[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




                      INCREASING ECONOMIC SECURITY
                          FOR AMERICAN WORKERS

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                   INCOME SECURITY AND FAMILY SUPPORT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 15, 2007

                               __________

                           Serial No. 110-23

                               __________

         Printed for the use of the Committee on Ways and Means
















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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY C. HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director
                  Brett Loper, Minority Staff Director

                                 ______

           SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT

                  JIM MCDERMOTT, Washington, Chairman

FORTNEY PETE STARK, California       JERRY WELLER, Illinois
ARTUR DAVIS, Alabama                 WALLY HERGER, California
JOHN LEWIS, Georgia                  DAVE CAMP, Michigan
MICHAEL R. MCNULTY, New York         JON PORTER, Nevada
SHELLEY BERKLEY, Nevada              PHIL ENGLISH, Pennsylvania
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
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converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

























                            C O N T E N T S

                               __________
                                                                   Page

Advisory of March 8, 2007, announcing the hearing................     2

                               WITNESSES

The Honorable Robert Reich, J.D., Professor of Public Policy, 
  University of California, Berkeley.............................     7

                                 ______

Thea Lee, Assistant Director of Public Policy, AFL-CIO...........    27
Howard Rosen, Visiting Fellow, Peterson Institute for 
  International Economics........................................    35
Maurice Emsellem, Policy Director, National Employment Law 
  Project........................................................    49
Douglas J. Holmes, President, UWC--Strategic Services on 
  Unemployment and Worker's Compensation.........................    66

                       SUBMISSIONS FOR THE RECORD

Jeffrey R. Kling, statement......................................    81
National Association of State Workforce Agencies, statement......    85
New York State Department of Labor, statement....................    88
Washington State Employment Security Department, statement.......    90





















 
                      INCREASING ECONOMIC SECURITY
                          FOR AMERICAN WORKERS

                              ----------                              


                        THURSDAY, MARCH 15, 2007

             U.S. House of Representatives,
                       Committee on Ways and Means,
        Subcommittee on Income Security and Family Support,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:00 a.m., in 
room B-318, Rayburn House Office Building, Hon. Jim McDermott 
(Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                            SUBCOMMITTEE ON

                   INCOME SECURITY AND FAMILY SUPPORT

                                                CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
March 08, 2007
ISFS-3

               McDermott Announces Hearing on Increasing

                 Economic Security for American Workers

    Congressman Jim McDermott (D-WA), Chairman of the Subcommittee on 
Income Security and Family Support of the Committee on Ways and Means, 
today announced that the Subcommittee will hold a hearing to review 
proposals designed to improve security for American workers. The 
hearing will take place on Thursday, March 15, 2007, at 10:00 a.m. in 
room B-318 Rayburn House Office Building.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Robert Reich, former Secretary of Labor under 
President Clinton, and other experts on programs and policies designed 
to assist jobless workers and respond to changes in the U.S. labor 
market. However, any individual or organization not scheduled for an 
oral appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Unemployment Insurance (UI) system, established in 1935, 
continues to serve a vital role in providing temporary and partial wage 
replacement for unemployed workers and in stabilizing the economy 
during recessions. However, significant changes have occurred in the 
American workforce and in the U.S. labor market since the program's 
inception. Most obviously, women now constitute a much larger share of 
the workforce. But many other important changes have occurred, 
including a major decline in the portion of the workforce employed in 
manufacturing jobs, an increase in the share of the labor force working 
part-time, a rise in the duration of unemployment, and a drop in 
employment tenure in the same job. In some cases, the UI system has 
failed to adequately respond to these and other changes in terms of 
access to unemployment benefits. In other instances, there may be a 
need for additional support systems for workers moving between jobs.
      
    In announcing the hearing, Chairman McDermott stated, ``Our first, 
best approach to ensuring economic security for American workers are 
policies that support good jobs and rising wages. But, we also need a 
broader vision of supporting employment--one that helps workers through 
periods of dislocation and transition. I want to consider two 
possibilities. First, helping States fix some of the more obvious holes 
in the unemployment insurance system. And second, establishing a new 
program of wage insurance to support dislocated workers when they move 
into a new job that pays less than their previous employment. The 
concept of insurance is to be prepared in case something adverse 
happens, not because you expect it to happen. That's how I view this 
issue.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on proposals to improve the unemployment 
insurance system and to replace a portion of any lost wages between 
past and current employment for workers involuntarily changing jobs.

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FORMATTING REQUIREMENTS:

      
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noted above.

                                 

    Chairman MCDERMOTT. The Committee will come to order. We 
are here today to talk about a couple of issues that I put in 
some draft legislation and circulated around to start our 
thinking.
    When it comes to securing a brighter future for the 
American worker, our first goal really ought to be to support 
policies that grow jobs and increase wages. Also, at the same 
time, we have to realize that some level of dislocation is 
inevitable, especially in an era of globalization and rapid 
technological change. A comprehensive vision of promoting 
employment really calls for supporting workers through these 
periods of transition.
    Unfortunately, our present safety net for dislocated 
workers has more holes, really, than net. A little more than 
one-third of the jobless workers actually receive unemployment 
insurance, and there are particular barriers limiting access to 
low-wage and part-time workers. Additionally, there is no help 
for dislocated workers who subsequently become re-employed in 
lower-paid jobs.
    In short, much of our response for helping displaced 
workers has been on a kind of automatic pilot for a long time, 
even as the workforce and the labor market has changed 
dramatically. When I arrived in the State legislature in 1970, 
Boeing had just gone from 106,000 people down to 36,000 in the 
course of about 5 months, when the Safe Secure Transit contract 
went away.
    So, I know about what happens with unemployment, and how 
it's cyclical, and then they went back up to whatever 
thousands. That cyclical nature of the seventies is not what 
we're dealing with today.
    Now, I have suggested, two responses to the evolving needs 
of the American worker. These draft proposals are designed to 
stimulate discussion, and to get us moving in the right 
direction. They could easily fit into a broader response that 
includes some other important issues in my mind, such as 
portable health care coverage.
    First, we should fix some of the most obvious holes in the 
unemployment insurance system. We have money set aside in the 
Federal unemployment trust funds for the purposes of helping 
dislocated workers. I think it's time we use some of it to meet 
that goal. My proposal would distribute up to $7 billion to 
encourage, assist, and reward States for making specific 
improvements to their unemployment insurance (UI) programs.
    The first reform required of States to receive their share 
of these new funds is to count an applicant's most recent wages 
when determining their UI eligibility. Twenty States have 
already taken that step. Other steps, include ending 
discrimination against part-time workers, eliminating 
prohibitions on covering workers who leave work for compelling 
family needs, and providing extended benefits to workers in 
State-certified training programs. There is a real disconnect 
between unemployment and training in this country, and we need 
to begin to rectify that. In combination, these reforms might 
increase UI coverage for as many as half-a-million workers a 
year.
    The second step we should take is to create a national 
program of wage insurance to help dislocated workers who suffer 
a decline in wages when they are re-employed. Now, we have car 
insurance and home insurance, and even some pet insurance in 
this country. It seems to me that it's not unreasonable to 
consider having some wage insurance.
    Among re-employed full-time workers between 2001 and 2003, 
the average earnings dip by 13 percent. The Congressional 
Budget Office (CBO) tells us that 1 in 5 workers experienced an 
earnings decline of at least 25 percent from one year to the 
next.
    Now, to help displaced workers who become re-employed at 
lower-paying jobs, I have worked with Senator Schumer to craft 
a wage insurance proposal. The proposal would replace half the 
difference between a worker's old and new salary, up to $10,000 
a year for up to 2 years. The wage insurance program would 
supplement the current unemployment insurance system, not 
replace it. There would also be a need to help people who are 
seeking new unemployment, as the UI system now does.
    Wage insurance is designed to take the next step that 
should help displaced workers after they have found another 
job, by replacing a portion of any lost wages.
    Take the example of a factory worker who loses a job paying 
$50,000 a year, but can only find one paying $30,000 to replace 
it. The wage insurance program would fill half the gap in lost 
wages, bringing their take-home pay up to $40,000 a year. This 
reduces the level of hardship imposed on the worker, and it 
gives him or her time to gain experience, on-the-job training, 
job seniority, in order to climb the employment ladder back to 
a prior wage level.
    Now, some say that we should never concede that a worker 
may have to take a lower-paying job. Also, I am not a very good 
ostrich. I can't bury my head in the sand and ignore reality. 
When 4,000 jobs at Maytag end in Iowa, the likelihood of those 
coming back any time in the foreseeable future is zero. For us 
to say that, well, we will just have those workers wait it out 
is simply, in my view, not realistic.
    So, I look forward to hearing the witnesses' comments on 
these proposals, and also their own ideas about what we need to 
be doing to increse economic security for America's workers. I 
would yield now to our ranking Member, Mr. Weller. Mr. Weller?
    Mr. WELLER. Thank you, Mr. Chairman, and thank you for 
conducting today's hearing. Thank our panelists for joining us, 
and participating here.
    I do want to comment, Mr. Chairman, that things happen 
fast. We are just a couple of months into the new Democrat-
majority congress, and today we are here to discuss a proposal 
to create the new first Federal payroll tax increase since 
1965. This would be just part of the proposed 5-year new and 
additional $40 billion tax increase and raise in Federal taxes.
    Under this proposal, there would be even more tax hikes to 
come, since the up front Federal tax hikes will be matched by 
State payroll tax hikes down the line. These new taxes ignore 
the fact that there is currently $35 billion sitting unused in 
the Federal unemployment accounts. That large balance is enough 
to pay the current Federal responsibilities in the unemployment 
benefit system for the next seven years, even if we did not 
collect another dime in Federal taxes during that time.
    That argues for ending the Federal unemployment surtax, not 
extending it, as my friend, the Chairman's, proposal would do.
    Stated purpose for all these new tax increases is to assist 
workers confronting increased economic pressures due to trade, 
globalization, and a range of other factors, which is a fair 
goal. Also, the problem is, most workers don't sit around the 
kitchen table, thinking they would be more financially secure 
if only the Federal Government raised their taxes some more.
    In fact, after paying current Federal and State income 
taxes, Social Security taxes, Medicare taxes, unemployment 
taxes, property taxes, sales taxes, and on and on, most 
families figure another tax is the very last thing their family 
budget needs. The fact that these new Democrat tax hikes 
involve payroll taxes on wages, which are really taxes on job 
creation and wage growth, only makes matters worse.
    Today's hearing will also review the Chairman's proposal to 
fundamentally alter the nature of the Federal State 
unemployment benefits program. That program has provided laid-
off workers benefits since the thirties, with States 
determining eligibility and collecting State payroll taxes to 
support those benefits. States today are free to cover various 
categories of unemployed workers, including some who 
voluntarily leave their jobs, or who are seeking only part-time 
work.
    The Chairman's proposal seeks to reward--or some would say 
bribe--all States into permanently expanding eligibility for 
unemployment benefits with a one-time infusion of Federal 
funds. Moreover, after those Federal funds are gone, the 
broader eligibility will remain, forcing States to raise 
payroll taxes to keep paying promised benefits. Again, it's 
hard to see how more payroll taxes could promote job creation 
and higher wages.
    The final issue we will review today involves a concept of 
wage insurance. In terms of encouraging work, this idea has 
broad bipartisan appeal. In fact, yesterday I introduced H.R. 
1513, legislation that would encourage all States to seek 
waivers to develop wage insurance, personal savings, and other 
pro-work programs, as part of their current unemployment 
benefits system.
    As the work of this Subcommittee in recent years, and even 
the Chairman's current proposal suggests, the nation's 
unemployment benefit system needs repair to better connect 
dislocated workers and new jobs. However, instead of sensible 
reform, this new proposal proposes creating an entirely new 
program with a new Federal payroll tax on top of today's 
current unemployment benefits program.
    It seems more logical to first try and address deficiencies 
of the current system, especially since the current 
unemployment benefit system will collect and spend almost $200 
billion over the next 5 years on unemployment benefits. That 
leaves ample margin for States to develop ways to better assist 
workers in finding new jobs. This waiver approach is a model we 
successfully followed leading up to welfare reform, and it 
worked. The States are innovators. That is a path we can, and 
should, follow again.
    In fact, welfare reform worked so well at promoting work, 
that States were left with substantial savings. In the 
unemployment benefit system. That would result in state payroll 
tax cuts, since more work means less unemployment benefits 
going out the door. Now, that would be a novel idea.
    Mr. Chairman, I look forward to our witnesses' testimony.
    Chairman MCDERMOTT. Thank you very much, Mr. Weller. I 
think we will have quite an interesting discussion as we go 
down the road.
    Our first witness is Robert Reich, who is--I read your 
biography, and I don't think we're going to go through the 
whole thing here. He was labor secretary under Mr. Clinton, and 
has been an advisor in other administrations. I think 10 books 
and a play, and a few other things--we're glad to have you here 
today.
    I understand that you have gone to California, which is 
Nirvana, and we--leaving Boston--and we are eager to hear your 
testimony today.
    Your full, written testimony will be entered into the 
record. So, whatever you would like to say beyond that will be 
helpful to the Committee. Thank you.

STATEMENT OF ROBERT B. REICH, J.D., PROFESSOR OF PUBLIC POLICY, 
               UNIVERSITY OF CALIFORNIA, BERKELEY

    Mr. REICH. Thank you, Mr. Chairman. I commend the Committee 
for looking at the issue of economic insecurity, because, as 
you know, although the macro-economy, in terms of recessions 
and inflation, is well under control--far better under control 
now and over the last 10, 15 years, than the macro-business 
cycle was under control years before that--the structural 
changes in the economy are affecting average working people to 
a far greater extent than ever before.
    When I say ``structural changes,'' I am talking about 
changes in technology, in globalization, in supply and demand. 
The fact is that consumers and investors now have more choice 
than they have ever had before, and they can move to better 
deals, almost at the speed of an electronic impulse. That's 
great, if you're a consumer or an investor. You can get a 
better deal.
    The opposite side of the same coin is that working people 
in jobs, in businesses, in industries, are being buffeted as 
never before by these structural changes. Job security is a 
thing of the past. Wage security is a thing of the past. Now, 
that's fine if you're a young person, and you have the right 
skills, and you have a four-year college degree. Maybe that 
looks like a very exciting and dynamic set of opportunities for 
you. I hope it is.
    However, if you're 40 or 50 years old, and you're in an old 
industry, and you don't have perhaps as much education and 
training as would be ideal, these structural changes are 
threatening you, and they are threatening your family.
    In my formal testimony, Mr. Chairman, that I submitted for 
the record, I provided the Committee some evidence. I think the 
Committee probably has already had quite a lot of evidence as 
to the effect of structural changes on working people.
    Now, let me just say something. The dynamism of the 
American economy is one of its greatest strengths. We ought to 
celebrate that. The fact that people are moving from job to 
job, and field to field, and occupation to occupation, 
sometimes industry to industry, is a great, great boon to the 
American economy.
    Also, we have probably, of all wealth nations, the worst--
least adequate--system of moving people from job to job, for 
providing some employment security for people, so that when 
they get the next job, the next job does not pay less than the 
former job, or that they have a reasonable chance of when they 
do get buffeted by the winds of economic change, having another 
job that pays almost as well.
    Let me put this in a little bit of context, if I may, and 
then I would be very pleased to answer your questions.
    Unemployment insurance should be, in my view, viewed as 
part of a system of active labor market supports that move 
people, as quickly and reasonably as possible, from job to job, 
as long a the next job pays--or has a very good chance of 
paying--as much as the job that was lost.
    You need to, first of all, fix the holes in the 
unemployment system. That unemployment system was developed at 
a time in our Nation's history when the biggest threat to 
people was that they get laid off from their job during a 
period of recession, and then they would get the job back again 
when the economy recovered.
    Well, most people that lose their jobs today never get the 
old job back again. We saw this beginning in the 1990/1991 
recession, we saw it to even a larger extent in 2001. Since 
then, we have had huge numbers of lay-offs, even though we have 
had a recovery. People don't get the old job back again. The 
unemployment insurance system was premised on the notion that 
these were temporary lay-offs by workers who had been in full-
time jobs, and would most likely get that full-time job back 
once the recession was over. It's not happening.
    We have got a huge number of part-time workers in the 
workforce now, a lot of contingent workers. Most people's 
wages--most people's wages, even if they are full-time workers 
now--are premised on either overtime or billable hours, or some 
other variable, depending upon how well their employer is doing 
over the preceding interval.
    So, nobody has the kind of job security they used to have, 
and unemployment insurance needs to respond to the new reality. 
There are many women in the work force who are also the primary 
caretakers in their homes. Fortunately or unfortunately, women 
are the primary caretakers in our society. That means that if 
children or parents of loved ones need help, they have to leave 
their job. Or, if there is abuse in the family, sometimes they 
may have to leave the job, and leave their spouse.
    Our unemployment insurance, as it is now constituted, 
doesn't take account of part-time workers, it doesn't take 
account of people who may have to leave for a variety of family 
reasons.
    Just one word on wage insurance. I understand, Mr. Chairman 
and Members of the Committee, that some are nervous and anxious 
about wage insurance, because it might, in their view, 
substitute for unemployment insurance. That is, the fear is if 
you have a wage insurance system, why do you need an 
unemployment insurance system? Somebody can get a new job. If 
it pays less, then they simply get a little cushion against the 
possibility of wage loss.
    Most of the studies show--and most of the studies I have 
seen, and I included in my statement show--that if you have a 
good, solid system of unemployment insurance that gives people 
who lose their jobs an adequate opportunity to search for a new 
job, then it increases their odds that the new job will pay 
relatively well, or better than it would pay if they didn't 
have that unemployment insurance.
    Wage insurance should be understood as a complement and 
supplement to unemployment insurance, not as a substitute to 
unemployment insurance.
    Finally, let me say something about job training. I know 
it's not directly under the jurisdiction of this Subcommittee, 
but it is, it seems to me, very important. I speak from my 
experience as Secretary of Labor, not only with regard to 
unemployment insurance, but also the inextricable relationship 
between a good unemployment insurance system and a good job 
training and retraining system.
    In my view, the Workforce Investment Act (P.L. 105-220) was 
a big, big improvement over the Job Training Partnership Act 
(P.L. 97-300). However, there is not adequate funding for it. I 
have talked to workers across this country and seen study after 
study showing that in a dynamic economy likes ours, we need a 
much more effective and well-endowed training system, if it's 
going to work.
    I also know that the whole issue of international trade is 
not directly under this Subcommittee's jurisdiction. Trade 
adjustment assistance is something that hopefully will be 
addressed. However, it should not matter why somebody loses a 
job. They need help.
    Right now, it takes far too much time and energy and, 
often, a huge amount of bureaucratic delay to determine why it 
is somebody lost a job, and whether they are eligible for trade 
adjustment assistance. In my book, regardless of why somebody 
lost a job, they need help getting the new job. It's in their 
interest and in the public's interest to get them into a new 
job that pays well as quickly as possible. Thank you very much.
    [The prepared statement of Mr. Reich follows:]
  Statement of The Honorable Robert Reich, J.D., Professor of Public 
               Policy, University of California, Berkeley
    Mr. Chairman and Members of the Subcommittee:
    Economic insecurity is now endemic. Fear of job loss, and 
accompanying fear of loss of income as well as loss of employer-
provided or sponsored health care, affects almost every member of the 
American workforce. What can and should be done? The first step is to 
understand that the problem is very different from what we've faced 
before.
The New Problem of Insecurity: From Cyclical Change to Structural 
        Change
    It used to be that the main cause of economic insecurity was 
temporary and often short-term job loss during economic downturns. But 
downturns in the business cycle have become shallower. Indeed, the 
business cycle itself has become smoother than it was decades ago, and 
neither recession nor inflation as threatening. This is due, in part, 
to better management of the economy by the Federal Reserve Board, 
improvements in the quality and quantity of information available to 
the private sector in planning investment decisions, just-in-time 
inventory control systems, and the ease with which spare capacity can 
be found abroad.
    But structural changes in the economy have become more dramatic. 
Shifts in supply and demand are often sudden and large. That's because 
globalization and technological change are generating continuous waves 
of new products and services. The entry of China and India into global 
trade and investment has in effect expanded the global labor force 
about 70 percent--mostly at the lower end of the wage scale. But even 
if America was so unwise as to try to retreat from rest of world behind 
protectionist walls, job and wage security would still be a thing of 
the past. Computer software is now capable of doing many of the jobs 
people used to do: Numerically-controlled machine tools and robots do 
much of the factory work that used to be done by workers on the line; 
software also does much of the clerical work that used to be done 
inside offices by secretaries and lower-level white-collar workers. The 
answer to ``what happened to that job?'' is as often ``it's being done 
by software'' as ``it's being done elsewhere.''
    Meanwhile, consumers and investors are gaining easier and easier 
access to information about better deals, and easier means of executing 
such deals. The result is almost continuous economic upheaval on a 
scale never before experienced. Consumers and investors switch 
allegiances at the speed of an electronic impulse. That makes the 
market extraordinarily efficient at getting them what they want, when 
they want it. But the corollary is that just about every business in 
every industry is continuously at the mercy of consumers and investors 
who may abandon it in pursuit of better deals. Employees, whose pay and 
benefits typically constitute 70 percent of the cost of doing business, 
are especially vulnerable. While capital is more mobile than ever, most 
people who work for a living are relatively immobile. They live and 
work in specific jobs, with specific skills, in specific places, often 
with families whose members also have specific connections to those 
places.
    Decades ago, most jobs were fairly permanent and earnings were 
predictable because the economy was based largely on high-volume, 
standardized, stable mass production. Stability of work and wages were 
necessary for economies of scale to be achieved. A handful of firms 
dominated each industry, because there was only room for a that handful 
Competition was minimal. Consumers and investors had little choice of 
products or services. A sufficiently large portion of jobs were 
unionized (in the mid 1950s, more than a third of America's workers 
belonged to a union), that unionized contracts established prevailing 
wges and working conditions throughout the economy. Periodically, this 
stable system would succumb to recession and large numbers of workers 
would be temporarily laid off, until aggregate demand picked up, and 
they were hired back. The very term ``layoff'' suggested its temporary 
nature. Employees were ``laid off'' until they were back ``on'' the 
payrolls.
    Fast forward to 2007. Today, almost every job is temporary--even if 
it's called ``permanent.'' And for the vast majority of workers, 
earnings are unpredictable. Pay now depends on number of hours of 
overtime, billable hours, commissions, profits, bonuses, or some other 
variable measure of the unpredictable demand for their employment. 
Instability has become an inherent part of the structure of the 
economy. A recent CBO analysis shows that between 2001 and 2002, one in 
four workers saw their earnings increase by at least 25 percent while 
one in five saw their earnings drop by at least 25 percent.\1\ Workers 
who lose their jobs permanently typically get new paying 16 percent 
less than the old. For displaced manufacturing workers, the typical 
drop in earnings has been 20 percent. In certain industries, wage 
losses are even greater. Workers who have lost jobs in the tire and 
blast furnace industries have experienced average wage losses of over 
45 percent.\2\
---------------------------------------------------------------------------
    \1\ The CBO analyzed data from the 2001 panel of the Bureau of the 
Census's Survey of Income and program Participation. Workers with less 
education tend to experience more volatility in their earnings than do 
workers with more education. See CBO, Changes in Low-Wage Labor Markets 
Between 1979 and 2005 (December, 2006).
    \2\ See Lori Kletzer, ``Trade-Related Job Loss and Wage Insurance: 
A Synthetic Review,'' Review of International Economics 12(5), 2004.
---------------------------------------------------------------------------
    The Panel Study of Income Dynamics at the University of Michigan, 
which has tracked 65,000 people since 1975, has found that over any 
given two-year stretch about half of all families experience some 
decline in earnings. Although many make up for such losses later on, 
the swings have become progressively larger as the decades have passed. 
In the 1970s, a typical decline was about 25 percent. By the late 
1990s, it was 40 percent. By the mid-2000s, family incomes rose and 
fell twice as much as they did in the mid-1970s, on average.\3\
---------------------------------------------------------------------------
    \3\ See Panel Study of Income Dynamics, University of Michigan, 
various years. See also Mark Rank, One Nation Underprivileged: Why 
American Poverty Affects Us All(New York: Oxford University Press, 
2004), p. 93; Jacob Hacker, The Great Risk Shift (New York: Oxford 
University Press, 2006).
---------------------------------------------------------------------------
    Polls show a substantial increase over recent decades in the 
percent of Americans worried about losing their jobs.\4\ Last year, the 
fifth year of an economic recovery, some 4.5 million Americans, on 
average, left their jobs or were fired every month, and some 4.8 
million people started new jobs every month. Presumably some of these 
people chose to change jobs. They relished the change of pace, the new 
opportunities, and the excitement of all this tumult. Presumably some 
would have preferred to stay where they were.
---------------------------------------------------------------------------
    \4\ See, for example, Pew Social Trends Poll, August 30, 2006. A 
representative sampling of Americans was asked: ``Compared to 20 or 30 
years ago, do you think the average working person in this country . . 
. has more job security, less job security, or about the same amount?'' 
Results: More job security, 11 percent of respondents; less job 
security, 62 percent; about the same, 24 percent; don't know or refused 
to say, 3 percent.
---------------------------------------------------------------------------
    But we also assume that a not insignificant number had difficulty 
finding a new job. They may have had to change industries, develop 
entirely new skills, or move to a new location. All this took time. 
Over the last twenty years we've witnessed a substantial increase in 
the rate of long-term joblessness. During this interval they may have 
drained their savings, or put them and their families deep in debt. 
Chances are, even if they qualified for unemployment insurance, they 
exhausted it before they found a new job. Typically, they had 
difficulty finding the training they needed for the new job, or 
couldn't support themselves and their families while getting the 
training. And they had to accept a new job that paid significantly less 
than the job they lost.
    Upheaval can be stimulative when the electricity bill can be paid 
and there's enough food in the refrigerator. It is considerably less 
welcome when the kids have to go hungry, even temporarily.
The Current Employment Transition System Is Outmoded and Broken
    The American labor market has among highest rates of job turnover 
of any wealthy economy. That's one if its great strengths. But our 
current system for easing job transitions is the weakest of all wealthy 
nations. That's one of our economy's most significant weaknesses. 
Employment transition includes an unemployment insurance system that 
reaches fewer than 40 percent of people who have lost jobs; a 
retraining system that's so piecemeal, unresponsive, and underfunded it 
hardly merits the term ``system;'' and, as a practical matter no real 
re-employment insurance at all. Taken as a whole, Americans who lose 
their jobs get almost no help toward gaining new jobs that pay at least 
as well as the old.
    There are many reasons why comparatively few unemployed workers 
receive unemployment insurance. One is they don't know they're eligible 
for it. Unions once played a major role in disseminating information 
about the availability of unemployment insurance, but now that only 7.4 
percent of private-sector workers are unionized, they cannot play this 
role. Another reason is that far women are in the labor force today 
than before, and many of them are working part time in order to 
preserve enough time to take care of children or parents. Women are 
still the major unpaid caretakers of American society. But certain 
states deny unemployment insurance to people who have lost part-time 
jobs. Another reason is that the job-holder is working several part-
time jobs simultaneously, and the eligibility rules of that state don't 
recognize that the loss of one or more may impose a substantial 
hardship. Or it may be that even though the worker had been employed 
full time, he or she didn't earn enough to qualify for unemployment 
insurance under the rules of certain states. Or it may be that someone 
has to leave a job in order to accompany a working spouse to another 
city or state, and is deemed ineligible because that job loss is not 
considered to be involuntary.
    The point is that the current unemployment insurance system is full 
of holes because it was designed for a time when almost all workers had 
full-time jobs with predictable wages, when relatively few women were 
in the workforce, when most families did not depend on two incomes, and 
when unemployment was due to a temporary downturn in the business 
cycle. None of these conditions holds true any longer. So it's no 
surprise that the system is failing.
    Meanwhile, our system of job training is woefully underfunded, and 
remains a patchwork of programs put together for the convenience of 
government agencies and congressional authorizing committees rather 
than people who need help. The Workforce Investment Act of 1998 is an 
improvement on the Job Training Partnership Act that preceded it, and 
the idea of one-stop shopping for workers who have lost their jobs and 
need an array of re-employment services is a good one. But community 
colleges are not included--although community colleges often provide 
among the most important sources of retraining. Nor is the job-training 
system sufficiently integrated with unemployment insurance so that 
people who lose their jobs and need retraining to get new jobs that pay 
at least as well as the one they lost can count on income assistance 
while they retrain. Nor, most fundamentally of all, has nearly enough 
money been authorized and appropriated under the Act for all the 
training--both the quality and the duration--that a workforce in such 
rapid transition needs.
    Trade Adjustment Assistance is theoretically available to 
supplement unemployment insurance for those who lose their jobs because 
of trade, but as a practical matter it is often impossible to separate 
out the reasons for job loss, and difficult and time-consuming to prove 
that one is entitled to benefits and training under the TAA program. 
Nor does it make any sense to separate out workers who have lost their 
jobs because of trade from those who have lost it because of 
displacement by technology or some sudden shift in demand.
    Despite reform in 2002, Trade Adjustment Assistance is helping 
fewer than 75,000 new workers each year, while denying over 40 percent 
of employer's petitions. The Department of Labor, which I used to run, 
has interpreted the TAA statute so restrictively as to exclude the 
growing number of service workers who have been displaced by trade. The 
Department is denying TAA benefits to roughly three-quarters of workers 
who are certified as eligible for them. Moreover, like the Workforce 
Investment Act, TAA funding has been woefully inadequate. Two-thirds of 
newly certified workers do not receive any training benefits at all.
The Current Debate--Preserve the Old Job vs. ``Let-'er-Rip''
    What to do? Most of our debates over what to do about the rising 
tide of economic insecurity occur between two ideological schools, 
neither of which provides any practical hope of dealing with the 
situation most Americans now face. One the one side are those who urge 
that America preserve and protect existing jobs. They advocate trade 
protection for jobs threatened by workers overseas, and laws curbing 
global outsourcing. They often seek government subsidies for industries 
whose jobs are threatened by competition--domestic as well as 
international. Occasionally the members of the ``preserve and protect'' 
school want regulations that keep new technologies at bay and require 
that businesses continue to hire workers for jobs that the technologies 
otherwise would displace. Members of this school are not, in general, 
enthusiastic about job training, on the theory that there are few if 
any new jobs to be trained for--a battle-cry they often express as 
``training for what?'' And they are wary if not hostile to wage 
insurance, fearing that it is inevitably a means of reducing the scope 
and duration of unemployment insurance, and little more than grease on 
the slide of downward mobility.
    Opposed to this preserve and protect school of thinking is what 
might be termed the ``let-'er-rip'' school, which sees the workings of 
the ``free market'' as so sublime that any government effort to take 
account of social costs is automatically deemed an ``interference'' 
almost guaranteed to ``distort'' the market. For subscribers to this 
school, any move to cushion workers against the shocks of economic 
change will encourage laziness or lassitude on the part of those so 
helped. Unemployment insurance inevitably slows the rate at which the 
unemployed find new jobs because, according to this thinking, it 
reduces the pain that provides a prod to find a new job, or allows a 
worker to indulge in the fantasy that the old job will return. Help 
with job training is also assumed ill-advised, on the theory that the 
only training that matters occurs on the job, when a newly-hired worker 
is sufficiently fearful of losing the new job that he or she has a 
strong incentive to learn everything necessary to perform it well. Wage 
insurance, by this view, is also wasteful and inefficient because it 
reduces any immediate incentive to work harder and put in longer hours.
    Neither of these positions is tenable. America cannot preserve and 
protect old jobs. Even to try to do so would impose an extraordinary 
cost on the nation, forcing Americans to sacrifice the significant 
benefits that come with globalization, technological change, and a wide 
choice of goods and services. But nor can we allow the market to 
subject so many Americans to wanton economic insecurity, pain, and fear 
of job loss and income decline. There is nothing sacrosanct about the 
``free market.'' The market is a manmade creation; it exists because of 
laws that define and redefine private property, fair exchange, 
reasonable liability, and require minimum standards of fair dealing, 
disclosure, and protection for consumers, investors, and employees. 
Whether we call the real pain of economic change as a ``social cost,'' 
an ``economic externality,'' or a human problem, it is very real, and 
it is becoming larger. It must be addressed, and be reduced.
    In sum, neither position is tenable. Those who wish to preserve and 
protect ignore the structural changes that are now engulfing the 
economy. Those who want to let the market ``rip,'' ignore the pain that 
these changes are inflicting. To the extent our politics endorses one 
or the other of these positions, we will have difficulty meeting the 
challenge ahead.
The Need for a New Employment Security System: The Three-Legged Stool
    The best and only practical solution is through active labor market 
policies that ease the transition of our workforce out of old jobs and 
into new ones that pay at least as well as the old. The goal, in other 
words, cannot be job security because no job can be secure; and it 
cannot be the insecurity that comes with the sort of structural changes 
we are experiencing, because that puts too many people in jeopardy. The 
goal must be, rather, employment security--the security that comes in 
knowing with a high degree of confidence that even though the current 
job and wage cannot be counted on forever, there's a high likelihood of 
finding new employment at the same or higher wage.
    Such an employment security system would require, in my view, at 
least three things: 1. Income support while unemployed; this requires, 
at the least, filling the holes in the current unemployment insurance 
system. 2. Easy access to training and skill development that leads to 
a new job paying at least as much as the old. 3. Wage insurance during 
the transition period--providing workers who can only find a new job 
paying less than the old with a portion of the difference in pay--long 
enough that workers can begin learning on the job and improving their 
skills and productivity, well on the way to matching or exceeding the 
pay on their former job.
    Think of it as a three-legged stool. If any one leg is missing, the 
support is inadequate. If the current holes in the unemployment 
insurance system remain unfilled, wage insurance alone is likely to 
mean downward mobility for too many workers who have lost their jobs 
and must quickly find new ones in order to maintain their incomes. 
Without adequate unemployment insurance, workers lack the ability to 
undertake a full and adequate search for a new job. That means, in too 
many cases, a new job with much lower wages than would be the case if 
the job search were longer. Indeed, studies show that workers who 
collect unemployment insurance enjoy an increased likelihood of finding 
a new job that will have employer-sponsored health insurance.\5\ 
Another study has found that workers who receive unemployment benefits 
receive higher pay, as well, by a factor of $240 a month compared to 
those who do not collect unemployment benefits.\6\ Hence, wage 
insurance should not undermine funding and support for necessary 
reforms of unemployment insurance. It should not be viewed as a ``work 
first'' requirement, and it should be be designed in such a way as to 
be entirely compatible with job training.
---------------------------------------------------------------------------
    \5\ Boushey, Wenger, ``Finding the Better Fit: Receiving 
Unemployment Insurance Increasese Likelihood of Re-Employment with 
Health Insuracne,'' Economic Policy Institute, April, 2005.
    \6\ Kiefer, Neumann, ``An Empirical Job Search Model with a Test 
Constant Reservation Wage Hypothesis,'' Journal of Political Economy, 
Vol. 87, No. 1, 89-107.
---------------------------------------------------------------------------
    On other hand, if workers only have access to unemployment 
insurance and not to wage insurance, then they may well reach the end 
of their unemployment benefits and be forced to settle for jobs paying 
far too little for them to be able to maintain the standard of living 
they and their families had before the job loss. Wage insurance is 
critical in helping them stay on the new job long enough to gain 
sufficient experience and on-the-job skill to justify wage that's near 
or matching the wage of the job that was lost.
    But on-the-job training and experience is seldom adequate, 
especially if the worker who loses a job has to find a new one in a new 
industry or occupation. If workers have access to unemployment 
insurance and wage insurance but not to job training, there is little 
reason to suppose--given the pace of structural change in the economy--
they will find a job paying as well as their old job. Finally and most 
obviously, if they are eligible only for training, but not for 
unemployment benefits or for wage insurance, then many will not be able 
to take advantage of the training because they cannot afford the loss 
of income such training would entail.
    In sum, each leg of the stool is important for allowing workers who 
have lost their jobs to balance the three things they need most--income 
support during their search for a new job, income support during 
training for a new job, and a wage supplement at the start of the new 
job while they gain on-the-job training and experience.
Mending the Holes in Unemployment Insurance
    The proposed legislation makes a good start at mending the current 
holes in unemployment insurance. It makes sense to create incentives 
that provide extra funding from the Federal Unemployment Account to 
states that meet specific criteria such as:

