Extending Unemployment Compensation Benefits During Recessions
Released: 2014-10-01T00:00:00

Unemployment Compensation and Exhaustion of Benefits

The cornerstone of an unemployed worker's income support is the joint federal-state Unemployment Compensation (UC) program, which may provide income support through the payment of UC benefits. The underlying framework of the UC system is contained in the Social Security Act. Title III of the act authorizes grants to states for the administration of state UC laws, Title IX authorizes the various components of the federal Unemployment Trust Fund (UTF), and Title XII authorizes advances or loans to insolvent state UC programs. UC is financed by federal taxes under the Federal Unemployment Tax Act (FUTA) and by state payroll taxes under the State Unemployment Tax Acts (SUTA).

The federal government funds federal and state UC program administration, the federal share (50% under permanent law) of Extended Benefit (EB) payments, and federal loans to insolvent state UC programs. States fund regular state UC benefits and the state share (50%) of EB payments. The American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 , as amended) temporarily provided for 100% federal funding of EB from February 22, 2009, through December 31, 2013.

UC Benefits and Duration

Workers who lose their jobs face serious long-term economic implications. In general, they face a substantially reduced probability of full-time employment and an increased probability of part-time employment. Those workers who find new full-time employment on average experience significantly decreased earnings relative to what they earned before they lost employment.

The UC program pays benefits to workers in covered employment who become involuntarily unemployed for economic reasons or other good cause and meet state-established eligibility rules. The UC program generally does not provide UC benefits to the self-employed, to those who are unable to work, or to those who do not have a recent earnings history. States usually disqualify claimants who lost their jobs because of inability to work or unavailability for work, who voluntarily quit without good cause, who were discharged for job-related misconduct, or who refused suitable work without good cause.

This temporary unemployment insurance benefit is designed to be sufficient to meet an unemployed worker's basic obligations until the worker finds a new position. Generally, benefits are based on wages for covered work over a 12-month period. The entitlement formula varies by state, typically requiring a substantial work history and replacing up to 50% of workers' wages. Generally, the maximum benefit amount is capped (often half of the average wage in the state or less), which lowered the average national replacement rate to 33% of the average weekly wage in the first quarter of 2014.

Maximum weekly benefit amounts in January 2014 ranged from $133 (Puerto Rico) to $679 (Massachusetts) and, in states that provide dependents' allowances, up to $1,019 (Massachusetts). In June 2014, the average weekly benefit was $314. Benefits are available for up to 26 weeks in most states (30 weeks in Massachusetts; 28 weeks in Montana; eight other states have maximum durations that are fewer than 26 weeks). The average regular UC benefit duration in June 2014 was 16.6 weeks, with less than half (43%) of all beneficiaries exhausting their regular benefits. In June 2014, approximately 2.4 million unemployed workers received regular state UC benefits in a given week. In 2013, on average, 26% of all U.S. unemployed workers received regular state unemployment benefits (when all extended unemployment benefits were included, that percentage increased to 40%).

Generally, the UC recipiency rate (the ratio of unemployed receiving UC benefits to all unemployed) rises during economic recessions (as workers with strong labor market experience are laid off) and falls during economic expansions (as new entrants to the labor market begin to comprise a greater proportion of the unemployed).

Monitoring Search, Generosity of Unemployment Benefits, and Disincentives to Find Work

The difficulty in monitoring job search intensity creates the risk the unemployed will abuse a system designed to alleviate the worst financial aspects of job loss. Although most economists would agree that UC benefits create some disincentives to find work quickly, these disincentives are somewhat balanced by a relatively low replacement rate of wages by UC benefits and a recognition that proper allocation of human resources and human capital requires adequate job search time.

The job search behavior of the unemployed can be influenced by changing the timing, generosity, and duration of UC benefits. Higher benefit levels and easier program requirements for benefits will cause recipients to be less willing to accept jobs and may alleviate some of the social stigma from being unemployed. The availability of benefits may create a disincentive to search for and accept reemployment, increasing unemployment and unemployment duration. Economic research has suggested that this disincentive effect is relatively small and not a particularly large contributor to the high unemployment rates found during economic recessions.

