Unemployment Insurance: Role as Safety Net for Low-Wage Workers Is Limited
Released: 2001-01-29T00:00:00

Letter

Background

In 1935, as part of the Social Security Act, Congress established two programs—Aid to Dependent Children and the federal-state system of unemployment insurance—to provide income support to two different groups of unemployed people. Aid to Dependent Children added federal support to state systems of pensions for widows with children. The UI program, on the other hand, aimed to provide workers with partial replacement of wages lost during temporary periods of unemployment due to economic causes. Historically, the majority of people who file for UI benefits have been men.

As administered in subsequent years (when it became known as Aid to Families With Dependent Children or AFDC), the welfare program evolved into an open-ended entitlement program, providing cash assistance to people with children, usually single parents, who earned little income. Over time, as more women with children joined the labor force, AFDC recipients with older children were expected to look for work. More recently, several states experimented with stricter work requirements (the so-called “work first” philosophy) and time limits on the receipt of aid. In 1996, federal legislation known as the Personal Responsibility and Work Opportunity Reconciliation Act ended AFDC, alternatively providing block grants to the states as part of a new program called Temporary Assistance for Needy Families (TANF). The legislation put a maximum 5-year limit on the availability of federal cash assistance under TANFand required adults to work or participate in work-related activities after receiving assistance for 24 months as a condition for continuing to receive benefits. Between August 1996 and December 1999, the number of TANF families declined by approximately 2.1 million, and many new workers entered the labor force.

Unlike the Aid to Dependent Children program, the UI program has always operated as a social insurance program. It is administered as a federal-state partnership. To finance the program, the states levy and collect payroll taxes from employers. The funds collected are managed in a trust fund administered by the federal government. In almost all industries, federal standards require coverage on all work for employers who pay wages of $1,500 or more in any calendar quarter. Today UI coverage is nearly universal, extending to almost all wage and salaried workers.

Employers pay the premiums for the UI program through federal and state payroll taxes that are assessed on employers but based on employees’ earnings. Employers pay taxes on wages earned by even the lowest-paid worker. Additionally, if a worker held jobs with two different employers during the year, the wages from each job are taxed separately.

The federal payroll tax, established by the Federal Unemployment Tax Act (FUTA), is currently set at 6.2 percent of the first $7,000 of an employee’s salary. In states with UI programs that meet specified federal guidelines, employers receive a 5.4 percent credit toward their FUTA tax payment, resulting in a net federal tax of 0.8 percent. These federal taxes finance the state and federal administrative costs of the UI program, as well as the federal portion of the Extended Benefit program, advances to states with insolvent trust funds, and other related federal costs.

The actual rate of the state tax paid by individual employers depends upon the employer’s “experience rating”—a measure related to the amount of UI benefits collected by a firm’s employees. Depending upon the employer and the state, the state payroll tax may range from 0 to 10 percent. By federal law, state taxes are assessed against at least the first $7,000 of an employee’s salary. However, among the states, the wage base against which state taxes are assessed varies widely, from $7,000 (in 9 states) to $27,500 in Hawaii. The wage base is less than $11,000 in 32 states, thereby requiring the same tax whether, for example, employees earn $11,000 per year or $110,000 per year. Revenues from state UI taxes finance the payment of regular UI benefits and the state portion of the Extended Benefit program.

Benefit coverage under the UI program is related to an individual’s work history. Generally, state law provides that unemployed workers must fulfill three general conditions: (1) they must have been “substantially attached” to the labor market; (2) they must have left their prior job involuntarily (such as by employer layoff) or have quit their job for “good cause” only; and (3) they must be currently “able and available” for work, and, in most states, actively seeking work. State law provides specific requirements for claimants to meet these general conditions.

50-Year Decline in Application for UI Benefits Attributed to Economic and Policy Factors

Overall, the percentage of the total unemployed population applying for UI benefits has gradually declined in the past 50 years. Several factors generally are cited as contributing to the decline in UI participation, although the significance of each is disputed. Three major factors have persisted over most of this period—reduction in manufacturing jobs, decline in union membership, and increasingly strict state UI eligibility requirements.

Long-Term Decline in UI Claims

Over the past 50 years, the percentage of unemployed filing for UI benefits has generally, but gradually, declined. The measure most commonly used by the Department of Labor to assess the effect of the UI program—the standard recipiency rate—shows that while about 50 percent of the unemployed filed for UI in the 1950s, only about 35 percent of the unemployed filed for UI in the 1990s. Although this rate has fluctuated considerably—for example, in 1980 the rate was 44 percent, then dipped to 29 percent in 1984, but by 1991 had increased to 39 percent—it indicates a general decline over the past 5 decades. In 1999, the recipiency rate was 37 percent. Figure 1 presents the average recipiency rate, by decade, since 1950.

Of the past 5 decades, the last decade—1990 through 1999—had the most stable rate of UI claims, showing the least annual variation. Over this decade, an average of 35 percent of the unemployed filed for UI benefits— varying from a high of 39 percent in 1991 to a low of 31 percent in 1993, then increasing to 37 percent in 1999. Overall, the average recipiency rate in the 1990s was 1 percentage point higher than that of the 1980s.

Certain Economic and Policy Factors Parallel Long-Term UI Decline

Although there is no agreement about the causes of the general decline in the rate of UI filing,certain factors are commonly considered significant, including (1) the decrease in the number of workers employed in manufacturing jobs; (2) the decline of union membership in the workforce; (3) increasingly tighter state requirements for UI eligibility; (4) federal taxation of UI benefits beginning in 1979; (5) population shifts, starting in the 1970s, of workers from northeastern states to southern states, where unemployed workers are less likely to apply for UI benefits; and (6) changes in the survey methodology of the CPS during the 1980s that increased the number of unemployed who were counted (changing the denominator used in calculating the recipiency rate).Of these factors, the first three affect the entire period of decline.

