Unemployment Insurance: States' Reductions in Maximum Benefit Durations Have Implications for Federal Costs
Published: 2015-04-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As part of the nation's UI system, overseen by DOL, states provide benefits to eligible unemployed workers, with additional weeks of benefits sometimes provided by the federal government in times of economic stress. Since the 1960s, states have had maximum UI benefit durations of 26 weeks or longer. However, since 2011, nine states have reduced their maximum benefit durations: Arkansas, Florida, Georgia, Illinois, Kansas, Michigan, Missouri, North Carolina, and South Carolina. GAO was asked to review the states' reductions.
GAO examined (1) the circumstances in which states reduced the maximum duration of UI benefits, (2) the implications of these reductions for individuals, (3) the effects on federal UI costs, and (4) their broader economic effects. GAO reviewed relevant federal and state laws; visited Georgia and Michigan, which had different approaches to reducing durations; analyzed UI program data from 2006 (before the recession) to 2014; and reviewed relevant economic research.
section_title: What GAO Found
paragraphs: The unemployment insurance (UI) system, a federal and state partnership that provides benefits to eligible workers who have lost their jobs, was under financial pressures during the recent recession and recovery. Since 2011, nine states reduced the maximum length of time (duration) individuals could receive state benefits. These states reduced duration from 26 weeks to as few as 12 weeks, with 20 weeks being the most common new maximum. Compared to states that did not reduce duration, those that did generally had higher unemployment rates and weaker UI trust fund balances and were more likely to have federal loans as their UI reserves became depleted. Officials in five of the nine states said that replenishing their trust fund balance was a key rationale for reducing benefit duration. GAO found that most of the nine states, like other states, also increased employer taxes for their UI program and made other benefit reductions such as by changing UI eligibility rules.
Reductions in state benefit durations resulted in some individuals receiving substantially less in total UI benefits. During the period from 2009 through 2013, individuals who exhausted their state benefits could receive additional weeks of benefits from the federal government. The duration of federal benefits was based on the duration of state benefits; shorter maximum state benefit periods resulted in shorter maximum federal benefit periods. As a result, some individuals received substantially less in total UI benefits because the durations of both their state and federal benefits were reduced. For example, in 2013, an individual in a state that had shortened its maximum benefit duration to 20 weeks could have received up to 52.4 additional weeks of federal benefits, for a total of 72.4 weeks. However, had the state maximum duration remained at 26 weeks, that individual could have received up to 67 weeks of federal benefits, for a total of 93 weeks. In contrast, individuals eligible for UI benefits for relatively short periods of time were unaffected by the reduced durations.
The effects of these reductions on federal UI program costs are unclear. Although GAO's prior work on past recessions found it can be useful for federal agencies to assess the unintended consequences of state policy responses, the Department of Labor (DOL) has not assessed the extent of any cost shift to the federal government. The net impact on federal UI costs would depend on how reductions in the duration of state benefits affect the number of people receiving federal benefits and for how long. On the one hand, federal costs are increased to the extent that state duration reductions shift individuals to federal benefits earlier. On the other hand, federal costs are decreased to the extent that fewer weeks of federal UI benefits are available. However, because DOL has not analyzed state data on individuals' weekly benefits, it remains unclear whether the federal government incurred a net cost due to the states' duration reductions.
Relevant research suggests that reductions in benefit duration may reduce the positive effects of UI on the economy. The economic literature that GAO reviewed, including analysis by the Congressional Budget Office, generally indicates positive macroeconomic effects from the UI program, based on the likelihood that benefits are spent, thus providing a stimulus to the economy.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Secretary of Labor examine the implications of state duration reductions for federal UI program costs and develop recommendations, if warranted. DOL agreed with GAO's recommendation and indicated it will begin to assess an approach for studying the implications of reductions in maximum duration on federal costs.

section_title: Letter
paragraphs: The recent recession and the slow recovery placed extraordinary  demands on the nation’s unemployment insurance (UI) system—a  program of temporary wage replacement. UI benefits are generally  provided through states and extended, at times, with federally-provided  benefits, for example during periods of high unemployment. Between  late 2007, when the recession began, and early 2009, the total dollar  value of state-funded UI benefit payments to individuals increased 164  percent nationwide and 22 states experienced increases of 200 percent  or more.
The UI system provides temporary benefits that partially replace earnings  for individuals who have lost jobs through no fault of their own. Under  federal law, there is no minimum or maximum period of time state  programs must provide benefits. From the 1960s until recently, according  to the Congressional Research Service (CRS), all states provided  benefits up to 26 weeks, and 2 states provided additional weeks. During  periods of high unemployment, the federal government has provided UI  benefits beyond the states’ maximum durations. Since 2011, however, 9  states reduced the maximum allowable duration for their benefits:  Arkansas, Florida, Georgia, Illinois, Kansas, Michigan, Missouri, North  Carolina, and South Carolina. Among these states, the most common  new maximum duration is 20 weeks, and in 2 states it can be as low as  12 weeks under certain conditions.
You asked us to review state reductions in maximum durations to assess  their significance. Our review examines (1) the circumstances in which  states reduced the maximum duration of their UI benefits to fewer than 26  weeks, (2) the implications of these reductions for individual UI claimants  in these states, (3) the effect, if any, on costs for the federal government,  and (4) what is known about the broader economic effects of these  benefit reductions.
To identify the circumstances in which states reduced the maximum  duration of state unemployment benefits, we reviewed relevant federal  laws and regulations, as well as relevant state laws, interviewed federal  UI program officials and state UI officials in 7 of the 9 states that reduced  their durations, and conducted site visits to 2 of them—Georgia and  Michigan. We selected these 2 states because they differed in type,  magnitude, and timing of the duration reductions, as well as geographic  region. In the site visit states, we conducted additional interviews with  selected state legislators, researchers, governors’ workforce policy  advisors, employer groups, and labor advocates. To understand more  broadly how state UI programs responded to challenges following the  recession, we also interviewed state UI officials in 4 states that did not  reduce their UI benefit duration. We selected 3 of these states—Indiana,  Ohio, and Tennessee—based on their similarity to the states that reduced  benefit duration. We selected the fourth state, Washington, on the basis  of expert recommendation. To identify state characteristics that most  distinguished the states that reduced duration from those that did not, we  analyzed data for all 50 states and the District of Columbia, primarily  from the Department of Labor’s (DOL) Office of Unemployment Insurance  and Bureau of Labor Statistics (BLS). The data analyzed included both UI  program and financing characteristics, as well as state demographic and  economic characteristics. We also analyzed these data to address  potential implications of duration reduction for individuals, focusing on the  9 duration reduction states and the 4 states we selected that did not  reduce duration.
To examine any potential effect of the states’ maximum duration  reductions on costs to the federal government, we analyzed data  provided to us by two states, Georgia and Missouri. These data included  specific items from reports that states provide regularly to DOL. We  assessed the reliability of the data we used for this report. In each case,  we collected information about the data series in question, such as the  uses of the data, applicable internal controls, and data entry practices.  We determined the data to be sufficiently reliable for the purpose of this  report. Finally, we reviewed economic literature to understand the  significance of UI benefits for individuals, in terms of their attachment to  the labor force and job search behavior, among other implications, and  the effects of UI on the economy. From this research, we derived  reasonable conclusions about the likely implications of duration  reductions for individuals and the broader economic effects of these  benefit reductions. For additional information about our methodology, see  appendix I.
We conducted our work from November 2013 through April 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe the  evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: UI: A Federal and State Partnership
paragraphs: The nation’s UI system is a joint federal/state partnership originally  authorized by the Social Security Act and funded primarily through federal  and state taxes on employers. Under this arrangement, states administer  their own programs, generally known as regular UI benefits, according to  certain federal requirements and under the oversight of DOL’s Office of  Unemployment Insurance. The primary objectives of this partnership are  to provide temporary, partial compensation for lost earnings to individuals  who have become unemployed through no fault of their own and to help  stabilize the economy during economic downturns.
Federal law sets forth broad provisions for the categories of workers who  must be covered by the program, some benefit provisions, the federal tax  base and rate, and program administration, such as how states will repay  any funds they borrow from the federal government to pay benefits when  state reserves are depleted.
