we use these criteria to evaluate the Administration’s 

budget and legislative proposals. 

Principle #1: Prevent Hardship and Promote Economic Security 

The first and most obvious purpose of the employment security system is suggested by its name: to promote economic security by preventing economic hardship 

for workers who lose their jobs. This goal is as important today as it ever has been, 

but it is not being met by the current system. 

90 

None of the remarkable changes in the American workforce in the past few decades have obviated the need to promote economic security for displaced workers. Despite an ostensibly low U.S. unemployment rate of 4.7 percent, there are still seven 

million Americans officially unemployed. If discouraged workers and involuntary 

part-time workers were counted, the U.S. unemployment rate would be 8.4 percent. 

One noticeable change in the U.S. labor market is the rising level of job turnover, 

which has increased 4 percent just since 2003 (from 37 percent in 2003 to 41 percent 

in 2005). This troubling development calls for more, not less, UI assistance for displaced workers. It also suggests additional reforms such as universal health care 

coverage and increased portability of defined-benefit pension plans. 

Despite the need for increased assistance, the UI system is now providing less assistance to fewer workers than it has in the past. Unemployment benefits replace 

only 34.7 percent of the lost income of jobless workers in the U.S., and much less 

in some states. 

States such as California, Arizona, Missouri, and Indiana have raised regular UI 

benefit levels since the 1990s, but much more remains to be done. To promote higher levels of wage replacement, future special distributions from the federal UI trust 

funds should be dedicated, at least in part, to raising regular state UI benefit levels. 

The percentage of unemployed workers who receive regular state UI benefits has 

fallen from 50 percent in 1975 to 36 percent in the last quarter of 2005. One reason 

for the decline in UI eligibility is that most states have failed to update their eligibility rules to reflect the massive entry of women, contingent workers, and part-time 

workers into the workforce. Low-wage workers are twice as likely to be unemployed 

as other workers, yet they are half as likely to receive UI benefits, partly because 

32 states do not count workers’ most recent earnings for purposes of determining 

eligibility. Approximately one in five workers is employed part-time, most of them 

women, but only 18 percent of part-time workers received UI benefits in the 1990s. 

Several states have adapted to these changes in the workforce by modernizing 

their UI programs to serve more workers. Nineteen states now cover more low-wage 

workers by using an alternative base period (ABP) that counts workers’ most recent 

earnings. Twenty-four states allow UI eligibility for at least some part-time workers. 

And twenty-seven states provide UI benefits to victims of domestic violence who are 

forced to leave work. 

Federal funding should support such state efforts to expand UI eligibility. In the 

late 1990s, the ‘‘stakeholder’’ process—involving employers, organized labor, state 

UI administrators, and the U.S. Department of Labor—produced a consensus package of UI reforms that encouraged eligibility expansion. This ‘‘stakeholder package’’ 

included federal funding for states to cover more low-wage workers by implementing 

an ABP, as well as federal funding for states to cover part-time workers. 

Another noteworthy development in the U.S. labor market is the rise in long-term 

unemployment, most likely caused by structural changes in the economy. Repairing 

the dysfunctional federal extended benefit (EB) program would be an especially appropriate response to the increase in structural unemployment. The EB program 

was intended to allow long-term unemployed workers in high-unemployment states 

to receive benefits even when Congress has failed to enact a nationwide program 

of extended federal benefits. However, the EB activation triggers are obsolete, and 

the ‘‘stakeholder package’’ of UI reforms includes repair of the EB triggers. 

Raising UI benefit levels, expanding UI eligibility, and improving UI outreach obviously require additional budget resources. We propose that these reforms be paid 

for through a special account funded by the Bush Administration’s proposed fiveyear extension of the Federal Unemployment Tax Act (FUTA) surtax. 

Principle #2: Set Workers on a Career Path Towards Higher Wages and 

Higher Benefits 

The second principle of reform is to improve the effectiveness of our economic security system in helping displaced workers find, and qualify for, good jobs with good 

wages and good benefits. 

Recent changes in the U.S. labor market underscore the need for a much more 

ambitious national reemployment strategy. Because of rising job turnover, there are 

obviously more workers seeking reemployment than ever before. And because of increased structural unemployment, the challenge of finding good reemployment opportunities lies increasingly beyond the means of individual workers and localities, 

and demands a national response. 