Over the past 50 years, the number of workers in manufacturing jobs has declined in the United States, as has the number of workers who are union members. Studies suggest that the steady decline in workers in manufacturing jobs and in union membership has adversely affected the overall participation in the UI program.According to these studies, both the manufacturing industry and unions traditionally have encouraged labor practices that are treated favorably in UI programs. For example, union members are more likely to be laid off than fired—a practice that makes workers eligible for UI benefits. Manufacturing firms tend to have layoffs of large numbers of employees who are handled as a group by UI program officials. Further, both manufacturing workers and union members are more apt to be better informed about UI benefits.

In the past 5 decades, many states have tightened their UI regulations, increasing limitations on eligibility for UI benefits and thereby decreasing the participation in the UI program. In general, in order to demonstrate that a person is an active member of the labor force, states have a series of tests dealing with a claimant’s recent work history, his or her reasons for termination from the last job, and evidence that the claimant is still available for work. For example, most states require that in order to establish that a person worked a sufficient amount of time to qualify for UI benefits, he or she must have earned a minimum amount of wages over a year’s time (a so-called “base period”). Over the years, many states have increased these earnings amounts, thereby limiting who can be eligible for UI benefits.

Other limitations affect program participation as well. For instance, when the UI program was first established, people who quit their jobs for compelling personal reasons, such as pressing family obligations like lack of child care, were not disqualified from receiving UI benefits. Increasingly, however, states have enacted laws that specifically limit the generally acceptable reasons (“good cause”) for quitting a job to those related to work or to the employer.The number of states with such statutory restrictions grew from 16 in 1948 to 28 in 1979, and by 1995, 38 states restricted “good cause” for quitting to work-related circumstances. Under these restrictions, states generally allow a worker to collect UI benefits if a worker quit because of actions taken by an employer—if, for example, an employer requires the employee to work a night shift even though the employee had been hired specifically to work only during daytime hours. On the other hand, most states disqualify a claimant for UI if he or she quit a job because of a temporary lack of child care.

Unemployed Low- Wage Workers Were Less Likely to Receive UI Than Other Unemployed Workers in the 1990s

Unemployed low-wage workers were less likely to collect UI benefits than other unemployed workers in the early 1990s, and the most recent evidence suggests that this trend continued throughout the decade. Unemployed workers were more apt to receive UI benefits if they worked longer than 35 weeks, worked full-time rather than part-time, or lived in a state that tended to have less strict eligibility criteria. However, even when low-wage workers and other workers shared characteristics that favored UI receipt— for example, when they worked more than 35 weeks—low-wage workers were less likely to collect UI. In March 1995, almost two-thirds of unemployed low-wage workers worked immediately before becoming unemployed in jobs in the retail trade or services industries,industries whose workers were the least likely to participate in the UI program. In contrast, only one-third of unemployed higher-wage workers held their last job in these industries. Although SIPP data were limited to the 4-year period between 1992 and 1995,other evidence suggests that these patterns remained throughout the entire decade.

Significantly Lower UI Rate of Receipt Among Low- Wage Unemployed Workers

From 1992 to 1995, low-wage workers were twice as likely to be out of work as higher-wage workers but only half as likely to receive UI benefits. Table 1 compares the unemployment rates of low-wage workers with those of other workers in the early 1990s. During this period, low-wage workers made up about 50 percent of the unemployed former workers,even though they were only about 30 percent of the total labor force. Table 2 shows the rates at which low-wage workers received UI benefits while unemployed, as compared with the rates of higher-wage workers.

Among unemployed workers who had worked for similar periods of time, low-wage workers were still less likely to receive UI benefits than higher- wage workers. As shown in table 3, nearly 35 percent of unemployed low- wage workers who had worked at least 35 weeks during the year collected UI. In contrast, about 62 percent of unemployed higher-wage workers who had worked at least the same number of weeks collected UI.

Even when comparing full-time workers with substantial work histories, differences remained. Table 4 looks at unemployed people who had worked at least 35 weeks, grouped into those who had worked full-time and those who had worked part-time. As can be seen, among the people who had worked full-time for at least 35 weeks, a considerable difference continues between the percentages of low-wage and higher-wage unemployed workers who collected UI benefits.

Although some states had greater participation among the unemployed in their UI programs—most of these tending to use less strict eligibility criteria that allow a greater percentage of unemployed to collect benefits— low-wage unemployed workers continued to be less likely to collect UI benefits than other unemployed workers, regardless of the states in which they lived. To group states, we used the Department of Labor standard recipiency rate as a rough gauge of the relative rates at which the unemployed used the state UI programs. As can be seen in table 5, even though states with high recipiency rates were more likely to pay UI benefits, low-wage workers in those states were still only about half as likely as higher-wage unemployed workers to collect UI benefits.

Industry Sector of Previous Job Affected UI Rate of Receipt

Overall, low-wage unemployed workers were far more apt to have worked in retail trade and services and less apt to have worked in manufacturing, mining, or construction than higher-wage unemployed workers. Figure 2 shows the industry sector (based on the worker’s last job) for workers who were unemployed in March 1995. As shown, 64 percent of the low-wage unemployed workers had been previously engaged in jobs from retail trade and services, as opposed to 32 percent of higher-wage workers (primarily in the services industry). On the other hand, while 49 percent of the higher- wage unemployed workers had been employed in manufacturing, construction, or mining, only 23 percent of the low-wage workers had been employed in these industries.

Wide variation exists among industry sectors in the rates at which unemployed workers collected UI benefits. In general, workers formerly associated with the retail trade or services industries were far less likely to receive UI benefits than were workers most recently employed in manufacturing, construction, or mining. Table 6 compares the rates among industries for workers unemployed in March 1995. As shown, 16 percent of former retail employees and 13 percent of former services employees collected UI benefits, while 39 percent of unemployed manufacturing workers and 58 percent of unemployed construction and mining workers collected benefits. Even with these variations among sectors, differences remained in the rates of UI receipt for unemployed low-wage workers and other workers in individual industry sectors. Among former services workers, though, both low-wage and higher-wage workers were far less likely to collect UI than were higher-wage workers in the other industry sectors.