UC Benefit Exhaustion

The limited duration of UC benefits (generally 26 weeks) will result in some unemployed individuals exhausting their UC benefits before finding work or voluntarily leaving the labor force for other reasons such as retirement, disability, family care, or education. Empirical research suggests that workers who exhaust benefits search at similar or higher levels of intensity as workers who find employment before benefit exhaustion. All state programs attempt to identify potential benefit exhaustees through a state-specific profiling system. Workers who are identified as likely to become unemployed long term may be offered intensive employment services.

Figure 1 displays UC beneficiaries as the monthly rate of UC benefit exhaustees since 1979 and as a percentage of all unemployed workers (the "recipiency rate"). The proportion of UC recipients who exhaust their benefits varies according to economic conditions, state benefit duration formulas, and the composition of the labor force. Some evidence suggests that an aging work force may have increased the proportion of unemployed workers who are long-term unemployed; at the same time, this aging work force may also have contributed to the decrease in the overall unemployment rate.

Recessions

Determination of a Recession

The National Bureau of Economic Research (NBER)—not the federal government—declares when a recession began. A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in measures of real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between a trough and a peak, the economy is in an expansion.

Most Recent Recession Began December 2007 and Ended June 2009

The NBER maintains a time line of the U.S. business cycle. This chronology identifies the dates of peaks and troughs that frame economic recessions or expansions. According to the NBER, a peak was reached in December 2007, marking the end of the expansion that began in November 2001 and the beginning of the recession that ended in June 2009.

Recessions from 1980 to Present

Since 1980, there have been five separate periods that the NBER has identified as recessions: January 1980-July 1980; July 1981-November 1982; July 1990-March 1991; March 2001-November 2001; and December 2007-June 2009.

Federal Programs of Extended Unemployment Compensation

The UC program's two main objectives are to provide temporary and partial wage replacement to involuntarily unemployed workers and to stabilize the economy during recessions. These objectives are reflected in the current UC program's funding and benefit structure. When the economy grows, UC program revenue rises through increased tax revenues while UC program spending falls because fewer workers are unemployed and receive benefits. The effect of collecting more taxes while decreasing spending on benefits dampens demand in the economy. This also creates a surplus or "cushion" of available funds for the UC program to draw upon during a recession. In a recession, UC tax revenue falls and UC program spending rises as more workers lose their jobs and receive UC benefits. The increased amount of UC payments to unemployed workers dampens the economic effect of lost earnings by injecting additional funds into the economy.

In response to economic recessions, the federal government sometimes has augmented the regular UC benefit with both permanent (the Extended Benefit program) and temporary extensions (including the Emergency Unemployment Compensation of 2008 program) of the duration of unemployment benefits.

Extended Benefit Program (Determined at the State Level)

The Extended Benefit (EB) program was established by the Federal-State Extended Unemployment Compensation Act of 1970 (EUCA), P.L. 91-373 (26 U.S.C. 3304, note). EUCA may extend receipt of unemployment benefits (EB) at the state level if certain economic situations exist within the state. The Omnibus Budget Reconciliation Act of 1981, P.L. 97-35 , among other items, amended the EUCA to require that claimants have worked at least 20 weeks of full-time insured employment or the equivalent in insured wages.

The EB program is triggered when a state's insured unemployment rate (IUR) or total unemployment rate (TUR) reaches certain levels. All states must pay up to 13 weeks of EB if the IUR for the previous 13 weeks is at least 5% and is 120% of the average of the rates for the same 13-week period in each of the 2 previous years. There are two other optional thresholds that states may choose. (States may choose one, two, or neither of the additional options.) If the state has chosen the option, it would provide the following:

Option 1: an additional 13 weeks of benefits if the state's IUR is at least 6%, regardless of previous years' averages. Option 2: an additional 13 weeks of benefits if the state's TUR is at least 6.5% and at least 110% of the state's average TUR for the same 13 weeks in either of the previous two years; an additional 20 weeks of benefits if the TUR is at least 8% and at least 110% of the state's average TUR for the same 13 weeks in either of the previous two years.