States have considerable flexibility to set benefit amounts and their  duration, or the maximum period of time that the state pays benefits, and  establish eligibility requirements and other program details. Regarding  duration, for example, most states provided up to 16 weeks in 1938, after  the program was first established. More recently, states provided up to  26 weeks.reduced benefit duration, with 20 weeks—representing a reduction of   In the wake of the recession, according to DOL, 9 states  over 20 percent—the most common new maximum (see table 1).   Among these states, 4 enacted new maximum durations that vary  according to the state’s unemployment rate (referred to in this report as  “variable duration”), while the other 5 states’ new maximum durations do  not vary in this way (referred to in this report as “flat duration”). All 9  states established these new durations through changes in state law.
States also have flexibility to establish eligibility requirements, which can  affect duration. There are two kinds of eligibility requirements. Monetary  eligibility typically refers to an earnings threshold and employment history  that applicants must meet in order to qualify for benefits. Based on such  eligibility criteria, individuals may qualify for less than a state’s maximum  duration. The other category of eligibility requirements is non-monetary,  which according to DOL, refers to states’ criteria to determine if an  individual’s job loss is through no fault of his or her own, and that the  individual is able to work, available for work, and actively seeking work.  According to DOL, each state’s law sets both monetary and non- monetary requirements for eligibility.
section_title: Federal Programs Can Provide UI Benefits Beyond the State Maximum
paragraphs: In addition to the state UI benefits, federal emergency and extended UI  programs may sometimes provide additional weeks of benefits under  certain economic conditions, such as rising unemployment or economic  downturns.
Temporary Federal UI Programs. During economic downturns,  Congress has sometimes passed legislation to provide temporary  unemployment compensation. Most recently, such a temporary program  was created by the Supplemental Appropriations Act, 2008 (Emergency  Unemployment Compensation; “emergency benefits” for the purposes of  this report). According to CRS, this represented the eighth time a  federal temporary unemployment compensation program was created  since the inception of the UI program. This program provided up to 53  additional weeks of emergency benefits to qualifying claimants and  expired in December 2013. After establishing the recent emergency  benefits program in 2008, Congress amended the program 11 times,  extending it and in some cases adding weeks of benefits, according to  information provided by DOL. From December 2008 until the program  expired in December 2013, emergency benefits were available in all  states, including the states that reduced duration, with the exception of  North Carolina (see app. V).
Extended UI Benefits. In addition, states and the federal government  provide “extended” benefits to workers. This program, which has no  expiration date, provides up to 13 additional weeks of benefits to workers  who have exhausted state unemployment insurance benefits during  periods of high unemployment. According to CRS, some states have also utilized an option to pay up to 7 additional weeks of extended  benefits when unemployment reaches certain levels. While financing for  extended UI benefits is typically shared between the states and the  federal government, the American Recovery and Reinvestment Act of  2009, as amended, provided for temporary full federal funding of the  extended benefits program through December 2013.
According to DOL, from January 2009 to May 2013, 39 states met the  criteria for extended benefits at various times, including all of the states  that reduced duration, and since May 2013, no state has met the criteria  for federal extended benefits (see app. V). During the recovery, the  maximum period for all combined benefits—state, emergency, and  extended—to qualifying claimants reached 99 weeks in some states (see  fig. 1).
section_title: Calculating Federal Benefits
paragraphs: Under both emergency and extended benefit programs, the duration of an  individual’s federal UI benefits has depended, in part, on the duration of  his or her state UI benefits. If a claimant was entitled to fewer than 26  weeks of state benefits, the duration of any available federal benefits to  the claimant would be reduced proportionally. Under the most recent  rules for the emergency program, the formula specified that, for the first  level or “tier” of benefits, benefits were payable for up to 54 percent of the  duration of an individual’s total state benefits.provide up to 50 or 80 percent of the duration of an individual’s total state  benefits, depending in part on the rate of unemployment in the claimant’s  state. For the 80 percent level to be applicable, a state must have a  provision in its laws causing extended benefits to become available when  the unemployment rate reaches a certain level. Both federal emergency  and extended benefits were available in 2011, when duration reductions  were first enacted in 6 states (see fig. 2).
section_title: UI Financing
paragraphs: The UI program was designed to be forward funded and self-financed  by states through a trust fund that the federal government maintains on  behalf of the states.accounts through revenue from employer taxes during periods of  economic expansion in order to pay UI benefits during economic  downturns. Because unemployment can vary substantially during a  business cycle, it is important that states build sufficient reserves so trust  fund balances remain solvent during recessions.
Ideally, states build reserves in their trust fund  The UI program is financed primarily by state taxes levied on employers,  as well as a federal tax—the Federal Unemployment Tax Act (FUTA)  tax—also levied on employers. depending on the extent to which their state UI programs comply with  federal criteria. Specifically, states set a taxable wage base—the  maximum amount of an employee’s wages subject to UI employer  taxes—and any wages above this amount are not subject to taxation. In  addition, states determine the employer tax rate levied on the taxable  wage base. In order for employers in a state to qualify for the full FUTA  tax credit, the state’s taxable wage base must at least be equal to the  FUTA wage base—currently $7,000. In addition, the state’s tax rate for  each employer may vary according to the employer’s layoff records—a  practice known as experience rating. Experience rating results in lower  tax rates for employers with fewer layoffs and higher tax rates for those  with more layoffs. States can also levy other taxes on employers, known  as surtaxes or surcharges, for various purposes.
This discussion of state tax provisions is based on DOL’s Comparison of State  Unemployment Insurance Laws, 2014 (Washington, D.C.: 2015) and UWC— Strategic  Services on Unemployment & Workers’ Compensation, Highlights of State Unemployment  Compensation Laws 2014. Although these taxes are paid by the employer, economists  generally have concluded that their cost is likely to be borne by workers. Additionally, 3  states—Alaska, Pennsylvania, and New Jersey—directly levy UI taxes on workers.
In addition to their ability to change tax rates, states can make changes to  program benefits to help ensure that funds are available to pay future  benefits. For example, as previously mentioned, states can change  program eligibility provisions to limit or expand the population who qualify  for benefits. States can also change benefit amounts directly. Figure 3  shows the various tools states generally use to balance program revenue  and benefits.
Although states have flexibility to change both revenues and benefits,  they can exhaust their UI reserves during periods of exceptional  unemployment. In such times, states may borrow from the federal  government. If a state satisfies certain conditions, loans taken from  January 1 through September 30 and repaid before October 1, are  interest free as long as the state does not borrow again during the fourth  quarter of the calendar year. In states that do not repay their loans within  a specified period, employers lose a portion of the FUTA tax credit.  However, states with outstanding loans can still seek relief from these  loan provisions in the form of a limit to the reduction of the FUTA tax  credit and the opportunity to delay interest payments. During the recent  recession, most states opted to borrow from the federal government: 36  states had federal trust fund loans, and the total borrowed reached $48.5  billion in March 2011.Islands had trust fund loan balances, totaling about $14 billion.
As of March 2015, 9 states and the U.S. Virgin  Measures of UI solvency are expressed as a percentage of wages,  typically total annual wages earned by employees who are potentially  eligible for receiving UI benefits. Among the measures that DOL reports  are reserve ratios and the high cost multiple. A high cost multiple  measure of 1.0 corresponds to sufficient reserves to pay benefits at the  high cost rate for 1 year without taking in additional revenue, according to  DOL. A similar measure is the average high cost multiple (AHCM), which  divides a trust fund’s reserve ratio by the average high cost rate, which  uses a multi-year average. An AHCM measure of 1.0 is the target for  solvency, recommended by the Advisory Council on Unemployment  Compensation and is specified in DOL regulations providing for interest- free loans. States also monitor their own trust fund balances. We have  previously reported that almost all states measure their trust fund  balances and make tax rate changes once per year. According to our  previous report, the majority of states have trust fund balance targets  written into their state laws, with triggers built in to adjust the tax rates  according to the balance. Most states impose higher tax rates when their  trust fund balances are low and lower rates when their balances are high,  according to DOL.
section_title: States That Reduced UI Benefit Durations Generally Had Weak Pre-Recession Trust Funds and Raised Taxes While Improving Solvency
paragraphs: In our analysis of the 9 duration reduction states, we found that as a  group they exhibited several characteristics that tended to distinguish  them from other states.reduce duration, the states that reduced duration had:   Overall, as compared to the states that did not weaker trust fund balances before the recession;  lower total taxable resources; federal loans to a greater degree; higher unemployment rates;  lower union membership rates; and greater political homogeneity.