Differences Likely Continued Throughout the Decade

Although the available SIPP data for our purposes extended only to 1995, we concluded on the basis of our analysis of other data that the rate of UI receipt for low-wage unemployed workers most likely remained lower than that for other unemployed workers through the last half of the decade. This analysis combined two sets of data that were available for the entire decade: (1) CPS data showing the percentage of low-wage workers in the employed labor force and (2) Department of Labor data showing the percentage of all those collecting UI benefits who were low-wage workers. These two percentages were stable over the entire time period. From these factors, together with the likelihood of a higher rate of unemployment for low-wage workers, we inferred that the UI rate of receipt of low-wage workers remained lower than that of other workers. Between 1992 and 1995, SIPP data showed that the unemployment rate of low-wage workers was twice that of higher-wage workers. Our analysis of these other data showed that as long as the unemployment rate for low-wage workers continued to be substantially higher than that for other workers,the rate of UI receipt for low-wage unemployed workers would still have been lower than that for other unemployed workers in the last half of the 1990s. (See app. I for our analysis.)

From other economic factors, it appears likely that the unemployment rate of low-wage workers remained higher than the unemployment rate (calculated for all workers) throughout the decade (even though the unemployment rate declined from 5.6 percent in 1995 to 4.2 percent in 1999) and that, therefore, the rate of UI receipt for low-wage workers remained lower than that for other workers. For example, low-wage workers were clustered in the same industries in the later 1990s that they were in during the early 1990s—about the same percentage (nearly 70 percent) of low-wage workers were employed in services and retail industries in 1997 as in 1992. In addition, while many welfare recipients joined the labor force and became employed during the latter half of the 1990s, many in low-wage jobs, it appears that they experienced higher than average unemployment rates. According to Department of Health and Human Services data, about 30 percent of those with jobs during the late summer 1998 were no longer employed by January 1999.Unemployment rates for former welfare recipients entering the labor force in 1996 and 1997 have been estimated as 35 percent and 33 percent, respectively.Given these data, we believe that low-wage workers continued to experience higher than average unemployment rates in the last 5 years of the decade.

Economic and Policy Factors Influencing General UI Decline Have Significant Impact on Low-Wage Workers

Many factors may explain the relatively lower rate of UI receipt among low- wage workers. These factors could include the possibility that low-wage workers are more likely to quit work to look for another (perhaps better- paying) job or to be fired for cause than other workers. Both of these circumstances would generally make claimants ineligible for UI benefits. However, certain major factors commonly cited by experts as contributing to the general decline in use of the UI program—fewer workers in manufacturing jobs or with union membership, and tighter state eligibility requirements—have particular significance for low-wage workers.

Low-Wage Workers Less Likely to Work in Manufacturing Jobs or to Be Union Members

As a group, low-wage workers are much less likely than other workers either to be employed in manufacturing or to be union members. They are also less likely to be employed in other industries such as construction and mining that, like the manufacturing industry, tend to use layoffs to terminate employees. Rather, they are likely to work in retail trade or services, industries that historically have handled job separations differently (generally, there are fewer employee layoffs) and had less union membership than industries such as manufacturing. In 1997, about 70 percent of low-wage workers were employed in retail trade and services, while 18 percent worked in manufacturing, mining, or construction.

Certain Eligibility Criteria and Time Lags in Processing Wage Records Present Hurdles for Low-Wage Workers

Certain state eligibility criteria are particularly challenging to low-wage workers, especially to those who have not held jobs for steady periods of time, such as many former welfare recipients. Unemployed people with economic and financial characteristics commonly associated with former welfare recipients—single parents with dependent children who most often have an intermittent work history of low-wage (and frequently part-time) work—can be particularly vulnerable to these state requirements. These state criteria include requirements for minimum amounts of earnings as well as disqualification for benefits if workers leave jobs because of personal financial circumstances. In addition, the time allotted in many states for processing wage records may require that a claimant wait between 3 and 6 months before receiving benefits to which he or she is entitled.

Initially, to apply for UI benefits an unemployed person must have had “substantial attachment to the labor force” in prior work. Most statesuse previous earnings—recorded on a quarterly basis in state wage records—to measure whether a claimant has had sufficient employment history. For the most part, states require that a claimant have earned a certain minimum amount over a specified four calendar quarters (the “base period”). The minimum amount for the base period ranges from $130 in Hawaii to $3,400 in Florida.

As a practice, the use of earnings to measure employment history treats low-wage workers differently from higher-paid workers, even if their participation in the workforce is similar. For example, a worker in Florida earning the minimum wage of $5.15 per hour must work 660 hours to qualify for UI, while a worker earning $10.00 per hour would need to work a little over one-half as long to qualify for benefits. Although the current state earnings requirements appear fairly minimal (a full-time worker earning minimum wage for 40 hours per week would need to work 16.5 weeks to qualify for UI in Florida), they can have a negative impact on workers with a less stable job history.

In table 7, we compare the effect of state earnings and employment requirements on two unemployed part-time workers who both lost their jobs in 2000—one earned minimum wage and the other earned $10.00 per hour. The comparison demonstrates that a part-time, low-wage worker is less likely to qualify for UI benefits. In fact, in eight states, working 20 hours a week for 6 months at the minimum wage would be insufficient to qualify an unemployed worker for benefits.

Next, to be eligible for UI benefits in most states, a person must have become unemployed involuntarily—that is, the person was either laid off or quit a job for “good cause.” Generally, if a person leaves a job for reasons other than good cause, he or she is disqualified from UI benefits. However, much variation exists among the states about the factual circumstances that may constitute “good cause.” Even though many states have laws that restrict good cause to work-related circumstances, administrative decisions and specific statutory exceptions lead to different interpretations of “work-related circumstances.”