      Counting applicant's most recent wages (from last 
completed quarter) when determining eligibility for UI benefits. 
Workers who lose their jobs shouldn't have to wait three months before 
getting unemployment benefits. Computerized information available to 
most state unemployment offices should be adequate to accomplish this.
      Insure part-timers. States should not deny unemployment 
insurance to an individual solely because that person is seeking part-
time work. Some states still require recipients to seek full-time 
employment even if they can only work part time. This makes no sense, 
and fails to account for the changes in the structure of the economy to 
which I alluded, above.
      When determining UI eligibility, permit good cause 
allowance for voluntary employment separations that related directly to 
compelling family reasons such as avoidance of domestic violence, 
caring for a disabled family member, and following a spouse whose 
employment has been relocated. This is also a sensible reform. There 
are wide disparities among states on good cause allowances for 
voluntary separations. Given the changes in the economy, and in the 
structure of families, the current system in many states imposes an 
unreasonable burden on too many families.
Encouraging Job Training and Education--Off and On the Job
    Job training--both on and off the job--should be an important 
component of any new employment system. Numerous studies have 
documented the economic value of job training, especially longer-term 
training in programs designed to prepare workers for jobs that 
employers are actively seeking to fill, for which they are likely to 
continue to need employees. On-the-job training is critically important 
as well; it has been estimated that for ever dollar invested in on-the-
job training yields an additional 13 cents in annual earnings for the 
working lifetime of the individual; the return is 19 percent for 
workers without a college degree.\7\
---------------------------------------------------------------------------
    \7\ See Rosen, ``Taxation and On-the-Job Training Decisions,'' The 
Review of Economics and Statistics vol 64 (3), pp. 442-449.

      Lifetime training. The Workforce Investment Act is 
underfunded, relative to the palpable needs of our workforce in an 
economy subject to significant structural change. I would also urge 
Congress to consider imposing on employers--especially those employing 
more than, say, 100 employees--a requirement that they invest at least 
one and a half percent of their payrolls into the continuing education 
and training of all their employees. Any portion of this percentage 
that is not so used should be paid into local Workforce Investment Act 
funds.\8\
---------------------------------------------------------------------------
    \8\ The diligent reader with a long memory will notice that this 
idea first appeared in Bill Clinton and Al Gore, Putting People First 
(Times Books, 1992), p. 128.
---------------------------------------------------------------------------
      Training assistance benefits to claimants who have 
exhausted their regular unemployment insurance. States should be urged 
to provide such funding so long as recipients are making satisfactory 
progress in a state-approved training program related to a high-demand 
occupation. The proposed legislation would require that weekly cash 
benefits be the same as benefits provided under regular unemployment 
insurance, which seems reasonable to me. I would urge that states have 
discretion as to duration, but that the duration of such training 
assistance should be at least 26 weeks.
      Wage insurance that effectively subsidizes on-the-job 
training on the new job. One of the most important rationales for wage 
insurance is that it recognizes that workers who are new at a job or an 
occupation gain value as they gain experience, and often learn relevant 
skills, on the job--eventually justifying a higher wage. In this 
respect, wage insurance can and should be understood as a temporary 
subsidy for on-the-job training.
Insuring Wages
      Replace half a worker's lost wages compared to previous 
employment for up to two years, and up to total of $10,000 per year. 
The proposed legislation calls for this, and it seems reasonable to me, 
although replacement rates may have to be higher for workers who earn 
less than half the median income.
      Make the insurance available to all permanently displaced 
workers who have at least two years of tenure at the previous job, and 
whose new job is a full-time job. This also strikes me as reasonable--
the requirement of a new full-time job would avoid any possible 
incentive to reduce hours of work.
      Consider making it available on a pro rata basis to part-
time workers who move on to new part-time jobs that require the same 
hours but pay less. Given the practical realities of work in the 
current economy--especially as they relate to women--I would urge the 
Subcommittee to consider making the insurance available on a pro rata 
basis to part-time workers who move on to new part-time jobs that pay 
less than their former part-time jobs, as long as the number of hours 
in the new job is the same as that of the old one.
The Longer Term: A More Ambitious Agenda
    The three-legged stool of income support, training, and wage 
insurance is a beginning. If our workforce is to have the flexibility 
it--and our dynamic economy--needs, other innovations will be 
necessary.
    Universal and affordable health insurance. For most Americans, 
economic insecurity is intimately connected to the fear of loss of 
health insurance, because employer-based health insurance continues to 
be the major vehicle through which health insurance is dispensed in 
America. But this system makes less and less sense. It amounts to a tax 
subsidy estimated to be in the range of $160 billion a year. Yet people 
who need it most--who have lost a job, either because of their own 
health problem or a health problem in their family made it difficult 
for them to continue--have no access to it. And poorer workers tend to 
receive a much smaller portion of this tax subsidy--sometimes no health 
insurance at all--than top executives, whose employer-provided health 
insurance for them and their families is often quite generous. It makes 
eminent sense, therefore, to decouple health care from employment and 
apply the $160 billion to the cost of providing universal and 
affordable health care.
    American employers are on the way to decoupling health insurance 
from employment in any event. The proportion of large and medium-sized 
companies offering full health coverage for their employees dropped 
from 74 percent in 1980 to 18 percent in 2005. As recently as 1988, 
two-thirds of medium-sized employers provided health insurance to their 
retirees; by 2005, the portion had fallen to around a third.\9\
---------------------------------------------------------------------------
    \9\ National Compensation Survey: Employee Benefits in Prigvate 
Industry in the United States (U.S. Department of Labor, Bureau of 
Labor Statistics, March, 2006).
---------------------------------------------------------------------------
    Paid Family and Medical Leave. Another feature of a more ambitious 
agenda would be paid family and medical leave. All too often, a 
family's economic security is jeopardized by the need for a family 
member to provide temporary care for a child or a parent or other 
relative. The nation's current Family and Medical Leave system, 
requiring employers to provide twelve weeks of unpaid leave for family 
and medical emergencies, has proven to be a large success; but many 
families are unable to take advantage of it because they cannot afford 
to forfeit income during the time away from work. Before the Act was 
passed and signed into law, in 1993, employers predicted a wave of 
fraudulent leave-taking, arguing that even without pay, large numbers 
of employees would take advantage of the Act and take days or weeks off 
of work whenever they chose to, on the pretext of a family emergency. 
That has not been the case. The vast majority of American workers want 
to work and need to work. They also need to be able to attend to family 
and medical emergencies when they occur. Congress should follow 
California's example and establish paid leave, running along side the 
unemployment insurance system.
    Housing Transition Assistance. I would also urge Congress to 
consider including housing transition assistance for workers in towns 
and cities from which major employers have left. Given the upheavals in 
the economy, the housing stock in places that suffer from falling 
employment over a period of years often loses substantial value. 
Meanwhile, the value of housing in towns and cities where employment is 
growing often rises considerably. Research has shown that a doubling of 
employment in a metropolitan area is associated with a 33 to 55 percent 
increase in owner-occupied housing prices.\10\ Given that one's house 
is often the family's largest single asset, this mismatch can make it 
particularly difficult for Americans to leave a town or city where they 
have lost a job and move to a town or city where new jobs are 
available.
---------------------------------------------------------------------------
    \10\ Hwang, Min and Quigley, Economic Fundamentals in Local Housing 
Markets'' Evidence from U.S. Metropolitan Regions,'' Journal of 
Regional Science, vol 46 (3), pp 425-453, 2002.
---------------------------------------------------------------------------
    Housing transition assistance could take many forms, including 
using a limited portion of unemployment insurance funds to provide 
below-market loans for workers leaving towns or cities where housing 
prices have fallen and moving in search of work to towns or cities 
where housing prices have risen. Some states have created ``home 
protection funds,'' providing revolving loans that save homes from 
foreclosure and help maintain their communities.
Conclusion
    I commend the Subcommittee for the proposed reforms in unemployment 
insurance and the creation of wage insurance. These are important 
starts on one of the most important challenges facing the American 
economy today--providing our people with enough security to accept the 
changes that will inevitably affect almost every job in every 
industry--and, hopefully, prosper in the economy of the twenty-first 
century.

                                 