In addition, while state officials cited a range of considerations in reducing  benefit durations, we found that most duration reduction states, like most  of the states we selected for comparison that did not reduce duration,  raised taxes and made other changes to their programs. Overall, our  interviews with state officials could not establish the degree to which any  characteristics or considerations affected the decisions to reduce  durations.
subsections: section_title: Duration Reduction States Generally Had Weaker Finances and Faced Higher Unemployment Rates than States That Did Not Reduce Duration
subsections: section_title: Weaker Trust Fund Balances
paragraphs: Duration reduction states were more likely than other states to enter the  recession with trust fund balances that were inadequate to pay historical  benefit levels. Specifically, 8 of the 9 duration reduction states (89  percent) had an AHCM below 1.0 in the last quarter of 2007—indicating  an inadequate trust fund balance—as compared to 25 of the 42 states (60  percent) that did not reduce duration. Duration reduction states had a  median AHCM of .33, which was less than half the median AHCM of .79  among states that did not reduce duration (see fig. 4). Consequently, the  trust fund balances of the duration reduction states were particularly  vulnerable to recessionary pressures and these states faced a greater  risk of depleting their trust fund balances than states with more adequate  trust fund balances. Among the states that reduced duration and among  those that did not, there was variation in AHCM values: for example, as  shown in figure 4, 1 duration reduction state among the 9 did have an  adequate AHCM. In contrast, 17 of the 42 states that did not reduce  duration had an AHCM greater than 1.
The inadequacy of trust fund balances may have been a factor in the  decision to reduce duration for some states. Officials from 5 of the 7  duration reduction states with whom we had interviews cited the condition  of their state’s trust fund balance as having been a likely consideration in  the decision to reduce duration.  One state UI director said it had been a driving factor in his state’s deliberation.
The weak or inadequate trust fund balances may have been partially a  result of relatively low employer UI tax rates. Specifically, 5 of the 9  reduction states had average UI tax rates on total wages that were lower  than the U.S. average for the 5 years preceding reduction. Additionally,  stakeholders in 4 reduction states told us that there were periods (prior to  the recession) of up to several years in which employer UI taxes were  held to minimal levels through means such as tax holidays, tax cuts,  actions to suppress automatic tax adjustment mechanisms, and actions to  distribute some trust fund revenues to employers. We have previously  reported that long-standing UI tax policies and practices in many states  have eroded trust fund reserves, leaving states in a weak position prior to  a previous recession.
section_title: Lower Total Taxable Resources
paragraphs: Additionally, duration reduction states had weaker overall fiscal capacity  than other states. The total taxable resources of duration reduction states  were generally lower than those of states that did not reduce duration,  according to a measure of states’ overall fiscal capacity calculated by the  Department of the Treasury. In 2010 (the year before any duration reductions occurred), 8 of the 9 duration reduction states had measures  of total taxable resources below the median per capita indexed value for  the U.S. overall, and 3 of these states had measures that were among the  lowest in the country (see app. II for more information).
section_title: More Likely to Have Federal Trust Fund Loans
paragraphs: States that reduced their benefit durations were more likely to have  received a federal trust fund loan since 2010 (see app. II for more  information). Specifically, all 9 duration reduction states took such loans  at some point during the recession; whereas 61 percent of nonreduction  states had trust fund loans (see app. II for the maximum trust fund loan  balances for each state). While the size of loans varied among reduction  states, 2 of them (Michigan and North Carolina) ranked among the top 4  states nationwide with the largest debt per covered employee.
section_title: Higher Unemployment Rates
paragraphs: States that reduced UI benefit duration also tended to have higher  unemployment rates. Before they adopted duration reduction, almost all— 7 of 9—duration reduction states had total unemployment rates of 9  percent or more.duration—one-third—had unemployment rates of 9 percent or more in  2010. Higher unemployment rates increase the pressure on UI trust funds  because they reflect the population of those who could qualify for and  receive UI benefits.
section_title: Lower Union Membership Rates
paragraphs: Duration reduction states also had lower rates of union membership. In  2010, 7 of the 9 duration reduction states had rates of union membership  below the median for states that did not reduce duration—13.2 percent— and 3 of them had rates that were among the 5 states with the lowest  rates in the country—5.6 percent or lower. Low union membership has  been associated with lower benefits and wages in the economics  literature.
section_title: Greater Political Homogeneity
paragraphs: Finally, duration reduction states also exhibited fairly homogenous  political composition of their legislatures and governorships, which may  have facilitated development and adoption of the state laws that included  duration reduction. We found that 8 of the 9 duration reduction states had  a single party in control of both the legislature and the governorship when   In contrast, 45 percent of nonreduction states  reductions were enacted.were politically homogeneous in 2010, although by 2013, this was the  case for 71 percent.
section_title: State Officials Cited Some Additional Factors Relevant to Reducing Benefit Durations
paragraphs: Beyond the characteristics that tended to distinguish the states that  reduced duration from other states, officials in some duration reduction  states suggested other considerations as influential. Specifically, officials  cited a federal program requirement and the availability of federal  benefits, among other reasons for reducing duration.
In 4 of the 7 states where we interviewed UI officials, officials cited the  federal nonreduction requirement as a possible factor. This requirement  made states that directly reduced UI benefit amounts ineligible for federal  UI emergency funds, thereby limiting the range of options available to  states to reduce benefit costs.suggested that “no other effort to reduce benefits [beyond reducing  duration] would be acceptable.”
As one state official said, this rule  Also, although the duration reductions will continue regardless of the  availability of federal benefits, in 4 of the 7 states where we interviewed  UI officials, officials said the availability of federal benefits may have  played a role in the decision to reduce the maximum duration of state- funded benefits. The availability of federal benefits meant that claimants  would generally continue to receive benefits, albeit federal benefits,  beyond the new maximum state duration. One state UI official told us the  state’s reduction was “not significant,” in part because federal benefits  were then available, and another told us that the legislature likely  anticipated minimal impact on claimants. In 7 of the 9 duration reduction  states, the total maximum duration of all available benefits, including  federal benefits, was at least 93 weeks at the time of duration reduction  (see app. V).
During our interviews, officials in 2 states cited the state’s economic  health and the need to encourage claimants’ reemployment efforts as  reasons for reducing duration. Specifically, officials in Kansas said that  duration in that state is tied to the health of the state’s economy so that  longer durations are available when the unemployment rate is high.  Kansas is 1 of 4 states, along with Florida, Georgia, and North Carolina,  that adopted variable maximum durations. They provide more weeks of  benefits when the total state unemployment rate is high, and fewer weeks  when it is low (see app. III).
section_title: Duration Reduction States Raised Taxes and Made Other Program Changes
paragraphs: States reduced maximum benefit duration in the context of other changes  to their UI programs, according to information provided by state officials  and our review of selected state laws. Some of these changes, such as  tax increases, played a role in repaying federal loans and improving their   States also made other changes to their programs  trust fund balances.that can reduce benefit payments, such as changes related to eligibility  and program integrity.
Increasing Tax Revenues. Of the 9 duration reduction states, 7 adopted  increases in employer taxes, some of them temporary, according to  information provided by state officials. changed the taxable wage base, employer tax rates, supplemental taxes,  or some combination of these (see app. III).
Of the 9 duration reduction states, 2 did not respond to our written questions. duration reductions as providing such a balance. To understand the  relative role of duration reductions and tax increases, we asked the states  whether they had estimated any cost savings associated with duration  reductions. Of the 7 duration reduction states we contacted, 4 provided  estimates of cost savings equivalent to 3.4 percent, 4.6 percent, 9.8  percent, and 44.9 percent of their maximum loan balances (see app. III).In addition, officials in the 3 other duration reduction states we contacted  identified tax changes as among the actions that contributed most to  repayment of the trust fund loan, and one of these states identified  duration reduction as a major contributor to repaying the loan. One official  estimated that state tax rate changes accounted for about 65 percent of  the funds needed to restore the trust fund balance.
Other Changes. Two duration reduction states issued bonds to repay  their loans. On the benefits side, one state lowered its benefit amount, according to CRS. In addition, 8 of the 9 duration reduction states made  changes to program eligibility. These included changes to requirements  for individuals regarding earnings or employment history, as well as  changes to rules addressing conduct for which an individual could be  disqualified. In one state, eligibility changes were enacted to reverse  previous expansions of eligibility under federal law, such as eligibility for  those who claimed UI on the basis of part-time employment.