Certain temporary family crises—such as the sudden loss of child care or the serious illness of a dependent child—may cause workers in marginal financial circumstances to quit their jobs. We surveyed the UI directors of the 50 statesabout three hypothetical situations involving retail workers who quit their jobs for compelling personal reasons. In all cases, it was assumed that the workers were otherwise eligible for UI and that they were able to work when they applied for benefits.

Table 8 shows that most states would deny benefits to those currently available for work who had to quit their jobs because child care was temporarily unavailable. However, if a worker originally hired to work a day shift was suddenly required to work a night shift and had to quit the job because child care was not available, only eight states would deny UI benefits. If an employee had quit to take care of a seriously ill child, about half of the states would deny benefits.

In general, under state laws the unemployed person must also be available and able to work and, in most states, actively seeking work. Again, states have different definitions as to who is currently available and seeking work, often requiring that a claimant search for full-time work. In addition, some states require that the claimant be available to take a job for any shift that might be offered. Because many former welfare recipients work part- time and may be limited in the hours they work because of lack of child care and limited access to transportation, we surveyed the states on their requirements related to these issues.

Table 9 shows that three-fifths of the states would not allow benefits to be paid to an unemployed part-time worker continuing to look only for part- time work, even though the worker is otherwise eligible for UI. However, if a person looking for work in retail trade could not work during a night shift because child care or transportation was not available, most states would continue to pay UI benefits.

Finally, even if the unemployed worker is eligible to receive benefits, the time it takes to process wage records may cause serious delays before the worker can collect UI benefits. In most states, a claimant for UI must have worked in two calendar quarters and have state wage records that show earnings in each of the quarters. However, the time it takes to add quarterly employee wage information to the state wage records generally means that the complete wage records will not be available until the next quarter after the information is received.

Two factors cause delays in processing state wage records, which are compiled from quarterly employee wage reports. First, the wage report is not due to most states until a month after the end of the quarter in which the wages are earned. For example, the wage report for the last calendar quarter of the year (ending on December 31) is due to the state January 31. Second, after the state receives the wage report, it needs time to process it. While many states require that employers with more than 250 employees file wage reports on magnetic media, smaller companies often file on paper documents, which may take 3 to 6 weeks longer to process. Therefore, although some wage data may be available after the first month of the next quarter (February 1 in the example), all wage data may not be available until the beginning of the next quarter (April 1).

To allow for these processing delays, most states specify that wages that count for UI must have been earned within the first four quarters of the last five completed quarters. These four quarters are called the “standard base period.” In many states unemployed workers whose only work was in the most recent 6 months may have to wait between 3 and 6 more months to have their earnings counted toward UI eligibility. For example, if a worker starts a job in a retail store in October but gets laid off February 1, 39 states would not apply the worker’s total earnings toward UI eligibility until after July 1.

Currently, only 11 states will count the worker’s earnings immediately toward UI eligibility. If a worker does not have sufficient earnings in the standard base period, most of these states will allow what is known as an “alternative base period” and count the earnings in the last four completed quarters (so that the worker’s January earnings would be counted in the second calendar quarter starting in April). In these states, if the wage records have not yet been processed, state officials most commonly make a “wage request” of an employer to verify a claimant’s most recent earnings.

Little Change to UI Since Welfare Reform

Since welfare reform in 1996, the welfare rolls have dropped and large numbers of people have joined the labor force, many in low-wage jobs. Yet, most states have made little change to their UI benefit coverage provisions that would assist low-wage workers. Specifically, states have made few alterations to eligibility criteria, such as minimum earnings requirements, and other practices that in their current form may make it more difficult for low-wage workers to qualify for UI. Recently, however, a group representing the Department of Labor, state UI directors, and others has offered proposals to expand benefit coverage for UI claimants that address some of the issues related to low-wage workers.

UI Benefit Coverage Provisions and Processing Lags Remain Largely Unchanged

For the low-wage worker with an unstable job history, little has changed in state laws in recent years to increase the likelihood of UI coverage.In fact, in some states UI benefits for such workers became less accessible. For example, a former welfare recipient started her first job October 1 as a retail clerk paid at $5.15 per hour. After working 26 weeks for 20 hours each week, she was laid off because of slow sales. During that period, she earned $2,678 and worked 520 hours. In 1996, she would have been ineligible for benefits in five states—Indiana, Maine, New Hampshire, North Dakota, and Virginia—because these states require a claimant to have earned more than this worker’s total wages, and also in Washington because she had not worked a sufficient number of hours. In 2000, she would be ineligible in eight states—those listed above plus Florida and North Carolina—because these states raised their minimum earnings requirements. During the period 1996 through 2000, 19 states increased the total earnings required for UI eligibility, 1 state lowered its requirement, and the remaining 29 kept the same minimum earnings level.

If the worker in the previous example resided in a state where she was eligible for UI, the benefits available to her would most likely be about the same in 2000 as in 1996. In 12 states, she would receive additional benefits if she had dependents. The states vary as to both weekly benefit amounts and how long a claimant may receive the weekly amount. Table 10 illustrates the benefit coverage of UI if this worker filed in 2000 in the four most populous states.

Since 1996, there also has been very little movement among the states to adjust for the time lag in reporting wages if it affects when an unemployed low-wage worker can be eligible for benefits. Thus, even if the unemployed worker in our example was eligible to receive benefits, the time it would take to have her wages count would most likely cause delay before she could apply for, and collect, UI benefits. In 1996, nine states had provisionsto allow recent wages to count, even if the wages were earned outside the normal base period, if a claimant needed the earnings to qualify for UI. In 2000, two more states (North Carolina and Wisconsin) had similar provisions.Among the remaining states, however, our survey of UI state directors indicated that it is unlikely much change will occur in the near future. Of the 39 states without provisions to count recent earnings, only one state director said that his state (Alaska) was likely to adopt such a provision, and state directors from 29 states said that their states were either very unlikely or unlikely to adopt this change.