    Chairman MCDERMOTT. Thank you. The hardest thing to--or at 
least one of the hard things in trying to make a new public 
policy is to sell the idea. I am sure the idea of unemployment 
insurance in 1935 was sort of radical. So, whenever you come 
with anything that seems like a departure from the way things 
have gone--how do you explain to people that this is not a 
replacement for unemployment insurance?
    You have a program, and maybe you're saying to people, 
``Look, take a job. You're not eligible. We have a job over 
here, and you can take that job, and you can take the wage 
insurance buffer and go to it now. We're not going to pay you 
for 6 months, or your 26 weeks of regular unemployment 
insurance.'' How do you answer that question? How do you 
structure it so that someone can stay on the 26 weeks, if they 
want to, and not be forced into a lesser paying job?
    Mr. REICH. Well, I think you build and structure the 
program in such a way that the unemployment insurance is--and 
remains--available to someone. It becomes very clear, in the 
framing of the issue, in the public understanding of the issue, 
that wage insurance is not a substitute for unemployment 
insurance.
    You see, I think this Committee--I think it's very 
important for public officials to make it clear to the public 
that the purpose of unemployment insurance is not, and has 
never been--at its inception it was not--to give people simply 
an excuse to sit back and not do a job search. Most people, 
most studies show, most people who have lost their job don't 
use unemployment insurance to sit back and just wait for the 
next job to come along. They are actively engaged in a job 
search, and they are looking for a job that is most suitable, 
not only to their skills, but also to their family's needs, 
with regard to earnings and benefits.
    The longer that job search is allowed to proceed--and this 
is what the purpose of unemployment insurance is--the more 
likely it is that somebody is going to find a job that meets 
all of those criteria. However, you don't want to get to the 
end of that 26 weeks and have somebody in a very dynamic 
economy--and, again, this is a much more dynamic economy than 
it was in the thirties, forties, fifties, sixties, seventies, 
or eighties--you don't want somebody to get to the end of that 
26 weeks and have to dramatically sacrifice their standard of 
living because the only job available to them is one that pays 
substantially less than the job they lost. That is where wage 
insurance comes in.
    You want to give them the opportunity to get a new job that 
does not entail a huge sacrifice and standard of living, and 
also gives them a leg up on getting on-the-job training, so 
that they have a good chance of eventually getting back to 
where they were before.
    Wage insurance, therefore, is a natural complement, a 
natural supplement, to full unemployment insurance. That's the 
way it needs to be understood, that's the way it needs to be 
sold, in my view.
    Chairman MCDERMOTT. How do you deal with the employer who 
says to himself, ``I could lower my wages a little bit here, 
and see if I couldn't get some of those unemployed people to 
work here, and use the cushion as a way of saying, `Well, you 
have the cushion, so you don't need this salary that I used to 
pay for this?' ''
    Mr. REICH. Well, there is absolutely no evidence that 
employers have used the earned income tax credit in that way, 
or any kind of employment subsidy in that way. Employers are 
eager to get the best employees they can, and will pay the 
marginal benefit that those employees provide to that employer. 
They are in competition for other employers for every employee.
    There is no reason to believe that any government subsidy, 
whether it's called the earned income tax credit, or it's 
called wage insurance, is going to change that fundamental 
dynamic.
    Chairman MCDERMOTT. Thank you. Mr. Weller?
    Mr. WELLER. Thank you, Mr. Chairman, and Mr. Secretary, 
it's good to have you with us. I remember reading your book 
after your service in the Clinton Administration, ``Locked in 
the Cabinet.'' I enjoyed it, and the sense of humor. How is 
Waffle, your dog? Is he still with you?
    Mr. REICH. Still with us, yes.
    Mr. WELLER. Yes. Must be getting older. I had a puppy for a 
long time, and enjoyed him.
    The Chairman's proposal before us creates a new wage 
insurance proposal. As you stated, and as I have stated, it has 
bipartisan appeal. Something that--so I am very pleased that it 
gives us an opportunity for Democrats and Republicans to work 
together.
    One of our witnesses before us today, Mr. Rosen, has 
authored a report suggesting workers will benefit more from 
personal savings in the event they become unemployed. There is 
a scholar with the Brookings Institution, Jeffrey Kling, who 
has a similar proposal. The President has proposed creating 
personal accounts to help workers retrain for new jobs. Each 
proposal suggests creating a new program on top of the current 
unemployment benefit system, which people on both the right and 
left agree needs repair.
    Mr. Secretary, I feel that a more logical first step would 
be to allow the states to do what they do best, and that is to 
innovate, to experiment, and to be creative within the context 
of the current unemployment benefit system.
    I have introduced, as I mentioned earlier, H.R. 1513 this 
week. It is legislation that I would note allows the states to 
innovate, obtain waivers, something they were able to do prior 
to the Welfare Reform Act 1996, which experimented a lot with 
welfare reforms that were successfully incorporated in Federal 
legislation.
    I would note that they would be able to provide wage 
insurance in addition to unemployment benefits, under my 
legislation, once granted these waivers.
    So, again, I noted that you agree wage insurance has 
tremendous potential. You served as the Secretary of Labor in 
the Clinton Administration. You also sought the office of 
Governor, so you saw the State of Massachusetts as an 
opportunity to innovate with some of the ideas you wanted to 
bring into public policy.
    My friend, the Chairman, has a proposal that suggests 
expanding current unemployment benefits, increasing Federal 
taxes by $40 billion, and then creating, as part of that, a new 
wage insurance program. Wouldn't the more logical approach be 
to allow the states to do what they do best, to innovate and 
develop wage insurance programs as part of their unemployment 
insurance programs in their state, as proposed in H.R. 1513?
    Mr. REICH. Congressman, I think it is an enormous benefit 
of a Federal system such as we have, that states can innovate, 
and they can experiment, and they do get waivers. The history 
of welfare reform, indeed, the history of most of our labor 
laws, if you go back to the decades of the 20th century, as you 
know, centered on states trying various experiments.
    What concerns me is that there is enormous pressure on 
states--and I saw this as Secretary of Labor--fiscally, to 
minimize any kind of expenditures, particularly those 
expenditures that happen to require, episodically, expenses, 
and--such as job losses associated with unemployment insurance.
    I will not suggest that there is a race to the bottom, 
because I don't think that states see it as a race to the 
bottom. Also, the fact of the matter is that the states are, 
not only in times of recession, but even right now, they are 
quite constrained with regard to what they are able to do.
    When a state faces declining employment, or in times where 
major industries in the state begin to suffer stress, states 
don't have, often, the wherewithal that they need to do all the 
experimenting that we would like them to do.
    Mr. WELLER. Mr. Secretary, that brings up a follow-up 
question here. Under the proposal that's before this 
Subcommittee, there is, essentially, a $40 billion tax 
increase. It provides additional assistance to states, and I 
have never met a state program director that hasn't welcomed 
more money. I have enjoyed working with those for my State of 
Illinois. My Governor has proposed $8 billion in new tax 
increases so far in the state legislative process, so he can 
spend more money.
    So, the question I have is the Chairman's proposal 
provides, as I understand it, with this $40 billion tax 
increase, assistance to the states to expand their programs. 
However, it's temporary. In that case, once that money is no 
longer there, the programs have been expanded, the states would 
have to come up with the money from somewhere else.
    So, in that case, is it suitable to expect the states to 
either have to cut spending somewhere else to continue those 
higher promised benefits, or would they have to raise payroll 
taxes to replace that lost revenue a few years down the road?
    Mr. REICH. Congressman, I don't know precisely what the 
structure of this proposed legislation is. Also, let me just 
say, generally--and we did this with the School to Work 
Opportunities Act (P.L. 103-239), and many other pieces of 
legislation in the nineties--giving states additional funding 
to try things that they otherwise may not be able to try, 
letting them see, as you yourself suggested a moment ago, see 
what works with that additional funding, and then, on the basis 
of that experimental period, have an opportunity to draw 
conclusions and see what makes most sense for them--and then, 
for the Federal Government to withdraw that funding, and leave 
it up to states as to which programs and which aspects they 
want to continue----
    Mr. WELLER. Sir, I want to follow up. I realize my time is 
running out. If you suggest providing additional funding, we 
have almost $35 billion in surplus funds in the Federal 
unemployment trust fund, UI trust fund. That, today, with 
current allocations of funds, is enough for almost seven years, 
without collecting one more dime in payroll taxes to fund that. 
So, we have a large amount of funding.
    Would you suggest, or agree, that that funding that is in 
the surplus that is current there is adequate, without raising 
taxes, if we want to provide additional assistance to the 
states?
    Mr. REICH. If it is adequate right now, I am not sure--and 
I am certainly not going to claim--that it will be adequate, 
come the next recession. Most of these insurance funds are 
designed in such a way that they are safeguards, they are 
safety nets. Should the economy go into recession, I don't 
think we have repealed the business cycle, even though business 
cycles are more moderate than they were 25 or 30 years ago. So, 
I--this is something the Committee obviously has to decide.
    Also, let me make a more general point, if I may. That is 
that our systems of active labor market policy is for helping 
people navigate through a treacherous economy are inadequate. 
They are inadequate, both in terms of the design of our 
programs, and they are inadequate in terms of the amount of 
money available to people to do that navigation, whether it's 
unemployment insurance or job retraining, or it's the proposed 
subsidy for job wage insurance.
    Mr. WELLER. Thank you, Mr. Chairman. You have been 
generous.
    Chairman MCDERMOTT. Mr. Stark will inquire.
    Mr. STARK. Thank you, Mr. Chairman. I guess you will be 
accused of offering to raise taxes. Also, in the current 
suggestions of how to raise taxes, you are a real piker. The 
President has suggested increasing taxes by $300 billion over 
10 years, which would be the net effect, according to the Joint 
Tax Committee, of giving everybody a $7,500 tax deduction for 
health insurance.
    So, one person's tax increase might be another person's 
political suggestion, but I--there is no way it will pay for 
some things--we won't be able to fight wars or have police 
protection or fire protection or education--unless somebody is 
willing to pay for it. I have yet to find the tax fairy who is 
going to put that money under our pillow, unless some of us are 
willing, at some point, to vote for it.
    I wanted to talk with you, Mr. Secretary, a minute about 
your adopted residence. Maybe we can keep you there 
permanently. However, south of you, in my district, is a 
factory, a joint venture between Toyota and General Motors. I 
am allowing a little poetic license here, but I believe there 
are about 6,000 employees there.
    As I can remember from the--my experience in the late 
forties in the Somerville Ford assembly plant, assembly line 
work is not something that would have even required my ability 
to mess with the slide rule in those days. It is hard work, but 
it doesn't require computer skills, it doesn't require much--I 
suppose--much more than, really, good eighth grade math and 
algebra, maybe.
    What I am wondering--and those jobs, now in Fremont, are 
paying $22 an hour to start, plus benefits, which the United 
Auto Workers has--can justifiably take great pride. Not a whole 
hell of a lot of jobs in your new adopted territory where 
somebody, basically with a high school degree, can start at $22 
an hour. The rates go up. There were some seniority increases.
    Furthermore, as we know, automobile plants have a way of 
disappearing, almost overnight--move south, move to other 
countries, move to Canada. What would we do, and I guess, 
what--the union strategy, as near as I can tell at this point, 
is to write me a letter and say, ``Please buy a Corolla.'' 
However, even if I got all my colleagues to buy a Corolla, I am 
not sure that we have the wherewithal to keep that plant alive, 
just by saying, ``Buy that,'' and the competitive--what should 
we encourage the unions to do, support part of Mr. McDermott's 
plan?
    In the event--what would happen to those 6,000 people, all 
of whom live in the Bay area? They could probably get $10 an 
hour at Wal-Mart, I'm guessing--maybe not quite that high--and 
other such jobs. That's just--where do they go? They are not 
going to start another automobile plant in the Bay area. There 
are not many jobs in manufacturing that will--we have the dot-
com and the computer industry and all of that, which requires 
much more--a higher level of skills.
    These employees, for the most part, are a bit elderly. They 
have been there through the Chevy plant that preceded it, and 
so they have been long-time workers. What should the unions do, 
or ask me to do, in the event that something would happen to 
that plant?
    Mr. REICH. Congressman, the active labor market policies 
that we are talking about today--that is, unemployment 
insurance, fixing those holes, job and wage insurance, and good 
job training--will probably not deal with the fate of the 50 or 
55-year-old auto worker paid $22 an hour who has a high school 
degree, but nothing more than that, and who has to get a new 
job. The chances are, given our current economy, that that 
person is not going to get a new job paying that well.
    Now, the good news is that there is a mismatch now between 
the demands of employers around the country for technicians--
people who have maybe a year or two of job training in a 
technical area, where they can do the installation and 
maintenance and upgrading of computerized machinery that is 
finding its way into factories, offices, medical facilities--a 
mismatch between employer demand and the numbers of people 
available to do that kind of work.
    Not every 55-year-old auto worker can be trained to have 
the technical skills necessary to do the kind of new work that 
is available, but some of them can. Certainly a 40-year-old 
auto worker can do that, and could, based upon current supply 
and demand, get a new job paying comparable wages and benefits 
to that old job.
    However, you are raising, it seems to me, a much larger 
question.
    Mr. STARK. However, they would have to move to do that.
    Mr. REICH. They may have to move. They may have to move.
    Mr. STARK. Then their house would be sold to a Republican, 
and what would happen to my district?
    [Laughter.]
    Mr. REICH. Well, that is a problem for you, Congressman.
    However, in my prepared remarks, I talked about universal 
and affordable health care, and also housing insurance, housing 
transition assistance. Today's USA Today had a piece about the 
difficulty many workers have when they are in a city or a 
region faced with large unemployment, where housing prices 
decline because there is not much demand for housing, and want 
to move to a place that has a lot of jobs where housing prices 
are going up because there is a demand for housing. That is a 
tremendous barrier right now to the kind of flexibility that 
employees need, as is the lack of health care.
    So, it's hard to know where to begin, except to stipulate 
that right now we do not have the supports in place.
    Mr. STARK. Thank you.
    Chairman MCDERMOTT. Thank you. Mr. Herger will inquire.
    Mr. HERGER. Thank you very much, Mr. Chairman, and I thank 
you, Secretary Reich. It is good to have you with us. This is 
certainly an incredibly important issue that we are dealing 
with. The economy that we're in today, a global economy, one 
that is moving, as you mentioned in your testimony.
    The old days, if you will, where someone would be in a job, 
maybe they would be in two jobs in their lifetime, is gone. We 
see people that are in five, six, seven jobs, on average, 
because of things changing. How do we adapt to this is 
certainly one that all of us need to be looking at. Perhaps how 
we might go about doing that might be different, but certainly 
the goal that we are doing is one that is very important.
    I have a concern about what it does to our economy, and 
what it does to workers when their taxes are raised, when they 
have less disposable money. Of course, we have these wonderful 
programs that are well meaning programs. However, my concern is 
what happens when you take money out of their pockets.
    Current law would suggest that the Federal unemployment 
surtax will expire after 2007. Wouldn't continuing it be a tax 
increase?
    Mr. REICH. Congressman, there are various ways in which the 
unemployment insurance payments could be structured, in terms 
of employers paying into the trust fund, so that, with regard 
to the incidents of demand for labor, the cost does not fall on 
working people.
    You are raising, it seems to me, a larger question, that if 
you will allow me to address, I would love to. Again, we are 
getting slightly beyond this Subcommittee's jurisdiction, but 
if I may say, as the Committee knows, I'm sure, there has not 
been quite this degree of inequality in wages and in overall 
income in the United States since the twenties. By some 
measurements, since the 1880s. People who are earning over 
$300,000 to $400,000 a year have never had it so good.
    If this Committee and other Committees are worried about 
how to provide even the minimum safety net for workers in this 
tumultuous economy, it would seem to me, in terms of my values, 
entirely appropriate to raise the marginal tax on the highest 
income earners because, again, they have never had it so good, 
and median wages, despite an economy overall that continues to 
grow quite well, median wages have been stuck in the mud.
    If I can say just one more thing on that theme, economy 
insecurity is so endemic right now in the United States, that 
we are seeing people all over the political spectrum, whether 
they call themselves Republicans or Democrats or Independents, 
beginning to lose support, or lash out, against free trade. If 
you look at the polls, free trade is very unpopular. That kind 
of backlash against free trade is to be expected--not 
justified, but to be expected--in an economy in which so many 
people feel economically insecure.
    If we--and I say ``we,'' as you and all of us who believe, 
fundamentally, in free markets and free trade--don't provide 
more economic security, we are going to face a backlash that 
makes it impossible for the President to get fast track 
authority this coming June or July, and also to proceed with 
any free trade agenda that is so important to the world 
economy.
    Mr. HERGER. Mr. Secretary Reich, let me just mention what 
my very strong concern is. Keeping in mind what we are both--
the context of what we're talking about now, and what you're 
just referring to.
    One is that I think it would be very detrimental if we 
raised taxes. As Mr. Weller mentioned, in this area of 
extending this, we already have $35 billion in this account. 
So, I think it could be argued that we really don't need to 
raise taxes here. My concern is this seemingly class warfare.
    I think it's great that we have people in our society who 
are making more money. Poor people don't hire people. It's 
people who have an excess of money who hire. You see small 
businesspeople that are out, that are doing better, that can 
hire more because they're making more. I do have concerns 
about--I know you had an article that you wrote in December of 
2006 where you were supporting getting back toward 70 or 90 
percent marginal rates. Is that correct?
    If you take that into estate taxes, effectively, the top 
marginal rate would be over 100 percent. I just--I think that 
would----
    Chairman MCDERMOTT. I think we are going to----
    Mr. HERGER. Okay.
    Chairman MCDERMOTT (continuing). Recess for about--long 
enough for us to walk over to the floor and back, which is 
about 10 minutes. If you can wait, we would appreciate it.
    Mr. REICH. That will be fine. Thank you.
    Chairman MCDERMOTT. We will be right back.
    [Recess.]
    Chairman MCDERMOTT. The Committee will come to order. Mr. 
Lewis of Georgia will inquire. Mr. Lewis?
    Mr. LEWIS OF GEORGIA. Well, thank you very much, Mr. 
Chairman, thank you. Mr. Secretary, it is good to see you.
    Mr. REICH. Good to see you, Congressman.
    Mr. LEWIS OF GEORGIA. Thank you for being here. Mr. 
Chairman, I want to thank you for holding this hearing today.
    Mr. Secretary, in the next panel, one of our witnesses, Mr. 
Douglas Holmes, will argue that there are no really--there are 
not really any holes in the unemployment insurance system, and 
that benefits have been paid to those who have an attachment to 
the workforce and are looking for work. How do you respond?
    Do low-wage and part-time workers have equal access to 
unemployment insurance?
    Mr. REICH. No, Congressman. Low wage workers, workers who 
are working in part-time jobs, workers who have a contingent 
relationship to work, indeed, much of the new workforce that is 
now in place, is not eligible for unemployment insurance, 
because unemployment insurance was designed at a time in our 
Nation's history when most workers worked full-time, had steady 
jobs, and could count on steady work. That is simply not the 
case today.
    So, the holes in our system are as a result of changes in 
the system of employment. I don't think any of us wants to--or 
thinks we can--go back to the old days of full-time, steady, 
secure work. We have to accept, fortunately or unfortunately, 
changes in the structure of the economy. However, part of 
accepting the changes in the structure means that we have got 
to fill the holes that have developed.
    Mr. LEWIS OF GEORGIA. How do we go about filling the holes, 
or fixing the holes, or----
    Mr. REICH. Well, I think that the proposal put forward by 
this Subcommittee is an excellent beginning. Using the surtax--
and, by the way, Congressman Weller, this would not be a tax 
increase. I want to make sure that we all understand that, with 
regard to the unemployment insurance hole-filling aspect of 
this proposal, my understanding, at least, is that there is no 
tax increase; it is an extension of the Federal Unemployment 
Tax Act (FUTA) (P.L. 76-379) surcharge, which has been in place 
for 30 years, and indeed, which the President's budget expects 
to--and proposes to--increase.
    Congressman, using that, and providing to the states an 
incentive for filling some of these holes, strikes me as an 
excellent idea.
    Mr. LEWIS OF GEORGIA. What do you really mean when you 
stated that job security is something of the past? That people 
who--at one time in our history, people went to work for a 
company and they worked for 30 years, 35 years, and they stayed 
there until they retired. I know there were people in my own 
family who left rural Alabama and they went to Detroit, and 
they worked in the automobile industry, and they stayed there. 
That was the only place they worked, until they retired.
    Are you saying that people cannot look forward, in years to 
come, to staying at a company, or staying with the same 
employer for years?
    Mr. REICH. No. The structure of the economy has changed. 
Thirty years ago, the biggest threat to job security was 
recession. When people got laid off from their jobs, because 
aggregate demand was inadequate, they would have to wait, 
usually a few months--on average, 26 weeks--until they got the 
job back again. Unemployment insurance for 26 weeks fit that 
model perfectly.
    However, most people who lose their jobs these days don't 
get the old job back again. Job loss can happen at any time 
during the business cycle. It is not cyclical. Again, it has to 
do with structural changes. Entire industries are affected.
    The automobile industry that you were referring to has seen 
major structural changes. Detroit has endured, over the last 30 
years, fundamental changes. Only a fraction of the number of 
auto workers in places like Flint are still there. Indeed, most 
people who are now 18 years old, or 22 years old, and embarking 
upon their careers, cannot plan on being with the same employer 
for 20 or 30 or 40 years.
    Just one more point, Congressman. I think that the efforts 
of this Subcommittee to repair unemployment insurance and 
provide wage insurance as a supplement--not a substitute, but a 
supplement--for unemployment insurance that is so mended, is a 
good place to start. However, it is vitally important that we 
also mend our health insurance system.
    Right now, as you know, health insurance comes, for most 
people, through employment. Well, if you are in the kind of 
economy we are in, given the structural changes and the 
likelihood that you are going to lose your job, that kind of 
health care system is inadequate. Universal and affordable 
health care has got to be put into place, and we have got to 
decouple health care from employment.
    Mr. LEWIS OF GEORGIA. Thank you, Mr. Secretary. My time has 
expired. Thank you, Mr. Chairman.
    Chairman MCDERMOTT. Thank you. Mr. English will inquire.
    Mr. ENGLISH. Thank you, Mr. Chairman. Secretary Reich, it's 
a real privilege to have you here. I just have, because my time 
is limited, some quick, rapid-fire questions.
    In your testimony, you focus on one of the current 
dysfunctional features of the unemployment compensation (UC) 
system, and that is extended benefits. As you know, the 
Employee Benefit (EB) program is very important for workers in 
states that have gone into an extended recession. However, 
right now, the triggers don't work.
    Is the extended benefits system something that needs to 
continue to be part of the UC system? How would you recommend 
we change the current trigger mechanism, so that we are not 
making arbitrary decisions in congress as to when to turn it 
on, turn it off, and for what states?
    Mr. REICH. Yes. We went through this in the past two 
recessions, Congressman, and I think, again, we haven't 
repealed the business cycle, although the business cycle is 
more modulated than it has been, or was 20 or 30 years ago. 
However, extended unemployment insurance is going to be 
necessary. It is a necessary part of the system.
    I am not prepared right now to offer you a perfect formula, 
but I think you are on the right track. I think Congress needs 
to look and see how that formula can be changed, so that 
Congress is not forced to continuously revisit the issue every 
time there is a recession.
    Mr. ENGLISH. Let me just make the standing offer, if you do 
have any suggestions, I, for one, would very much welcome them, 
because this is an area of great interest, particularly 
representing, as I do, a state like Pennsylvania.
    You have advocated here for extending unemployment 
insurance to part-time workers. I have seen, over the years, 
many proposals to do that. How do you avoid the problem of 
moral hazard implicit in any insurance program, that by 
designing a program for part-time workers, you create an 
opportunity for employers to design employment opportunities 
that, in effect, allow the rest of the employment base to 
subsidize their part-time employment?
    You took a question from Mr. McDermott which was similar. 
However, I wonder, do you see any problems around the edges 
with designing this extension of the program?
    Mr. REICH. As long as the recipient of the benefit goes 
into a new part-time job that has as many hours as the old 
part-time job--that is, what you don't want to do--and here, I 
think, is your moral hazard issue--you don't want to create, 
through wage insurance, for example, an incentive for people to 
move from full-time job, and reduce the hours of work, and 
thereby use the wage insurance as a vehicle for subsidizing 
their move to fewer hours.
    With regard to unemployment insurance, I don't see the 
problem on the employer's side, if that's what you're getting 
at, because employers have every incentive to pay individuals 
the marginal value of their employment, as long as that 
employer is in a competitive labor market, and has to pay 
people what they are ``worth,'' in economic terms.
    Mr. ENGLISH. However, the flip side of it is that we do 
have employers who provide high value-added full-time jobs, who 
also strongly support the UC system by providing the employer-
end of those UC taxes. This is still a system based mostly on 
employer taxes.
    On that point, are there not situations where employers in 
certain industries which tend to produce part-time jobs, in 
effect, could, under what you have proposed, be subsidized by 
employers that produce good, full-time jobs?
    Mr. REICH. Well, first of all, Congressman, there is 
always, in every system, at the margin--as you've said, you 
used the term ``at the margin''--a moral hazard problem. 
However, let me just say that if an employer is providing a 
part-time job, and that employer is in competition with other 
employers offering either part-time or full-time jobs for 
employees, there is no reason to suppose that that employer is 
going to be able to get employees at less than the going rate, 
given that employee's marginal value.
    Mr. ENGLISH. Understood. Last question, quickly. 
Unemployment benefits used to be tax-free, prior to the 1986 
tax. I am a strong advocate of rolling back the tax on 
unemployment benefits. Some have criticized the idea as, 
believe it or not, tax cuts for the rich. I think it's tax cuts 
for workers who are represented by unions, and who are 
commanding higher wages, as a result.
    Any thoughts on whether unemployment benefits should be tax 
free?
    Mr. REICH. I am in favor of making every benefit tax free, 
but then there is this question, Congressman, of how you pay 
for the benefit.
    Mr. ENGLISH. Thank you very much. I sense I am chopped off 
here.
    Chairman MCDERMOTT. The reality hits the road. Mr. Porter.
    Mr. PORTER. Thank you, Mr. Chairman, and I appreciate the 
secretary being here today. I periodically hear folks say 
things were better in the good old days, and I hear that 
frequently. Probably, in some respects, they are.
    Also, you mentioned about the polls today. Of course we can 
look at polls in many different ways, and especially in 
Washington we use them to our own gain. However, you mentioned 
that in 1997--well, today, let's move to today, and I will go 
back to 1997--that 60-some percent today are not happy, and 
feel less job security than did a generation ago. However, if 
we go back to the polls that were done in 1997, actually, it 
was higher. It was almost 70 percent of those that felt that 
they had insecurity regarding their job. How do you explain 
that, in today's terms?
    Even in 1997, back when the Clinton Administration was in 
place, security was less.
    Mr. REICH. Well, some of this, obviously, Congressman, is 
affected by the business cycle. However, I included data in my 
testimony from the Michigan panel on income dynamics, in which 
they have studied 65,000 people over decades, to try to get a 
sense of what the actual cycles are in their own income, and in 
their own wage and job experiences.
    What that panel study shows is that average working 
Americans are seeing greater instability of income and job 
today than they saw 10 years ago or 20 years ago.
    Mr. PORTER. To Pew, that's not the case.
    Mr. REICH. I'm sorry?
    Mr. PORTER. According to the Pew Research Center, that's 
not the case.
    Mr. REICH. Well, I am happy to exchange with your staff all 
of the information I have, and I have published some of it, 
many colleagues working in--with the data have shown that 
economic insecurity is greater today, controlling for the 
business cycle.
    Maybe it could be that the difference in data that we're 
seeing has to do with where we are in the business cycle.
    Mr. PORTER. Actually, I am using from your testimony. You 
cited the Pew social trends poll, August----
    Mr. REICH. Yes, but Congressman, let me just emphasize that 
not only do the academic researchers find greater insecurity in 
this decade than in previous decades, but also the opinion 
polls, Gallop and most of the Roper polls--and, again, I am 
happy to supply your staff with them--are showing greater 
degrees of job insecurity and wage insecurity.
    Mr. PORTER. I had a poll about a month ago that I gave to 
Ways and Means from the USA Today stating just the opposite, 
again. So, I guess enough said on the polls.
    However, you also mentioned that a supplement--you would 
want this proposal to be a supplement, and not a substitute. 
So, how is that not a tax increase?
    Mr. REICH. Well, are you talking about the wage insurance, 
or are you talking about filling in the holes? You're talking 
about wage insurance?
    Mr. PORTER. Yes.
    Mr. REICH. Well, here again, I did not say that it would 
not be a tax increase, in terms of wage insurance. I said that 
with regard to filling the holes in the unemployment insurance, 
my understanding of the proposal is that it would require 
continuing the FUTA surtax, which even--again, my understanding 
is that the President has included a continuation of that 
surtax, which has been continued for 30 years, in his proposed 
budget.
    Undoubtedly, if you're going to go beyond that and provide 
wage insurance, there would have to be some funding of that 
wage insurance, and that would include a tax--a slight 
increase, a small increase--on employers, with regard to 
unemployment insurance.
    Moreover, the issue here, Congressman, is whether it's 
worth it. I--and I am sure you are not, either--am not 
doctrinaire, as to whether taxes are good or bad. It always 
depends on whether the public benefits exceed the cost of the 
taxes.
    Given what I have--and, again, my testimony, I hope, 
reflects this--what I have seen, and what I have understood 
about the labor force is that there is a need for some 
cushions. Otherwise, we are facing not only a great deal of 
economic pain and stress, but also a backlash against the whole 
concept of free markets and free trade.
    Mr. PORTER. Since the 1930s, it has really been driven by 
the states, don't you think?
    Mr. REICH. I'm sorry?
    Mr. PORTER. Since the thirties, it has really been driven 
by the states. This is a substantial change. However, why not 
go with something like Mr. Weller is suggesting, giving the 
states more flexibility?
    Mr. REICH. I am personally in favor of a great deal of 
flexibility. However, as I stressed, wage insurance should not 
be a substitute for unemployment insurance. I fear that if the 
states were given enough flexibility to do the wage insurance 
through the unemployment insurance system, as it is now, that 
there might be too much pressure on states, given pressure on 
state budgets, to reduce other aspects of unemployment 
insurance.
    Therefore, the wage insurance becomes--starts to become--a 
substitute for unemployment insurance. I don't think that is 
fair to American workers, and I think it would also generate a 
huge amount of opposite.
    Mr. PORTER. My final comment, I appreciate your passion on 
this, and your attempts to make the system better. Thank you 
very much.
    Mr. REICH. Thank you.
    Chairman MCDERMOTT. We thank you very much for coming to 
Washington, D.C. to see old friends, and we hope you will come 
again before the Committee.
    Mr. REICH. Well, thank you very much, Mr. Chairman, and 
thank you, Members of the Committee.
    Chairman MCDERMOTT. The next panel--if you will assemble at 
the table--I will begin to introduce you, as you're sitting 
down.
    Ms. Lee is from the AFL-CIO, the assistant director of 
public policy. Mr. Rosen is a visiting fellow with the Peterson 
Institute for International Economics. Maurice Emsellem is the 
policy director for the National Employment Law Project, and 
Mr. Holmes is president of UWC, which is a strategic services 
on unemployment and worker's comp. Acronyms in Washington, D.C. 
have to be explained.
    We welcome all of you. Your whole testimony will be entered 
into the record. We would like you to take 5 minutes to give us 
an overview of what you want us to know. Ms. Lee, will you 
begin?

                     STATEMENT OF THEA LEE,

          ASSISTANT DIRECTOR OF PUBLIC POLICY, AFL-CIO

    Ms. LEE. Thank you very much, Mr. Chairman, Members of the 
Subcommittee, for the opportunity to talk about these two 
important topics that are before you.
    The two issues include, first, proposals that have been put 
forward to strengthen and modernize the unemployment insurance 
system, and second, to provide wage insurance, wage subsidies 
for workers who take new jobs that pay less than their old 
jobs.
    On the first topic of unemployment insurance modernization, 
we have been asked to comment on the proposed legislation that 
would distribute as much as $7 billion from the Federal UI 
trust funds over 5 years, to encourage states to modernize 
their UI programs. The AFL-CIO has strongly supported, many of 
these proposals over the years, and we welcome the proposal by 
Chairman McDermott.
    This proposal correctly rewards states that have been 
leaders in building a stronger UI system, and incorporates some 
of the best UI reforms that have been pioneered in the states. 
So, we applaud the Chairman for taking this initiative, and we 
look forward to working with him to enact this bill.
    We did want to add one point. While this proposal is an 
important step forward, it doesn't address all the shortcomings 
of the UI program. For example, much work needs still to be 
done to restore UI eligibility to a higher percentage of the 
workforce, to restore higher benefit levels, to repair the 
dysfunctional extended benefits program, as was recently 
discussed, and to address the severe underfunding of UI and the 
employment service administration.
    However, we are really pleased to see this legislation on 
the table, and we look forward to working closely with you as 
it is implemented.
    The second proposal that we came to talk about is the wage 
insurance proposal. It would cost approximately $3.5 billion 
per year, and would create a universal wage insurance program 
for displaced workers. This builds on the experience we had 
with the pilot program in the trade adjustment assistance 
program that is now available only to certain workers over 50 
years of age who lose their jobs because of trade.
    We do have some serious concerns with this proposal, and I 
would like to summarize them briefly. You all have my written 
testimony. There are some contradictions in what the proponents 
of the wage insurance program have put forward, what their 
arguments are of what the benefits would be, and what we know 
about the research.
    There are three sets of problems that we wanted to talk 
about today, and the first is whether wage insurance is a well-
defined program that would fit into what we would call a good 
jobs strategy, a national good jobs strategy. I'm pretty sure 
everybody in this room would agree that wage insurance isn't 
the only jobs program we need, and would also agree that we 
have a lot of challenges, in terms of getting the right macro-
economic policies, labor market regulations, trade policies, 
tax policies, infrastructure, and investment in education and 
training. Those are the broader foundation of national good job 
strategy. I go into more detail in my written testimony.
    The key part to that is increasing the bargaining power of 
workers, giving them the skills that they need to compete in a 
global economy. However, also, providing the regulatory 
framework that would support the creation of good jobs, and the 
investment that this country needs to make in good jobs.
    In our view, wage insurance does not help workers get good 
jobs. On the contrary, the most frequently invoked rationale 
for wage insurance is that it promotes rapid re-employment by 
encouraging workers to look for, consider, and accept lower-
paying jobs they would not otherwise take.
    Getting workers to take bad jobs quickly is not part of 
what we would consider a good jobs strategy. It only really 
makes sense if workers are getting useful skills and moving up 
the job ladder in the 2 years in which they're in the lower-
paying jobs, receiving the wage subsidies.
    Our reading of the research on this is that this is based, 
essentially, on wishful thinking on the part of the proponents. 
I think people are well meaning, who have put this proposal 
forward. They do want to help workers, they want to improve the 
function of the labor market.
    One of the key arguments that has been made is that workers 
who receive wage insurance would receive on-the-job training of 
a higher quality than that provided by training programs. In 
fact, what the research shows is that lower-wage employers are 
the least likely to offer on-the-job training that provides 
transferable skills, that most of the on-the-job training that 
happens in the U.S. labor market is in the high-skilled, high-
paid jobs.
    There is nothing about the wage insurance program that 
requires employers to offer on-the-job training, or that 
monitors whether they have provided on-the-job training, or 
provided any kind of skill ladder or wage ladder.
    Our fear is that workers would be induced to take a job, 
if, in fact, the wage insurance works as its proponents argue 
it should, to get workers more quickly into the labor market, 
sit in that job for two years, and at the end, emerge still in 
a low-paid job, and without the skills they might have gotten, 
or without the job that might have provided health care and a 
decent wage.
    The second issue is whether the wage insurance program 
would, in fact, divert needed resources from other training 
programs, and other programs that serve displaced workers. The 
concern that we have was reinforced by Mr. Weller's proposal 
that, in fact, this program be funded through taking funds out 
of the unemployment insurance system.
    It is a fact that resources are tight, and that we need to 
make sure that every dollar that we spend, every new tax 
dollar, is spent in the most appropriate way possible. Our 
concern is that the wage insurance program does not meet that 
test, that it would have unintended consequences of promoting 
downward mobility, possibly crowding out lower-skilled workers 
from other jobs, and in that sense, would have some possible 
pernicious, unintended side effects, and divert resources from 
other needed programs.
    So, we look forward to your questions, and we thank you 
very much for the opportunity to be here today.
    [The prepared statement of Ms. Lee follows:]
                         Statement of Thea Lee,
              Assistant Director of Public Policy, AFL-CIO
    Thank you, Chairman McDermott, and members of the Subcommittee, for 
this opportunity to testify on two forthcoming legislative proposals: 
one to strengthen and modernize the unemployment insurance (UI) system; 
the other to provide wage subsidies for workers who take new jobs that 
pay less than their old jobs (called ``wage insurance'').
UI MODERNIZATION
    Chairman McDermott has asked us to comment on proposed legislation 
that would distribute as much as $7 billion from the federal UI trust 
funds over five years to encourage states to modernize their UI 
programs. For many years the AFL-CIO has strongly supported several of 
the specific items in this legislation, which we believe would make 
significant progress towards strengthening the UI system.
    Under Chairman McDermott's proposal, one-third of the maximum grant 
amount available to each state would be distributed if the state counts 
workers' most recent wages for purposes of determining UI eligibility. 
Using such an ``alternative base period'' would address one of the most 
significant gaps in UI coverage by expanding eligibility for 
predominantly low-income workers who have paid into the UI system and 
earned qualifying wages. The AFL-CIO participated in the Advisory 
Council on Unemployment Compensation (ACUC), which recommended this 
particular reform in 1996, and since then we have consistently 
supported legislation to establish incentives for states to use an 
alternative base period.
    The remainder of the maximum grant amount available to each state 
would be distributed if a state meets two of three additional 
conditions: (1) it provides extended unemployment benefits for workers 
enrolled in state-approved job training; (2) it provides for the UI 
eligibility of workers seeking part-time work; or (3) it provides for 
the UI eligibility of workers who quit their jobs due to compelling 
personal circumstances (domestic violence, caring for a disabled family 
member, or following a spouse who has been relocated).
    First, we believe that providing incentives for states to support 
workers enrolled in training programs for high-demand occupations is an 
especially good idea that fits within a broader strategy of helping 
workers get good jobs. Similar programs in seven states have produced 
impressive outcomes with regard to employment and wage replacement.
    Second, the ACUC also recommended promoting UI eligibility for 
workers seeking part-time work, and since 1996 the AFL-CIO has 
consistently supported legislation to establish financial rewards for 
states that adopt this reform.
    Third, providing incentives for states to accommodate workers' 
compelling personal circumstances recognizes and rewards groundbreaking 
reforms that are especially important to women with families.
    Finally, Chairman McDermott's bill would distribute to the states a 
total of $100 million per year over five years for the purpose of 
administering these reforms and making other improvements in the 
administration of the UI and Employment Service (ES) system. Since 
2001, federal funding for administration of the UI system has been cut 
by $305 million in real terms despite increasing demands on the system.
    Chairman McDermott's proposal correctly rewards states that have 
been leaders in building a stronger UI system, and incorporates some of 
the best UI reforms that have been pioneered in the states. We applaud 
the Chairman for taking this initiative and we look forward to working 
with him to enact this bill.
    While Chairman McDermott's proposal is an important step forward, 
we realize that it does not address all the shortcomings of the UI 
program. For example, much more needs to be done to restore UI 
eligibility to a higher percentage of the workforce, to restore higher 
benefit levels, to repair the dysfunctional extended benefits (EB) 
program, and to address the severe under-funding of UI and ES 
administration. The National Association of State Workforce Agencies 
(NASWA) has recommended a special distribution of $2.4 billion over 
three years for administration of the ES/UI system, and this figure 
does not take into account the additional administrative needs arising 
from this legislation.
WAGE INSURANCE
    Chairman McDermott has also asked us to comment on proposed 
legislation costing approximately $3.5 billion per year that would 
create a universal wage insurance program for displaced workers--far 
larger than the small pilot program within the Trade Adjustment 
Assistance (TAA) program that is available only to certain workers over 
50 years of age who lose their jobs because of trade. There are three 
main points I would like to make about this proposal.