Actions taken to address program integrity were reported by all 7 of the 9  duration reduction states that provided information, and included activities  to address overpayments, detect fraud, and impose penalties for  noncompliant employers. State officials reported that these actions were taken in response to both federal and state initiatives.
section_title: Comparison States Also Made Program Changes but Varied in Consideration of Benefit Duration
paragraphs: The 4 states we examined that did not reduce duration also reported  making similar program changes in raising employer taxes, tightening  eligibility, and strengthening program integrity. Specifically, 3 of the 4  comparison states reported increasing employer taxes. Of the 3  comparison states that had loans, two— Indiana and Tennessee— reported increasing employer taxes (see app. III).
The third state with a  loan, Ohio, was considering changes to its UI program, including to  employer taxes. The fourth state, Washington, did not require a loan,  and officials told us that the state’s taxable wage base—the maximum  amount of an employee’s wages subject to tax—was raised through a  provision in state law that took effect automatically, while employer taxes  were reduced.
Regarding eligibility, 3 of the 4 comparison states reported recent actions  to tighten eligibility, such as by strengthening work requirements. states reported taking actions to strengthen program integrity, such as  efforts to address overpayments.
The 4 comparison states varied in the extent to which they considered  reducing maximum duration. Indiana, Ohio, and Tennessee were similar  to the duration reduction states, for example, in terms of having had weak  trust fund balances before the recession. However, UI officials in  Indiana told us that benefit amounts for some claimants had already been  reduced in 2011, and no further actions have been taken on the benefit  side. In Ohio, which has a large outstanding loan balance, state UI  officials told us that a bipartisan group of legislators was considering  changes to the program, including a potential reduction in maximum  duration. Officials in Tennessee and Washington told us that duration  reduction had not been considered in their states.
According to information provided by an official in one comparison state, eligibility  changes were enacted to reverse previous expansions of eligibility under federal law, such  as eligibility based on part-time employment.
section_title: Reduction in Maximum Duration of UI Benefits Lowered Total Benefits for Some Individuals
subsections: section_title: Reduced Durations Decreased Total Benefits for Some Individuals
paragraphs: In the duration reduction states, those UI claimants who would have been  eligible to receive benefits beyond the new maximum receive less in total  benefits in the absence of federal UI programs. The foregone benefit for  those individuals who would have exhausted benefits under the previous  duration can be estimated as the product of the number of weeks of the  reduction and the average weekly benefit amount. For example, Michigan  had an average weekly benefit of $273 in the third quarter of 2014 and  the maximum benefit duration was 20 weeks (a reduction of 6 weeks from  the previous maximum). A claimant in Michigan who would have been  eligible for 26 weeks of benefits absent the reduction could receive 20  weeks of benefits. The claimant’s foregone benefit can be estimated as  $1,638 (or 6 times the average weekly benefit amount). Benefits foregone  by individuals in the states whose durations do not fluctuate with  unemployment rates (flat maximums) ranged from $289 to $1,638 (see  table 2)
As expected, foregone benefits would vary for individuals who would have  exhausted benefits under the previous duration in the 4 states where  maximum durations are tied to the unemployment rates —Florida,  Georgia, Kansas, and North Carolina. The benefit amount foregone by  individuals in these states ranged from $1,370 to $2,926 (see table 3.)
One potential rationale for tying maximum durations to the unemployment  rate is that a lower unemployment rate signals that more jobs are  available and, consequently, a shorter UI duration may be sufficient to  find employment. In such a scenario, UI claimants may find jobs sooner  and may not be affected by the decreased maximum duration. On the  other hand, improvement in the unemployment rate is not the only factor  that affects unemployment levels—lower unemployment rates can be  caused in part by individuals giving up the job search altogether and  dropping out of the labor force.
Some state UI directors told us their states examined the average  duration on UI when legislators were considering where to set the new  maximum durations. For example, Georgia officials told us that average  duration had been below 14 weeks for years, and was recently closer to  between 11 and 13 weeks. On the other hand, average duration on UI  does not always reflect the average length of unemployment for several  reasons—for example, an unemployment spell can exceed the maximum  weeks of UI benefits. When we examined the average length of  unemployment for persons in these states, we found that it is generally  longer than the state’s new maximum benefit duration.reduced duration, the average length of unemployment for all   In the states that  unemployed persons—not just those receiving UI—for 2014 ranged from  almost 24 weeks to nearly 44 weeks. The maximum durations in these  states ranged from 14 to 25 weeks, as of October 2014 (see table 4).
When federal UI benefits were in effect (most recently generally from  2009 until the end of 2013), those individuals who were eligible to  receive UI benefits for the maximum total state and federal duration would  have received substantially less benefits following reduction, since  duration in each federal benefit program depends, in part, on the duration  of state benefits. Specifically, in a state that reduced benefits from 26 to  20 weeks, those claimants who would have received state and federal  benefits for up to 93 weeks before the reduction would receive benefits  for up to 72.4 weeks after the reduction, as illustrated in figure 5.
However, UI benefit durations would not change for those claimants who  would have received benefits for less than 72.4 weeks before the  reduction. For example, prior to any reductions in maximum benefit  durations, an individual who found employment after 36 weeks of  receiving UI benefits would have received 26 weeks of state benefits and  10 weeks of federal emergency unemployment benefits. All else equal,  such an individual would have still received a total of 36 weeks of benefits  in a scenario in which the state reduced maximum duration, for example,  to 20 weeks, although the source of the benefit would change: 20 weeks  of state benefits and 16 weeks of federal emergency unemployment  benefits (see fig. 6).
To illustrate how reductions in state benefit durations could have affected  UI claimants who were eligible to receive benefits for the maximum state  and federal durations, we calculated a hypothetical foregone benefit  amount to illustrate how the reduction in state maximum duration could  impact benefits paid through the federal programs. For this hypothetical  scenario (for example in May 2013), we assume that a claimant was  eligible for the maximum benefit duration available, and that 20 weeks of  federal extended benefits and all four tiers of emergency benefits were in  effect, although this was not the case in all states. In such a scenario,  hypothetical foregone benefits could range from around $700 to over  $20,000 (see table 5).
section_title: Shorter Benefit Durations Reduce Household Spending and May Not Hasten Reemployment
paragraphs: In light of our findings that some individuals may have received less total  UI benefits due to duration reduction, we also examined research on the  impact of decreases in UI benefits on individuals.reviewed considered the theoretical basis for and empirical research on  the implications for individuals of changes in UI benefits (amounts and  duration) in terms of labor market behavior, poverty, and enrollment in  social safety net programs.
The literature we  Theories of economic efficiency generally propose that the ideal UI  benefit amount and duration would prevent sharp reductions in the  claimant’s household spending without creating incentives for an  unnecessarily lengthy job search. Benefits that are too high prolong job  searches and can elevate unemployment, while benefits that are too low  reduce spending during jobless spells and cause workers to accept sub- optimal employment.
According to the research, some claimants facing shorter UI benefit  durations may find employment, while others may leave the labor force.  Some models show that a longer benefit period—and thus a longer job  search—can result in better job offers that enable workers to be more  productive, although empirical support for this possibility is limited.  Nevertheless, with low or unavailable benefits, research has found that  some people give up on seeking employment and leave the labor force  altogether. Unemployment benefits promote labor force participation, both  on the “front end’ by reducing the layoff risk in work covered by UI, and on  the “back end” in the event of layoff, by reducing labor force exit.
In our own work, some of the state UI directors and stakeholders we  interviewed told us that they hoped reduced benefit duration would  increase reemployment. However, the available research on UI duration  and claimants’ reemployment offers little support to the premise that  reducing duration increases reemployment. In an economy with few jobs  relative to the number of job seekers—as was the case during the  recession and the slow recovery when the ratio of job seekers to job  openings rose to as much as six to one—a shorter benefit period is not  likely to return individuals to the labor force sooner. One study estimated  that as many as one-third of claimants who exhaust benefits are unable to  find work. many people do or do not find jobs once they stop receiving benefits  because of limited data on individuals who have left the program.
David Grubb, Assessing the Impact of Recent Unemployment Insurance Extensions in  the United States, Working Paper (Paris: Organization for Economic Cooperation and  Development, May 2011).