Proposals for UI Reform

In the past 5 years, the Advisory Council on Unemployment Compensation and a stakeholder workgroup that includes state UI directors, union representatives, business representatives, and Department of Labor officials have made proposals that would expand the availability of the UI program for low-wage workers, among other reforms. According to Labor, the changing U.S. economy and its labor force have led to the current movement for reform. The UI program was designed over 60 years ago and worked well for a certain type of worker within the U.S. economy at that time. Since then, the U.S. economy and the composition of its labor force have changed, while the UI program has been slow to adapt to these changes. Labor noted that this has resulted in a larger portion of the labor force more closely resembling a category of worker that UI was not designed to assist. More recently, the reform of the welfare system has further increased the number of workers in this category.

In 1995, the advisory council made a series of proposals regarding low- wage workers as part of a larger set of recommendations about the needs of today’s labor market. Subsequently, the Department of Labor organized a dialogue with state, employer, and union representatives to continue the debate on possible UI reform. As a result of this dialogue, a stakeholder workgroup of federal, state, and private sector officials recently proposed reforms for the UI program. Reform proposals applicable to low-wage workers from these two groups include the following:

ShortenthelagtimeinqualifyingearningsforUIeligibility. The advisory council recommended that all states use a “moveable” base period to consider earnings necessary to qualify a claimant for benefits. Under this proposal, the minimum earnings requirement could be met by earnings from the last four completed quarters, rather than from the first four of the last five completed quarters. Although initially the stakeholder workgroup considered a proposal to provide incentive funding to the states for “alternative” base periods similar to the advisory council’s moveable base period, ultimately it suggested that states try to use technology advances to process the UI reports faster and, where at all possible, to use the latest wage earnings available for all claimants.

SetminimumstandardsforUIearningsrequirements. The advisory council recommended that all states set their laws so that required base period earnings do not exceed 800 times the state’s minimum wage. In its dialogue, the Department of Labor asked for comments on a proposal that would set the minimum earnings requirements to 400 times the minimum wage (this figure was selected so that someone who had worked for 20 weeks for 20 hours at minimum wage would be eligible for benefits in every state). However, the final proposals from the stakeholder workgroup did not include any recommendation on this issue.

Donotdisqualifyclaimantsseekingpart-timework. Both the advisory council and the stakeholder workgroup proposed that states should not reject claimants simply because they are looking for part-time, rather than full-time, work.

Donotdisqualifyclaimantswhoquitajobtocareforadependent. Although neither group ultimately recommended this proposal, the Department of Labor originally offered it for comment. The proposal would have provided financial incentives to states to pay UI benefits to claimants who had to quit their jobs to care temporarily for a child or other family member.

State objections to these proposals focus on the expansion of benefits, and the states argue that (1) the costs of the proposals are burdensome and (2) the proposals violate the traditional roles of the federal and state governments in the operation of the UI program. Regarding the first issue, the states point to, for example, the extra costs of obtaining the most recent earnings records for UI claimants. In response to proposed state legislation, Texas estimated the extra administrative costs at $153,000 annually for making special requests to employers for recent wage information. The proposal from the stakeholder workgroup would eliminate the requirement that states make these special requests, instead calling for federal funding of improved technology to accelerate state processing of UI wage records. However, the largest cost cited by states relates to the increased number of claimants receiving UI benefits. If alternative base provisions were implemented, Texas estimated that the annual costs to the unemployment insurance trust fund would be $24 million per year in benefits paid to potential claimants; California officials estimated their costs at $33 million per year.

From the standpoint of the states, the second objection—changes to the traditional roles of the state and federal governments—raises more difficult problems. While the federal government has imposed some specific requirements, these requirements are viewed as minor conditions only; for example, UI claimants cannot be denied benefits if they refuse work as a union strikebreaker. In contrast, the proposals discussed here—for example, the earnings requirements or allowable reasons for quitting a job—pertain to issues that state officials consider integral to the operation of the state’s UI program that, until now, have been generally under the control of the state.

Conclusion

Despite interest in ensuring that the UI program is meeting the needs of low-wage workers, little action has been taken at the state or federal levels to expand UI availability to this group. In part, this reflects the difficulty of addressing the cost implications of expanded eligibility and balancing states’ autonomy in operating their UI programs. Yet, as a safety net, the UI program continues to offer only minimal protection for low-wage workers. Even though employers in many states pay the same UI payroll taxes for employees earning minimum wage as they pay for employees earning far more than that amount, low-wage workers are much less likely than higher- wage workers to be included in the UI safety net. In the event of an economic downturn, many low-wage workers may find that, unlike higher- wage workers, they will be unable to qualify for UI benefits. While the situation deserves attention on its own merits, the sweeping changes in national welfare policy heighten its importance. A UI program that supports all workers who lose their jobs through no fault of their own during times of economic hardship can play an important role in helping many former welfare recipients maintain their places in the labor force and out of the welfare system.

Agency Comments

In its review of a draft of this report, the Department of Labor generally agreed with our findings and conclusion. It made three major comments: (1) that the changing U.S. economy and its labor force have led to the current movement for UI reform; (2) that nonmonetary eligibility criteria such as voluntarily quitting a job may explain some of the differences between the UI rate of receipt for low-wage and other workers; and (3) that the increases in the national minimum wage between 1996 and 2000 may have made some unemployed low-wage workers eligible for UI. We concur with these comments and have modified our report as appropriate. Labor also made technical comments, which we have included in our report where appropriate. (Labor’s comments appear in app. III.)

As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Honorable Alexis M. Herman, Secretary of Labor; the Honorable Donna E. Shalala, Secretary of Health and Human Services; appropriate congressional committees; and other interested parties. We will also make copies available upon request.