1. Wage insurance does not fit within a ``good jobs'' strategy.

    America is hemorrhaging good jobs, wages are stagnating, and the 
system of employer-provided health and pension benefits is being 
eroded. America is in dire need of a good jobs strategy. Such a 
strategy should strive to create good new jobs; to transform bad jobs 
into good jobs; to improve the effectiveness of programs that connect 
workers with the good jobs that are available; and to improve the 
effectiveness of job training and education programs that help workers 
qualify for those good jobs.
    A strategy to ensure that good jobs are available in the first 
place must include (1) balanced monetary and fiscal policies to promote 
full employment; (2) robust investments in communications and 
transportation infrastructure; (3) a national strategy to revive the 
manufacturing sector, including investments in technology development 
and dissemination, currency policy reform, and repeal of tax subsidies 
that encourage off-shoring of manufacturing jobs; (4) trade policies 
that discourage downward competition in wages and benefits and the off-
shoring of good jobs; (5) sectoral strategies in emerging sectors of 
the economy, such as renewable energy technologies, building on 
successful labor-management models in manufacturing, hospitality, 
telecommunications, and health care; (6) economic development 
initiatives; and (7) policies that promote worker rights and collective 
bargaining, higher wages, and improved health care and retirement 
security.
    Wage insurance does not help workers get good jobs. On the 
contrary, the most frequently invoked rationale for wage insurance is 
that it promotes ``rapid reemployment'' by encouraging workers to look 
for, consider, and accept lower-paying jobs they would not otherwise 
take.\1\ Getting workers to take bad jobs does not fit within any good 
jobs strategy we would propose.
---------------------------------------------------------------------------
    \1\ See, e.g., Howard Rosen, Testimony Before the Ways and Means 
Subcommittee on Human Resources (May 4, 2006) (``Wage insurance is 
specifically designed to encourage people to return to work sooner than 
they might have otherwise''); Robert Litan, Lael Brainard, and Nicholas 
Warren, ``A Fairer Deal for America's Workers in a New Era of 
Offshoring,'' Brookings Institution (May 2005) (``A main purpose of 
wage insurance is to accelerate the pace at which permanently displaced 
workers are reemployed'').
---------------------------------------------------------------------------
    In fact, getting workers to take bad jobs is not a worthy objective 
at all. Our national focus cannot be rapid reemployment to the 
exclusion of job quality, because this would argue for the elimination 
of all assistance for displaced workers. It is undoubtedly true that 
eliminating all assistance for displaced workers would result in more 
higher-skilled workers finding reemployment more quickly at Wal-Mart 
and McDonald's, but this would hardly be a desirable outcome for 
higher-skilled workers, for the lower-skilled workers they displace, or 
for the economy as a whole.
    Helping workers find rapid reemployment in good jobs is a worthy 
objective, but our priority should be job quality. It is possible to 
reconcile job quality with rapid reemployment: for example, the Clinton 
administration created a grant program to provide reemployment services 
for UI claimants, but the Bush administration de-funded the program in 
its FY 2006 budget. In addition, the Employment Service (ES) provides 
workers with information they need to find good jobs that match their 
skills, and in 2000 the Labor Department noted that every $1 spent on 
reemployment services produces $2.15 in savings to the UI trust 
funds.\2\ But the Bush administration cut ES funding by $256 million in 
real terms between 2001 and 2007.
---------------------------------------------------------------------------
    \2\ Stephen Wander and Jon Messenger, Worker Profiling and 
Reemployment Services Policy Workgroup: Final Report and 
Recommendations, U.S. Department of Labor (2000).
---------------------------------------------------------------------------
    To the extent that a wage insurance program diverts resources away 
from ongoing efforts to help workers get good jobs, or to improve that 
assistance, it amounts to giving up on workers. Even if wage insurance 
is funded with new revenues, this is money that could be used to create 
good jobs and help displaced workers get those jobs.
    Proponents of wage insurance sometimes argue that the existing job 
training programs do not work. It is true that some job training 
programs--particularly the less costly shorter-term training promoted 
under the Workforce Investment Act (WIA)--are less effective than 
others, but there are also many examples of effective training 
programs. The answer is to improve the effectiveness of job training 
programs, not to encourage workers to forego job training.
    Proponents of wage insurance routinely argue that wage-subsidized 
workers would receive on-the-job training of a higher quality than that 
provided by training programs.\3\ We know of no basis for this 
argument. In fact, lower-wage employers are the least likely to offer 
on-the-job training that provides transferable skills.
---------------------------------------------------------------------------
    \3\ See, e.g., Lael Brainerd, Testimony Before the Joint Economic 
Committee (February 28, 2007) (``The retraining that a displaced worker 
receives on a new job provides new skills that contribute directly to 
his or her performance in the new job and is thus directly useful not 
only to the worker but also to the new employer''); Howard Rosen, 
Testimony Before the Ways and Means Subcommittee on Human Resources 
(May 4, 2006) (``In addition, it is hoped that the new employer will 
provide on-the-job training, which has proven to be the most effective 
form of training''); Robert Litan, Lael Brainard, and Nicholas Warren, 
``A Fairer Deal for America's Workers in a New Era of Offshoring,'' 
Brookings Institution (May 2005) (``The retraining that displaced 
workers receive on a new job is the best kind--in sharp contrast to 
generalized training programs such as those available under TAA'').
---------------------------------------------------------------------------
    Research has established that the probability of workers receiving 
workplace education is directly proportional to their wage and 
education levels. Workers with the highest wages and the most formal 
education receive the most extensive workplace education, while workers 
with the lowest wages and least education receive the least extensive 
workplace education.\4\
---------------------------------------------------------------------------
    \4\ See Ahlstrand, Bassi, and McMurrer, Workplace Education for 
Low-Wage Workers, W.E. Upjohn Institute for Employment Research (2003).
---------------------------------------------------------------------------
    Workers who accept lower-wage employment because of wage insurance 
are likely to be no better off at the end of their eligibility period. 
They will have foregone any opportunities to engage in a more fruitful 
search for a good job or to improve their skills or education level to 
qualify for a good job. As a result, we are concerned that the earnings 
potential of many participants could be negatively affected. Oddly 
enough, it is often the proponents of wage insurance who emphasize that 
education and training are the key to ensuring that the gains from 
economic growth are shared more broadly.\5\

    \5\ See, e.g., Prof. Lawrence Summers, Testimony Before the Senate 
Finance Committee (March 8, 2007) (``It is particularly important that 
investments [in education be made to ensure all of our citizens have a 
chance to fully participate and share in our prosperity--I believe it 
is also appropriate that consideration be given to thinking about 
methods of wage insurance''); Deputy Assistant Secretary of Labor Mason 
Bishop, Testimony Before the Ways and Means Subcommittee on Human 
Resources (May 4, 2006) (``the data--shows the gap that is emerging in 
our country between those that have post secondary educational 
attainment. That is not just 4-year degrees. It may be 2-year degrees, 
industry-recognized certifications, licenses, et cetera, apprenticeship 
programs--That is how people's wages are going to rise--We have many, 
many individuals who, with better access to post secondary education 
and training, could get higher wages'').

2. Advocates of wage insurance have proposed diverting resources from 
---------------------------------------------------------------------------
already under-funded programs serving displaced workers.

    We understand that Chairman McDermott has no intention of 
substituting wage insurance for existing programs that assist displaced 
workers. However, this is precisely what other advocates of wage 
insurance have proposed.
    Wage insurance has repeatedly been proposed as a substitute for the 
UI program.\6\ At a May 4, 2006 hearing of this subcommittee, the Bush 
administration proposed legislation that would permit the diversion, 
without limitation, of state UI trust funds to pay for wage 
insurance.\7\ Then last September a paper commissioned by the Hamilton 
Project proposed diverting two-thirds of aggregate UI funding to pay 
for wage insurance.\8\ And just last month the Bush administration 
again included the same legislative proposal in its FY 2008 budget.\9\
---------------------------------------------------------------------------
    \6\ See, e.g., Robert Reich, ``Despite the U.S. Boom, Free Trade Is 
Off Track,'' Los Angeles Times (online) (June 18, 1999) (``Turn 
unemployment insurance into wage insurance. Unemployment insurance was 
originally intended as temporary income support during economic 
downturns, until the old jobs returned. But it is less relevant today, 
when most workers who lose their jobs never get them back. Their major 
worry is that the new job will pay less''); Timothy Kane, Heritage 
Foundation, Transcript of Hearing of the Ways and Means Subcommittee on 
Human Resources (May 4, 2006) (``I would want to encourage the states 
to experiment with radical freedom on how they do UI and wage 
insurance'').
    \7\ Unemployment Compensation Program Integrity Act of 2006 (May 3, 
2006) (``The Secretary of Labor may waive the requirements of--the 
Social Security Act to permit an exception to the requirement that 
money withdrawn from the unemployment fund of the state be used solely 
for the payment of unemployment compensation'' if the waiver will 
assist in ``accelerating the reemployment of individuals who establish 
initial eligibility for unemployment compensation''); ``Administration 
Wants UI Income Maintenance Strategy Waivers,'' Employment and Training 
Reporter (May 15, 2006) (``The Bush administration is asking Congress 
for authority to grant waivers of federal unemployment insurance 
policies that would allow states to implement novel strategies aimed at 
accelerating claimant reemployment--Deputy Assistant Secretary for 
Employment and Training Mason Bishop told the subcommittee--Perhaps 
states would subsidize new-hire wages through wage insurance,' he 
said'')
    \8\ Jeffrey Kling, ``Fundamental Restructuring of Unemployment 
Insurance,'' The Hamilton Project (September 2006).
    \9\ U.S. Department of Labor, ``FY 2008 Budget Justification of 
Appropriation Estimates for Committee on Appropriations,'' (February 
2007), at SUIESO 25-26.
---------------------------------------------------------------------------
    Wage insurance has also been proposed as a substitute for the TAA 
program. The conservative Heritage Foundation has proposed replacing 
the TAA program in its entirety with wage insurance.\10\ Sen. Baucus 
(D-MT) alluded to such proposals in May 2002: ``There are those who 
would like to abandon traditional TAA entirely in favor of wage 
insurance. If this experiment [the TAA pilot program] succeeds, that 
may be just the course we decide to take in a few years.''\11\
---------------------------------------------------------------------------
    \10\ Denise Froning, ``Trade Adjustment Assistance: A Flawed 
Program,'' The Heritage Foundation (July 31, 2001) (``The current TAA 
program has failed to provide effective assistance, one of the crucial 
factors for a successful adjustment program. If the aim of such 
programs is to help workers find new jobs, then the TAA should be 
eliminated over time and replaced by a program that provides 
incentives, not disincentives, for workers to do just that. Wage 
insurance is one such proposal that has won widespread support'').
    \11\ Sen. Baucus, Congressional Record (May 2, 2002), at S3795.
---------------------------------------------------------------------------
    We are concerned that resources may be diverted away from TAA and 
the UI-WIA system if workers' choices are structured so that they 
``choose'' wage insurance over alternative forms of assistance. This 
choice will not be a meaningful reflection of worker preferences, 
however, if the alternatives to wage insurance are rendered 
unattractive or inaccessible. Already, workers who want to enroll in 
TAA job training are being denied access due to funding shortfalls, and 
the Bush administration's proposed TAA regulations would restrict 
access even further. Funding shortfalls and the Bush administration's 
emphasis on rapid reemployment are already limiting access for non-
trade-affected workers who want to enroll in quality WIA job training, 
and the administration's proposed WIA regulations would restrict access 
even further.
    The supposed cost advantages of wage insurance would create an 
incentive to structure workers' choices in this way. Some advocates of 
wage insurance argue that it would be less costly per worker than 
TAA.\12\ Others conclude that wage insurance would be less costly per 
worker than UI.\13\
---------------------------------------------------------------------------
    \12\ Lael Brainerd, Testimony Before the Joint Economic Committee 
(February 28, 2007) (``On a per worker basis, this cost falls midway 
between the current unemployment and retraining benefits available 
under UI and Worker Investment Act (WIA) programs and the comprehensive 
costs of TAA benefits''); see also Sen. Baucus, Congressional Record 
(January 4, 2007) (``Wage insurance--can even save money over 
traditional Trade Adjustment Assistance.'')
    \13\ Howard Rosen, Testimony Before the Ways and Means Subcommittee 
on Human Resources (May 4, 2006) (``Wage insurance is also a less 
expensive form of assistance than unemployment insurance'').
---------------------------------------------------------------------------
    We are especially concerned that workers' choices would be 
structured in this way because of the known philosophical preference, 
on the part of some, for promoting rapid reemployment without any 
consideration of job quality. Critics of the UI-WIA system and TAA have 
traditionally argued that the availability of income support and job 
training creates a ``moral hazard'' that encourages workers to stay 
unemployed longer. By contrast, the leading argument for wage insurance 
is that it would counter this ``moral hazard'' by encouraging workers 
to take lower-paying jobs that they would not otherwise search for, 
consider, or accept, and thereby reduce the duration of their 
unemployment spell.\14\
---------------------------------------------------------------------------
    \14\ See, e.g., Lori Kletzer, ``Hamilton Project Media Call on 
Income Stability Among American Families'' (September 12, 2006) (``Part 
of its genesis came around in thinking about unemployment insurance 
itself. That is, unemployment insurance has a recognized distortion in 
the sense that you only collect UI if you remain unemployed. So there's 
a whole labor supply disincentive. Well, if one becomes eligible for 
wage loss insurance, only when you become reemployed, then there's a 
counter to that distraction--So it can counter the disincentive--More 
jobs look interesting or possible in the presence of wage insurance 
because if somebody who is making under $50,000 a year has to think 
about going from a job with tenure to a reentry job, with wage 
insurance, those jobs start to look a little more attractive. Jobs that 
were spurned won't be so spurned--it's a program that actually 
addresses in very important ways some issues that are out there 
regarding unemployment durations and job search''); Howard Rosen and 
Lori Kletzer, ``Reforming Unemployment Insurance for the 21st Century 
Workforce,'' The Hamilton Project (September 2006) (``Wage-loss 
insurance has some clear roots in the literature of optimal UI policy 
design, most clearly as a response to moral hazard concerns arising 
from a UI-recipient worker's reduced incentive to leave unemployment 
due to a reduction in the net return to securing a job''); Jeffrey 
Kling, ``Meeting the Challenges of the Global Economy,'' Brookings 
Institution Transcript (July 25, 2006) (``Receipt of UI benefits 
encourages longer unemployment spells--The new system [of wage 
insurance would also introduce incentives to reduce unemployment--by 
creating stronger rewards for finding another job quickly'').
---------------------------------------------------------------------------
    The issue of rapid reemployment is certain to arise when Congress 
next considers extending federal unemployment benefits during a 
recession. We know exactly what these debates look like. In 2001, 2002, 
and 2003, opponents of an extension argued that unemployment benefits 
prolong unemployment, and used inflated numbers to claim that laid-off 
workers already receive generous amounts of assistance. If this pattern 
repeats itself, the existence of a wage insurance program designed to 
promote rapid reemployment will be used as an argument against 
extending jobless benefits. And if this argument is successful, wage 
insurance will substitute for, rather than complement, unemployment 
benefits.
    We fully appreciate that Chairman McDermott has no intention of 
financing his wage insurance proposal through the unemployment payroll 
(FUTA) tax system. Instead, his proposal would be financed through a 
new dedicated payroll tax of 0.1 percent of wages up to the taxable 
wage base of the Social Security program, which is currently $94,000 
per year. But if there is bipartisan agreement on the design of a wage 
insurance program, we question whether it is realistic to expect 
defenders of the UI system to prevent the diversion of UI resources by 
insisting on an increase in payroll taxes.
    It would be especially unfortunate if wage insurance were financed 
by revenues from extension of the 0.2 percent FUTA surtax. The FUTA 
surtax is scheduled to expire in December 2007, but for the last two 
years the Bush administration has proposed a five-year extension. The 
surtax generates $7.4 billion over five years. We believe that any 
additional revenues from unemployment payroll taxes should be used 
solely to fund modernization of the UI system, and not for wage 
insurance.

3. Further study would be necessary to resolve the many unanswered 
questions about a universal wage insurance program--including potential 
harm to workers.

    There has been remarkably little research into the possible 
consequences of a universal wage insurance program, and the empirical 
data on wage insurance is scarce. Our only real experience with wage 
insurance is with two pilot programs--one a short-lived pilot in Canada 
and the other an ongoing pilot with the TAA program. Further study 
would be necessary to resolve the following issues:
    To what extent would a universal wage insurance program shorten 
unemployment spells? Although rapid reemployment is the leading 
rationale for wage insurance, there has been relatively little study of 
this question. The Canadian pilot program showed only a small impact on 
unemployment spells.\15\
---------------------------------------------------------------------------
    \15\ Bloom, et al. ``Testing a Reemployment Incentive for Displaced 
Workers: the Earnings Supplement Project,'' Social Research and 
Demonstration Corporation (May 1999), at 39.
---------------------------------------------------------------------------
    To what extent would a universal wage insurance program induce 
workers to accept lower-wage employment they might otherwise refuse? In 
1995 the Upjohn Institute performed the only economic modeling to date 
on wage insurance and concluded that it ``would induce dislocated 
workers to search harder for jobs and accept employment that they might 
otherwise refuse.''\16\
---------------------------------------------------------------------------
    \16\ Carl Davidson and Stephen Woodbury, ``Wage-Rate Subsidies for 
Dislocated Workers,'' Upjohn Institute (January 1995).
---------------------------------------------------------------------------
    Would these lower-paying jobs lack benefits such as health 
insurance? We know that workers who collect unemployment benefits, by 
contrast, are more likely to find a new job with employer-provided 
health insurance.\17\
---------------------------------------------------------------------------
    \17\ Heather Boushey and Jeffrey Wenger, ``Finding the Better 
Fit,'' Economic Policy Institute (April 2005).
---------------------------------------------------------------------------
    What portion of wage subsidy recipients would have taken lower-
paying jobs even without the subsidy? Some proponents of wage insurance 
argue that its purpose is to provide income support for workers who 
would take lower-wage jobs even without the subsidy, while 
acknowledging that it will induce some workers to take lower-paying 
jobs.\18\ However, it is unknown what portion of subsidy recipients 
would take lower-paying jobs even without the subsidy. The smaller the 
portion of recipients induced to take bad jobs, the less the potential 
harm to workers.
---------------------------------------------------------------------------
    \18\ Jeffrey Kling, ``Meeting the Challenges of the Global 
Economy,'' Brookings Institution Transcript (July 25, 2006) (``The new 
system [of wage insurance would also introduce incentives to reduce 
unemployment--by creating stronger rewards for finding another job 
quickly'').
---------------------------------------------------------------------------
    To what extent would the employment of wage-subsidized workers 
displace other workers? The Upjohn Institute's economic modeling found 
that the employment gains from wage insurance came almost completely at 
the expense of employment for other workers.\19\ If wage insurance 
turns out to be simply a game of musical chairs, encouraging workers 
laid off from highly-paid jobs to take lower-paying jobs that would 
otherwise go to workers with less skill and experience, then it raises 
serious equity concerns.
---------------------------------------------------------------------------
    \19\ Carl Davidson and Stephen Woodbury, ``Wage-Rate Subsidies for 
Dislocated Workers,'' Upjohn Institute (January 1995) (``But the 
simulations also raise the possibility that the gains for dislocated 
workers could come at the expense of other groups of workers; that is, 
other groups of workers could experience small increases in employment 
duration, and decreases in employment levels, that almost fully offset 
the gains for dislocated workers'').
---------------------------------------------------------------------------
    To what extent would employers provide subsidized workers with on-
the-job training? Proponents of wage insurance regularly argue that 
wage insurance acts as a subsidy for employers to provide on-the-job 
training.\20\ But Chairman McDermott's proposal contains no requirement 
that employers provide any on-the-job training at all. Wage insurance 
is a particularly poor policy choice for subsidizing on-the-job 
training. The Job Training Partnership Act (JTPA) required that on-the-
job training lead to a progression of job skills and higher wages, with 
protection against displacement of other workers, and that labor 
organizations be consulted so that subsidized training met quality 
standards and linked workers to good jobs.
---------------------------------------------------------------------------
    \20\ Joint Economic Committee, ``Meeting the Challenge of Household 
Earnings Instability'' (March 2007) (``Perhaps most importantly, wage 
insurance would subsidize the hiring and training of workers who 
transition into new jobs or sectors''); Lael Brainerd, Testimony Before 
the Joint Economic Committee (February 28, 2007) (``Wage insurance can 
act as a subsidy of on-the-job training for the worker's new 
employer''); Robert Litan, Lael Brainard, and Nicholas Warren, ``A 
Fairer Deal for America's Workers in a New Era of Offshoring,'' 
Brookings Institution (May 2005) (``The second critical value of wage 
insurance is that it acts like a training subsidy for the new 
employer''); Sen. Baucus, Congressional Record (January 4, 2007) 
(``Wage insurance provides an incentive for employers to hire lower-
skilled and older workers and train them on the job'').
---------------------------------------------------------------------------
    To what extent would any on-the-job training given by employers 
provide transferable skills? Again, we know of no basis for the claim 
that employers of wage-subsidized workers would provide better on-the-
job training with transferable skills. Chairman McDermott's proposal 
contains no requirement that on-the-job training lead to a progression 
of skills or higher wages.
    To what extent would a large-scale universal wage insurance program 
subsidize low-wage employers such as Wal-Mart? If wage insurance 
advocates are correct that wage insurance acts as a subsidy to 
employers, recipients of the subsidy would be, by definition, lower-
wage employers. And the amount of the subsidy would be greater for 
employers such as Wal-Mart that pay lower wages than their competitors, 
such as Costco.
    To what extent would employers be able to capture the subsidy by 
paying subsidized workers less than they would otherwise? Wage 
insurance can act as a subsidy for employers only if employers are able 
to pay program participants, or other employees, less than they would 
otherwise pay. It is sometimes assumed that employers will not know the 
identity of workers who are eligible for wage insurance, but this 
assumption is questionable. Any employer would be able to identify 
former Boeing workers after a Boeing layoff in Seattle, or former 
Delphi workers in Flint, Michigan, or former employees of any large 
employer whose layoffs are publicized.
    To what extent would wage subsidies lower wages for non-recipients? 
Subsidized employers might further benefit from a reduction of wages 
resulting from an increase in the total labor supply \21\ or from an 
increase in the number of workers willing to work for lower wages.
---------------------------------------------------------------------------
    \21\ Jeffrey Kling, ``Responses to Questions About Fundamental 
Restructuring of Unemployment Insurance''' (September 2006) 
(``increases in total labor supply from wage-loss insurance may reduce 
wage levels, in the same manner as any other policy that encourages 
work'').
---------------------------------------------------------------------------
    To what extent would the availability of a program designed to 
promote ``rapid reemployment''--such as wage insurance--be used as an 
argument against strengthening programs serving displaced workers that 
have historically been attacked for prolonging unemployment? To what 
extent would it enable critics of programs serving displaced workers to 
make them less accessible or less attractive?
CONCLUSION
    We strongly support Chairman McDermott's proposal to strengthen and 
modernize the UI system, and we look forward to working with him to 
enact this legislation. We believe available budgetary resources should 
be dedicated on a priority basis to a good jobs strategy, which 
includes strengthening the UI program and other severely under-funded 
programs that provide assistance for displaced workers. But we believe 
it makes little sense to divert scarce budgetary resources away from a 
good jobs strategy towards proposals that are specifically designed to 
induce workers to take lower-paying jobs. And further study would be 
necessary to determine whether a universal wage insurance program 
adversely affects workers by promoting downward economic mobility, 
diverting resources away from severely under-funded programs that serve 
displaced workers, subsidizing lower-wage employers such as Wal-Mart, 
and causing job loss for lower-skilled workers.