Reform efforts should therefore focus on developing a comprehensive ‘‘good jobs 

strategy’’ to ensure that good jobs are available in the first place; improving the effectiveness of programs that connect workers with the good jobs that are available; 

and improving the effectiveness of job training programs that help workers qualify 

for those good jobs. 

91 

A comprehensive strategy to create and maintain good jobs must include (1) balanced monetary and fiscal policies to promote full employment; (2) robust investments in physical infrastructure; (3) a national strategy to revive the manufacturing 

sector, including investments in technology development and dissemination, currency policy reform, and repeal of tax subsidies that encourage off-shoring of manufacturing jobs; (4) trade and currency policies that discourage downward competition 

in wages and benefits and the off-shoring of good jobs; (5) other sectoral strategies 

to rescue and modernize ailing sectors of the economy, building on successful labormanagement models in hospitality, telecommunications, and health care; (6) economic development initiatives; and (7) policies that promote worker rights and collective bargaining, higher wages, and improved health care and retirement security. 

To do a better job of matching workers with available good jobs, the Employment 

Service (ES) must be reinvigorated. Today the ES administers the ‘‘work test’’ for 

millions of UI claimants to ensure that they are registered for, and matched with, 

suitable job openings, and provides reemployment services that help UI claimants 

return to work. In 2005, the ES helped over 14 million workers look for jobs. 

A number of studies have demonstrated that labor exchange services provided by 

the ES are extremely cost-effective. According to a 2002 paper by Westat researcher 

Lou Jacobson, public labor exchange services spend about $330 per job placement. 

Mr. Jacobson observes, ‘‘What is particularly remarkable is that virtually every rigorous analysis of PLXs [public labor exchanges] indicates that they are highly costeffective.’’ 

The ES has a unique state and national focus that cannot be duplicated by private 

contractors, or by One-Stop offices under the Workforce Investment Act (WIA). Private businesses such as Monster.com cannot match the breadth of services or listings offered by the ES. WIA One-Stops have a local focus that is ill-suited to carry 

out a national, or even statewide, reemployment strategy. Congress should direct 

the WIA system to devote fewer resources to wasteful duplication of ES infrastructure, and more of its resources to job training. Core services provided by the WIA 

One-Stops should be provided by ES merit staff employees. 

However, the ES cannot meet its current responsibilities, much less shoulder additional responsibilities, without additional budget resources. The ES budget has 

been cut for five years in a row. In FY 2006 its budget was cut $45.8 million in 

nominal dollars over FY 2001, and $34 million in DOL grants for reemployment 

services for UI claimants were eliminated. 

Finally, the quality and effectiveness of job training programs must be improved, 

starting with restoration of recent budget cuts. The WIA system should ensure that 

training investments lead to good jobs by developing and implementing performance 

standards, economic self-sufficiency standards, and other measures to ensure accountability of public subsidies. 

In light of rising job turnover and structural unemployment, studies show that 

the most effective job training programs are those that offer workers a broad skill 

set that can be transferred to multiple employers. There is also a correlation between the effectiveness of job training and the duration of training, which suggests 

the need for additional budget resources for training, and accompanying income support, modeled after the Trade Adjustment Assistance (TAA) program. 

Principle #3: Provide an Economic Stabilizer 

One of the original purposes of the UI program was to stabilize local economies 

by helping displaced workers maintain purchasing power during spells of unemployment. Reform proposals should not overlook this important purpose of the UI program, but rather should seek to create additional countercyclical stimulus. 

In the last recession, regular UI benefits pumped over $50 billion back into the 

economy, and temporary federal extensions injected another $23 billion. According 

to a 1999 study, every one of these benefit dollars generated $2.15 in additional economic growth. 

Reforms designed to raise UI benefit levels, expand UI eligibility, and repair the 

EB program would serve the dual purpose of stabilizing the economy during economic downturns. 

Principle #4: Ensure Fair and Efficient Administration 

The best way to ensure fairness and efficiency in the administration of the UI/ 

ES system is to guarantee ‘‘merit staffing’’ (public administration) and adequate 

congressional appropriations of administrative funding. Adequate administrative 

funding is also the best way to prevent overpayments and underpayments to UI 

claimants, and to achieve better tax compliance by employers. 