Please call me at (202) 512-7215 or Gale Harris at (202) 512-7235 if you or your staffs have any questions about this report. Other GAO contacts and staff acknowledgments are listed in appendix IV.

Scope and Methodology

We used a variety of data sources to examine the role of unemployment insurance (UI) as part of the safety net for low-wage workers. To show the general trends of UI participation among all unemployed, we summarized data compiled by the Department of Labor. To measure the use of UI by low-wage workers as opposed to other workers, we used data from the Survey of Income and Program Participation (SIPP), a survey conducted by the Bureau of the Census. To determine the specific eligibility criteria used currently in state UI programs, we surveyed the directors of these programs. Finally, to assess whether states have changed their policies and practices to better ensure that low-wage workers are included in the UI safety net, we reviewed data from the Department of Labor as well as data from a national survey of UI directors, and we visited the four most populous states to talk with state officials about their UI system. We performed our work between January 2000 and September 2000 in accordance with generally accepted government auditing standards.

Estimating the Unemployment Rate and UI Rate of Receipt of Low-Wage Workers

To compare low-wage workers’ experience with UI with that of other workers, we estimated the unemployment rates and the UI rates of receipt for the two groups of workers. To do this, we needed information on (1) the employment status of individuals; (2) specific characteristics of the employed population; (3) specific characteristics of the unemployed population; and (4) detailed information on unemployed people who collected UI. We talked with experts at the Department of Labor and the Bureau of the Census and reviewed academic research and other related literature to determine what data sources could be used for our study.

We considered four data sources with information on the use of the UI program nationwide—SIPP, the Current Population Survey (CPS), the Benefit Accuracy Measurement program (BAM), and general Department of Labor UI administrative data. SIPP is a longitudinal survey that collects information on labor force participation and income sources over a 3-year period. CPS, a national survey conducted by the Bureau of the Census for the Bureau of Labor Statistics, is a longitudinal survey that collects data on employment status and other demographic characteristics over a 1-year period. BAM is a Department of Labor program that collects information in order to evaluate the accuracy of state UI payments, and it includes specific data on demographic characteristics of people who collect UI benefits. Labor also maintains other administrative databases that collect information related to unemployment and the UI program. Figure 6 compares various data elements that are available among these four sources.

From our review, we determined that SIPP was the only data source that would allow us to estimate what portions of the unemployed population were low-wage and higher-wage and the extent to which each group received UI. SIPP is a survey administered in person to participants every 4 months over a 3-year period. During the 3-year period, the same set of questions is asked of the same individuals, allowing for analysis of an individual’s labor force experience over the entire time. The respondents who are surveyed for this period are referred to in total as a “panel.” For example, participants in the panel included in the 1993 SIPP first reported data beginning in October 1992, and they continued to report data at 4- month intervals through December 1995.

Our data analysis required that we use SIPP data that covered an entire 3- year period. At the time we conducted our research, the only completed SIPP panels with data from the 1990s were those started in fiscal years 1990, 1991, 1992, and 1993. The latest data available from these panels were for December 1995 from the 1993 SIPP panel. As a result, our research using SIPP data was limited to the period January 1990 through March 1995.

General Methodology for SIPP Analysis

To estimate the unemployment rates and the UI rates of receipt for low- wage and higher-wage workers using the 1990 through 1993 SIPP panels, we took the following steps: Step 1: We created a sample from each SIPP panel of 18- to 64-year- olds who were not self-employed.

We limited our sample in each SIPP panel to those between the ages of 18 and 64. We also excluded those who were self-employed and for whom there were incomplete data during the 3-year period. Our sample included data on the wages and salaries of respondents as well as the number of hours and weeks worked.

Step 2: We used March of the last year of each SIPP panel to determine employment status.

Because of the design of our analysis, we chose to focus on the employment status in one month, March, from the last year of each panel.Because seasonal employment can greatly affect employment status at certain times of the year (such as summer and winter), we examined data from March, a month less likely to be affected by seasonal employment. SIPP records data on a monthly basis. Since it is possible for an individual to be both employed and unemployed in the same month, to address this issue, we consulted with officials at the Bureau of the Census.We considered a person as employed if he or she had a job for the entire month or, if the person missed work during this period, it was not because he or she was laid off and he or she spent no time looking for a job.We considered a person as unemployed if he or she was out of work for the entire month or, if the person did work for part of the month, he or she spent the rest of the time laid off or looking for another job.We did not include those who were out of the labor force.

Step 3: We “looked back” 27 months for the most recent job.

To determine the wage level of an unemployed person, we identified the most recent job held by that person. To do this, we reviewed the work history to determine whether the person had had a job during the period covered by the SIPP panel. Starting in March of the last panel year (the month we used to determine unemployment), we looked back on a month- by-month basis to determine the most recent month in which that person was identified as employed. By using March of the last panel year we could, where necessary, look back for a period of 27 months to identify prior employment. In some cases, a respondent did not have a job during the entire 27-month period. If a respondent had not held a job at all during this time, we excluded the person from our sample.

Step 4: We divided our sample into low-wage and higher-wage workers.

We divided both the employed and unemployed populations into either low-wage or higher-wage workers on the basis of data from the current job if the person was employed or from the person’s most recent job if unemployed. We defined low-wage as earning $8 per hour or less, based on 1999 dollars. For our analysis, we adjusted the rate for inflation. We determined the $8 level by dividing the annual income for a family of four at the federal poverty level by 2,080 hours (full-year, full-time employment).We determined each person’s hourly earnings in one of two ways: (1) if the data included an hourly wage, we used the reported hourly wage in the most recent month that the person was employed or (2) if there was no reported hourly wage, we constructed an hourly wage using data from the most recent month that the person was employed (reported monthly salary divided by the number of weeks worked in the month multiplied by the number of hours usually worked during the week). In some cases, a respondent who had had a job could not be classified as either low-wage or higher-wage because of missing wage or salary data. Table 11 shows what percentage of our SIPP sample had missing wage or salary data.