The EB program imposes additional restrictions on individual eligibility for benefits. It requires that a worker be actively searching and available for work. Furthermore, the worker may not receive benefits if he or she refused an offer of suitable work. Finally, claimants must have recorded at least 20 weeks of full-time insured employment or the equivalent in insured wages during their base period (the four quarters of earnings used to determine UC benefit eligibility).

EB Provisions in the American Recovery and Reinvestment Act of 2009

As amended, the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 , also known as ARRA or the 2009 stimulus package, signed into law on February 17, 2009) contained several provisions affecting EB. Among these provisions was a temporary change increasing the federal share to 100% in the cost-sharing agreement for EB from February 22, 2009, through December 31, 2013. (The permanent funding arrangement is 50% federal funding and 50% state funding.) ARRA also provided a supplemental $25 weekly benefit from February 22, 2009, through June 5, 2010, for recipients of unemployment benefits, including EB. Finally, ARRA also allowed states, at their option, to temporarily change the eligibility requirements for the EB program to expand the number of persons eligible for EB.

Temporary EB Trigger Modifications in P.L. 111-312

Beginning on December 17, 2011, P.L. 111-312 made some temporary changes to certain triggers in the EB program. P.L. 111-312 , as amended, allowed states to temporarily use lookback calculations based on three years of unemployment rate data (rather than the permanent law lookback of two years of data) as part of their mandatory IUR and optional TUR triggers if states would otherwise trigger off of or not be on an EB period. Using a two-year versus a three-year EB trigger lookback was a significant adjustment because some states would have otherwise triggered off of their EB periods despite high, sustained—but not increasing—unemployment rates.

States implemented the lookback changes individually by amending their state UC laws. These state law changes had to be constructed in such a way that if the two-year lookback was functioning and the state would have an active EB program, no action would be taken. But if a two-year lookback was not sufficient to trigger on to an EB period, then the state would have been able to use a three-year lookback. This temporary option to use three-year EB trigger lookbacks expired the week ending on or before December 31, 2013.

Temporary Federal Extensions of Unemployment Benefits: Congressional Intervention in Recessions

During most economic recessions in recent history, Congress has created federal temporary programs of extended unemployment compensation. In total, Congress acted eight times—in 1958, 1961, 1971, 1974, 1982, 1991, 2002, and 2008—to establish these temporary programs of extended UC benefits. These programs extended the time an individual might claim UC benefits (ranging from an additional 6 weeks to 63 weeks) and had expiration dates. Some extensions took into account state economic conditions; many temporary programs considered the state's total TUR, IUR, or both.

Historically, these programs started operation after the trough of a recession had passed (i.e., after the recession had officially ended) for several reasons. One is that the exact date of the recession is not known until months after that recession has started. NBER often announces a recession has begun three or more months after what is later determined to be its official start. Another cause of this lag in response time is that often the severity of the recession and its impact on unemployment levels do not become apparent until several quarters after the recession begins.

The 1958 and 1961 programs were proposed and enacted after the trough of those recessions but before the unemployment rate had peaked. The 1971 program was enacted after the end of the recession in November 1970. Both the 1974 and 1982 programs became effective toward the end of those recessions. The 1991 program was enacted eight months after the 1990-1991 recession trough but eight months before the unemployment rate peaked. Likewise, the 2002 program was enacted after the recession had ended but before the unemployment rate peaked. The Emergency Unemployment Compensation (EUC08) program of 2008 was enacted seven months after the most recent recession began.

Table A-1 in the Appendix briefly summarizes these temporary programs as well as the permanently authorized EB program. The 1982 Federal Supplemental Compensation (FSC) and 1991 Emergency Unemployment Compensation (EUC) programs had extremely complicated—and changing—benefit triggers. Table A-2 and Table A-3 provide detailed information on benefit triggers for those two temporary programs. Table A-4 provides information on the EUC08 program benefits and triggers.