Under current law and regulations, fairness and efficiency in the UI and ES programs are served by the ‘‘merit staffing’’ requirement—the requirement that the UI 

92 

and ES programs be administered by state civil service employees. The principle behind merit staffing is that unbiased, nonpartisan staff should perform the functions 

of the UI and ES programs, which are inherently governmental and intimately related to the public interest. 

The merit staffing requirement must be maintained for both the UI and ES programs to ensure unbiased services, confidentiality, and accountability. Merit staffing 

is important in the ES system, especially, to avoid discrimination against African 

American and Hispanic workers, who are often turned away from private placement 

agencies, and to ensure compliance with federal equal opportunity requirements. 

Merit staffing is necessary in both the UI and ES programs to protect the confidentiality of information provided by workers and employers, which may be compromised in the hands of private firms. And there is greater public accountability 

over public employees than over profit-motivated private contractors. 

Fair and efficient administration also requires adequate administrative funding, 

which is the responsibility of the federal government. Unfortunately, appropriations 

for UI administration have not been adjusted for inflation, including personnel and 

services costs, since 1995. 

To protect states against chronically inadequate appropriations, the ‘‘stakeholder’’ 

process recommended mandatory funding of UI administration at levels sufficient 

for states to adequately administer their UI programs. At the very least, Congress 

should support the NASWA proposal to increase funding to $3.023 billion in FY 

2007, $283 million more than DOL’s request. 

Inadequate administrative funding hampers state ‘‘program integrity’’ efforts to 

ensure that unemployed workers receive the correct amount in UI benefits and employers pay the correct amount in payroll taxes. Most overpayments of UI benefits 

result from innocent errors that could be reduced or avoided with more adequate 

administrative resources. 

However, the underfunding of UI administration also results in underpayments to 

workers, which also should be avoided. The National Employment Law Project 

(NELP) estimates that workers were improperly denied a total of $1.3 billion in benefits in 2002, while DOL statistics show overpayments of $888 million. 

The chronic shortfall of UI administrative funding hampers the ability of states 

to detect and collect unpaid employer taxes. While DOL recommends that states 

audit 2 percent of employers, states audited only 1.7 percent of employers in 2004, 

though nearly half of state audits result in the adjustment of reported wages. States 

blame their failure to conduct more audits on a shortage of administrative funding. 

Furthermore, additional administrative resources are necessary to detect employer misclassification of workers as ‘‘independent contractors’’ rather than ‘‘employees.’’ According to a recent report by the DOL Inspector General, seven states 

that use IRS data sets to detect misclassification of employees have recovered close 

to $1.5 billion in underpaid employer taxes, and two-thirds of their audits have resulted in adjustments of employer taxes. Congress should direct DOL to provide IT 

resources, training, and grants to help states prioritize use of the IRS data. 

Federal administrative funding is also necessary to help states detect SUTA 

dumping. In 2004 Congress passed legislation to prohibit ‘‘SUTA dumping’’ schemes, 

in which employers evade payment of UI taxes by improperly transferring their UI 

experience ratings to third parties. The GAO has identified 14 states that have uncovered SUTA dumping schemes costing over $120 million in lost UI revenue. Funds 

made available for the implementation of SUTA dumping detection systems have 

been insufficient for states to purchase the necessary hardware, train staff to implement the programs, or investigate and prosecute SUTA dumping schemes. 

Finally, legislative changes are necessary to increase recoveries from SUTA dumping. The 2004 legislation ignored one of the most common forms of tax evasion— 

the transfer of employees to the payroll of a professional employee organization 

(PEO). California estimates that PEO schemes account for half of the $100 million 

in UI taxes underpaid every year. Congress should pass legislation to allow states 

to recover unpaid taxes from employers who evade taxes through the use of PEO 

schemes. 

The Bush Administration’s FY 2007 Budget Proposal for DOL Programs 

Unfortunately, the Bush Administration’s FY 2007 budget proposal violates all 

four of the reform principles discussed above. None of the Bush budget proposals 

would help prevent economic hardship for workers when they lose their jobs, or 

make it easier for workers to find reemployment at good jobs with good wages and 

good benefits. 