Step 5: We determined whether the unemployed worker reported UI as a source of income.

We then identified whether each respondent had received UI benefits while out of work. If an unemployed former worker reported UI as a source of income in March of the last panel year, we classified the person as receiving UI. Otherwise, we classified the person as not receiving UI.

Step 6: We identified additional characteristics of the unemployed population.

We further analyzed the unemployed population by identifying the industries in which they had worked, whether they had worked full-time, and how long they had worked before becoming unemployed. To identify the kinds of industries low-wage and higher-wage unemployed workers had worked, we used the industry code of the most recent job. Our work presents data for nine industry groups: (1) retail trade; (2) manufacturing; (3) finance; (4) mining and construction; (5) agriculture, fishing, and forestry; (6) wholesale trade; (7) transportation and utilities; (8) public administration; and (9) services. We developed these groups by combining detailed CPS industry codes. For example, the services sector combines five types of service industries: business services, personal and entertainment services, medical services, education and social services, and professional services.

Next, we identified whether the unemployed former worker had been employed full-time or part-time. We defined full-time employment as working 35 or more hours each week and part-time employment as working fewer than 35 hours per week.

To determine the number of weeks worked by the person in the year immediately before he or she became unemployed, we created a subsample from our original SIPP sample. The subsample included only those who were unemployed in March of the last panel year and who had had a job during the 15 months prior to unemployment (as compared with the 27- month look-back period for our original sample). After identifying the most recent job in the 15-month period, we counted how many weeks each person had worked during the 12 months before becoming unemployed. We classified the unemployed low-wage and higher-wage workers into three categories: (1) those who had worked more than 35 weeks during the year, (2) those who had worked between 20 and 35 weeks during the year, and (3) those who had worked fewer than 20 weeks during the year. To increase the size of this subsample, we combined all four SIPP panels.

Calculating the Unemployment Rate

We calculated the overall unemployment rate by dividing the number of unemployed by the total number of people in the labor force, as follows: The unemployment rates for low-wage and higher-wage workers were calculated on the basis of their representation in the labor force. For example, the unemployment rate for low-wage workers was calculated by dividing the number of unemployed low-wage workers by the number of low-wage workers in the labor force.

In calculating an unemployment rate for higher-wage workers, we included the cases with missing wage or salary data in such a way as to calculate the most conservative estimates, that is, estimates that would minimize any differences between the low-wage and higher-wage unemployment rates. To calculate this rate, we assumed that all those with missing wage data were actually higher-wage unemployed workers. With that assumption, the group with missing wage data was added to the higher-wage unemployed group when we calculated the higher-wage unemployment rate.

The unemployment rate we calculated using the SIPP data differs for a variety of reasons from the standard unemployment rate published by the Bureau of Labor Statistics from CPS data. These two rates differ in part because each rate measures different populations. Specifically, our rate includes only those in the labor force who are between the ages of 18 and 64, whereas the standard rate includes all those who are 16 years old and older. Also, our analysis excludes those who are self-employed, while the standard rate includes self-employed workers. Another key contrast results from technical differences between the two databases used to calculate these rates. SIPP, for example, records data for each month, but the CPS records data for a 1-week period. Therefore, while employment status in SIPP measures whether or not a person was employed during the entire month, the CPS measures whether the person was employed during the week that included the 12th of the month.

Calculating the UI Rate of Receipt

We calculated the overall UI rate of receipt by dividing the number of unemployed workers who had collected UI benefits during March by the total number of unemployed workers in that month.

In calculating the UI rates of receipt, we included the respondents with missing wage data in such a way as to present the most conservative estimates; that is, we allocated the missing wage data so that our estimates would minimize the difference between the receipt rates for the two groups. Therefore, to calculate the UI rate of receipt for low-wage workers, we assumed that all workers with missing wage data who were paid UI benefits were low-wage unemployed workers. Conversely, to calculate the higher-wage UI rate of receipt, we assumed that all those with missing wage data who were not paid UI benefits were higher-wage unemployed workers.

The UI rate of receipt we constructed using SIPP data is not comparable to the Department of Labor’s standard UI recipiency rate. Our UI rate of receipt measures the number of people who have actually received a UI check as a percentage of the unemployed in the labor force. Labor’s standard recipiency rate, on the other hand, measures the number of people who file a claim for UI as a percentage of the unemployed in the labor force.By measuring the number of people who file a claim for benefits, Labor’s rate includes those who eventually receive UI as well as those who do not.

Because the UI program differs from state to state, we analyzed whether there were differences in the UI rates of receipt for the low-wage and higher-wage unemployed that lived in different states. For purposes of comparison, we created two groups of states—those with high standard recipiency rates and those with low standard recipiency rates based on Labor’s standard recipiency rates from 1992 through 1995. States that consistently were in the 15 states with the highest standard UI recipiency rates were in one group and states that were consistently the lowest 15 were in the other. To increase the size of the sample for each of the two groups of states, we combined all four SIPP panels.

For each unemployment rate and UI rate of receipt presented in the analysis, we tested whether the differences between low-wage and higher- wage workers were statistically significant. To do this, we compared the sampling errors for the two estimates and, if the sampling errors for the low-wage and higher-wage workers did not overlap, we concluded that each difference is statistically significant. Unless otherwise noted, statistical significance was tested at the .01 level, thereby allowing us to conclude that there is only a 1 percent chance that the difference between the rates is due to sampling error.

Data Analysis for the Rest of the 1990s

Although SIPP data are unavailable for the latter half of the 1990s, other relevant data are available from the CPS and from the Department of Labor’s BAM database. From the CPS data, it is possible to calculate the proportion of low-wage (or higher-wage) workers in the employed labor force. From the BAM data we can determine the proportion of low-wage (or higher-wage) workers who received UI, compared with the total number of unemployed workers receiving UI. Table 12 compares these data with our calculations, using the SIPP data for the years 1992 through 1995.

