Now That We’ve Read the Fine Print … Another Look at Pennsylvania's Unemployment Compromise

As Mark Price has noted, the Pennsylvania Legislature approved a compromise bill last week that avoids cutting off 13 weeks of federally funded extended unemployment insurance benefits to 45,000 Pennsylvanians now and will allow another 90,000 Pennsylvanians to qualify for extended benefits through the end of 2011. This year, the bill will draw down $350 million in additional federal funds.

It would have been crazy in this economy, and unfair to 135,000 Pennsylvanians and their families, to leave $350 million in federal funds on the table. But there is a catch with this compromise bill. You see, this bill also contains “savings”— that is, cuts in benefits — that the Department of Labor and Industry estimates will equal almost $1 billion between 2012 and 2018. Permanent savings estimated at $133 million per year in exchange for about six months of additional benefits equal to $350 million.

The benefit cuts were prompted by concern about Pennsylvania’s Unemployment Insurance Trust Fund being in debt to the tune of $3.7 billion. As a matter of Trust Fund mathematics, increased contributions and reduced benefits (even beyond last week’s changes) are needed to bring the Trust Fund into balance over the next seven to 10 years.

There are some simple economic and fairness reasons that the rest of the Trust Fund hole should be plugged with increased contributions. We should use the benefit cuts in last week’s bill as a “teaching moment” that helps lawmakers and the public understand why there should be no further benefit cuts.

Here are the two reasons why:

  • First, we ALL have a stake in unemployment insurance benefits that replace a high proportion of lost wages. Why? Because these benefits play the role of an “automatic stabilizer” in our economy. UI benefits make it possible for jobless workers and their families to maintain their consumption levels. UI benefits, therefore, help prevent the economy from spiraling downward into a deeper recession. This was one of the reasons that UI benefits were first established in 1935 — to help lift the economy out of the Great Depression. Because Pennsylvania has more generous unemployment benefits than most states, our unemployment insurance system cushions us better from economic downturns and helps us maintain a lower unemployment rate than the national average.
  • Second, even in Pennsylvania, unemployment insurance benefits, on average, replace only a little over half of lost wages for those who receive benefits. Furthermore, economic research shows that joblessness not only costs workers the short-term gap between unemployment benefits and prior wages, but unemployment also has long-term negative impacts on earnings, worker health and family well-being. (For a review of this literature, see the Department of Labor and Industry's September 2010 report, A Profile of Pennsylvania’s Unemployed People.) Since unemployment benefits only replace half of lost wages and unemployment has additional long-term costs, the unemployed in Pennsylvania already pay much more of the “social cost” of unemployment than do workers fortunate enough to escape unemployment.

In sum, cuts in unemployment benefits (a) make it likely that Pennsylvania will suffer deeper recessions in the future, and (b) transfer additional costs of unemployment to the workers, families and communities that already pay the heaviest cost.

It is also important to remember that UI is not an entitlement program; it’s an insurance arrangement. The problem, however, is that UI is a little like car insurance that pays for only half of what you need to fix your car after you have an accident. (Actually, more like a third of what you need because not all workers receive benefits.)

Since UI benefits already fail to insure fully against the risk of unemployment — and do not stabilize the economy in a downturn as much as higher benefits would — it becomes clear that the solution to the Pennsylvania UI Trust Fund crisis should be higher contributions.

This also makes sense when you see that contributions have fallen dramatically over the past 27 years because they fall on a smaller and smaller fraction of wages. For each worker, employers only contribute on the first $8,000 in wages and this figure has not increased since 1984. If the level of wages subject to UI taxes had kept pace with inflation since 1984, it would be $21,500 today, and Pennsylvania would not have a UI Trust Fund crisis. (Trust Funds in states that index to inflation the UI wage base on which employers make contributions to their UI funds are in much better shape today than UI Trust Funds in other states, such as Pennsylvania.)

Pennsylvania, unlike most states, also has the option of increasing workers’ direct contributions into the UI Trust Fund. Since the 1980s, when the UI Trust Fund gets low, workers pay into the fund a small contribution that is imposed on all of their wages, not just the first $8,000.

If last week’s UI compromise can serve as a wake-up call for preventing additional benefit cuts, then this legislative deal will look a lot better down the road.

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