The budget proposal would make it harder for displaced workers to find and qualify for the higher-quality jobs that are available. It calls for a reduction of $63 million in real dollars for all ES programs over FY 2006, and $378 million over FY 

93 

2001. It would also eliminate America’s Job Bank (AJB), funded through the ES, 

which is now the largest listing of job openings in the world. 

DOL also proposes another round of cuts in the job training budget. The budget 

proposal would eliminate funding for WIA programs designed to help unemployed 

workers, disadvantaged adults, and at-risk young people, and cut training and assistance overall by $831 million in real dollars over FY 2006, and by more than $2 

billion over FY 2001. 

Finally, the FY 2007 budget request for UI administration is only slightly higher 

than the appropriation for 2003, and far less than what is needed to administer the 

UI program. 

DOL’s Legislative Proposal to Divert UI Trust Funds to Pay for Employer 

Subsidies, PRAs, and Wage Insurance 

In a letter to Speaker Hastert dated May 3, 2006, Secretary Chao outlined DOL’s 

legislative proposal to waive fundamental requirements of the UI program, including the requirement that states use their UI trust funds only to pay for UI benefits, 

and the requirement that states assess UI employer taxes based on employers’ experience rating. We strongly oppose this proposal. 

The scope of DOL’s proposal is astonishing. It would allow states to divert UI 

trust funds to purposes other than UI benefits—the only limitation being that such 

diversions must be ‘‘consistent with’’ one of two purposes: (1) accelerating reemployment or (2) improving the effectiveness of state administrative activities. There is 

no restriction on the size of such diversions, so states could divert the entirety of 

their trust funds to other purposes. 

Obviously, diverting UI trust funds to other purposes threatens the ability of 

states to provide unemployment compensation to workers who need it. Furthermore, 

it makes it far less likely that states will be able to make needed reforms such as 

expanding UI eligibility or increasing UI benefit levels. Diversion of UI trust funds 

may also compromise the role of the UI system as an economic stabilizer if the trust 

funds are used in ways that have less stimulative effect on the economy. 

On May 4, Deputy Assistant Secretary of Labor Mason Bishop gave two examples 

of how DOL expects states to divert their UI trust funds under the proposal: personal reemployment accounts (PRAs) and wage insurance. Mr. Bishop testified that 

DOL expects states to set up personal accounts that workers could use to pay for 

job training, which is yet another formulation of the controversial PRA proposal, 

and that DOL expects states to supplement the wages of unemployed workers who 

find reemployment, a concept known as ‘‘wage insurance.’’ As part of wage insurance programs, DOL expects states to use UI trust fund money to provide ‘‘unemployment tax incentives’’ for employers who hire workers receiving a wage supplement. 

The drawbacks of PRAs are well known. PRAs would result in less, not more, assistance to displaced workers. Certainly the amount of unemployment compensation 

for workers would fall if UI trust funds were diverted to other purposes. And while 

PRAs could be used to pay for job training and reemployment services, it is unlikely 

that overall funding for such assistance would increase by a corresponding amount, 

given that funding for job training and reemployment services has been cut five 

years in a row. 

While details are missing from this latest version of the PRA proposal, previous 

versions would reduce the amount of assistance available to individual workers. 

PRAs would establish—for the first time—a federal cap on the amount of job training and reemployment services available to workers, at a level lower than the 

amount available under current law. 

Another significant drawback of PRAs is that they would discourage workers from 

enrolling in job training. If workers are able to retain the unspent balances of their 

accounts upon finding a job, or if they receive a cash bonus for finding reemployment within a certain period, they are less likely to spend down their accounts on 

training. This is because unemployed workers cannot know in advance what the 

payoff to retraining will be, or when that payoff will occur, yet they are often in 

dire need of immediate cash assistance. 

This is not an unintended consequence of PRAs; it is their principal selling point. 

It is the reason why DOL expects PRAs to qualify for the proposed waiver authority: 

because PRAs are ‘‘consistent’’ with the purpose of ‘‘accelerating the reemployment 

of individuals who establish initial eligibility for unemployment compensation under 

a state’s law.’’ 

However, in many cases it may not be in the best interest of workers to forego 

training. Many training programs are effective, and a generalized policy of steering 

workers away from job training can have the effect of diminishing workers’ longterm job prospects and living standards. 