                                 

    Chairman MCDERMOTT. Thank you.
    Mr. Rosen.

STATEMENT OF HOWARD ROSEN, VISITING FELLOW, PETERSON INSTITUTE 
                  FOR INTERNATIONAL ECONOMICS

    Mr. ROSEN. Thank you very much, Mr. Chairman. To the 
Committee, I appreciate the opportunity to be here to discuss 
an issue that I think has been ignored for too long, and is one 
of the most important issues in this country to millions of 
people.
    Mr. Congressman, your proposals, I think, go very far in 
improving the relevance of the unemployment insurance program 
to current labor market conditions. They are probably the most 
ambitious proposals in the last decade. I applaud you for them.
    You will hear in the discussion some disagreements on 
specific aspects of your proposals. However, I think it's very 
important to understand that I think all of us agree that 
unemployment insurance is a bedrock in this country, and we 
need to strengthen it, so that all people have access to it.
    Unemployment insurance cannot be a substitute for sound, 
economic policies that create high-wage, high-skilled jobs. 
Similarily, wage insurance cannot be a substitute for 
unemployment insurance. Let me just take a second to talk about 
some of the major changes in the labor market that have taken 
place over the last couple of decades. Please, keep in mind the 
fact that our unemployment insurance system has not kept pace 
with these changes.
    The first is that the unemployment rate has been falling. 
The economy is doing better. However,, on the other hand, the 
duration of unemployment has been rising. If you look carefully 
at this graph, the gray areas are recessions. You see something 
very interesting. The duration of unemployment continues to 
rise after the end of a recession. Recessions are getting 
shorter, but the labor market conditions continue to worsen 
after recessions.
    As Secretary Reich mentioned, this is radically different 
from the labor market of the past, which was basically short-
term unemployment during cyclical downturns. In many cases, 
people went back to their previous jobs. This is no longer the 
case. If you are one of the unlucky people in this country to 
lose your job, and the percentage of people losing their jobs 
is smaller today, the costs on you are much higher than they 
were in the past.
    If I could ask you to remember one chart, it is this chart. 
This is what happens to people who are seriously dislocated. I 
am not talking here about the transitional unemployment. These 
are people who lose their jobs and their occupations. About a 
third of these people, between one and 3 years after layoff, do 
not find re-employment. Forty percent of them-- and this is 
only in manufacturing--take a new job and experience an 
earnings loss, a long-term, lifetime earnings loss. Only one-
quarter of people end up better off, in terms of wages, after 
their unemployment.
    Let me just jump ahead and say a wage-loss insurance 
system, however it is structured, would immediately help those 
40 percent, which is the largest share of people.
    Here are the same data for workers from the service 
industries. It's pretty much the same. The point being is that 
the labor market these days is not just a manufacturing issue 
any more. It's a total employment issue. It is manufacturing 
and services.
    The unemployment insurance system has remained the same, 
despite major changes in the labor market. I can go into that 
in a little more detail in our discussion. As a result, only 
about one-third of unemployed people in this country get 
unemployment insurance. If you are lucky enough to get it, the 
average across the nation is $260 a week.
    Now, what we have always been saying is that $260 is below 
the poverty rate for a family of 4. The $260 is now below the 
minimum wage which Congress is currently considering. What is 
the point? On what basis are we setting that number? As 
mentioned by Congressman English, the extended benefit triggers 
are broken. They are not automatic. The extended program has 
not worked in the last two recessions.
    In addition, let me add something. Extended unemployment 
insurance program is also relevant in cases of Katrina, or 
natural disasters. We had problems in those cases, providing 
long-term unemployment insurance to those people, because the 
triggers were broken.
    One of the reasons why we have additional money left in the 
UI trust fund is because we haven't been using it for extended 
benefits. Congress has taken that money out of general revenue.
    There has been a lot of concern this morning about fiscal 
policy. Would it not be better to have a healthy extended 
benefit program that uses money from the trust fund, and not 
money out of general revenue?
    Here, I think, is the most egregious problem. Congressman 
Weller, you made a statement, I think, that reflects a lot of 
people's thinking, which is that payroll taxes are egregious, 
and they hurt the creation of employment. Many studies do not 
confirm this. However, if you believe that, the current 
structure of our FUTA does it in the worst way. The maximum 
income upon which FUTA is charged right now is $7,000. So, what 
that means is if you believe that the payroll tax is hurting 
the creation of jobs, it is hurting the creation of jobs of 
precisely those people who need new jobs. The Social Security 
system has a maximum income of $96,000. Why UI was left at 
$7,000, I don't understand. It has been there for 20 years. I 
think it's just been forgotten, and it's time to correct it.
    Again, I hope we will engage on this issue of tax policy. 
We have an automatic increase in the maximum wage in Social 
Security. It's now at $96,000. It used to be at $60,000, 
$70,000, $80,000. Do we call that a tax increase? I don't know. 
That's a semantic issue. So, what I would be calling for is a 
correction of the maximum income that is used to calculate the 
FUTA tax. You can see the redline what it would be if it were 
corrected for, inflation.
    I am running out of time. Let me just say that I think that 
the Congressman's proposals address most of these problems. He 
would expand eligibility. We need to raise the amount that is 
provided, fix the triggers, and the weak link to re-employment, 
which we would address through the wage insurance program.
    Let me just say that the wage insurance program, as 
currently structured, would have no impact on wages in the 
economy, because it's being paid to the employee. The employer 
doesn't even know about it. Now, I am speaking from facts, 
because we have a program already in place. The employer 
doesn't know about it, so it should have no impact on wages. It 
is applied for and paid directly to the employee. I would be 
happy to discuss this further. If we need to know more about 
wage insurance, then we should have a Government Accountability 
Office (GAO) study on that, and try to get that information.
    A health care tax credit, I will again talk about that 
later. I think that that's something that we should be also 
borrowing from Trade Adjustment Assistance. I think it is 
really an urgency to correct the mistakes in the FUTA tax wage 
level. Thank you very much.
    [The prepared statement of Mr. Rosen follows:]
             Statement of Howard Rosen, Visiting Fellow,\1\
---------------------------------------------------------------------------
    \1\ Howard Rosen is Visiting Fellow at the Peterson Institute for 
International Economics and the Executive Director of the Trade 
Adjustment Assistance Coalition. This statement is based on Kletzer, 
Lori and Howard Rosen (2006), ``Reforming Unemployment Insurance for 
the Twenty-first Century Workforce,'' The Hamilton Project, Washington, 
DC: The Brookings Institution.
---------------------------------------------------------------------------
             Peterson Institute for International Economics
Introduction
      The unemployment insurance (UI) system is the foundation 
of the U.S. Government's response to the hardships associated with 
economic downturns and related job loss.
      There have been no major changes in the basic structure 
of the UI system since it was established more than 70 years ago, 
despite significant changes in U.S. labor market conditions.
      Currently, only about one-third of unemployed workers 
actually receive assistance under the program, and that assistance is 
modest, at best.
      Although the basic structure is sound, important aspects 
of the UI system are in desperate need of reform.
Changes in the U.S. labor market
    Over the last few years there have been changes in the nature of 
unemployment in the United States. After rising between the 1960s and 
the 1980s, the average unemployment rate began falling in the 1990s, 
reaching a low of 4 percent in 2000 and remaining moderate over the 
past six years. (See Figure 1.)
    Despite overall declines in the unemployment rate, the average and 
median duration of unemployment has increased. (See Figure 2.) These 
two conflicting trends suggest a change in the source of joblessness--
from temporary layoff to permanent displacement.
                      Figure 1.  Unemployment Rate
[GRAPHIC] [TIFF OMITTED] T0310A.001

    Source: Bureau of Labor Statistics

    For most of the past century, employment and unemployment were 
highly correlated with the business cycle. This relationship appears to 
have changed in recent years. First, with the exception of the early 
1980s, there has been a decline in the official length of recessions. 
Second, there has also been a decline in the magnitude of job losses 
occurring during economic slowdowns. Third, employment declines have 
continued for at least one year after the end of the last two 
recessions and employment recovery has taken longer. Taken together, 
these three developments suggest that something has changed in the 
underlying structure of the U.S. labor market in recent years.
    Data presented in Figure 3 suggest that there has been a 
significant decline in variation across state unemployment rates over 
the past 30 years. During the late 1970s, states in the Northeast and 
Midwest--regions with high concentrations of traditional industries 
such as automobile manufacturing, textiles and apparel, and steel--
experienced significantly higher unemployment rates than states in 
other regions. Beginning in the 1980s, state unemployment rates began 
converging toward the national average, reflecting a slow decline in 
overall unemployment and more similarity in state unemployment rates. 
This convergence suggests that, during the past 20 years, unemployment 
has been explained more by national factors than by state or regional 
factors.
                  Figure 2.  Duration of Unemployment
[GRAPHIC] [TIFF OMITTED] T0310A.002

    Source: Bureau of Labor Statistics
            Figure 3.  Variation in State Unemployment Rates
[GRAPHIC] [TIFF OMITTED] T0310A.003

    Source: Authors' calculations from Bureau of Labor Statistics data.

    To summarize, the U.S. labor market has experienced 3 major 
developments in recent years:

      Despite a moderate aggregate unemployment rate, the 
duration of unemployment has increased, with a greater incidence of 
permanent job loss than of temporary layoffs.
      State unemployment rates are converging, reflecting a 
reduction in their variation.
      Changes in employment and unemployment seem to be due 
more to structural rather than to cyclical factors.

    The original UI program was designed to offset income losses during 
cyclical periods of temporary involuntary unemployment. By contrast, 
current workers face long-term structural unemployment. The existing UI 
system is inadequate in responding to these current labor market 
conditions.
    The current UI system does not assist workers who seek part-time 
employment, workers who voluntarily leave one job in order to take 
another, or workers who experience long-term unemployment. New entrants 
and reentrants into the labor market are not currently eligible for UI, 
since these two groups of unemployed do not fit well with one of the 
program's original objectives, i.e., insuring against the risk of 
involuntary job loss. Covering these workers would raise issues 
concerning the amount and duration of assistance, since they may not 
have relevant work experience.
    Underlining these macroeconomic changes to the U.S. labor market is 
a shift from traditional employer-based full-time employment to an 
increased reliance on contingent and part-time employment. The shift to 
these nontraditional forms of employment reflects additional shortfalls 
in the current UI program. A system designed to provide income support 
during temporary layoffs for workers who were permanently attached to a 
single employer is not well designed for a labor market with 
considerable self-employment and contingent, part-time, and low-wage 
employment.
The Current UI Program
    Federal law established the UI program in 1935 in order to provide 
temporary and partial wage replacement to workers involuntary separated 
from their jobs. It was believed that UI would serve as a 
countercyclical mechanism to help stabilize the economy during economic 
slowdowns. In the more contemporary language of the economic analysis 
of insurance, the primary goal (or benefit) of UI is the ability of the 
government to smooth income and consumption during unemployment spells.
    The UI program was established as a federal-state system. The 
federal government sets rules and standards, primarily on minimum 
coverage and eligibility criteria, and imposes a minor tax to finance 
the overall administration of the program. Individual states set their 
own benefit amounts, duration of assistance, and means of financing 
that assistance.
Coverage and Eligibility
    The existing eligibility criteria for receiving assistance, listed 
below, are based on monetary and non-monetary determinations; the 
application of these criteria varies by state:

      record of recent earnings, over a base year
      length of job tenure (calendar quarters employed)
      cause of job loss
      ability and willingness to seek and accept suitable 
employment

    Monetary eligibility is essentially a sufficient work history prior 
to job loss. Each state determines its own sufficient work history, 
relying on earnings during a base period.\2\ Most state programs assist 
only those workers who lose their jobs through no fault of their own, 
as determined by state law. In more detail, reasons for ineligibility 
of UI include the following:

    \2\ See Kletzer and Rosen (2006) for a complete discussion of the 
base period used to determine UI eligibility.

      voluntary separation from work without good cause
      inability or unwillingness to accept full-time work
      discharge for misconduct connected with work
      refusal of suitable work without good cause
      unemployment resulting from a labor dispute

    There is enormous variation across states in the definition of good 
cause for voluntary separation, i.e., leaving to accept other work, 
compulsory retirement, sexual or other harassment, domestic violence, 
and relocation to be with a spouse. Program discretion in setting these 
standards results in numerous inconsistencies. For example, workers who 
quit to move with a spouse and meet the monetary eligibility criteria 
are eligible to receive UI benefits in some programs--including 
California, Kansas, and New York--but not in others--including 
Connecticut, Delaware, the District of Columbia, and Massachusetts.
    Workers who quit because they have been victims of sexual or other 
harassment are potentially eligible for UI benefits in all programs 
except six: Alabama, Georgia, Hawaii, Missouri, New Hampshire, and 
Vermont. Workers who voluntarily leave their jobs in anticipation of a 
plant closing in order to accept another job are potentially eligible 
for UI in many states, including California, Minnesota, New York, and 
Pennsylvania, but are ineligible in North Carolina, South Carolina, 
Tennessee, and West Virginia. In a highly mobile society, with 
integrated labor markets, it is difficult to imagine a plausible 
argument in support of these differences in state programs.
    The base period monetary criteria are used as an imperfect proxy 
for labor market attachment. One unfortunate consequence is that some 
workers have insufficient work experience to meet the base period 
requirement, i.e., reentrants into the labor market who are actively 
seeking employment are not eligible for UI. As a result, women who 
decide to postpone returning to work after childbirth and workers who 
return to school or who take up training following a job loss can be 
ruled ineligible for UI. This is true despite the fact that their 
current or former employers paid UI taxes, and despite the likely 
satisfaction of monetary eligibility requirements for the immediate 
base period prior to the job loss.
    The percent of total unemployed workers receiving assistance, the 
recipiency rate, has declined over the past two decades. The recipiency 
rate peaked in 1980 when half of all unemployed workers received UI. 
The rate fell to as low as 30 percent in 1984, before rebounding to 39 
percent in 1991. Receipt of benefits increased to above 40 percent in 
2001, 2002, and 2003, before falling back in 2004. (See Figure 4.) The 
average recipiency rate over the past 27 years is approximately 37 
percent. In other words, in recent years only a little more than one-
third of unemployed workers actually have received assistance under the 
UI program.
Benefit Levels
    One of UI's initial goals was to replace half of lost wages. 
Because of the federal-state nature of the program, each state sets its 
own minimum and maximum weekly benefit amounts. Although several states 
have set their maximum weekly benefit at approximately two-thirds the 
state weekly wage, currently only one state--Hawaii--has achieved the 
initial goal of actually replacing, on average, half of lost wages.
    Almost all states set their maximum weekly benefits somewhere 
between $200 and $500, with the largest concentration of states between 
$300 and $400. Puerto Rico has the lowest maximum weekly benefit 
($133). States with the highest maximum weekly benefits include 
Massachusetts ($551 to $826), Minnesota ($350 to $515), New Jersey 
($521), and Rhode Island ($492 to $615). The average weekly benefit in 
2004 ranged from $106.50 in Puerto Rico to $351.35 in Massachusetts. 
The average weekly benefit for the entire country was $262.24. This 
average is almost 10 percent less than the weekly equivalent of the 
poverty level for a family of three that was set by the U.S. Census 
Bureau.\3\
---------------------------------------------------------------------------
    \3\ Annual incomes at and below $14,974, for a family of three, 
with one child under the age of 18, were defined as poverty level for 
2004 (U.S. Census Bureau 2005).
---------------------------------------------------------------------------
    The replacement rate, defined as average weekly benefits as a share 
of average weekly earnings, is a useful measure of benefit 
sufficiency.\4\ The District of Columbia has the lowest replacement 
rate, less than one-fourth of average earnings. As mentioned above, 
Hawaii's UI program comes closest to replacing half of unemployed 
workers' average weekly earnings. Thirty-eight states have an average 
replacement rate of more than one-third but less that one-half of their 
workers' average weekly wages. The states with the lowest replacement 
rates include Alabama, Alaska, Arizona, California, Connecticut, 
Delaware, Louisiana, Maryland, Mississippi, Missouri, New York, 
Tennessee, and Virginia. The average replacement rate for the United 
States between 1975 and 2004 was 0.36, reaching as high as 0.38 in 1982 
and as low as 0.33 in 1998 and 2000.
---------------------------------------------------------------------------
    \4\ Only average weekly earnings for UI recipients are used in 
calculating the replacement rate.
---------------------------------------------------------------------------
Duration of Benefits
    In the early years of the program, the duration of UI benefits was 
12 to 20 weeks. Starting in the 1950s, a period of relatively low 
unemployment, a sizable number of states increased their UI duration to 
26 weeks. By 1980, 42 states had a maximum duration of 26 weeks, and 
the duration for the 11 remaining programs was between 27 and 39 weeks. 
By the 1990s, 50 states had a uniform maximum duration of 26 weeks, 
with two jurisdictions at 27 to 39 weeks. Currently, all jurisdictions 
except three have a maximum duration of 26 weeks.\5\
---------------------------------------------------------------------------
    \5\ Washington and Massachusetts have a maximum duration of 30 
weeks.
---------------------------------------------------------------------------
    Over the past 30 years, the average duration for receiving UI has 
ranged from a low of 13 weeks in 1989 to a high of 17.5 weeks in 1983, 
hovering around 15 weeks for most of the period. (See Figure 5.) A 
sizeable fraction of UI beneficiaries exhaust their benefits, i.e., 
remain unemployed beyond the period for which they can receive UI, 
ranging from a low of 25.8 percent in 1979 to a high of 43.9 percent in 
2003. On average, approximately one-third of UI recipients exhaust 
their benefits before finding new jobs.
Figure 4.  Unemployed Workers, Job Losers, and UI Recipients, 1972-2003
[GRAPHIC] [TIFF OMITTED] T0310A.004

    Source: Congressional Budget Office 2004, Figure 3.
  Figure 5.  Average Duration of Unemployment Insurance Receipt, with 
              Periods of Recession Highlighted, 1957-2005
[GRAPHIC] [TIFF OMITTED] T0310A.005

    Source: Bureau of Labor Statistics, U.S. Department of Labor and 
National Bureau of Economic Research.

    With the trend increase in the average duration of unemployment, 
the maximum period that workers can receive UI has fallen from two 
times to a little more than 1.5 times the average duration of 
unemployment. As with benefit levels, there does not appear to be any 
significant relationship between benefit duration and local labor 
market conditions.
Extended Benefit Programs
    The UI system proved unable to respond to surges in unemployment 
during most of the cyclical downturns over the past half century. 
Increases in the duration of unemployment during and immediately 
following those recessions were the primary impetus for extending 
statutory UI beyond its base period. Congress enacted the first 
temporary extension of UI during the 1958 recession. In 1970, Congress 
enacted the Extended Benefit (EB) program with automatic triggers to 
provide assistance in a more orderly fashion. High rates of regular UI 
exhaustion, problems with the automatic triggers, and political 
pressures resulted in the need for subsequent congressional action to 
deal with heightened levels and prolonged duration of unemployment 
during recessions.
    Under the current program, UI benefits can be extended for an 
additional 13 weeks when the unemployment rate of those workers covered 
by the program, i.e., the Insured Unemployment Rate (IUR), for the 
previous 13 weeks is at least 5 percent and 20 percent higher than that 
rate for the same 13-week periods in the previous two years. Since 
states are required to finance half of the extended benefit programs, 
they are free to adjust this trigger.
    Changes in the labor market combined with the static nature of the 
triggers, have produced an extended benefit system that is not 
automatic. As a result, Congress has occasionally found it necessary to 
extend UI through the Temporary Extended Unemployment Compensation 
program. Since the 1980s, the standard extended benefit program has 
provided a smaller share of assistance to unemployed workers than the 
emergency extensions of UI enacted by Congress.
    Although helpful to millions of workers, these temporary stopgap 
measures have politicized unemployment, thereby undermining one of the 
initial goals of the UI program. These temporary programs have proven 
to be clumsy, typically being enacted after hundreds of thousands of 
workers have already exhausted their UI. In addition, the sunset 
provisions are arbitrarily set and usually fall before employment has 
recovered. Overall, the nation's UI program has become less automatic 
and more dependent on congressional action in response to prolonged 
periods of economic slowdown.
Financing UI
    UI is financed by a combination of federal and state payroll taxes. 
Revenue from the federal payroll tax is used to finance the costs 
incurred by federal and state governments in administering the UI 
program and to cover loans to states that exhaust their regular UI 
funds. States are required to raise the necessary revenue to finance 
regular UI benefits paid to their unemployed workers. Federal and state 
governments share the costs of financing benefits under the automatic 
extended benefit program. Currently, federal taxes finance 17 percent 
of the UI program. The remaining 83 percent is financed by state taxes. 
Temporary extended UI programs enacted by Congress have typically been 
financed by federal budgetary expenditures without any specific revenue 
offset.
    The federal tax established by the Federal Unemployment Tax Act 
(FUTA) is currently 6.2 percent on the first $7,000 of annual salary by 
covered employers on behalf of covered employees.\6\ Employers must pay 
the tax on behalf of employees who earn at least $1,500 during a 
calendar quarter. Employers in states with federally approved UI 
programs receive a 5.4 percent credit against the tax, making the 
effective FUTA tax rate 0.8 percent. The bottom line is that the 
federal tax is trivial: A maximum of $56 is collected annually for each 
worker who is covered under the program.
---------------------------------------------------------------------------
    \6\ The 6.2 percent includes a 0.2 percent surtax initially passed 
by Congress in 1976, designed to replenish the UI trust fund. The 
surtax is scheduled to expire on December 31, 2007.
---------------------------------------------------------------------------
    There have been few adjustments in the FUTA taxable wage base since 
it was first established in 1939. The wage base, originally set at 
$3,000, remained fixed for 32 years, until 1972, when it was raised to 
$4,200. That increase kept the taxable wage base in line with its real 
value in 1960. Congress raised the federal taxable wage base to $6,000 
in 1978 and to $7,000 in 1983, where it has remained for the past 22 
years. Had the taxable wage base been adjusted for inflation over the 
past 65 years, it would currently be approximately $45,000. (See Figure 
6.)
            Figure 6.  Federal Taxable Wage Base, 1940-2004
[GRAPHIC] [TIFF OMITTED] T0310A.006

    Source: U.S. Department of Labor, and authors' estimates.

    If the taxable wage base were adjusted to $45,000, the net federal 
tax rate, i.e., the tax rate minus the credit, could be reduced by 
half, to 0.4 percent, and generate the same amount of revenue that is 
currently being collected. Although it is unrealistic to expect an 
adjustment of this magnitude anytime soon, any increase in the wage 
base to make up for the erosion in its real value over the past two 
decades could provide additional funding for providing assistance to 
workers in need, or could enable the federal government to reduce the 
FUTA tax rate, or both. Most importantly, adjusting the wage base 
upward would reduce the regressive nature of the tax. Under the current 
structure, the FUTA tax accounts for a larger share of lower income 
workers' wages. Adjusting for inflation alone, as many states have been 
doing for their own UI taxes, would increase the federal taxable wage 
base fivefold, make the system more progressive, and provide additional 
revenues to the system.
    Federal guidelines dictate that states have in place UI payroll tax 
systems that are experience rated. With experience rating, firms that 
lay off fewer workers face a lower tax rate on their payroll. States 
have the discretion to structure their own experience rating system, 
and those systems, as with the tax rates, vary considerably among the 
states.
    Some aspects of the current UI system work well and deserve to be 
highlighted. UI constitutes an important source of income for 
unemployed workers and their families, particularly for the long-term 
unemployed. The Congressional Budget Office (2004) reports that UI 
benefits played a significant role in maintaining the family income of 
recipients who experienced long-term spells of unemployment in 2001 and 
early 2002, particularly for those families that had only one wage 
earner. Before becoming unemployed, recipients' average family income 
was about $4,800 per month. When recipients lost their job, that 
income--excluding UI benefits--dropped by almost 60 percent. Including 
UI benefits reduced the income loss to about 40 percent.\7\
---------------------------------------------------------------------------
    \7\ Long-term recipients are defined in this report as unemployed 
workers who received UI benefits for a spell of at least four 
consecutive months, in 2001 or early 2002.
---------------------------------------------------------------------------
Reforming UI
    In recent years, the U.S. labor market has come under increased 
pressures from intensified domestic and international competition. 
These pressures have changed the nature of job turnover in the United 
States. Unlike the cyclical job losses that characterized the labor 
market and economy from 1945 to the 1980s, job losses are now related 
more to structural factors, with workers simultaneously changing jobs, 
industries, and occupations. The existing UI program, though, is 
fighting the last battle, one of widespread temporary layoff, where 
workers were attached to a single employer.
    As discussed above, current labor market conditions differ a great 
deal from those that existed in 1935, suggesting that it is time to 
revisit some of the fundamental elements of the original UI program. 
The reforms outlined below maintain the basic structure of UI, while 
enhancing its efficiency, reach, and impact to reflect the changes in 
the labor market since the program was designed. Although each proposal 
can be evaluated and implemented separately, it would be preferable to 
enact them all.
Strengthen the Federal Leadership Role in UI
    As documented above, the nature of unemployment in the United 
States has shifted from cyclical to structural. Although there clearly 
remain some differences in local labor market conditions, the current 
pressures on the U.S. labor market are becoming more national. State 
differences in the incidence and experience of unemployment have 
narrowed considerably. Local labor market conditions primarily affect 
the prospects for reemployment. Given the increasingly national nature 
of the labor market, UI would better meet its original objectives if 
the federal government played a more prominent role in this 
partnership.
    In addition to inequities created by disparate rules across states, 
a significant downside of the current federal-state partnership is the 
states' real or perceived fears that program generosity will result in 
adverse changes to their business environment. Increased Federal 
leadership would avoid interstate competition and a ``race to the 
bottom'' in program benefits.
    An increased leadership role for the federal government would be 
characterized by expanding standards for eligibility, duration, and 
level of benefits; and for financing the program.
Eligibility
      Standardize the base period for determining eligibility 
to the past four complete calendar quarters prior to job loss. This 
change, already implemented by a number of states, updates the 
operational definition of labor market attachment, and reflects the 
reduced time needed to report earnings.
      Use hours rather than earnings in determining 
eligibility. Shifting the determination of eligibility to hours rather 
than earnings would bring more low- and moderate-wage workers--who 
often most need help during periods of unemployment--into the system.
      Harmonize non-monetary eligibility standards. The 
patchwork of non-monetary eligibility criteria, where some states 
consider voluntary separations for good cause, while others do not, 
creates unnecessary complexity and inequities in the system.
      Enable reentrants to the labor force, if determined 
eligible at the time of job loss or separation, to be eligible to 
receive the benefits they would have received at the time of job loss. 
In a fluid labor market, many workers may leave the labor force for 
some time (e.g., to care for a child or parent) and then return. If the 
workers had been eligible for UI when they separated from their 
previous job but did not claim them at that time, they should be 
eligible for benefits when they return to the labor force.
      Amend the work test to allow job search for part-time 
employment. Part-time work is a common feature of the current labor 
market, accounting for 16 percent of employment in July 2006, and 
unemployed workers should not be disqualified from receiving benefits 
because they are searching for part-time work.