Empirical research indicates longer durations prolong spells in the  program. However, the implication of longer spells for the overall  unemployment rate is ambiguous. Shortened durations could lead to  reemployment, but the reemployed UI claimant might have taken a job  otherwise obtained by someone outside the program. Alternatively,  shorter durations could also lead to earlier exit from the labor force.  Lengthened durations could lead to longer spells in the program, but also,  with the benefit of more search time, to the program participant finding a  job for which they are better suited. Studies that specifically consider net  employment for the entire labor force indicate little effect from shorter  benefit durations. For the same reason, research finds that shorter  durations have a negative effect on consumption in families of  unemployed workers, since shorter benefit durations do not necessarily  result in rapid reemployment.
Some research finds that reduced benefits—including those resulting  from reduced durations—lead to a greater incidence of poverty among  those eligible for UI benefits. UI has been shown to reduce poverty; the  Census Bureau estimated that UI benefits kept 1.2 million people out of  poverty in 2013. rate among unemployed workers from 22.5 percent to 13.6 percent.
Carmen DeNavas-Walt and Bernadette D. Proctor, Income and Poverty in the United  States: 2013, (U.S. Census Bureau Current Population Reports, September 2014).
Nutrition Assistance Program (formerly known as food stamps). For  example, a 2010 study found that UI extensions reduce SSDI claims,  while a 2013 study found no relation between benefit exhaustion and  disability claims.applications that would eventually be made to other programs, such as  SSDI.
However, longer benefit durations may delay  We examined UI program and economic indicators, and found that, on  average, individuals in reduction states were less likely to participate in UI  and more likely to leave the labor force than individuals in nonreduction  states. Additionally, while the rates at which claimants exhausted their UI  benefits increased during the recession, and declined since 2010, these  rates were consistently higher in duration reduction states on average as  compared to states that did not reduce duration. Although duration  reductions may have affected some of these indicators, it is difficult to  attribute causation, given the many other program changes made by the  states and federal government, as well as the changes occurring in the  economy. For more information on our analysis of individual states, see  appendix V.
section_title: Duration Reduction by States Shifted Some Costs from States to the Federal Government
paragraphs: In the presence of federal UI benefit programs, reducing maximum state  UI benefit durations affects federal program costs in two opposing ways.  First, at the front end, claimants use federal benefits earlier than they  would have absent a state reduction, so the federal government pays  some costs that states otherwise would have paid. For example, in states  that reduced the maximum duration of state UI benefits from 26 weeks to  20 weeks, those claimants who were eligible for benefits for more than 26  weeks transitioned to federal benefits 6 weeks earlier. In addition, federal  benefits were paid to some claimants who would not have received any  federal benefits absent the reduction. Specifically, in states that reduced  duration to 20 weeks, federal benefits were paid to any eligible claimants  who exited the program during weeks 21 through 26.
Second, at the back end, federal benefits were not available for as long  as they would have been absent a reduction in state durations, which  potentially led to some federal savings. For example, claimants could  receive up to 67 weeks of federal benefits when the maximum state  benefit duration was 26 weeks. After a reduction to 20 weeks, those  claimants could receive a maximum of 52.4 weeks of federal benefits.  As a result, some of the upfront costs that were shifted to the federal  government in weeks 21 through 26 are offset by shorter federal benefit  durations at the back end, as shown in table 6.
The net cost to the federal government due to the reduction in state  benefit durations is difficult to measure because the amount and duration  of federal program benefits depend on both a claimant’s state benefits   For example, we found that before  and how long he or she is eligible.duration reduction, a claimant who received benefits for 75 weeks—26  weeks of state benefits and 49 weeks of federal benefits—would receive  fewer total weeks of benefits after reduction in state duration to 20 weeks,  but more weeks of federal benefits. Specifically, the claimant would  receive 20 weeks from the state, and then 52.4 weeks of federal benefits,  providing a total of 72.4 weeks of UI benefits. (See fig. 7.)
Over time, some claimants find jobs or exit the program for other reasons.  As a result, there are likely to be fewer claimants receiving benefits at the  back end of the program than during the front end. Therefore, even  though state duration reductions may have resulted in fewer weeks of  federal benefits, costs to the federal government may have increased. In  other words, the front end cost caused by an earlier transition to federal  programs by more claimants may exceed any savings generated by  paying fewer weeks of federal benefits to those claimants still receiving  benefits at the back end of the federal programs.
It is difficult to measure the magnitude of the front end costs and back  end savings because, while DOL collects aggregate data on benefits  paid, it does not collect data on weekly benefits at the individual level.  Nevertheless, using data provided by two states, Missouri and Georgia,  we found that the earlier transition to federal benefits shifted some costs  from these states to the federal government.
In order to illustrate the front end cost shift to the federal government for  one calendar year quarter for the weeks from the end of state benefits  through week 26, for example, we analyzed data from Missouri and  Georgia on the number of claimants who received weekly benefits, by  benefit week. For each benefit week beyond the new state maximum  duration, we multiplied the number of claimants by the average weekly  benefit amount in each state. Missouri reduced its maximum duration  from 26 weeks to 20 weeks effective April 2011. Using the average  weekly benefit amount for claimants in Missouri, we calculated the federal  government would have paid about $23.7 million in benefits for one  calendar year quarter for the claimants who received benefits for weeks  21 through 26. See figure 8 for estimated costs to federal programs for  the first 6 weeks after reduction.
Whether front end costs to the federal government were offset by back  end savings generated by paying fewer weeks of benefits depends on the  amount the federal government would have paid in the weeks eliminated  by the reduction in state benefit durations. Specifically, if the federal cost  of UI benefits for weeks 72.4 through 93 exceeds $23.7 million, then the  federal government would have realized cost savings by paying benefits  for weeks 21 to 26 while eliminating benefits in weeks 72.4 through 93.  Conversely, if the federal cost of benefits for weeks 72.4 through 93 is  less than $23.7 million, then the federal government would have realized  cost increases as a consequence of the state duration reduction.
Similarly, Georgia reduced its benefit duration from 26 weeks to a  variable duration of 14 to 20 weeks, effective July 1, 2012. Using the  average weekly benefit amount for claimants in Georgia, and assuming a  maximum duration of 18 weeks, we calculated that the federal  government would have paid about $27.2 million in benefits that the state  would previously have paid for the claimants who received benefits for  weeks 19 through 26, as shown in figure 9.
Our analysis of these 2 states shows that there could be a net cost shift to  the federal government, perhaps unintended, as a result of state duration  reductions. As we have previously reported on state policy changes in  past recessions, knowledge of the unintended consequences of such  changes—including estimates of the impact on federal costs—can inform  federal assistance to states in future recessions. Additionally, in our  report on best practices in estimating costs, we have noted that cost  estimates should identify and reflect budgetary uncertainties. However,  DOL has not assessed the extent to which state duration reductions,  adopted by states in the wake of the recent recession, affected costs to  the federal government. To do so would require an analysis of weekly  benefit data for individuals, which are collected by the states, and not by  DOL. Without an analysis of the cost implications of duration reductions,  DOL and Congress lack information needed to plan for future economic  downturns and the equitable role of the federal government in the  federal/state UI partnership.
section_title: Research Suggests That Reductions in Benefit Duration May Lessen UI’s Positive Effects on the Economy
paragraphs: The relevant economic literature on UI that we reviewed, including  analysis by the Congressional Budget Office (CBO), considers the  benefits to be a source of economic stabilization, by increasing aggregate  demand through a “multiplier effect” during downturns. The multiplier  effect is derived from claimants’ tendency to spend a high proportion of  their benefits. The maximum duration of state benefits has not varied  substantially since the 1960s, according to CRS. We reviewed the  research that focuses on maximum durations of benefits (federal and  state benefits combined). To the extent benefits are reduced, such as by  a shortened benefit period, the effects on gross domestic product (GDP)  and employment are likely to be negative, although the precise magnitude  would be difficult to determine. effect captures the effects of this initial spending, as well as the  subsequent stream of spending by other parties. The UI claimant spends  benefits, and those who benefit from this spending, in turn, increase their  own spending, and so on. The sum total of all such ripple effects is  embodied in estimates of a multiplier associated with the initial spending  increase. Effects of changes in individual states’ duration could have less  pronounced effects than national changes.