As shown in column A of table 12, the CPS percentage of low-wage workers in the employed workforce was roughly 30 percent for the entire period. In column C, the BAM percentage of those paid UI who were low-wage workers was also roughly 30 percent during the same time. Although the table refers only to low-wage workers, the percentages for higher-wage workers can be computed as the inverse of the low-wage percentage (that is, 100 minus the low-wage percentage). Thus, the CPS percentage for higher-wage workers is roughly 70 percent, and this percentage is about the same as the BAM percentage for higher-wage workers—also about 70 percent.

Figure 7 demonstrates that the data from the CPS and BAM can be used to infer how the rate of UI receipt and the unemployment rate relate across wage groups between 1996 and 1999. It can be shown that, given the observed pattern of data from CPS and BAM, it is unlikely that the rate of UI receipt for low-wage workers would exceed that of higher-wage workers during this period. Essentially, for this to have occurred, the unemployment rates across the wage groups would have to have converged dramatically during this period—in sharp contrast to the experience of earlier years. Whereas between 1992 and 1995 the unemployment rate for low-wage workers exceeded that of higher-wage workers by well over 100 percent, as long as the unemployment rate for low-wage workers exceeded that of higher-wage workers by as little as 18 percent throughout the rest of the decade, the rate of receipt for low-wage workers remained less than that of higher-wage workers for each year between 1996 through 1999.

In figure 7, RR (lw) equals the UI rate of receipt for low-wage workers and UR (lw) equals the unemployment rate of low-wage workers. For higher- wage workers, the UI rate of receipt is RR (hw) and the unemployment rate is UR (hw).

Considering the highest value W had taken from 1996 through 1999 was 1.18 in 1998, RR(lw) is less than RR (hw) throughout the decade as long as UR (lw) is greater than UR(hw) by at least 18 percent.

Eligibility Criteria for State UI Programs

To ascertain how individual states would treat specific circumstances that might be particularly applicable to low-wage workers, and to former welfare recipients, we sent a questionnaire to state UI directors. For the most part, the questionnaire presented hypothetical situations related to unemployed workers, and asked the UI directors to determine whether the unemployed worker could qualify for UI benefits in their state program. We received responses from all 50 states.

Status of State UI Programs

To assess whether state UI programs had changed in the 4-year period since welfare reforms, we reviewed the Department of Labor’s compilation of legislative changes in state UI laws from all 50 states.

To examine the current status of the state UI programs, we included questions about the operation of UI programs in our survey of the state UI directors. We also visited four states—California, Texas, New York, and Florida—to talk with officials about the state UI program. We chose these states not only because they were the most populous states but also because they presented contrasts in how they manage their UI programs.

State Responses to GAO Questionnaire on UI Eligibility

In June 2000, we sent a questionnaire to the UI directors for the 50 states. In this appendix, we present the questions that we discuss in our report and data on how each state responded.

Question 2: Does your state have an alternative base period?

Question 4: (If the state had no alternative base period) In your opinion, how likely or unlikely is it that your state will adopt an alternative base period in the near future?

Questions 5, 6, and 7 dealt with personal circumstances for quitting a job. For each question, the respondent was asked to assume that (a) the worker has quit a job as a stockroom clerk with a retail chain store; (b) the worker’s reasons for leaving the job are compelling and not the fault of the worker; (c) the worker is otherwise eligible to receive UI benefits.

Question 5: The worker quits because child care suddenly becomes unavailable and the employer cannot reschedule the worker’s hours. Subsequently, child care becomes available. The worker files for UI.

Question 6: The worker was originally hired to work during the day shift. However, the employer requires that the worker change work hours to a night shift, and the worker quits because child care is unavailable during the night shift.

Question 7: The worker quits to care for a sick child (physician certifies need). Subsequently, the worker is available to resume work. The worker files for UI.

Questions 8, 9, and 10 dealt with the requirement that a worker be “able and available” for work. For each question, it is assumed that the worker’s previous job was a stockroom clerk in a retail chain store, that the worker was laid off this job, and that the worker is otherwise eligible to receive UI.

Question 8: In her prior job, the worker was employed part-time, for 30 hours a week. When she applies for UI and is asked whether she is available for work, she indicates that she is looking for work with the same hours as those of her previous job and is not able to work more hours than previously.

Question 9: The worker is available to work full-time during the weekdays. However, she cannot work evenings or weekends because of the lack of affordable child care at that time. As a result, the worker is unable to take jobs that require that she work evenings or weekends.

Question 10: The worker is available to work full-time but always relies on public transportation to get to work. The worker is therefore unable to take jobs that require work during a night shift because public transportation is generally not available during night hours.

Comments From the Department of Labor

GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition, Michelle C. Verbrugge, Richard Kelley, Grant M. Mallie, Joan K. Vogel, and Andrew M. Davenport made key contributions to this report.

Related GAO Products

WelfareReform:States’ImplementationandEffectsontheWorkforce DevelopmentSystem(GAO/T-HEHS-99-190, Sept. 9, 1999).

WelfareReform:States’ImplementationProgressandInformationon FormerRecipients(GAO/T-HEHS-99-116, May 27, 1999).

WelfareReform:InformationonFormerRecipients’Status(GAO/HEHS-99- 48, Apr. 28, 1999).

WelfareReform:States’ExperiencesinProvidingEmploymentAssistance toTANFClients(GAO/HEHS-99-22, Feb. 26, 1999).

WelfareReform:StatesAreRestructuringProgramstoReduceWelfare Dependence(GAO/HEHS-98-109, June 17, 1998).

UnemploymentInsurance:Program’sAbilitytoMeetObjectives Jeopardized(GAO/HRD-93-107, Sept. 28, 1993).

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