94 

1 Carl Davidson and Stephen Woodbury, ‘‘Wage-Rate Subsidies for Dislocated Workers,’’ 

Upjohn Institute (January 1995) (‘‘The wage-rate subsidy we consider—would induce dislocated 

workers to search harder for jobs and accept employment that they might otherwise refuse’’). 2See, e.g., Heather Boushy and Jeffrey Wenger, ‘‘Finding the Better Fit: Receiving Unemployment Insurance Increases Likelihood of Re-employment With Health Insurance,’’ Economic Policy Institute (April 14, 2005). 3Litan et al. apparently believe that wage insurance would subsidize employers by depressing 

wages. Robert Litan, Lael Brainard, and Nicholas Warren, ‘‘A Fairer Deal for America’s Workers 

in a New Era of Offshoring,’’ Brookings Institution (2005) (‘‘The second critical value of wage 

insurance is that it acts like a training subsidy for the new employer’’). 4 70 Fed. Reg. 42474, at 42477. 

5Stephen Wander and Jon Messenger, Worker Profiling and Reemployment Services Policy 

Workgroup: Final Report and Recommendations, U.S. Department of Labor Employment and 

Training Administration (2000). 

Wage insurance is a very similar concept, and shares many of the same flaws. 

Like PRAs, wage insurance would reduce the amount of UI trust funds available 

to pay for UI benefits. Like PRAs, wage insurance would accelerate reemployment 

by offering workers a cash incentive. The intended purpose of wage insurance, like 

PRAs, is to induce workers to accept jobs they might not otherwise accept.1 And neither proposal takes into account the quality of those jobs, or the sacrifice workers 

are being induced to make in terms of wages, benefits, and working conditions. 

The jobs that workers would be induced to accept are not promising career 

choices. By definition, they would pay less than the worker’s old job. Only if the pay 

cut were substantial would a wage supplement affect workers’ decisions (because 

the wage supplement is determined as a percentage of the pay cut). The new employer is therefore unlikely to be one that pays high wages. Any on-the-job-training 

that might be provided by low-wage employers is likely to be poor quality training 

that does not give workers transferable skills. And once the wage supplement is exhausted, workers may well end up with poorer job prospects than when they started. 

Meanwhile, workers would have foregone whatever opportunities they may have 

had to find a good job with good wages and good benefits. Workers who are able 

to rely on UI income support while conducting a thorough job search, receiving career counseling, or enrolling in job training are often able to find higher-quality 

jobs.2

The more wage insurance programs succeed in inducing workers to accept ‘‘rapid 

reemployment’’ at lower-paying jobs, the greater the potential sacrifice of job quality 

for workers. Unfortunately, under DOL’s proposal, there is no limit on the amount 

of state UI trust funds that could be diverted to wage insurance. While worker participation would presumably be voluntary, states could easily favor wage insurance 

by making it harder for workers to remain in the UI program. Employers that benefit from the resulting downward pressure on wages,3 or from DOL’s proposed tax 

subsidy, would have an economic incentive to agitate for such policies. Already, DOL 

has proposed a new regulation—not yet implemented—that could pressure UI recipients to accept low-wage jobs.4 DOL’s waiver proposal threatens to transform UI 

into a workfare program, instead of a ‘‘good jobs’’ program. 

The problem with ‘‘rapid reemployment’’ schemes is that they fail to distinguish 

situations in which ‘‘rapid reemployment’’ at low-wage jobs is beneficial to the worker from situations when it is not. Their effectiveness in modifying workers’ behavior 

depends largely on the degree to which workers lack information and are financially 

vulnerable, not the degree to which ‘‘rapid reemployment’’ would serve workers’ 

long-term interests. 

A better approach is to make workers less financially vulnerable and provide 

them with information necessary to properly assess their best interests. This is precisely what the UI system and the Employment Service (ES) are designed to do. The 

ES promotes ‘‘rapid reemployment’’ too, by providing workers with the information 

they need to find good jobs that match their skills. In 2000 the Labor Department 

noted that every $1 spent on reemployment services produces $2.15 of savings to 

the UI Trust Funds.5 But ES promotes ‘‘rapid reemployment’’ when it is in the 

worker’s best interest. When a broader job search or retraining might better serve 

a worker’s needs, the ES also supplies the information workers need to make that 

determination. 