Experts provide varying estimates of the extent to which an increase in  government spending causes those whose incomes are directly  benefited, such as the unemployed, to increase their own spending, and  by extension increase aggregate demand and GDP. However, estimates  of the multipliers in the short term are almost always positive. Responding  in 2011 to a proposed extension of UI benefits, CBO estimated multipliers  for UI of between .4 and 1.9 using a model that draws from multiple  schools of thought, including leading models used by other institutions,  related to proposed extensions of UI benefits. A private sector estimate  also found a positive effect. In 2012, investment firm Moody’s estimated  the multiplier for UI to be 1.55, also in relation to proposed extensions of  benefits. Both estimates found that the multiplier for UI is generally  higher than those for other types of spending, such as reductions in  payroll taxes for workers and employers.
Moreover, traditional models used by CBO and others have found that  multipliers are estimated to be greater during downturns than at other  times, because there is greater potential for stimulus at such times.  However, there is professional disagreement regarding these models.(See fig. 10.)
Similarly, some recent studies have estimated the effect on GDP and  employment of UI benefit terminations, as decreases in benefits can also  have ripple effects. In 2013, for example, the Council of Economic  Advisors and DOL used private-sector and CBO estimates to determine  that discontinuation of federal emergency benefits could reduce GDP by  .2 to .4 percentage points. This report also estimated that terminating  these federal benefits could result in a potential loss of 240,000 jobs.  Additionally, in December 2011, using a CBO multiplier, the Joint  Economic Committee estimated that continuing federal benefits could  generate up to 400,000 jobs overall.
Identifying any effects from 9 states’ duration reductions on the economy  as a whole would be complicated by potentially offsetting factors. For  example, the effect of a spending decrease in one program, in this case,  UI, could be mitigated by a spending increase in another program,  because multipliers work in both directions.
Furthermore, experts disagree on the extent to which an increase in  government spending may provoke offsetting behavior by other entities,  based on our review of relevant literature. For example, UI claimants may  spend their benefits, but taxpayers may reduce their spending in  anticipation of higher taxes to service government debt, canceling the  intended stimulus effect.
With regard to the role UI plays in stabilizing the economy during  economic downturns, the program stands out as an important component  of the federal government’s automatic stabilizers. It avoids the  shortcomings of other types of fiscal stimulus because it is highly targeted  to individuals with low income and a high likelihood of spending the  benefits, and it is timely because it promptly increases in periods of rising  unemployment and falls as the economy recovers.
section_title: Conclusions
paragraphs: The joint federal and state unemployment partnership provides temporary  financial relief to individuals who have become unemployed through no  fault of their own, and stabilizes the economy during economic  downturns. While states determine the amount and duration of benefits  paid to individuals through unemployment insurance, their decisions have  an impact on the federal government’s role and costs. In the recent  recession and slow recovery, 9 states chose to reduce the maximum  duration of benefits paid to individuals and, as previously mentioned,  none of the states that we interviewed reported any restoration of the  previous maximum duration. As we have shown, these states’ actions will  lead to reductions in total benefits for some claimants. If total benefits  were reduced, the UI program’s objectives to provide relief to unemployed  individuals and help stabilize the economy during downturns would be  adversely affected.
The states’ decisions to reduce benefit durations reflect the flexibility  afforded states that can help them make adjustments appropriate to their  particular circumstances during challenging economic times. In addition, a  larger federal role during downturns is consistent with the part that UI  plays as an economic stabilizer. Yet the state duration reductions also  had the unintended consequence of recasting the federal role—causing  the federal programs to fund weeks of benefits that were formerly the  responsibility of states. Further, these costs were shifted to the federal  government without necessarily providing more weeks of total benefits for  the individual. DOL does not have information about the costs shifted to  the federal government and about the changes in total durations resulting  from the states’ actions. As we have previously reported on state policy  changes in past recessions, knowledge of the unintended consequences  of such changes—including estimates of the impact on federal costs— can inform federal assistance to states in future recessions. Without an  analysis of the extent to which costs were shifted to the federal  government as a result of state duration reductions, the agency and  Congress lack information needed to plan for future economic downturns  and the equitable role of the federal government in the federal/state  unemployment insurance partnership.
section_title: Recommendation for Executive Action
paragraphs: To inform the design of any future federal UI programs, the Secretary of  Labor should examine the implications of state reductions in maximum UI  benefit duration on federal UI costs, for example, by modeling the net  effect of paying federal benefits earlier to more beneficiaries, albeit for a  possibly shorter period of time, and develop recommendations for the  program, if appropriate.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOL for review and comment. In its  written comments, reproduced in appendix VI, DOL agreed with our  recommendation. Specifically, DOL noted that additional study would be  useful, and indicated it will begin to assess an approach for determining  the implications of reductions in maximum duration on federal costs. DOL  noted that measuring the net cost to the federal government is difficult,  and we acknowledge this difficulty. However, understanding the federal  cost associated with state duration reductions will inform any proposed  modifications to the UI federal-state partnership and the balance of costs.   DOL noted that it has proposed incentives to states to maintain maximum  durations of 26 weeks, included in the President’s fiscal year 2016  budget. For example, one proposal would make several changes to the   extended benefits program, including providing 100 percent federal  funding for states with 26-week maximum durations. DOL also provided  technical comments, which we incorporated as appropriate.
Additionally, we provided selected state UI agencies with a draft of  pertinent sections and incorporated their technical comments as  appropriate. We also asked an external expert to review the report, and  made technical changes based on this review as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Labor,  appropriate congressional committees, and other interested parties. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov. Please contact me on (202) 512-7215 or at  sherrilla@gao.gov if you or your staff have any questions about this  report. Contact points for our Offices of Congressional Relations and  Public Affairs may be found on the last page of this report. Key  contributors to this report are listed in appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To address the objectives of this request, we used a variety of methods.  Specifically, we  reviewed relevant federal laws and regulations and state laws, and  confirmed information regarding state laws with relevant state officials; interviewed federal unemployment insurance (UI) program officials  and state UI officials in 7 states that reduced duration and 4 states  that did not reduce duration, and in 4 of the 7 states that reduced  duration, we also interviewed other stakeholders with an interest in UI  duration, such as employer groups and advocates; conducted a cluster analysis using data from the Department of  Labor’s (DOL) Office of Unemployment Insurance, the Bureau of  Labor Statistics (BLS), and other sources; analyzed data on a range of variables using data from DOL and BLS;  calculated survival rates (the probability that a claimant will continue  receiving benefits after a given week) based on data provided to us; conducted an economic literature review on key implications of UI  benefits for individuals; and conducted an economic literature review that focused primarily on the  stimulative effects of UI, and identified reasonable conclusions about  the likely economic effects of duration reduction.
subsections: section_title: Interviews of Federal and State UI Officials and Other Stakeholders
paragraphs: To identify the circumstances in which states reduced the maximum  duration of state benefits, we interviewed federal UI program officials and  state UI officials in 7 of the 9 states that reduced duration and 4 states  that did not reduce duration (Indiana, Ohio, Tennessee, and Washington).  We selected Indiana, Ohio, and Tennessee based on their similarity to  the duration reduction states on certain criteria, including presence of a  trust fund loan and the size of the loan; geographic location; average high  cost multiple; total taxable resources; and total unemployment rate. In  addition, we selected Washington on the basis of expert recommendation  and mention in selected studies. Washington was among a minority of  states that did not require a federal UI trust fund loan at any point during  the recession and recovery. The UI officials in Florida and North Carolina  did not respond to our questions. We also conducted site visits to two  duration reduction states—Georgia and Michigan—where we interviewed  a wide range of stakeholders, including employer groups (such as the  state Chambers of Commerce and affiliates of the National Federation of  Independent Business), legislators who supported and opposed duration  reduction, academic experts, governor’s workforce policy staff, and  advocates (such as the National Employment Law Project and similar  state-level organizations). We selected these states based on the  magnitude of the duration reduction and the structure of the duration  reductions (i.e., a mix of flat and variable maximum durations), timing of  duration reduction, and geographic diversity. In the 2 duration reduction  states where we were unable to interview UI officials—Florida and North  Carolina—we interviewed advocates and employer groups. See table 7  for the range of stakeholders interviewed for each state.
In our interviews we asked questions about the circumstances that led to  duration reduction, trust fund solvency, other recent changes to the UI  program, estimates of cost savings or individuals affected, broader  economic effects, and reemployment programs. We also interviewed  academic experts regarding these topics, including Dr. Jeffrey Wenger,  University of Georgia; Dr. Christopher J. O’Leary, W.E. Upjohn Institute  for Employment Research; Dr. Patrick Conway, University of North  Carolina; Dr. Michael Leachman and Dr. Chad Stone, Center on Budget  and Policy Priorities; Dr. H. Luke Shaefer, University of Michigan; and Dr.