    The share of unemployed workers who actually received assistance 
under the UI program averaged 37 percent between 1980 and 2005. The 
proposals outlined above are designed to increase the number and share 
of unemployed workers eligible to receive assistance. Given the 
difficulties associated with precise estimation of how much each of the 
individual proposals would contribute to increasing the number of 
potentially eligible workers, the costs associated with raising the 
recipiency rate in increments to 50 percent is estimated (Table 1), 
which is a reasonable objective for the changes delineated above.


                    Table 1.  Estimated Costs Associated with Increasing the Recipiency Rate
----------------------------------------------------------------------------------------------------------------
                                                                    Increase in number of     Increase in total
                         Recipiency rate                              workers eligible*        benefits paid*
                                                                         (thousands)             (billions)
----------------------------------------------------------------------------------------------------------------
0.40                                                                                  220                  $1.6
----------------------------------------------------------------------------------------------------------------
0.45                                                                                 0.45                  $4.5
----------------------------------------------------------------------------------------------------------------
0.50                                                                                1,000                  $7.4
----------------------------------------------------------------------------------------------------------------
* Increase in workers and costs (benefits paid) relative to 25-year average.
Source: Kletzer and Rosen (2006).


Benefit Levels and Duration of Benefit Receipt
      Standardize benefit levels to at least half of lost 
earnings with a maximum weekly benefit equal to two-thirds of state 
average weekly earnings. Table 2 provides budgetary estimates for 
raising the replacement rate in this manner.
      Develop standard rules to cover benefits for partial 
unemployment (reduced hours). Standardizing these rules would help to 
update the program to reflect new labor market realities.
      Establish uniform duration of a minimum of 26 weeks in 
all state programs.
      Fix the extended benefit triggers so that they are more 
automatic and workers can receive assistance during economic downturns 
without disruption.
      Make benefits more responsive to work experience and 
local labor market conditions. Currently, UI benefits are set 
arbitrarily, primarily based on a state's ability and willingness to 
pay. In general, benefits do not currently reflect an employee's work 
experience, nor (and more importantly) do they reflect the costs 
associated with that worker's job loss, including the potential 
difficulty in finding a new job. One way to correct this shortcoming 
would be to set benefit levels according to a formula based on a number 
of factors, including wage history, local labor market conditions, and 
reason for separation. Workers living in regions with poor labor market 
conditions might receive a higher level of assistance, or receive 
assistance for longer periods, or both.
      Standardize allowances for dependents across all states.


                                Table 2.
   Estimates of Costs Associated with Increasing the Replacement Ratio
------------------------------------------------------------------------
                                                           Increase in
                         Average weekly                   total benefits
                         benefit at new    Increase in        at new
   Replacement ratio      replacement    average weekly    replacement
                              rate           benefit          ratio
                                                            (billions)
------------------------------------------------------------------------
         40 percent          $295.67         $ 34.00             $0.3
------------------------------------------------------------------------
         45 percent          $332.63         $ 70.96             $0.7
------------------------------------------------------------------------
         50 percent          $369.59         $107.92             $1.1
------------------------------------------------------------------------
Source: Kletzer and Rosen (2006).
Note: Estimates based on the following assumptions: The average
  replacement ratio between 1980 and 2003 was 35.4 percent; the average
  weekly benefit in 2003 was $261.67; the average weekly wage in 2003
  was $739.18; the total number of weeks of compensation in December
  2005 was slightly fewer than 10 million.


Financing
      Increase the FUTA taxable wage base, in steps, to 
$45,000. The last time the UI taxable wage base was adjusted was more 
than 20 years ago. As a result, the payroll tax is extremely 
regressive. Raising the taxable wage base to $45,000 would have the 
benefit of making the tax more progressive while generating new revenue 
to finance needed reforms in the program. Increasing the taxable wage 
base to $45,000 while maintaining the same tax rate would generate 
approximately an additional $9 billion in revenue. This would be enough 
to finance the costs associated with providing more assistance (i.e., 
raising the replacement rate) to more workers (i.e., increasing the 
recipiency rate).

    Local or regional wage differences, or both, would be respected 
under this plan, because the harmonization of benefits would be in 
percentages of earnings, not dollar levels. Treating workers more 
equally, in terms of program standards, would remove differences that 
have little or no justification, other than tradition. Given their long 
experience in providing these services, local and state providers would 
remain primarily responsible for reemployment assistance, job training, 
intake, and administration of benefits.
Augment UI with a Program of Wage-Loss Insurance.
    On average, dislocated workers pay a heavy price as a result of 
unemployment. According to the Dislocated Worker Survey only two-thirds 
of unemployed workers find a new job within 1 to 3 years after layoff. 
(See Figure 6.) More than 40 percent of workers experience earnings 
losses and only approximately one-fourth of workers experience no 
earnings loss or an improvement in earnings after re-employment.
 Figure 7.  Re-employment and Earnings Experience of Dislocated Workers
[GRAPHIC] [TIFF OMITTED] T0310A.007

    Source: Displaced Worker Survey, Bureau of Labor Statistics, 
author's calculations.

    Wage-loss insurance offers assistance that is tailored to actual 
earnings losses. In order to be effective, wage-loss insurance must be 
a complement to traditional UI, since it only assists those workers who 
find new jobs. Under the program eligible workers would receive some 
fraction, perhaps half, of their weekly earnings loss over a specific 
period.
    For example, the average weekly wage before layoff for workers 
displaced from manufacturing industries was $396.88 between 1979 and 
2001 and the average weekly age for those laid off from non-
manufacturing jobs was $368.65. For those workers who found new jobs, 
the average percent loss in earnings was 29.2 percent for manufacturing 
workers and 18.6 percent of non-manufacturing workers. Had a wage-loss 
insurance program been in place, manufacturing workers would have 
received approximately $6,000 over a 2-year period, or 15 percent of 
their pre-lay-off wage. Non-manufacturing workers would have received 
approximately $3,600 over a 2-year period, or 9 percent of their pre-
lay-off wage.
    The Trade Act of 2002 expanded Trade Adjustment Assistance (TAA) to 
include a limited wage-loss insurance program. Under the TAA program, 
workers who are more than 50 years old and earning less than $50,000 a 
year may be eligible to receive half the difference between their 
previous and new earnings, subject to a cap of $10,000, for up to two 
years. Workers must find a new full-time job and enroll in the 
Alternative Trade Adjustment Assistance (ATAA) program within 26 weeks 
of job loss and cannot receive other income support or training under 
TAA.
    Despite its benefits, wage-loss insurance is not a perfect solution 
to addressing the costs associated with unemployment. Structuring a 
program with a relatively short eligibility period, starting with the 
date of job loss, may create a reemployment incentive, addressing one 
of the most commonly expressed UI concerns, but it also limits the 
compensatory nature of the program. Displaced worker earnings losses 
are long term (i.e., earnings losses exist five to six years after job 
loss), well beyond the two years covered by ATAA.
    In order to avoid any adverse effect on wages, wage-loss insurance 
must be provided to workers, not employers. In fact, there is no reason 
for employers to even know that workers are receiving assistance under 
this program.
    The cost of a wage-loss insurance program depends on the number of 
eligible workers, the earnings losses of those reemployed at lower pay, 
and the duration of unemployment prior to reemployment. Other critical 
program characteristics include the duration of wage-loss insurance 
payments, the annual cap on program payments, and the replacement rate. 
It has been estimated that the cost for a program with a two-year 
duration, a 50 percent replacement rate and a $10,000 annual cap for 
all dislocated workers would be around $4 billion.
    An expanded wage-loss insurance program could be financed through 
general government revenues or by raising the FUTA taxable wage base or 
tax rate. Augmenting UI, with assistance tailored to the size of 
reemployment earnings losses, is possible with relatively small changes 
in UI program parameters.
    In general, the current UI system has a limited relationship with 
efforts to transition workers back to employment. The Worker Profiling 
system targets resources on workers at risk of exhausting benefits. 
Workers receiving UI are required to prove that they are actively 
seeking employment, primarily by documenting job inquiries and 
interviews. Most unemployment spells (and benefit receipt) are too 
short for serious training, but job search assistance can be short term 
with high return, given its relatively low cost. With the rise in 
structural unemployment, training needs are likely to expand. As a 
result of the bureaucratic wall of separation between UI and federally 
supported training programs in the United States, the amount of funds 
appropriated are inadequate to provide any kind of serious training to 
all long-term unemployed workers.
Conclusion
    The current federal-state structure of UI is a relic of its 1935 
establishment. The program has not undergone any major reforms, despite 
significant changes in the U.S. labor market over the last few decades. 
The current UI program was created to assist workers experiencing 
transitional unemployment due to cyclical factors. Today's workers are 
experiencing longer spells of unemployment and large earnings losses 
due to structural factors like technological change and intensified 
competition resulting from globalization.
    Changes necessary to move UI into the twenty-first century require 
strong federal leadership. The very basic structure of UI must be 
reformed, broadening from the single-employer, full-time worker, 
temporary layoff model to an approach that accommodates permanent job 
loss, part-time or contingent work, self-employment, and the incidence 
of job loss and national, rather than local or regional, unemployment. 
Reforming the nation's UI program is necessary in order to make it 
relevant to the labor market of the twenty-first century.
    Congressman McDermott's draft legislation being considered by the 
Subcommittee incorporates most of the recommendations outline above. 
The Congressman's proposals would go very far in improving the 
relevance of the UI program to current labor market conditions. I 
strongly encourage members of Congress to seriously consider these 
proposals and to enact them as soon as possible. Delaying their 
adoption will result in raising the costs that unemployed U.S. workers 
already face.

                                 

    Chairman MCDERMOTT. Mr. Emsellem.

   STATEMENT OF MAURICE EMSELLEM, POLICY DIRECTOR, NATIONAL 
                     EMPLOYMENT LAW PROJECT

    Mr. EMSELLEM. I thank you for this opportunity to testify 
on the critical subject of reform of the nation's unemployment 
insurance program, and the proposal to create a wage insurance 
program.
    Mr. Chairman, I want to begin by expressing our appreciate 
for your leadership and the hard work of the staff to move this 
important and timely discussion of unemployment insurance 
reform. We strongly support the draft UI bill, which provides 
$7 billion in incentive funding to help the states modernize 
their programs.
    The bill responds to a documented and desperate need to 
fill the major gaps in the unemployment insurance system. We 
estimate that it will help more than half-a-million workers a 
year to collect unemployment benefits.
    The bill also takes the best of the bold, new policies that 
have been adopted by over half the states during the last 
decade, and creates a structure to promote, not mandate, 
broader UI reform. While we support the incentive structure of 
the bill and the specific reforms that qualify for funding, we 
also believe that more should be done to target the needs of 
the long-term unemployed, and increase the incentive for the 
states to participate in the program, which I will talk a 
little bit more about later.
    With respect to wage insurance, we certainly appreciate the 
needs of workers and their families who find themselves having 
to take a major cut in pay to find work in today's economy. For 
the past 20 years, it has been my job at NELP to help these and 
other workers get back on their feet and find quality jobs.
    We strongly believe that wage insurance is the wrong 
solution. Rather than encourage workers to forgo their long-
term interest for a wage insurance job, Congress should devote 
its limited resources to policy solutions that create more 
family sustaining jobs, not more downward mobility. In our 
testimony, we discuss the need to better protect trade-impacted 
workers, and consider some of the successful state initiatives, 
like health insurance coverage for the unemployed, home 
protection funds to prevent foreclosures that create better 
options to improve the long-term economic security of workers 
and their communities.
    Now, on unemployment insurance reform. What we appreciate 
most about the UI modernization bill is how it targets those 
workers who have been hardest hit by the gaps of the program, 
including low-wage and women workers. The first priority of the 
bill is to help low-wage workers who will benefit from the $2.3 
billion in funding available to the states to adopt what is 
called the alternative base period.
    Low-wage workers are twice as likely to be unemployed as 
higher-wage workers, but they are half as likely to collect 
unemployment benefits, even when they work full time. NELP has 
conducted a major survey of states that have--operate the 
alternative base period. Our study documents the significant 
impact it will have on low-wage workers and the administrative 
efficiencies that have substantially reduced the limited cost 
of implementation in recent years.
    I could go into more detail about how this alternative base 
period works, but I figure if you have questions I will get to 
that. Otherwise, I am going to discuss some of our other 
concerns with the bill.
    The UI modernization bill also targets the growing ranks of 
the long-term jobless, which includes large numbers of laid-off 
manufacturing workers. During the last recession and the 
jobless recovery that followed, a record 44 percent of workers 
ran out of their state unemployment benefits. It remained--the 
rate remained--above 40 percent, for a record 28 months. Before 
that time, it had only been above 40 percent for 4 months in 
the history of the program.
    So, we are concerned about the long-term unemployed. The 
bill takes on this challenge by providing up to 6 months of 
additional unemployment benefits for workers to participate in 
state-approved training, to allow them to better compete in the 
labor market.
    An evaluation of Washington State's program providing UI 
for workers in training found that 72 percent of the 
participants, mostly laid-off aerospace workers with only a 
high school education, were employed after receiving community 
college training. When they were employed, they earned an 
average of 93 percent of their pre-dislocation wages, 93 
percent. So, training works, if it's done right, as it's done 
in Washington.
    Our major concern with the draft UI bill is it fails to do 
more to help the long-term jobless, including the 700,000 
workers a year who now run out of their UI benefits after just 
23 weeks. Contrary to the common perception, most workers do 
not qualify for a maximum 26 weeks of benefits under state UI 
laws. In fact, in 14 states, the average worker exhausts his UI 
benefits after just 20 weeks. That means they also qualify for 
far less in Federal extended benefits, which are limited to 
half the workers' state benefits.
    So, take the fact that you're getting 20 weeks of benefits. 
Half of that is 10. During a recession, you're only getting 30 
weeks of benefits, not the 39 weeks that folks qualified for if 
you got 26 weeks of benefits. So, we think that the legislation 
should incorporate those state laws that provide a maximum of 
26 weeks to all workers.
    We also believe that the financial incentive for the states 
to participate in the program should be significantly 
increased, to be sure that more states, in fact, modernize the 
program. To maximum the incentive, the bill should take the 
money left at the end of the 5-year period--which could end up 
being a very large sum if a lot of the states don't participate 
in the program--and redistribute it to the states that have 
enacted the reforms, while capping that amount at a reasonable 
figure. So, you're creating a whole lot more incentive at the 
end of the program for folks to participate at the front end.
    Chairman MCDERMOTT. Sounds like use it or lose it.
    Mr. EMSELLEM. Exactly. Thank you again for your interest 
and commitment to these issues.
    [The prepared statement of Mr. Emsellem follows:]
                     Statement of Maurice Emsellem,
            Policy Director, National Employment Law Project
    Chairman McDermott and members of the Committee, thank you for this 
opportunity to testify on the critical subject of economic insecurity 
in the United States and respond to legislative proposals to modernize 
the nation's unemployment insurance program and create a new national 
wage insurance program.
    My name is Maurice Emsellem, and I am the Policy Director for the 
National Employment Law Project (NELP), a non-profit research and 
advocacy organization that specializes in economic security programs, 
including unemployment insurance (UI), Trade Adjustment Assistance 
(TAA) and the workforce development system. We have a long history 
serving families hard hit by economic downturns by helping them access 
their benefits and promoting innovative state and federal policies that 
deliver on the nation's promise of economic opportunity.
    We testify today in strong support of the draft bill providing $7 
billion in incentive funding to help states modernize their 
unemployment insurance (UI) programs. The bill responds to a documented 
and desperate need to fill the gaps in the UI program that deny or 
restrict benefits for millions of deserving workers and their families. 
It also takes the best of the bold new policies adopted by the states 
over the past decade and creates a structure to promote, not mandate, 
broader reform. While we strongly support the incentive structure of 
the draft bill and the specific state reforms that qualify for funding, 
we also urge that the bill incorporate several critical improvements 
that better target jobless families and the long-term unemployed.
    With regard to the draft wage insurance proposal, we appreciate the 
concern about the needs of those workers and their families whose lives 
have been thrown into disarray when they lose a good job and find 
themselves with no other options but to take a job that requires a 
major cut in pay. For nearly 20 years, it has been my job at NELP to 
help these and other workers get back on their feet and generate 
resources to rebuild their communities. But wage insurance is the wrong 
solution. Rather than encourage workers to forgo their long-term 
interests for a wage insurance job, Congress should focus on more 
meaningful solutions described below that create genuine economic 
security and more family-friendly sustaining jobs in our economy.
I. Unemployment Insurance Modernization Incentive Proposal
    Today's draft UI legislation represents a potential watershed 
moment in the evolution of the nation's UI program. Despite decades of 
mounting evidence documenting the need for reform, this is the first 
Congressional forum where serious federal proposals are being debated 
to expand and modernize the UI program. Our estimates indicate that the 
proposal providing Reed Act incentive grants to the states could help 
more than half a million workers each year, which is well worth the 
investment of $7 billion from the UI trust funds. Chairman McDermott, 
we greatly appreciate your leadership and the hard work of the 
subcommittee staff to move this critical and timely discussion.
A. The Critical Functions of the UI Program
    Before we address the need for reform of the UI program, it is 
important to reflect on the critical role that it plays in the lives of 
the seven to eight million workers each year who collect benefits and 
their communities. Despite its limitations, the UI program still serves 
its core function as the ``first line of defense'' to help prevent 
financial hardship to unemployed families while also stabilizing the 
economy during recessions and thus preventing more unemployment.
    Consider the experience of the last recession, which was relatively 
less severe compared to prior economic downturns. From 2000-2003, the 
UI program paid over $50 billion in additional state benefits and more 
than $20 billion in federal extended benefits received by 7.25 million 
workers. If doubled to account for the documented multiplier effect 
when UI benefits circulate in the economy, state and federal UI 
benefits generated about $140 billion in economic stimulus.\1\ Of 
course, the stronger the state's UI benefits, the greater the 
stabilizing impact on local businesses.
---------------------------------------------------------------------------
    \1\ Chimerine, et al. Unemployment Insurance as an Economic 
Stabilizer: Evidence of Effectiveness Over Three Decades, U.S. 
Department of Labor, Unemployment Insurance Occasional Paper 99-8 
(1999).
---------------------------------------------------------------------------
    In addition, UI benefits played a significant role alleviating the 
financial hardship caused by the recession. In 2003, the average worker 
who collected both 26 weeks of state benefits and the 13-week federal 
extension received over $10,000 in UI benefits. According to a national 
poll of unemployed workers conducted in 2003, 78% of those surveyed 
said that their unemployment benefits were ``very important'' to help 
them meet their family's ``basic needs.'' \2\ Thus, the Congressional 
Budget Office concluded that during the last recession UI benefits 
``played a substantial role in maintaining the family income of 
recipients who experienced a long-term spell of unemployment.'' \3\
---------------------------------------------------------------------------
    \2\ Peter D. Hart Research Associates, ``Unemployed in America: The 
Job Market, the Realities of Unemployment, and the Impact of 
Unemployment Benefits,'' conducted April 17-28, 2003 (commissioned by 
the National Employment Law Project).
    \3\ Congressional Budget Office, Family Incomes of Unemployment 
Insurance Recipients (March 2004).
---------------------------------------------------------------------------
    Although too often overlooked, unemployment benefits also maintain 
U.S. labor standards and promote economic opportunity. Indeed, one the 
few federal eligibility mandates requires that a worker not be denied 
state UI for refusing a job offer that does not satisfy the 
``prevailing conditions'' of work in the community.\4\ Like the federal 
minimum wage laws, this UI federal mandate sets the labor standards 
floor governing the prevailing ``wages, hours and other conditions of 
work'' (including fringe benefits and health insurance) of relevant 
jobs in the community. Thus, the UI program helps sustain meaningful 
wages and benefits, especially in those communities experiencing large 
numbers of layoffs.
---------------------------------------------------------------------------
    \4\ 26 U.S.C. Section 3304(a)(5)(B).
---------------------------------------------------------------------------
    The federal law also exempts workers from having to be available 
for work while they participate in state-approved training, thereby 
encouraging workers to upgrade their skills. As a result, workers who 
collect unemployment benefits are also more likely to find a better-
paying job (by a factor of $240 a month according to one study) \5\ and 
employment with health care coverage.\6\
---------------------------------------------------------------------------
    \5\ Kiefer, Neumann, ``An Empirical Job Search Model with a Test 
Constant Reservation Wage Hypothesis,'' Journal of Political Economy, 
Vol. 87, No. 1, 89-107.
    \6\ Boushey, Wenger, ``Finding the Better Fit: Receiving 
Unemployment Increases Likelihood of Re-Employment with Health 
Insurance'' (Economic Policy Institute, April 14, 2005).
---------------------------------------------------------------------------
B. The Decline of the UI Program
    That's the good news. But what about the gaps in the UI program 
which the draft federal legislation seeks to correct? As documented by 
several leading authorities, including a bi-partisan panel of experts 
created by Congress in 1991 (the Advisory Council on Unemployment 
Compensation),\7\ the UI program has failed to evolve to meet the 
demands of a changing economy and a changing workforce.
---------------------------------------------------------------------------
    \7\ Advisory Council on Unemployment Compensation, Collected 
Findings and Recommendations: 1994-1996 (1996).
---------------------------------------------------------------------------
    The workforce is now dominated more by low-wage and women workers 
and a changing economy which has produced more long-term unemployment 
experienced by workers of nearly all income and education levels.\8\ 
Thus, there are two major groups of workers who are falling through the 
cracks of the current UI program--those who fail to qualify because of 
outdated eligibility rules and those who qualify for UI benefits but 
end up receiving far too limited assistance as they struggle to find 
work over longer periods of time.
---------------------------------------------------------------------------
    \8\ Allegretto, Stettner, ``Educated, Experienced and Out of Work: 
Long-Term Joblessness Continues to Plague the Unemployed'' (National 
Employment Law Project & Economic Policy Institute, March 2004).
---------------------------------------------------------------------------
    The statistics paint a vivid picture of these dual challenges. 
According to the GAO study, low-wage workers were twice as likely to be 
unemployed as higher wage workers, but they were half as likely to 
collect unemployment benefits (even when they previously worked full-
time).\9\ As a result of the last two ``jobless recoveries,'' many more 
unemployed workers run out of their limited jobless benefits, now 
exceeding 35% of those who collect state benefits. During the last 
recession, the UI ``exhaustion rate'' peaked at a record 44% and 
remained above 40% for a record 28 months.
---------------------------------------------------------------------------
    \9\ U.S. General Accounting Office, Unemployment Insurance: Role as 
Safety Net for Low-Wage Workers is Limited (December 2000), at pages 
13-16.
---------------------------------------------------------------------------
     Given these disturbing trends, the UI system has reached a crisis 
point requiring serious federal action. Indeed, the percent of the 
unemployed collecting jobless benefits has fallen to dramatically low 
levels, with just 35% of the unemployed receiving jobless benefits in 
2006. That's down from nearly 50% in the 1950's, and over 40% in the 
1960s and 1970s. In nine states, less than 25% of unemployed workers 
collect jobless benefits today.
    But the tragic story of the decline of the UI program is not merely 
a function of the changing economy or the changing workforce. It is 
also the direct result of state and federal policies that have deprived 
the program of funding and produced devastating cuts in benefits.
    Of special significance, employers have successfully lobbied the 
states to dramatically cut UI payroll taxes, thus undermining the 
fundamental principle of ``forward financing'' of the UI program (where 
sufficient reserves are built up during good economic times to pay 
benefits during recessions). During the decade of the 1990s, the 
average UI tax on employers decreased by 33%, falling to a record low 
in 2001 of just half of one percent (0.51%) of total wages. Given the 
more limited revenue, nine states had to take out federal UI loans to 
pay their UI benefits thus creating significant pressure to restrict UI 
benefits when workers need the help most.
    In addition, the states have been deprived of the federal resources 
necessary to cover the basic costs of administering their UI programs. 
As a result, they have cut back on critical services like in-person 
claims assistance and job counseling, now relying almost exclusively on 
menu-prompted phone systems and the Internet to process their claims. 
The states have also been forced to raise their own revenues (to the 
tune of about $150 million a year) to fill the federal void.\10\
---------------------------------------------------------------------------
    \10\ Power Point Presentation, National Association of Workforce 
Agencies, ``Unemployment Insurance State Administration'' (2007).
---------------------------------------------------------------------------
    Since 2001, federal UI administrative funding has been cut back by 
$305 million in inflation adjusted dollars, despite the intervening 
recession and other increased demands on the state UI programs.\11\ The 
U.S. Employment Service, which provides the critical labor exchange 
functions matching workers with available jobs, has also been cut by 
over $300 million since 2001. According to the National Association of 
State Workforce Agencies, there is now a $500 million annual gap 
between the workload needs of the state agencies that administer the UI 
program and the amount appropriated by Congress.\12\
---------------------------------------------------------------------------
    \11\ AFL-CIO, ``President Bush's FY 2008 Budget Proposal.''
    \12\ Resolution, National Association of State Workforce Agencies, 
Reed Act Distribution Resolution, adopted September 7, 2006.
---------------------------------------------------------------------------
    Finally, as a result of devastating cuts by Congress in the 1980s, 
both the federal program of Extended Benefits (EB) and federal Disaster 
Unemployment Assistance (DUA) are failing to provide critical benefits 
to the nation's families hardest hit by recessions, disaster and 
terrorist events. For example, the permanent federal program of 
``Extended Benefits'' (EB)--created in 1970 to provide an extra 13 to 
20 weeks of benefits--is so outdated in how it measures unemployment 
that it only provided benefits to workers in five states during the 
2001 recession.\13\ As a result, Congress created another temporary 
extension of UI benefits that did not become law until March 2002, when 
the number of long-term unemployed had already doubled in just one 
year. In addition, Congress shut down the program just as a record 
three million workers were scheduled to run out of their state 
benefits.\14\
---------------------------------------------------------------------------
    \13\ National Employment Law Project, ``Nation's Highest 
Unemployment States Face Major Cuts in Unemployment Benefits Due to 
Flawed Extension Program'' (November 4, 2003).
    \14\ Center on Budget and Policy Priorities, ``Number of Unemployed 
Who Have Gone Without Federal Benefits Hits Record 3 Million (October 
13, 2004).
---------------------------------------------------------------------------
    The DUA program is also failing as evidenced by the limited relief 
it provided in response to the unprecedented terrorist attacks and 
disasters of the last five years. In 1988, the DUA was restricted to 
those workers who do not qualify for regular state UI, mostly including 
the self-employed. By shifting the responsibility from federal FEMA to 
the individual state UI programs, jobless families are often left with 
extremely limited assistance, especially in Southern states like 
Louisiana.\15\ Moreover, employers and disaster states are left paying 
the extra costs of the benefits when they can least afford to do so.
---------------------------------------------------------------------------
    \15\ National Employment Law Project, ``Rising Hurricane-Related 
Jobless Claims Trigger State Cuts in Limited Jobless and Training 
Benefits'' (Revised October 17, 2005).
---------------------------------------------------------------------------
C. The States Pave the Way for the Federal UI Modernization Legislation
    Despite the magnitude of the challenge, the states have been at the 
forefront of major reforms during the past decade building on the 
recommendations of the federal Advisory Council on Unemployment 
Compensation (ACUC) and other authorities to modernize their UI 
programs. Since 1996, nearly half the states have adopted bold new 
policies to fill the gaps in the UI system.\16\
---------------------------------------------------------------------------
    \16\ National Employment Law Project, Changing Workforce, Changing 
Economy: State Unemployment Insurance Reforms for the 21st Century 
(October 2004), at page 4.
---------------------------------------------------------------------------
    The UI modernization legislation before the subcommittee today 
takes the best of what has already made its way into these state UI 
laws and provides the necessary incentive funds to help more states 
fundamentally improve their programs. In addition, the proposal 
correctly rewards those states that have been leaders in building 
strong UI programs. With a reasonable investment of $7 billion, the 
federal legislation could help at least 500,000 workers a year.
1. The 33% Incentive Payment for the ``Alternative Base Period''
    In 1995, after detailed study, the bi-partisan ACUC recommended 
that ``All States should use a moveable base period in cases in which 
its use would qualify an Unemployment Insurance claimant to meet the 
state's monetary eligibility requirements.'' \17\ Since that time, 
another 12 states have adopted this policy, now covering 20 states and 
nearly half of the nation's unemployment claims (Table 1). This 
critical reform fills the most significant gap in the UI program 
denying benefits to low-wage workers. The draft bill correctly 
conditions Reed Act incentive funding on a state first adopting this 
policy.
---------------------------------------------------------------------------
    \17\ Advisory Council on Unemployment Compensation, Collected 
Findings and Recommendations, at page 19.
---------------------------------------------------------------------------
    Why is this policy so critical to qualify for special treatment 
under the draft UI bill? Most low-wage workers, especially those who 
have recently returned to work, need to use all their earnings to meet 
the state work history requirements necessary to qualify for 
unemployment benefits. But that is not the policy of many states that 
still fail to count a worker's latest 3 to 6 months of wages. These 
states instead rely on eligibility rules that date back to when an 
individual's wages were collected in paper form from the employer and 
hand processed by the state agency.
    For example, if a worker applied for benefits today (March 15th), 
the only earnings considered by the state would date from October 2005 
to September 2006 under the traditional base period, thus not counting 
5.5 months of recent wages. As shown below, if that worker was employed 
at the minimum wage for 20 to 30 hours a week for the past 8.5 months 
(since July 2006), she would not qualify for benefits even if the state 
required just $1,500 in base period earnings.