Temporary Extended UC Benefits as Economic Stimulus

In the 110 th Congress, congressional and popular debate examined the relative efficacy of expanding UC benefits and duration compared with other potential economic stimuli. Job loss means that many of the unemployed are severely cash constrained and would be expected to rapidly spend any increase in benefits that they may receive. The certainty of this behavior is very high, and this is the underlying reasoning why some economists consider temporary unemployment benefits a fairly effective economic stimulus. For example, in his January 22, 2009, congressional testimony, the Director of the Congressional Budget Office (CBO) stated that increasing the value or duration of UC benefits may be one of the more effective economic stimulus plans. Mark Zandi of Moody's Economy.com estimated multiplier effects for several different policy options, including extending unemployment benefits. Unemployment benefits had one of the highest estimated effects (1.64, where all proposed interventions ranged from 0.25 to 1.73).

Others pointed out that increasing either the value or length of UC benefits may, however, discourage recipients from searching for work and accepting less desirable jobs or that their spouses might forestall seeking additional work. A rationale for making any extension in unemployment benefits temporary would be to mitigate disincentives to work, as the extension would expire once the economy improves and cyclical unemployment declines.

Assessing the Labor Market: Determining When to Intervene

Various measures are typically used to assess the state of the labor market. These measures may include statistics that are absolute measures, such as employment and unemployment levels, as well as relative measures, such as the insured unemployment rate and the total unemployment rate.

A vigorous debate on how to determine when the federal government should intervene by extending unemployment benefits has been active for decades. Generally, this debate has examined the efficacy of using the IUR or TUR as a trigger for extending unemployment benefits. The debate also has examined whether the intervention should be at a national or state level. Serious consideration of other measures of the labor market has become increasingly common. In particular, the increase in the number of unemployed from the previous year has emerged in several proposals as a new trigger for a nationwide extension of unemployment benefits.

Improving the UC System as an Automatic Stabilizer

The President's 2010 budget proposal suggested changes to the UC system through the modification of the EB program to make the program more responsive to changing economic conditions. Although little information was provided as to the specifics of the legislation, the broad description echoes the recommendations of the Advisory Council on Unemployment Compensation first published in 1994. The President's 2011 (and subsequent) budget proposals did not have similar suggestions.

Advisory Council on Unemployment Compensation's 1994 Findings and Recommendations for the EB Program

The Advisory Council stated that the changing demographics of the work force—coupled with state funding problems—had led to a decline in UC recipients. This had, in turn, caused the IUR to be a less reliable indicator of economic conditions at the state level and thus reduced the likelihood that the EB program would be active in the states during economic recessions. The Advisory Council also found that the temporary federal extensions of unemployment benefits have been "extremely inefficient" as they have been neither well timed nor well targeted.

The Advisory Council generally supported that the EB program use a state TUR of 6.5% as an indicator of economic conditions meriting an active EB program. It also suggested that any indicator not use historical comparisons or thresholds (e.g., 110% of previous year's level), which the Advisory Council labeled as "not helpful" because the threshold triggers caused the activation of the EB program to occur later and deactivate earlier than what the Advisory Council believed was appropriate.

Finally, the Advisory Council suggested raising the FUTA tax base from $7,000 to $8,500 to raise the additional funds needed for this suggested change. The President's 2012, 2013, 2014, and 2015 budget proposals included measures that would have increased the federal unemployment tax base to $15,000 while lowering the tax rate.

Using the Insured Unemployment Rate Versus Total Unemployment Rate

The Federal-State Extended Benefit Program, created by P.L. 91-373, originally assessed the labor market through both IURs and TURs and included both national- and state-level triggers for extended UC benefits. The EB's federal trigger was eliminated by the Omnibus Reconciliation Act of 1980 ( P.L. 96-499 ). That act also required that the IUR measure no longer include those who had exhausted benefits or who were receiving EB. This effectively made the IUR statistic a less generous measure of unemployment as it counted only the recently unemployed.

Since the adoption of the permanent EB program in 1970, there has been considerable debate concerning the relative merits of the IUR versus the TUR as an EB trigger. The IUR is defined as the 13-week moving average of continuing regular UC claims divided by the average number of individuals in UC-covered employment. This means the IUR itself is an output of the UC program.

Because calculation of the IUR is based upon the number of individuals currently receiving UC benefits, each state's IUR depends on various noneconomic factors, including state eligibility rules and administrative practices. Thus, the IUR is not a precise reflection of the health of a state's economy.