Wayne Vroman, The Urban Institute. In addition, Dr. Vroman reviewed a  draft of the report.
section_title: Cluster Analysis of UI and BLS Data
paragraphs: Additionally, we conducted a cluster analysis using data from DOL’s UI  program, the Bureau of Labor Statistics (BLS), and other sources. Our  analysis included numerous variables, including industry composition,  population over 55, unemployment rates, and trust fund loans. Cluster  analysis methods assessed the degree to which these variables  simultaneously were similar within various possible groups of states but  were different across the groups. We used these methods to identify  characteristics that were shared among states that reduced duration.  Cluster analysis allowed us to identify broad, shared patterns among  states across multiple variables at once, which yielded insights that can  be more difficult to discern by comparing states on individual  characteristics one at a time. In this way, cluster analysis can discover  patterns in data, but they cannot explain why they exist or confirm cause- and-effect relationships.
We used a particular form of cluster analysis, known as hierarchical  agglomerative methods, to identify potential clusters of states and their  decisions to reduce UI benefits. We selected variables related to program  benefits and financing, as well as variables exogenous to the program,  such as states’ capacity to tax, selected state demographic information,  and state industry composition. After collecting the variables above for all  50 states and the District of Columbia, we standardized the scales of all  variables such that each variable’s mean was equal to 0 and its variance  was equal to 1. Because the natural scales of the variables were  generally percentages, the specific method of standardization should not  strongly influence our results. After standardizing the scales, we  calculated a multivariate Euclidean distance matrix for all variables and  states. We then applied a hierarchical agglomerative clustering algorithm  to this distance matrix, which used average linkage methods to form  various clusters at increasing distances.
We examined the results of the clustering algorithm to identify the  individual variables that appeared to influence the results strongly. We  further assessed, in concert with the political homogeneity of the state  legislature and governorship, the degree to which states in various  possible clusters reduced UI benefit duration. This allowed us to identify a  group of benefit reduction states (Arkansas, Florida, Georgia, Missouri,  North Carolina, and South Carolina) that were similar on the  characteristics we analyzed, as well as benefit reduction states (Illinois,  Kansas, and Michigan) that were not similar to this group. In addition, we  identified comparison states (Indiana, Ohio, and Tennessee) that the  algorithm clustered with the benefit reduction states but which had not  reduced benefit duration. The comparison states helped us to examine  why states in similar circumstances chose not to reduce benefits. For  more information on the variables we examined, see table 8.
In addition, we used data from the National Conference of State  Legislatures to identify the partisan composition of state legislatures and  governorships when duration reductions were adopted. These data were  analyzed separately from the cluster analysis, because cluster analysis  requires continuous, rather than categorical, variables.
section_title: Analysis of Federal and State UI Program Data
paragraphs: To identify the individual implications of duration reduction, we analyzed  UI program data on a range of variables using data from DOL’s Office of  Unemployment Insurance and BLS, including the value of the foregone  state and federal benefits for individuals who reach the maximum  duration. We used data from DOL’s Employment and Training  Administration 5159 (Claims and Payment Activities) and 218 (Benefit  Rights and Experience) reports, which states submit to DOL on a monthly  basis. These reports include information on average weekly benefit  amounts, initial claims, recipiency rates, and exhaustions. For selected  variables, we analyzed data from 2006, before the recession began, to  2014, focusing on the 9 duration reduction states and the 4 states we  selected that did not reduce duration. We also analyzed data from the  Bureau of Labor Statistic’s Current Population Survey—such as length of  unemployment—and Local Area Unemployment Statistics—such as  seasonally adjusted employment rates. The Current Population Survey is  the nation’s source of official government statistics on employment and  unemployment, and it is conducted on a monthly basis with about 60,000  households. The Local Area Unemployment Statistics program provides  monthly estimates of employment and unemployment for approximately  7,300 areas.
section_title: Calculation of Survival Rates
paragraphs: We calculated survival rates (the probability that a claimant will continue  receiving benefits after a given week) based on data provided to us by  Georgia and Missouri. We obtained aggregate data for each quarter on  the number of claimants receiving state benefits, by benefit week, for  approximately a year prior to duration reduction through two quarters  following reduction. We then analyzed data from the quarter closest to  each state’s policy change that did not appear seasonally inflated, in  order to estimate a baseline survival function prior to the policy change.  Michigan provided data from a sample of claims drawn from the time  period we requested. We used the estimated survival functions to  estimate the possible impact of reducing maximum benefit duration in  three ways. First, we calculated the probability that claimants would be  affected by a maximum duration reduction, equal to the estimated survival  probability at the new maximum duration. Second, we calculated the total  number of claimants affected by the policy change, equal to the survival  probability at the new maximum duration multiplied by the population of  claimants receiving benefits at the beginning of the quarter. (We did not  calculate this quantity for Michigan, due to uncertain population sizes  from which our sample was drawn.) Finally, we calculated the benefit that  a claimant receiving the average benefit amount in the period shortly  before the policy change could have expected to lose due to a shorter  maximum duration, equal to the survival probability at the new maximum  duration multiplied by the total benefits received by the average recipient  over the weeks exceeding the new maximum duration.
section_title: Washington State Simulation
paragraphs: We also asked Washington’s state Employment Security Department to  project the implications of reducing benefits from 26 weeks to 20 weeks,  using the state’s Benefit Financing Model. According to Washington  officials, the model was originally developed by Wayne Vroman of the  Urban Institute as part of an earlier analysis of program solvency  conducted for Washington in the mid-1990’s. The Washington model has  continued to be used and supported by the Employment Security  Department since 2000 with a review of the model completed by Dr.  Vroman in June 2007, and the department also conducts quarterly  benchmarking on the results. The model was developed to model current  law projections and legislative changes impacting Washington’s trust fund  account. According to Dr. Vroman, it is an actuarial model, and actuarial  projections always have an element of uncertainty with the degree of  uncertainty increasing as the projection extends further into the future.  Macro factors such as the unemployment rate, the inflation rate and the  level of statewide employment present major uncertainties.
section_title: Economic Literature Review
paragraphs: We also reviewed selected economic literature on key implications of UI  benefits for individuals, such as labor force attachment, job search  behavior, poverty reduction, and participation in other federal programs  such as Social Security Disability Insurance, specifically on the effects of  changing benefit levels or changing duration of eligibility for benefits. We  obtained recommendations for studies from internal GAO and external UI  researchers and policy experts, including DOL officials; searched various  databases for peer-reviewed journal articles and other publications; and  reviewed policy and research organization websites for relevant studies.  Based on this research, we identified reasonable conclusions about the  likely implications of duration reductions for individuals. As noted in this  report, research on the questions discussed reaches different  conclusions.
To identify what is known about the economic effects of reductions in  benefit duration, we conducted an economic literature review that focused  primarily on the stimulative effects of UI, and based on that research, we  identified reasonable conclusions about the likely economic effects of  duration reduction. In addition, we interviewed researchers from the  Congressional Budget Office to understand its economic multiplier model.  As noted in this report, research on the questions discussed reaches  different conclusions. We have not done an exhaustive review of the  voluminous literature on this topic.
section_title: Data Reliability
paragraphs: Because external data were significant to each of our research objectives,  we assessed the reliability of the publicly and privately held data obtained  from federal agencies and an association. To assess the reliability of DOL  data sets, we administered a survey form that was specifically tailored to  the system in question and addressed data uses, internal controls, and  data entry practices. Once each survey was completed, we reviewed  responses to assess the adequacy of the internal controls and processes  in place. We determined that each data set was sufficiently reliable for the  analytical purposes of this report. For data on partisan composition, we  used data from the National Conference of State Legislatures. For data  on total taxable resources, we obtained data from the Department of the  Treasury. For these data sources beyond DOL, we obtained information  on how the relevant data were generated and maintained and determined  they were sufficiently reliable for the cluster analysis.
We conducted our work between November 2013 and April 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe the  evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Financial Characteristics of Selected States
paragraphs: Appendix II: Financial Characteristics of  Selected States This figure represents the average loan per covered employee for the non-duration reduction states  that incurred loans.