DOL Legislative Proposal to Privatize Administration of the UI System 

DOL’s legislative proposal would also allow states to privatize administration of 

the UI system by obtaining waivers of Section 303(a)(1) of the Social Security Act, 

which requires that states establish and maintain a merit-based personnel system 

to administer the UI program. This proposal should be rejected for reasons disVerDate Aug 31 2005 05:25 Jan 24, 2007 Jkt 031492 PO 00000 Frm 00098 Fmt 6633 Sfmt 6621 E:\HR\OC\31492.XXX 31492
95 

cussed above—namely, because the administration of publicly-funded UI benefits is 

an inherently governmental function, and because privatization would result in diminished guarantee of fairness and equal opportunity, compromised confidentiality, 

and less accountability. 

DOL Legislative Proposals to Recover UI Overpayments and Underpayments 

(‘‘Program Integrity’’) 

DOL’s ‘‘Unemployment Compensation Program Integrity Act of 2006’’ includes five 

legislative proposals designed to promote the ‘‘program integrity’’ of the UI system. 

These legislative proposals represent an unfair and unworkable approach whose 

shortcomings could be avoided if DOL would simply provide states with adequate 

levels of administrative funding. 

Ensuring ‘‘program integrity’’ of the UI system is an administrative function that 

should be financed through federal administrative grants to the states. Several of 

DOL’s ‘‘program integrity’’ proposals would use money belonging to the state UI 

trust funds—recoveries of benefit overpayments and tax underpayments—to finance 

this administrative function. Instead of using state UI trust fund money to pay for 

UI administration, the federal government should fulfill its responsibility to adequately fund administration of the UI system. 

If UI administration were adequately funded, there would be fewer benefit overpayments in the first place, as well as fewer underpayments to workers. The failure 

to provide adequate administrative funding also unfairly skews enforcement priorities against workers, since improving tax compliance by employers requires additional administrative resources. 

Under DOL’s proposals, the weight of collection efforts would fall on workers, in 

many cases unfairly. DOL fails to distinguish UI benefit overpayments that result 

from fraud from those that result from innocent error. In 2005, only 38 percent of 

overpayments were the result of fraud; about 30 percent were caused by errors on 

the part of the UI agency or employers; and the remaining overpayments were due 

to innocent errors on the part of claimants. 

Moreover, DOL’s proposal to intercept tax refunds would affect mainly low-income 

workers, since a greater percentage of low-income individuals receive tax refunds. 

According to CPS data, 41 percent of UI claimants have incomes low enough to receive the Earned Income Tax Credit (EITC). 

The tax intercept proposal may also be unworkable. Because UI benefits are taxable income, if overpayments are deducted from a taxpayer’s federal tax refund, the 

taxpayer may be owed a refund of taxes paid on the UI benefit. The IRS would either have to recalculate the worker’s taxes or offset the tax overpayment against 

the benefit overpayment, at considerable cost and effort. 

With regard to fraudulent overpayments, we strongly oppose DOL’s proposal to 

allow private collection agencies to collect up to 25 percent of recoveries. This proposal would establish a dangerous precedent for the privatization of ‘‘program integrity’’ activities, by allowing private parties to recover money that belongs to the UI 

trust funds. And there is no evidence that private collection agencies would perform 

any better than public agencies in collecting these debts. 

This proposal illustrates many of the problems with privatization of UI administration generally. The profit motive of private collection agencies could lead to abusive and potentially fraudulent collection practices. Private collection agencies are 

the most complained-about industry in the country in terms of unfair and abusive 

practices, even though they are subject to the Fair Debt Collection Practices Act. 

Moreover, it is unclear how the privacy controls that govern state agency employees 

would apply to private collection agents. Even when such privacy protections exist, 

private contractors have an abysmal record of protecting the confidentiality of taxpayer information. 

Conclusion 

The dramatic changes that have occurred in the U.S. economy in recent decades 

underscore the need for significant improvements in our economic security system. 

We propose an ambitious new national reemployment strategy to help displaced 

workers find good jobs with good wages and good benefits. But we strongly oppose 

shifting the mission of our economic security system to promoting downward economic mobility and subsidizing low-wage employers. 

Æ