 Example: Traditional Base Period In a State Requires $1,500 In Earnings, But a Worker Filing March 15th Earning $4,635 Over 8.5 Months Does Not Qualify
                                                                         for UI
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                       Time of Layoff--
                           First Quarter                               Second      Third Quarter   Fourth Quarter  Completed ``Lag''  ``Filing'' Quarter
                                                                       Quarter                                          Quarter
--------------------------------------------------------------------------------------------------------------------------------------------------------
(Oct. 2005-                                                          (Jan. 2006    (April 2006-      (July 2006-        (Oct. 2006-        (Jan. 2007-
Dec. 2005)                                                             to March      June 2006)      Sept. 2006)         Dec. 2007)        March 15th)
                                                                          2006)
 
No                                                                           No              No           $1,236             $1,854             $1,545
Earnings                                                               Earnings        Earnings      (working 20   (working 30 hours  (working 30 hours
                                                                                                  hours a week at   a week at $5.15   a week at $5.15 an
                                                                                                  $5.15 an hour)           an hour)              hour)
--------------------------------------------------------------------------------------------------------------------------------------------------------


    These are workers who have paid into the UI system like everyone 
else and earned the same qualifying wages, but three to six months of 
earnings have been disregarded under the state's outdated UI law. Now, 
with the help of computers, the states are able to readily capture 
these more recent wages. Thus, when a worker's prior earnings are not 
sufficient to qualify for UI using the old wage records, the states 
with the ``alternative'' (or ``movable'') base period (ABP) will also 
consider the most recent completed calendar quarter of wages. In the 
example above, the individual would therefore be eligible for UI using 
her latest completed ``lag quarter'' of earnings.
    About 40% of those who do not qualify for UI based on the 
traditional base period end up collecting in the those states that have 
adopted the ABP. They are mostly low-wage workers earning on average of 
$9.58 an hour.\18\ For example, in Michigan, 17% of all low-wage 
workers who qualified for unemployment benefits did so solely because 
of the alternative base period. As a result, rather than being denied 
benefits, 26,000 workers a year are receiving an average UI payment of 
$232 a week.\19\
---------------------------------------------------------------------------
    \18\ National Employment Law Project, Center for Economic and 
Policy Research, Clearing the Path to Unemployment Insurance for Low-
Wage Workers: An Analysis of Alternative Base Period Implementation 
(August 2005).
    \19\ NELP PowerPoint Presentation, ``A Decade of Progress Expanding 
the Unemployment Insurance Safety Net'' (December 10, 2006).
---------------------------------------------------------------------------
    According to NELP's estimates, nearly 300,000 new workers will 
qualify for unemployment benefits if the remaining states adopt the 
alternative base period with the help of federal incentive grants. The 
annual estimated cost of $550 million for the new ABP states compares 
favorably with the $2.3 billion proposed by the UI modernization bill 
over five years. Given the significant impact of the ABP on low-wage 
workers and the increased administrative efficiencies generated by the 
new states that have implemented the ABP, the draft bill correctly 
isolates the policy for special treatment.
2. The 66% Incentive Payment for Family-Friendly and UI-Training 
        Reforms
    Once a state has adopted the ABP as proposed by the draft bill, it 
qualifies to receive the remaining two-thirds share of the Reed Act 
distribution if it has adopted two out of three additional reforms that 
address major gaps in today's UI programs. Although we urge the 
committee to include additional provisions that better target jobless 
families and the long-term unemployed, we strongly endorse the general 
approach of this section of the bill.
  a. Parity for Part-Time Workers, Mostly Women with Families
    The draft UI modernization bill rewards those states that allow 
families to work part-time and collect UI benefits, thus removing the 
state eligibility provisions requiring workers to seek full-time work 
to qualify for UI benefits.
    Part-time work has now become a necessity for many more workers to 
accommodate their family responsibilities or to find the time necessary 
to go back to school and improve their job skills. Today, one in six 
workers is employed part-time, and most of them are women workers. 
While working an average of 23 hours a week, only 23% of low-wage part-
time workers collect jobless benefits.\20\ Responding to this 
conspicuous inequity, Maine recently provided UI to workers seeking 
part-time work, and now more than 70% of those who qualify with the 
help of the new part-time worker protection are women workers 
(collecting an average of over $2,000).\21\
---------------------------------------------------------------------------
    \20\ U.S. General Accounting Office, Unemployment Insurance: Role 
as Safety Net for Low-Wage Workers is Limited (December 2000), at page 
16.
    \21\ NELP PowerPoint Presentation, ``A Decade of Progress Expanding 
the Unemployment Insurance Safety Net'' (December 10, 2006).
---------------------------------------------------------------------------
    Like the ABP provision, this reform was endorsed by the bi-partisan 
Advisory Council on Unemployment Compensation, which recommended that 
``Workers who meet a state's monetary eligibility requirements should 
not be precluded from receiving Unemployment Insurance benefits merely 
because they are seeking part-time, rather than full-time, 
employment.'' \22\ Twenty states (Table 1) now cover these workers, 
including seven new states that have reformed their laws in the past 10 
years. If the remaining states allow jobless workers to seek part-time 
work and collect UI benefits, we estimate that about 200,000 more 
workers will collect $280 million in UI benefits.
---------------------------------------------------------------------------
    \22\ Advisory Council on Unemployment Compensation, Collected 
Findings and Recommendations, 1995-20.
---------------------------------------------------------------------------
  b. Recognizing Compelling Family Circumstances for Leaving Work
    The states have also made significant progress in recent years 
accommodating those who have to leave work for compelling family 
reasons. A state study of UI eligibility rules found that 71% of those 
who leave work for domestic reasons are women.\23\
---------------------------------------------------------------------------
    \23\ Washington State Employment Security Department, Study of 
Voluntary Quits (2006).
---------------------------------------------------------------------------
    More than 30 years ago, the Ford Administration issued a directive 
urging the states to ``change by legislation the legal inequities 
between the sexes'' in the operation of the UI laws.\24\ Given the 
gender inequities that continue to plague the UI program, we strongly 
support the following ``family friendly'' provisions adopted by the UI 
modernization bill.

    \24\ U.S. Department of Labor, Unemployment Insurance Program 
Letter No. 33-75 (December 8, 1975).

      Domestic Violence: The draft proposal rewards the states 
that have made UI benefits available to those women who are forced to 
leave work for reasons related to domestic violence and provides 
federal incentive funding for the remaining states to follow their 
lead. In 1997, Maine was the first state to specifically provide ``good 
cause'' for leaving work as a result of domestic violence, and since 
then 28 more states have done so (Table 1). These states recognize that 
domestic violence is more than a safety and security issue for these 
families. It is also a societal and workplace concern that requires 
meaningful public policy solutions, including UI benefits for domestic 
violence survivors.
      ``Trailing Spouse:'' In addition, the bill addresses a 
fundamental inequity in state UI laws that deny UI benefits to those 
who leave their jobs when their spouse is forced to relocate by the 
employer to another area. This issue has played out most recently as 
more military families are transferred across the country, forcing 
spouses to leave their civilian jobs without qualifying for 
unemployment benefits. An analysis of Virginia's law documented that 
nine out of 10 workers disqualified by these provisions are women.\25\ 
Despite the 1975 guidance from the U.S. Department of Labor calling 
attention to the discriminatory impact of this policy, only 17 states 
provide UI benefits in this situation (Table 1).
---------------------------------------------------------------------------
    \25\ Austin v. Berryman, 955 F. 2d 223, 226 (4th Cir. 1992).
---------------------------------------------------------------------------
      Family Illness & Disability: Half of all private sector 
workers in the United States do not have paid sick days on the job to 
help accommodate the illness of a child, a parent or other immediate 
family members.\26\ These and other working families are routinely 
forced to leave their jobs to attend to emergency medical situations, 
regularly scheduled doctor visits, or to remain home to care for sick 
family members when child care or elder care falls through. Many of 
them remain available for work, but require accommodations for work, 
like shift changes, which their employers often fail to provide. The UI 
modernization bill would offer incentive funding to accommodate these 
compelling medical needs of working families, which have now made their 
way into the laws of nearly half the states (Table 1).
---------------------------------------------------------------------------
    \26\ Testimony of Heidi Hartmann, Institute for Women's Policy 
Research, before the U.S. Senate, Committee on Health, Education, Labor 
& Pensions (2006).
---------------------------------------------------------------------------
    Combined, these reforms would benefit about 60,000 workers if 
adopted by the remaining states, generating an estimated $200 million 
in UI benefits for these families.
  c. Extended UI Benefits While in Training
    In response to the special employment challenges of dislocated 
workers, the draft legislation creates the option for states to provide 
extended UI benefits to workers participating in meaningful training in 
demand occupations. Without the extra income provided by unemployment 
benefits to participate in training, workers are left with no real 
options other than lower-pay jobs. Thus, we strongly support this 
proposed policy, which is modeled on the seven states that currently 
operate similar programs.
    These programs have produced strong results and a significant 
return on the investment. When evaluated in 2002, Washington State's 
program provided an average of 27 weeks of UI benefits for dislocated 
workers to participate in state-approved training. Those who 
participate are mostly workers with just a high school degree who were 
laid off from manufacturing jobs in aerospace and other state 
industries.\27\ 85% of them participated in community or technical 
colleges, with the largest numbers participating in information 
technology programs. By the third quarter after leaving the program, 
72% of the more than 8,000 participants were employed, making an 
average of 92.6% of their pre-dislocation wages.\28\
---------------------------------------------------------------------------
    \27\ Washington State Workforce Training and Education Coordinating 
Board, Training Benefits Program Review (December 2002).
    \28\ Id., at page 8.
---------------------------------------------------------------------------
    The studies also show that more extended training in community 
college programs geared toward skills development can have a meaningful 
impact on the wages of dislocated workers. For example, an evaluation 
of dislocated workers participating in Pennsylvania's community college 
programs found that men earned $1,047 more per quarter by attending 
community college and women earned $812 more.\29\ Another evaluation of 
community college programs serving dislocated workers found that those 
workers who were able to participate longer periods of time and 
complete more technical courses experienced a 10% increase in their 
post-dislocation earnings.
---------------------------------------------------------------------------
    \29\ Trutko, et al., Final Report: Earnings Replacement Outcomes 
for Dislocated Workers: Extent of Variation and Factors Accounting for 
Variation in Earnings Replacement Outcomes Across State and Local 
Workforce Investment Boards (Capital Research Corporation, March 2005), 
at page A-8.
---------------------------------------------------------------------------
    While some evaluations of federal training have produced limited 
results, many states have developed successful new models of training 
and education, often based on sector initiatives that build 
partnerships between employers, unions and training providers. It is 
not training just for the sake of training. Instead the training is 
driven by quality state and local planning that helps build a growing 
economy. For example, California's Employment and Training Fund, which 
targets key state industries, provides a return on investment of $5 for 
every $1 spent on the program (measured by benefits to employers, 
workers and the California economy).\30\
---------------------------------------------------------------------------
    \30\ Press Release, California Employment and Training Panel, 
``State Investment in Training Workers is Paying Big Dividends for 
California Employers, Study Says'' (June 28, 2000).
---------------------------------------------------------------------------
  d. Dedicating the UI Surtax to the UI Modernization Program
    The draft UI bill properly devotes most of the projected $7.4 
billion generated over five years from the FUTA surtax to the UI 
modernization program. The proposed Reed Act distribution is one-time 
funding that will not compromise the solvency of the federal UI trust 
funds (which are projected by the Administration to have nearly $40 
billion in reserves in 2008). The Bush Administration has proposed that 
Congress extend the surtax for the fifth time since it was established 
in 1977. Before 1977, employers were paying $25.20 per worker in FUTA 
taxes. In current dollars, however, employers would be paying $84.17, 
which is far more than the $56 per worker they now pay despite the FUTA 
surtax. As described earlier, the employer community has benefited from 
record tax breaks since the 1990s, thus it is not burden to continue 
the UI surtax.
  e. Key Limitations of the Draft UI Modernization Bill
    While we strongly support the incentive funding structure of the 
bill and the specific state reforms that qualify for incentive grants, 
we urge that the bill incorporate the following critical improvements 
before it is finalized and introduced in the House of Representatives.
    1. Guarantee 26 Weeks of Assistance for the Long-Term Jobless: 
Despite the common perception to the contrary, most unemployed workers 
in U.S. do not qualify for a maximum 26 weeks of state unemployment 
benefits. Indeed, only 12 states provide a maximum of 26 weeks to all 
workers (Table 1), leaving an estimated 700,000 workers each year who 
run out of their UI benefits before six months of job searching. Given 
the new realities of long-term unemployment, we believe the first 
priority before finalizing the bill should be to provide incentive 
funding to those states that offer a ``uniform duration'' of 26 weeks 
of UI benefits.
    As discussed earlier, today's workers have been exhausting their 
regular benefits at record rates, currently exceeding 35%. Although 
many workers apply for benefits assuming they qualify for 26 weeks, 
this is not the case because of the variety of state formulas that 
limit benefits based on an individual's work history. Indeed, the 
average U.S. worker runs out of UI benefits after 23 weeks of looking 
for work (Table 2). In 14 states, the average is 20 weeks or less. 
Therefore, the raising rate of workers who exhaust their state benefits 
is not just a function of the economy. It is also a direct result of 
the state UI laws that limit the maximum weeks of benefits.
    Worse yet, these same workers are also denied several weeks of 
federal extended benefits. That is because federal recession benefits 
typically cannot exceed half the individual's state UI. Thus, if a 
worker received just 20 weeks of regular state UI, she can only qualify 
for a maximum of 10 weeks of a 13-week federal extension. That compares 
with the 39 weeks of benefits available to those workers in the 12 
``uniform duration'' states (i.e., 26 weeks state UI, plus 13 weeks 
federal extension).
    This situation creates a serious hardship for working families, 
especially during recessions. Their limited state benefits, which now 
average $270 a week, are already insufficient to cover the 
unprecedented gas prices, a mortgage and health care for the family. In 
addition, the limited weeks of state UI forces more workers into low-
pay jobs before they have a sufficient opportunity to pursue better 
paying jobs or take part in meaningful training to compete in today's 
job market.
    2. Support ``Dependant Allowances'': Unemployment benefits should 
be sufficient to cover the basic necessities for workers who lose their 
jobs and have to support a family. In most states, UI benefits replace 
only one-third of the state's average weekly wage, which is far less 
than what's needed to care for most U.S. families. Moreover, low-income 
families spend far more on basic necessities, thus their unemployment 
benefits should represent a more reasonable share of the prior 
earnings. To help address this serious concern, 13 states now provide a 
``dependant allowance,'' which augments an individual's weekly 
unemployment benefits by up to $25 for each dependent in the family. We 
urge that the draft UI bill incorporate these dependent allowances into 
the proposed state incentive grants.
    3. Substantially Increase the State Incentive by Distributing the 
Carryover Funding: As currently drafted, a significant proportion of 
the $7 billion incentive funds will remain unspent unless literally all 
the states meet all the bill's requirements to collect their full Reed 
Act distribution. To maximize the incentive for the states to modernize 
their UI programs, we urge that the bill provide for an additional Reed 
Act distribution in the final year of the program to those states that 
have enacted the required reforms. By distributing the remaining Reed 
Act funds, the legislation will significantly increase the incentive 
for many more states to reform their UI programs. The final payments 
could be capped, if necessary, at a reasonable percentage of the 
state's original Reed Act distribution.
    4. Increase the State Funding to Pay for Claimant Services: Federal 
funding cuts to state UI administration have deprived the states of the 
critical resources they need to properly serve the unemployed, 
especially the large numbers of dislocated workers who often require 
additional assistance. In addition, the specific provisions of the 
draft UI bill require more intensive services than the states routinely 
provide (e.g., the processing of ABP claims, the outreach necessary for 
women workers to qualify for UI domestic violence benefits, and 
counseling to explore career options for those who qualify for UI while 
in training). Thus, we also urge that the bill significantly increase 
the amount of funding (now capped at $100 million a year) provided to 
the states for these critical claimant services.
II. Wage Insurance Draft Proposal
    With regard to the draft wage insurance proposal, we appreciate the 
concern being articulated by many about the needs of workers and their 
families whose lives are thrown into disarray when they lose a good job 
and find themselves with no other options but to take a major cut in 
pay on a new job. For nearly 20 years, it has been my job at NELP to 
help these and other workers to get back on their feet and generate 
resources to rebuild their communities.
    But wage insurance is the wrong solution. Rather than encouraging 
workers to forgo their long-term interests for a wage insurance job, 
Congress should focus on more meaningful solutions that create genuine 
economic security and more family-friendly sustaining jobs in our 
economy. We have seen it work in the states, which have created 
subsidized health insurance for the unemployed that runs alongside the 
UI program and self-sustaining ``home protection funds'' that provide 
no interest loans to laid-off families in high unemployment areas.\31\ 
The states have also been at the forefront of new models of training 
that help make their local economies more competitive and save good-
paying jobs.
---------------------------------------------------------------------------
    \31\ For a more detailed discussion of these and other state 
programs, see Emsellem, ``Innovative State Reforms Shape New National 
Economic Security Plan for the 21st Century'' (National Employment Law 
Project, December 2006), at pages 10-11.
---------------------------------------------------------------------------
    Like the AFL-CIO and several major unions that have expressed 
concerns with wage insurance, we also believe that there are far too 
many unanswered questions that convince us it is not the right time to 
move ahead with a national wage insurance program.\32\
---------------------------------------------------------------------------
    \32\ For a more detailed treatment of NELP's concerns with wage 
insurance, Testimony of Maurice Emsellem Before the U.S. Congress, 
Joint Economic Committee on February 28, 2007.
---------------------------------------------------------------------------
    First, it is important to ask whether wage insurance will promote 
more downward mobility for the nation's most vulnerable workers, since 
by definition wage insurance jobs pay far less? Thus, wage insurance 
jobs are also less likely to provide health insurance and other 
critical benefits. We believe that the limited federal resources 
devoted to the economic security of America's workers should promote 
good employment outcomes and quality jobs, but that is not the case 
with wage insurance.
    We are also not aware of any empirical evidence that wage insurance 
jobs will provide transferable skills or other meaningful training. 
Because workers are required to be employed full-time to qualify for 
wage insurance under the draft bill, the program may actually preclude 
most workers from pursuing the education and training they need to 
compete for better jobs in today's economy.
    Second, does the experience with actual wage insurance programs 
make a convincing case that now is the time to create a new national 
program? What we know from the only major evaluation of a wage 
insurance program, the Canadian pilot program, is that it failed in 
most areas to achieve its intended results. Thus, the Canadians never 
adopted wage insurance.\33\ And we are still waiting for the results 
from the U.S. pilot program serving trade impacted workers over age 50, 
although we know that participation in the trade program has been 
limited.
---------------------------------------------------------------------------
    \33\ Bloom, et al., Testing a Re-Employment Incentive for Displaced 
Workers: The Earnings Supplement Project (Social Research & 
Demonstration Corporation: May 1999).
---------------------------------------------------------------------------
    Another question that has not received enough attention is what 
impact will the program have on other workers who are competing for 
similar jobs with those collecting wage insurance? A leading researcher 
with the Upjohn Institute found that ``virtually all the employment 
gains experienced by dislocated workers as a result of the wage subsidy 
come at the expense of other workers.''\34\ Will this ``crowding out'' 
effect be even more severe in those communities in the Midwest and 
elsewhere where there are already large concentrations of dislocated 
workers?
---------------------------------------------------------------------------
    \34\ Davidson, Woodbury, ``Wage-Rate Subsidies for Dislocated 
Workers'' (Upjohn Institute Staff Working Paper 95-31, January 1995), 
at page 22.
---------------------------------------------------------------------------
    In addition to the research questions, there is also the concern 
that wage insurance could undermine those federal programs that now 
provide some measure of economic security to U.S. workers. For example, 
will major funding and support for wage insurance take precedence over 
long-delayed reforms of the UI program, not limited to the state 
reforms provided for in the draft UI bill?
    The draft bill creates a new $44 payroll tax on employers to be 
deposited in a special wage insurance trust fund. While technically 
separate funding from UI, we are not convinced that employers will see 
it that way when they lobby against more resources for necessary 
federal UI reforms, like a functional permanent Extended Benefits 
program. We are also not convinced that the significant new funding 
required by the state UI agencies to administer wage insurance will not 
compete with the additional funding desperately needed to pay for 
existing UI services.
    We are also concerned with the precedent wage insurance will set 
when hostile groups like the Heritage Foundation are on record strongly 
supporting wage insurance as a ``rapid reemployment'' substitute to 
dismantle the TAA program.\35\ Will wage insurance set the stage for 
more attacks on TAA, which is up for reauthorization this year?
---------------------------------------------------------------------------
    \35\ Denise Fronig, ``Trade Adjustment Assistance: A Flawed 
Program'' (The Heritage Foundation: July 31, 2001).
---------------------------------------------------------------------------
    And when the next recession hits, will the Heritage Foundation and 
others argue for a more limited federal extension of jobless benefits 
when workers can qualify instead for wage insurance by taking jobs that 
require a significant pay cut? Already, the Bush Administration has 
called for waivers of federal UI law to authorize states to experiment 
with wage insurance with their UI funds.
    These are some of the difficult questions that leave many of us who 
work with these programs convinced that wage insurance could do far 
more harm than good.
    So what are some of the other priorities for federal reform to 
create a reemployment system that promotes quality jobs? The first 
priority of the 110th Congress should be to fulfill the promise of 
economic security to the nation's workers and their communities that 
have suffered major job losses due to federal trade policies. Given the 
record trade deficits and the devastating loss of good-paying 
manufacturing jobs resulting from federal trade policies, Congress 
should move boldly to create a more robust TAA program.
    Congress should start by establishing an entitlement to TAA 
training, thus removing the $220 million cap on funding that now 
deprives training to thousands of deserving workers who have been 
certified as TAA eligible. The entire TAA program is funded at $1 
billion a year, which compares with the $3.5 billion in funding being 
proposed to create a new wage insurance initiative. A serious new 
investment of funding in the TAA program could also pay for coverage of 
service workers, a new system of TAA certification that applies to 
whole industries and regions suffering dislocations due to trade, and 
other necessary reforms.
    As described above, there are a number of priorities for reform to 
the UI program, not limited to the state improvements proposed in the 
draft bill. For example, to prepare for the next recession and the next 
federal disaster or terrorist event, Congress should make it priority 
to fix the Extended Benefits and Disaster Unemployment Assistance 
programs. Congress should also explore dedicated health care subsidies 
for the unemployed, which is a concept that President Bush supported 
during the last recession but it never made its way into federal 
law.\36\ Massachusetts has such a program that provides major subsidies 
for health care for those who qualify for jobless benefits. These and 
other programs can go a long way to provide more long-term economic 
security.
---------------------------------------------------------------------------
    \36\ President's Radio Address, ``Senate Must Act on Economy'' 
(January 5, 2002) (``I'm calling on Congress to act immediately to help 
the unemployed workers. I've proposed extending unemployment benefits 
by 13 weeks and I've supported tax credits to protect health insurance 
of workers who have been laid off.'')
---------------------------------------------------------------------------
                                 ______
                                 
    These are tough times for many more working families, full of 
concern that they will not share in the promise of the American dream, 
or worse, that they will end up destitute despite a lifetime of hard 
work. Mr. Chairman, we greatly appreciate your commitment to a 
discussion of these critical issues and we look forward to the 
opportunity to continue working together as the draft bills develop.