This is the median total taxable resources per capita index for all states that did not reduce duration.
Maximum trust fund loan  (in millions)
When DOL data showed the same maximum trust fund loan balance in 2 or more successive  quarters, the most recent quarter is shown.
According to DOL, South Carolina qualified for avoidance of its FUTA tax credit reduction. See 26  U.S.C. § 3302(g).
section_title: Appendix III: Specifications for Variable Maximum Durations, Estimated Cost Savings, and Additional UI Program Changes for Selected States
paragraphs: Maximum duration   available (weeks)
Maximum duration  following duration  reduction (weeks)
Maximum duration  as of October  2014 (weeks) increase in the  unemployment rate  above 5 percent  triggers an additional  week   23    10.5 percent or more  14    6.5 percent or less  increase in the  unemployment rate  triggers an additional  week   20    9 percent or more  16    Less than 4.5 percent  20    4.5 percent to less  26    6 percent or more  12    5.5 percent or less  increase in the  unemployment rate  triggers an additional  week  20    More than 9 percent  Florida and North Carolina did not provide information about the maximum durations that were in  effect following duration reduction or as of October 2014. We imputed these durations based on the  applicable unemployment rates, as calculated by BLS.
Illinois’ duration reduction was only applicable to claims filed in 2012.
State officials described these changes as temporary. In some cases, automatic readjustments may  be tied to the condition of the trust fund balance. For example, according to state officials, in  Michigan, if the trust fund reaches $2.5 billion for 2 consecutive quarters, the taxable wage base will  revert from $9,500 to its previous level of $9,000.  Michigan issued bonds in the amount of $3.3 billion to repay its loan. Although employers must pay a  special assessment to repay the bond, the interest rate was more favorable to the state than the  federal loan would have been, according to state officials. Additionally, officials state that, by repaying  the federal loan in this way, the state avoided FUTA tax credit reductions for its employers.  These states reported changes to the definition of misconduct among the non-monetary eligibility  changes.  In February 2013, North Carolina enacted legislation that reduced benefit amounts as of July 2013,  thereby losing eligibility for the emergency benefits program, according to CRS. However, states that  made changes to their benefit amounts before March 1, 2012 are not subject to the nonreduction  requirement. Pub. L. No. 112-96, § 2144, 126 Stat. 156, 171 (2012).
section_title: Appendix IV: Washington State Simulation Using Benefit Financing Model
paragraphs: We asked Washington State’s UI agency, the Employment Security  Department, to project the implications of reducing benefits from 26  weeks to 20 weeks, using the state’s Benefit Financing Model. The model  was originally developed by Wayne Vroman of the Urban Institute as part  of an earlier analysis of program solvency conducted for Washington in  the mid-1990s. According to state officials, the Washington model has  continued to be used and supported by the state since 2000 with a review  of the model completed by Dr. Vroman in June 2007, and the state also  conducts quarterly benchmarking on the results. The model was  developed to model current law projections and legislative changes  impacting the UI trust fund account.
Table 16 below shows the impact of a reduced maximum duration on key  UI benefit variables in 2013 under two scenarios. The first scenario  reflects current law assumptions while the proposal shows the same  benefit variables assuming a 20 weeks maximum duration. Assuming a  reduction in the maximum duration from 26 weeks to 20 weeks would  have led to a 9.5 percent reduction in total benefit payments in 2013.
According to state officials, Washington has a system with two taxes. The  first tax is experience-based and indexed to the benefit ratio. The other is  a “social tax” that is assessed yearly and is mandated by statute to collect  the amount required to make sure the UI trust fund remains solvent.
The state UI agency applied the 9.5 percent reduction in weeks  compensated that was calculated in 2013 to the UI model starting in  2015. As a result, UI tax collections would be reduced by $381 million  from 2016 through 2020 and tax rates in all years from 2016 forward  would also be decreased. The Employment Security Department  estimated that by 2020, duration reduction would increase the UI trust  fund balance by $257 million.
section_title: Appendix V: Analysis of Individual States
subsections: section_title: Dynamics of the Larger Economy
paragraphs: The economic recovery following the recession affected trends such as   The  average duration on UI and average length of unemployment.national unemployment rate decreased from a high of 10 percent in  October 2009 to 5.6 percent in September 2014. In addition, the  magnitude of the recession in terms of the substantial numbers of private- sector jobs lost, and more modest gains in jobs during the recovery, had  an impact on the trends we analyzed (see fig. 11).
Furthermore, despite the decline in the unemployment rate, the  participation rate for the civilian labor force continues to decline to  historically low levels, reflecting departures from the labor force  altogether.
section_title: Availability of Federal Benefits
paragraphs: The effects of the changes in state UI benefit durations were mitigated by  the duration of federal benefits, which were largely available when state  duration reductions went into effect. For example, the total number of  weeks available, including federal benefits, reached 46, 53, and 99 weeks  at different points in time in various states, according to the  Congressional Research Service. The availability of these federal benefits  would affect any impact of duration reductions.
section_title: Other UI Program Changes
paragraphs: UI program changes, such as restrictions on eligibility, could also have  affected participation in the UI program. For example, according to state  officials, South Carolina’s new definition of “gross misconduct” now  results in immediate, full disqualification for any claimant engaging in  certain behaviors, such as illegal drug use during either work or non-work  hours. Other states, including Georgia, implemented stronger work  search requirements, according to their UI directors. Florida mandated  that applications only be done online and that applicants complete a skill  assessment intended to help develop a reemployment plan, which,  according to advocates with whom we spoke, could deter some  individuals from completing their applications.
section_title: Appendix VI: Comments from the Department of Labor
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments:
paragraphs: In addition to the contact named above, Nagla’a El-Hodiri (Assistant  Director), Chris Morehouse (Analyst-in-Charge), Susan Aschoff, James  Bennett, Susan Bernstein, Jesse Elrod, Alex Galuten, Susan Offutt,  Kirsten Lauber, Kathy Leslie, Max Sawicky, Linda Siegel, Amy Sweet,  Jeff Tessin, and Frank Todisco made significant contributions to this  report.
section_title: Related GAO Products
paragraphs: Unemployed Older Workers: Many Experience Challenges Regaining  Employment and Face Reduced Retirement Security. GAO-12-445.  Washington, D.C.: April 25, 2012.
Unemployment Insurance: Economic Circumstances of Individuals Who  Exhausted Benefits. GAO-12-408. Washington, D.C.: February 17, 2012.
State and Local Governments: Knowledge of Past Recessions Can  Inform Future Federal Fiscal Assistance. GAO-11-401. Washington, D.C.:  March 31, 2011.
Unemployment Insurance Trust Funds: Long-standing State Financing  Policies Have Increased Risk of Insolvency. GAO-10-440. Washington,  D.C.: April 14, 2010.
Unemployment Insurance: Low-Wage and Part-Time Workers Continue  to Experience Low Rates of Receipt. GAO-07-1147. Washington, D.C.:  September 7, 2007.
Unemployment Insurance: More Guidance and Evaluation of Worker- Profiling Initiative Could Help Improve State Efforts. GAO-07-680.  Washington, D.C.: June 14, 2007.
Unemployment Insurance: States’ Tax Financing Systems Allow Costs to  Be Shared among Industries. GAO-06-769. Washington, D.C.: July 26,  2006.
Unemployment Insurance: Enhancing Program Performance by Focusing  on Improper Payments and Reemployment Services. GAO-06-696T.  Washington, D.C.: May 4, 2006.
Unemployment Insurance: Factors Associated with Benefit Receipt.  GAO-06-341. Washington, D.C.: March 7, 2006.
Unemployment Insurance: Better Data Needed to Assess Reemployment  Services for Claimants. GAO-05-413. Washington, D.C.: June 24, 2005.
Unemployment Insurance: Increased Focus on Program Integrity Could  Reduce Billions in Overpayments. GAO-02-697. Washington, D.C.: July  12, 2002.
Unemployment Insurance: Role as Safety Net for Low-Wage Workers Is  Limited. GAO-01-181. Washington, D.C.: December 29, 2000.
Unemployment Insurance: Program’s Ability to Meet Objectives  Jeopardized. GAO/HRD-93-107. Washington, D.C.: September 28, 1993.
Unemployment Insurance: Trust Fund Reserves Inadequate to Meet  Recession Needs. GAO/HRD-90-124. Washington, D.C.: May 31, 1990.