The U.S. needs a new unemployment insurance system

The COVID-19 crisis has exposed crippling defects in America’s unemployment-insurance system. The most essential short-term fix is to extend and adjust the emergency benefits that expired at the end of July. In due course, though, the system needs more than just the latest in a years-long series of ad hoc patches. It requires comprehensive reform — to assure workers of adequate protection, promote employment, insulate the economy against protracted downturns and spread the cost more equitably.

The current system is a complicated federal-state partnership. Both levels of government collect taxes and pay benefits, with the states designing and administering the systems, subject to federal rules designed to encourage ample relief. In principle, this has advantages. It means programs can be designed to reflect local preferences, and it allows different policies to be tried, tested and compared. But it’s time to admit that, in practice, this approach has failed. The needed comprehensive reform can best be achieved by asking the federal government to play a bigger role.

What went wrong? In short, tax competition among the states has squeezed funding over the years, which in turn has meant less generous benefits, narrower eligibility, and administrative systems starved of staffing and technology. This failure imposes a cost not just on the states concerned but on the whole U.S. economy.

Before the pandemic, the proportion of unemployed workers receiving benefits had fallen to less than 30 percent. The U.S. spends only about 0.1% of gross domestic product on helping workers with job search and training -- roughly one-fifth of what other advanced economies do. The system as a whole delivers a smaller countercyclical stimulus than is needed during a severe or sustained slowdown. Assailed by a crisis like today’s, it threatens to break down altogether.

After the financial crash, Congress had to enact exceptional extensions of unemployment benefits. The COVID-19 slowdown also prompted a series of emergency federal interventions, including Pandemic Emergency Unemployment Compensation (an extra 13 weeks of relief for eligible recipients), Pandemic Unemployment Assistance (up to 39 weeks of benefits for some workers not otherwise covered), Federal Pandemic Unemployment Compensation (an additional $600 a week on top of regular unemployment benefits), and more.

Granted, unforeseen emergencies demand flexibility and innovation. Even so, systems should be made as robust as possible. The existing benefits infrastructure was weak to begin with, and partly for that reason it has struggled to cope with this onslaught of temporary measures. A stronger underlying system would have needed less-urgent backup — and the interventions it did require would have been easier to administer.

Persistent dysfunction in Washington makes it foolish to rely so heavily on emergency arrangements. As far as possible, the unemployment insurance system should run on autopilot. If a recession is deeper and more protracted than usual, the system -- by design -- should provide more support for longer, without special intervention.

Today’s Congress is unlikely to take on this work. At the moment, even maintaining essential support during an ongoing crisis seems beyond it. But in due course a more productive alliance between a different president and a new Congress could and should make fundamental reform of unemployment insurance a priority. The crucial elements are automatic funding from federal revenue, broader eligibility (so that gig workers and others are covered), a national formula based on replacing a fixed share of income up to a ceiling, efforts to improve jobsearch assistance and other socalled active labor measures, and resources to ensure that the system is simple to use and effectively administered.

Together with a substantially higher Earned Income Tax Credit to boost the earnings of the working poor, a repurposed federal system of unemployment insurance would make America’s labor market fairer, more efficient and less vulnerable to ordinary downturns. And when emergencies come along, as they will, coping with them wouldn’t test the system to the point of failure.