In comparison, the TUR is defined as the number of all unemployed individuals actively seeking work divided by the size of the civilian labor force. The TUR represents a larger population than the IUR because it counts as unemployed all those who are out of work and actively looking for work, on layoff, or waiting to start a new job within 30 days.

National, State, and Sub-State Triggers

A perennial question concerns the appropriate level at which to measure changes in unemployment. Generally this debate has centered on the EB program and whether the EB trigger should be based on national, regional, state, or sub-state data. At the beginning of the most recent recession (but before the recession had been identified), the debate on the EB triggers was expanded to question what measure should be used if a new temporary extension of UC benefits were enacted. In particular, should Congress act as it has in the most recent recessions and create a nationwide extension of UC benefits with a nod to higher unemployment states through an additional "high-unemployment" trigger? Or would it be more appropriate and a better use of scarce resources to target only those states with current economic difficulties?

In the most recent recession, Congress first created a temporary program that did not target states based upon state unemployment rates ( P.L. 110-252 ). Eventually, Congress expanded the temporary program and targeted much of the expansion of benefits to the unemployed in states that had higher levels of unemployment (first in P.L. 110-449 and then again in P.L. 111-92 ).

The argument in favor of a national trigger is that the definition of a recession is national in scope and the federal government's interest in reversing an economic decline is national as well. However, recessions have often been primarily regional in impact. Thus, a national trigger can result in the payment of extended benefits to individuals in states that do not face unusually weak labor markets.

There have also been proposals to create regional and sub-state level triggers. The logic behind the regional or sub-state trigger is that it might improve the targeting of benefits because state boundaries are often of little relevance to the workings of labor markets. Considerable labor market differences may exist between urban and rural areas within a state or among urban areas within a state. Furthermore, some labor markets are located in more than one state. A statewide trigger can deny benefits to areas facing severe labor market problems because other regions of the state are not facing the same conditions.

There are a variety of arguments against regional and sub-state triggers. It would be difficult to define appropriate regional or sub-state boundaries, and it is unclear whether these newly defined regions would be any less arbitrary than current state boundaries. In addition, there are significant obstacles to be overcome in the financing and administration of an EB program on the basis of regional or sub-state areas because the state has always been the operational unit for UC. Concern also exists regarding the accuracy and availability of regional or sub-state data and the costs of data improvements that would be needed.

Increases in Unemployment of at Least 1 Million Unemployed as Compared with the Same Month in the Previous Year

In the 110 th Congress, debate moved away from using the IUR or TUR as a trigger for a national program. Serious consideration of other measures of the labor market has become increasingly common. In particular, the increase in the number of unemployed from the previous year emerged in several proposals for new triggers in a nationwide extension in unemployment benefits.

In the 110 th Congress, H.R. 4934 , the Emergency Unemployment Compensation Act of 2008, was introduced on January 15, 2008. This bill would have extended UC benefits for up to 26 weeks when the number of unemployed persons 16 years of age or older increased by at least 1 million individuals as compared with the same month in the previous year.

Table A-5 in the Appendix provides information on the timing of the recessions, changes in unemployment of at least 1 million compared with same month in the previous year, and federal enactment of the temporary extensions of benefits. During this period, the temporary extensions of unemployment benefits take effect between 4 months and 14 months after the onset of the recession. The first changes in unemployment compared with the same month in the previous year of at least 1 million occur between 3 months and 5 months after the onset of the recession. Therefore, if the "1 million" trigger had been in place in the past, the extension of UC benefits would have been triggered between 8 months and 12 months earlier than actually occurred.

Figure 2 provides a graphical presentation on the changing levels of unemployment since 1979 and the corresponding unemployment rates for each year. Figure 2 uses different numerical scales for changes in unemployment levels and for the unemployment rate. Because the correspondence between these two scales was determined by page size rather than by a particular reason, readers should not place any significance in the two lines crossing each other. The scale for the changes in unemployment levels compared with same month in the previous year is located on the left-hand y-axis. The scale for the unemployment rate is located on the right-hand y-axis.

Other Measures: Changes in UC Benefits Exhaustions and Changes in Long-Term Unemployment

Beyond the IUR, TUR, and changes in the total number of unemployed, several other measures of unemployment are often used in assessing the severity of employment conditions. These measures include the number of unemployed workers who exhaust UC benefits and the number of workers who have been unemployed for more than 26 weeks (i.e., long-term unemployed).

Figure 3 shows the change in the number of workers who exhaust UC benefits. That is, Figure 3 shows the change in the number of UC beneficiaries who have been unemployed for longer than the number of weeks for which UC benefits are available to them. Figure 4 shows another measure of the severity of unemployment, the change in the number of workers (regardless of whether they received UC benefits) who have been unemployed for more than 26 weeks. Generally, both the changes in the number of exhaustees and the changes in the number of long-term unemployed peak after a recession's end.

Congressional Interest in "Paying for Temporary Benefits"

Increases in Revenues or Decreases in Expenditures Related to Temporary Unemployment Benefit Legislation

Debate in Congress has included substantial interest in whether benefit extension legislation should include measures to "pay for" the proposals and be subject to House and Senate PAYGO requirements or whether these extensions should be considered "emergency" measures and exempt from the PAYGO requirements. With the exceptions of P.L. 111-92 , P.L. 112-78 , and P.L. 112-96 , all laws that created, extended, or altered the EUC08 program were treated as emergency expenditures or part of larger appropriation legislation.

Historical comparisons with previous extensions of temporary unemployment benefits are difficult because of differing internal House and Senate PAYGO rules that have changed over time. Table A-6 in the Appendix lists all public laws that have created or altered these temporary unemployment benefit programs. The second column lists all decreases in federal expenditures or increases in federal tax revenues that are related to unemployment benefits within these laws. The last column includes explanatory notes that may put the laws into better context within this particular discussion.

The Congressional Research Service (CRS) identified 11 laws that included reduced expenditures or increased revenues related to temporary unemployment benefits. Five laws increased the federal unemployment tax (FUTA) on employers. One law increased income tax on unemployment benefits received by individuals. Two laws increased the estimated withholding requirements for certain corporate income taxes. One law began to require interest payments from states for federal loans to allow states to continue to provide regular UC benefits to their workers. P.L. 112-78 required new fees be paid when certain new federally guaranteed mortgages were issued. P.L. 111-92 expanded the EUC08 program from two to four tiers (from a potential maximum duration of 33 weeks to 53 weeks) but did not extend the authorization of the program. The law included a 1.5-year extension of the FUTA surtax. P.L. 112-96 did not declare the temporary benefits to be emergency spending and did include some offsets, including the auction of spectrum licenses and increased contributions to federal retirement plans.

Some of the other laws did have reduced expenditures or increased revenues but are not included in this tally because (1) they were part of large appropriation bills and generally not subject to PAYGO rules, or (2) CRS was unable to directly link these measures to any type of unemployment benefits. CRS did not attempt to identify whether these reductions in expenditures or increases in revenues fully offset the expected costs of the changes in expenditures on temporary unemployment benefits.

Congressional Interest in the "Maximum Length of Total UI [Unemployment Insurance] Benefits over Time"

Debate in Congress has included substantial interest in whether the total number of weeks of unemployment insurance (UI) benefits available to workers is overly generous as compared with previous recessions. Table A-7 in the Appendix lists the total number of potential maximum available weeks of unemployment benefits available to the unemployed since 1935.

At the height of the EUC08 program, the potential maximum number of weeks of all unemployment benefits (UC + EB + EUC08) reached 99 weeks. This maximum was available to states (if state economic conditions and state laws met the availability requirements) from December 2009 through August 2012.

In comparison, the next-highest maximum potential duration of unemployment benefits was during the Temporary Emergency Unemployment Compensation (TEUC) program in 2002 and 2003, when up to a total of 72 weeks of unemployment insurance (UC + EB + TEUC) was available in some states. This maximum was available to states (if state economic conditions and state laws met the availability requirements) from March 2002 through December 2003.

Appendix. Related Tables