                           Table 1:  Selected Unemployment Insurance State Provisions*
----------------------------------------------------------------------------------------------------------------
                              Uniform 26                                         Compelling Family Reasons for
                               Weeks of                                                 Leaving Work***
                                  UI                                Weekly   -----------------------------------
                               Benefits                            Dependent
                                (or the    Extended                Allowance
                Alternative   maximum UI   UI While   Part-Time     of $15
    States      Base Period   may exceed      in        Worker      (``O``
                               more than   Training   Coverage**   indicates   Domestic    Spouse    Illness and
                                half of                             states     Violence   Relocates   Disability
                                 base                              with less
                                period                             than $15)
                               earnings)
----------------------------------------------------------------------------------------------------------------
     Alabama
----------------------------------------------------------------------------------------------------------------
      Alaska                                                             X                      X
----------------------------------------------------------------------------------------------------------------
     Arizona                                                                         X          X            X
----------------------------------------------------------------------------------------------------------------
    Arkansas                                                                                                 X
----------------------------------------------------------------------------------------------------------------
  California                   X (1/2)           X           X                       X          X            X
----------------------------------------------------------------------------------------------------------------
    Colorado                                                 X                       X                       X
----------------------------------------------------------------------------------------------------------------
 Connecticut   X(sunsets 12/         X                                   X           X                       X
                        08)
----------------------------------------------------------------------------------------------------------------
    Delaware                   X (1/2)                       X                       X
----------------------------------------------------------------------------------------------------------------
 District of              X                                  X                       X
     Columbia
----------------------------------------------------------------------------------------------------------------
     Florida                                                                                                 X
----------------------------------------------------------------------------------------------------------------
     Georgia              X
----------------------------------------------------------------------------------------------------------------
      Hawaii              X          X                       X                                  X
----------------------------------------------------------------------------------------------------------------
       Idaho
----------------------------------------------------------------------------------------------------------------
    Illinois   X (effective          X                                   O           X                       X
                      2008)
----------------------------------------------------------------------------------------------------------------
     Indiana                                                                         X          X            X
----------------------------------------------------------------------------------------------------------------


                     Table 1:  Selected Unemployment Insurance State Provisions*--Continued
----------------------------------------------------------------------------------------------------------------
                              Uniform 26                                         Compelling Family Reasons for
                               Weeks of                                                 Leaving Work***
                                  UI                                Weekly   -----------------------------------
                               Benefits                            Dependent
                                (or the    Extended                Allowance
                Alternative   maximum UI   UI While   Part-Time     of $15
    States      Base Period   may exceed      in        Worker      (``O``
                               more than   Training   Coverage**   indicates   Domestic    Spouse    Illness and
                                half of                             states     Violence   Relocates   Disability
                                 base                              with less
                                period                             than $15)
                               earnings)
----------------------------------------------------------------------------------------------------------------
        Iowa                                                 X           O
----------------------------------------------------------------------------------------------------------------
      Kansas                                                 X                       X          X            X
----------------------------------------------------------------------------------------------------------------
    Kentucky                                                                                    X
----------------------------------------------------------------------------------------------------------------
            Louisiana                                        X
----------------------------------------------------------------------------------------------------------------
       Maine              X          X           X           X           O           X          X            X
----------------------------------------------------------------------------------------------------------------
    Maryland                                                             O                                   X
----------------------------------------------------------------------------------------------------------------
Massachusetts             X                      X                       X           X
----------------------------------------------------------------------------------------------------------------
    Michigan              X                                              O
----------------------------------------------------------------------------------------------------------------
   Minnesota                                                 X                       X                       X
----------------------------------------------------------------------------------------------------------------
 Mississippi
----------------------------------------------------------------------------------------------------------------
    Missouri
----------------------------------------------------------------------------------------------------------------
     Montana                                                                         X                       X
----------------------------------------------------------------------------------------------------------------
    Nebraska                                                 X                       X          X            X
----------------------------------------------------------------------------------------------------------------
      Nevada                                                                                    X
----------------------------------------------------------------------------------------------------------------
New Hampshire             X          X                                               X                       X
----------------------------------------------------------------------------------------------------------------
  New Jersey              X                      X           X           O           X
----------------------------------------------------------------------------------------------------------------


                     Table 1:  Selected Unemployment Insurance State Provisions*--Continued
----------------------------------------------------------------------------------------------------------------
                              Uniform 26                                         Compelling Family Reasons for
                               Weeks of                                                 Leaving Work***
                                  UI                                Weekly   -----------------------------------
                               Benefits                            Dependent
                                (or the    Extended                Allowance
                Alternative   maximum UI   UI While   Part-Time     of $15
    States      Base Period   may exceed      in        Worker      (``O``
                               more than   Training   Coverage**   indicates   Domestic    Spouse    Illness and
                                half of                             states     Violence   Relocates   Disability
                                 base                              with less
                                period                             than $15)
                               earnings)
----------------------------------------------------------------------------------------------------------------
  New Mexico              X    X (3/5)                       X           X           X
----------------------------------------------------------------------------------------------------------------
    New York              X          X           X           X                       X          X
----------------------------------------------------------------------------------------------------------------
       North              X                                  X                       X          X            X
     Carolina
----------------------------------------------------------------------------------------------------------------
North Dakota                                                                                                 X
----------------------------------------------------------------------------------------------------------------
        Ohio              X                                              O
----------------------------------------------------------------------------------------------------------------
    Oklahoma      X (capped                                                          X          X            X
                   funding)
----------------------------------------------------------------------------------------------------------------
      Oregon                                     X                                   X          X            X
----------------------------------------------------------------------------------------------------------------
Pennsylvania                                                 X           O                      X
----------------------------------------------------------------------------------------------------------------
Rhode Island              X                                              O           X          X
----------------------------------------------------------------------------------------------------------------
       South                                                                         X
     Carolina
----------------------------------------------------------------------------------------------------------------
South Dakota                                                 X                       X
----------------------------------------------------------------------------------------------------------------
   Tennessee
----------------------------------------------------------------------------------------------------------------
       Texas                                                                         X          X            X
----------------------------------------------------------------------------------------------------------------
        Utah
----------------------------------------------------------------------------------------------------------------
     Vermont              X          X                       X                       X
----------------------------------------------------------------------------------------------------------------
    Virginia              X
----------------------------------------------------------------------------------------------------------------


                     Table 1:  Selected Unemployment Insurance State Provisions*--Continued
----------------------------------------------------------------------------------------------------------------
                              Uniform 26                                         Compelling Family Reasons for
                               Weeks of                                                 Leaving Work***
                                  UI                                Weekly   -----------------------------------
                               Benefits                            Dependent
                                (or the    Extended                Allowance
                Alternative   maximum UI   UI While   Part-Time     of $15
    States      Base Period   may exceed      in        Worker      (``O``
                               more than   Training   Coverage**   indicates   Domestic    Spouse    Illness and
                                half of                             states     Violence   Relocates   Disability
                                 base                              with less
                                period                             than $15)
                               earnings)
----------------------------------------------------------------------------------------------------------------
  Washington              X                      X                                   X                       X
----------------------------------------------------------------------------------------------------------------
West Virginia                        X
----------------------------------------------------------------------------------------------------------------
   Wisconsin              X                                                          X                       X
----------------------------------------------------------------------------------------------------------------
     Wyoming                                                 X                       X
----------------------------------------------------------------------------------------------------------------
      Totals             20         11           7          20          13          29         17           23
----------------------------------------------------------------------------------------------------------------
*Prepared by the National Employment Law Project, this table is based on an analysis of state laws, regulations
  and decisions.
**State law provisions that require the entire work history to include part-time work are not counted for the
  purposes of this survey.
***State law provisions that include specific ``good cause'' exemptions for the categories listed and those
  exempt ``personal'' reasons for leaving work are counted for the purposes of the survey.



   Table 2:  Average Weeks of UI Collected When Workers Exhaust State
                             Benefits (2005)
------------------------------------------------------------------------
                                           Average Weeks of State UI
                State                   Collected When Workers Exhaust
                                                   Benefits
------------------------------------------------------------------------
Alaska                                                             20.5
------------------------------------------------------------------------
Alabama                                                            23.3
------------------------------------------------------------------------
Arkansas                                                           21.9
------------------------------------------------------------------------
Arizona                                                            21.8
------------------------------------------------------------------------
California                                                         23.2
------------------------------------------------------------------------
Colorado                                                           17.3
------------------------------------------------------------------------
Connecticut                                                          26
------------------------------------------------------------------------
District of Columbia                                               18.8
------------------------------------------------------------------------
Delaware                                                           25.9
------------------------------------------------------------------------
Florida                                                            20.4
------------------------------------------------------------------------
Georgia                                                            19.2
------------------------------------------------------------------------
Hawaii                                                               26
------------------------------------------------------------------------
Iowa                                                               21.2
------------------------------------------------------------------------
Idaho                                                              18.4
------------------------------------------------------------------------
Illinois                                                           25.2
------------------------------------------------------------------------
Indiana                                                            18.6
------------------------------------------------------------------------
Kansas                                                             22.1
------------------------------------------------------------------------
Kentucky                                                             26
------------------------------------------------------------------------
Louisiana                                                            22
------------------------------------------------------------------------
Massachusetts                                                      26.2
------------------------------------------------------------------------
Maryland                                                             26
------------------------------------------------------------------------
Maine                                                              17.5
------------------------------------------------------------------------
Michigan                                                           23.9
------------------------------------------------------------------------
Minnesota                                                          21.5
------------------------------------------------------------------------
Missouri                                                           22.1
------------------------------------------------------------------------
Mississippi                                                        22.1
------------------------------------------------------------------------
Montana                                                            18.8
------------------------------------------------------------------------
North Carolina                                                       21
------------------------------------------------------------------------
North Dakota                                                       15.8
------------------------------------------------------------------------
Nebraska                                                           17.8
------------------------------------------------------------------------
New Hampshire                                                      25.7
------------------------------------------------------------------------
New Jersey                                                           24
------------------------------------------------------------------------
New Mexico                                                         24.9
------------------------------------------------------------------------
Nevada                                                             22.9
------------------------------------------------------------------------
New York                                                             26
------------------------------------------------------------------------
Ohio                                                               25.4
------------------------------------------------------------------------
Oklahoma                                                           22.5
------------------------------------------------------------------------
Oregon                                                             24.1
------------------------------------------------------------------------
Pennsylvania                                                       25.8
------------------------------------------------------------------------
Rhodes Island                                                      21.1
------------------------------------------------------------------------
South Carolina                                                     20.8
------------------------------------------------------------------------
South Dakota                                                       23.8
------------------------------------------------------------------------
Tennessee                                                          21.1
------------------------------------------------------------------------
Texas                                                              20.3
------------------------------------------------------------------------
Utah                                                               19.2
------------------------------------------------------------------------
Virginia                                                           19.9
------------------------------------------------------------------------
Vermont                                                            25.8
------------------------------------------------------------------------
Washington                                                         25.3
------------------------------------------------------------------------
Wisconsin                                                          21.5
------------------------------------------------------------------------
West Virginia                                                      25.5
------------------------------------------------------------------------
Wyoming                                                            19.4
------------------------------------------------------------------------
U.S. Average                                                       22.9
------------------------------------------------------------------------


                                 

    Chairman MCDERMOTT. Thank you.
    Mr. Holmes.

   STATEMENT OF DOUGLAS J. HOLMES, PRESIDENT, UWC--STRATEGIC 
       SERVICES ON UNEMPLOYMENT AND WORKER'S COMPENSATION

    Mr. HOLMES. Thank you, Mr. Chairman, Ranking Member Weller, 
Members of the Subcommittee on income security and family 
support. Thank you for the opportunity to submit comments today 
and testify.
    UWC fully supports efforts to maintain a sound unemployment 
insurance system, and targeted measures to reduce the duration 
of unemployment of individuals who have become unemployed 
through no fault of their own.
    A review of historical trends, really going back to 1942, 
demonstrates the unmistakable trend in increasing duration in 
the average number of weeks of unemployment compensation pay. 
In fact, Mr. Rosen had a good graph to demonstrate this.
    Targeted funding to reduce the duration of unemployment 
compensation is needed. The trend in increasing duration has 
been caused by a number of factors, including relaxation of 
state-determined work search requirements and lack of 
sufficient funding of state employment security agencies 
focused on integrity of benefit payments, and re-employment 
services.
    Also, insufficient use of information databases, such as 
the national new hire database and wage information, to 
identify issues.
    There is ample evidence that efforts targeted at unemployed 
workers who are job-ready will reduce duration. Despite this, 
funding for these services has been cut, in real dollars, 
nearly every budget cycle since the mid-eighties. Before large-
scale, new programs are enacted, we should properly fund the 
features of the system we have in place now, in order to 
evaluate the most effective methods and best practices in 
returning unemployed workers to work.
    Taxes should be cut, not increased. FUTA tax rates should 
be cut, not increased, as some have suggested. The fact of the 
matter is that employers have been over-taxed by the FUTA 
system for decades, while state employment security agencies 
have been underfunded for critical employment services.
    The case for a tax cut is, indeed, compelling. Current tax 
rates, even without an extension of the two-tenths FUTA surtax, 
as has been suggested, generate approximately $5.5 billion in 
dedicated annual revenue, which increases with an expanding 
economy each year.
    Yet, state and Federal employment security agencies have 
been funded at amounts under $4 billion per year. This annual 
over-tax--which is actually greater when the two-tenths is on--
led to the accumulated balances in the Federal unemployment 
trust fund accounts that greatly exceed that which may be 
needed in the event of triggering Federal extended benefits 
under the current law, or, for title 12 loans, as projected for 
the foreseeable future.
    Sound fiscal policy dictates that Federal unemployment 
taxes should be set at levels adequate to fund state and 
Federal Administration of employment security and Federally 
extended benefits.
    Since the early eighties, when Federal advances of states 
began to earn interest, there has been no program justification 
for the Federal unemployment account. This account, which is 
part of the unemployment trust fund, currently maintains a 
balance of approximately $14 billion, and is growing. It is no 
longer needed, because loans to states under the title 12 
provision now carry interest. The risk of non-reimbursed 
Federal outlays for this purpose is minimal, and certainly not 
justification for the maintenance of this level of service.
    There is no need for Federal unemployment benefit dictates 
to states, as have been suggested by some of the other 
testimony. Contrary to the suggestion that the employer-funded 
UI system has holes that are in need of fixing, the system 
works as it was designed. Let me say a little bit more about 
that.
    The coverage--let's be clear about this--the coverage of 
the system is, indeed, broad. Ninety-7 percent of the salaried 
and hourly workforce in this country, according to BLS, is 
covered for potential eligibility for unemployment insurance. 
What we are talking about is eligibility. When you set 
eligibility, the determination is based, in part, on the 
workforce attachment. I can tell you, from my years working in 
the State of Ohio, that we struggled with this all the time.
    What is sufficient workforce attachment before an 
individual should become eligible for unemployment 
compensation? Is it $100 a week? Is it nothing? Should we be 
paying people unemployment for individuals who have never been 
employed? Is it $200 a week? That's the question that states, 
right now, deal with in the context of the solvency of their 
unemployment trust funds. When we talk about whether there is a 
Federal hole, what I am saying is the coverage of the 
individuals is there. The question of eligibility is the item 
that is, for the states, under the current system to determine.
    The system was never designed--nor should it be reformed--
to assure cash payments to every individual who is currently 
not working. It is fundamental that coverage and benefit 
eligibility must be determined in a system that enables states 
to set state unemployment insurance tax rates based on 
experience. Failure of the system to be able to ascribe 
responsibility for unemployment benefit payments to employers 
based on experience, will lead to an imbalance in taxes to be 
paid by individual employers across industrial sectors within 
the business community. Also, a lack of accountability for 
unemployment benefit causation and ineffective cost controls.
    Benefit eligibility determinations are best left to the 
states where responsibility and accountability rest. UWC 
opposes Federal requirements as to state benefit eligibility 
determination.
    It should be noted that without Federal mandates, states 
have acted to address these issues. According to the U.S. 
Department of Labor, in their 2006 compendium, 33 states have 
enacted provisions including alternate base periods, 17 states 
have provisions enabling unemployed workers to limit work 
search to part-time work, and 42 states considered domestic 
violence as good cause for individuals to quit employment.
    There are, however, no cookie cutter provisions. Any 
Federal state law that would mandate would be inconsistent with 
a number of them.
    Let me just say on the issue of the wage insurance, a new 
Federally-imposed wage insurance program would be duplicative 
of the existing UI wage replacement system. It would create 
significant tax and administrative cost burdens for business, 
and for states, and could lead to unintended consequences.
    I recognize that there is value in specific situations 
where a wage insurance might be part of an overall program that 
would make sense at the local level, but that's something to 
take a look at down the road.
    The cost of a Federally-imposed, across-the-board wage 
insurance program simply is not justified by its benefit. At 
$40 per employee, a new wage insurance tax would cost employers 
approximately $5 billion annually, with virtually no evidence 
of benefit, in terms of net reduced cost to employers or 
duration. Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Holmes follows:]
 Statement of Douglas J. Holmes, President, UWC--Strategic Services on 
                 Unemployment and Worker's Compensation
    Chairman McDermott, Ranking Member Weller, and members of the 
Subcommittee on Income Security and Family Support, thank you for the 
opportunity to submit comments with respect to proposals to improve 
security for American workers.
    I am Douglas J. Holmes, President of UWC--Strategic Services on 
Unemployment & Workers' Compensation (UWC). UWC counts as members a 
broad range of large and small businesses, trade associations, service 
companies from the Unemployment Insurance (UI) industry, third party 
administrators, unemployment tax professionals, and state workforce 
agencies.
    UWC fully supports efforts to maintain a sound unemployment 
insurance system and targeted measures to reduce the duration of 
unemployment of individuals who have become unemployed through no fault 
of their own. A review of historical trends since 1942 demonstrates the 
unmistakable trend in increasing duration in the average number of 
weeks of unemployment compensation paid.
Targeted Funding to reduce the duration of unemployment compensation is 
        needed.

    The trend in increasing duration has been caused by a number of 
factors, including:

      the relaxation of state determined work search 
requirements
      the lack of sufficient funding of state employment 
security agencies focused on the integrity of benefit payments and 
reemployment services
      insufficient use of information databases such as the 
national new hire database, wage information, labor market information 
and unemployment tax information

    There is ample evidence that efforts targeted at unemployed workers 
who are job ready will reduce duration. Despite this, funding for these 
services has been cut in real dollars nearly every budget cycle since 
the mid-1980s.
    Before large-scale new programs are enacted we should properly fund 
the features of the system we have in place now in order to evaluate 
the most effective methods and best state practices in returning 
unemployed workers to work.
Taxes should be cut, not increased.

    FUTA tax rates should be cut, not increased as some have suggested. 
The fact of the matter is that employers have been overtaxed by the 
FUTA system for decades while state employment security agencies have 
been underfunded for critical employment services.
    The case for a tax cut is compelling. Current tax rates, even 
without an extension of the 0.2% FUTA surtax, as has been suggested, 
generate approximately $5.5 billion in dedicated annual revenue which 
increases with an expanding economy each year. Yet, state and federal 
employment security agencies have been funded at amounts under $4 
billion per year. This annual overtaxing has led to accumulated 
balances in the Federal Unemployment Trust Fund accounts that greatly 
exceed that which may be needed in the event of the triggering of 
federal extended benefits under current law or for Title XII loans as 
projected for the foreseeable future.
    Sound fiscal policy dictates that federal unemployment taxes should 
be set at levels adequate to fund state and federal administration of 
employment security and federal extended benefits. Since the early 
1980s, when federal advances to states began to earn interest, there 
has been no program justification for the Federal Unemployment Account. 
This account, which currently maintains a balance of approximately $14 
billion and growing is no longer needed as amounts ``loaned'' to states 
must be repaid with interest. The risk of non-reimbursed federal 
outlays for this purpose is minimal and certainly not justification for 
the maintenance of this level of reserve.
There is no need for Federal unemployment benefit dictates to states.

    Contrary to the suggestion that the employer funded UI system has 
``holes'' that are in need of fixing, this system works as it was 
designed, to pay unemployment compensation benefits to those who 
demonstrate a workforce attachment, become unemployed through no fault 
of their own, who are able, available and actively seeking suitable 
work.
    The system was never designed, nor should it be ``reformed'', to 
assure cash payments to every individual who is currently not working.
    It is fundamental that coverage and benefit eligibility must be 
determined in a system that enables states to set state unemployment 
insurance tax rates based on experience. Failure of the system to be 
able to ascribe responsibility for unemployment benefit payments to 
employers based on experience will lead to an imbalance in taxes to be 
paid by individual employers across industrial sectors within the 
business community, a lack of accountability for unemployment benefit 
causation, and ineffective cost controls.
    Benefit eligibility determinations are best left to the states, 
where responsibility and accountability rest, to set the appropriate 
state unemployment tax rates, based on experience, to raise the funds 
needed to pay current and projected benefits.
    UWC opposes federal requirements as to state benefit eligibility 
determinations. This opposition extends to federal mandates with 
respect to provisions which would permit unemployed individuals to 
limit their work search to part time employment and treating quits from 
employment for compelling family reasons as non-disqualifying.
    It should be noted that without federal mandates states have acted 
to address these issues. According to the U.S. Department of Labor, 33 
states have enacted provisions including alternate base periods, 17 
states have provisions enabling unemployed workers to limit work search 
to part time work, and 42 states consider domestic violence as good 
cause for individuals to quit employment.
    There are, however, no ``cookie cutter'' provisions, and any new 
federal mandate would be inconsistent with a number of these state 
provisions.
    A new federally imposed wage insurance program would be duplicative 
of the existing UI wage replacement system, create significant tax and 
administrative cost burdens for business and for states, and lead to 
unintended consequences.
    The current unemployment insurance system provides weekly wage 
replacement payments to unemployed workers who are covered by the 
program, and meet weekly eligibility requirements. The UI benefit 
system typically delivers checks to unemployed workers within three 
weeks of applying for and claiming unemployment compensation benefits.
    Approximately 97 percent of the wage and salaried workforce in the 
United States is already covered for unemployment insurance. Wage 
replacement rates for unemployed workers are typically set at 50 
percent of the worker's average weekly wage up to state legislated 
maximum weekly benefit amounts.
    In some sectors, particularly in manufacturing, there are 
Supplemental Unemployment Benefit (SUB) plans that are the products of 
collective bargaining negotiations and typically provide additional 
wage replacement payments of 90 to 100 percent of the individual's 
wages while working. As a condition of receiving these SUB payments, 
individuals are normally required first to apply for unemployment 
compensation under the state UI system. SUB pay amounts are then 
determined to make up the difference as long as the individual remains 
available to be called back to employment with the employer and 
otherwise meets the requirements of state unemployment compensation law 
with respect to continuing eligibility.
    Employers with SUB plans would be required to pay the new wage 
insurance tax while receiving virtually no benefit in reduced regular 
unemployment compensation duration.
    A broad based overlay of yet another wage insurance supplement 
payment is not necessary and creates administrative complexity for 
states and employers. For example, under state unemployment insurance 
law individuals are required to accept suitable work taking into 
consideration their employment experience and skills, as long as wages 
paid for the position are consistent with those for such positions in 
the local labor market.
    How will wage supplementation be considered in such situations? May 
an unemployed worker refuse an offer of work based only on wage 
compensation that is significantly above that which would otherwise be 
available in the local labor market? What impact would this have on the 
willingness of individuals to seek improved education and training? The 
number of individuals in America's workforce who are working multiple 
jobs on a full-time and/or part-time basis has grown in recent years, 
adding considerable complexity and administrative burden in making 
these determinations.
    It should also be noted that even where there may be federal policy 
justification for wage supplements for targeted populations on a 
temporary basis, such as the current TAA program, funding for such 
programs is not appropriately attributable to the employer paid FUTA 
system. The integrity of the FUTA funded system must be maintained, and 
benefit determinations controlled by the states, to assure long term 
solvency of the unemployment system.
    It is well accepted that individuals, if not provided with 
incentives or sanctions, will delay aggressive work search activities 
until the end of their period of compensable unemployment. An 
additional wage insurance program to encourage acceptance of the first 
job, although reducing the duration of regular UI benefits, may result 
in an extended duration of supplemental wage insurance payments.
    The cost of a federally imposed across the board wage insurance 
program simply is not justified by its benefit. At $40.00 per employee, 
a new wage insurance tax would cost employers approximately $5 billion 
annually with virtually no evidence of benefit in terms of net reduced 
costs to employers.
    A review of the current, more modest and targeted TAA program has 
not been completed and at this point is inconclusive as to demonstrated 
benefits. At a minimum, further consideration of any tax increase to 
fund additional wage insurance, not to mention a $5 billion per year 
tax increase to be paid by employers, must await the completion of 
reviews of this program.

                                 

    Chairman MCDERMOTT. Thank you. I want to thank you all. As 
I said earlier, your full testimony will be put in the record.
    Let me begin, Mr. Rosen, by asking you a question. It has 
been suggested, I think on this panel, that wage insurance 
would force, or perhaps overly encourage, dislocated workers to 
take jobs with lower pay. I would like to know your response to 
that, because it's been suggested that wage insurance will 
crowd out of jobs lower-skilled workers who might have access 
to them by having people coming from above.
    We have at least the experiment of the trade assistance, 
and I would like to hear from that experience what the real 
fact is.
    Mr. ROSEN. Thank you very much, Mr. Chairman. First of all, 
let me say that Washington State is very fortunate in having 
Rob Mills, who is our Trade Adjustment Assistance (TAA) 
coordinator. He helped me identify people who are currently 
involved in the program. He is very committed to the program, 
and really, I wish every state had a person like him running 
the TAA program. We spoke to some people.
    Unfortunately, I have to say publicly, the Department of 
Labor has not been very helpful in giving us access to these 
kinds of experiences. So, we have to go out on our own and talk 
to people, and I have done that.
    Let me tell you about a couple, and then I can let you know 
about more of them at another time. A woman by the name of Mary 
lives in Vancouver. She was a project coordinator, and was laid 
off from Hewlett Packard, where she made $20 an hour. She 
wanted to take a job as a senior care provider, which initially 
paid $9.06. It's really hard, when you're listening to these 
experiences, not to respond. Later, that wage was increased to 
$12 an hour.
    She said--and this is almost a quote--``I needed to get 
back to work right away for financial reasons.'' So, this is 
not a woman that was being forced back to work because of some 
arbitrary deadline. This is a woman who was looking for a job 
immediately. She said, the Alternative Trade Adjustment 
Assistance Program was very helpful, because it cut her losses 
in half. In fact, it gave her $4,000 more than she would have 
made, otherwise.
    If you don't mind, I want to give you one other experience, 
because it's a little bit different, and that is we have a 63-
year-old man who lives in Longview, laid off from Weyerhaeuser, 
where he earned $22 a week. Again, because he is 63, he did not 
want to just have unemployment insurance. He needed to go back 
to work to pay for, bills at home, and things like that, and, 
for his own esteem, he also wanted to be back at work.
    So, he took a new job at a pulpmill in Kosmopolis--I 
learned a lot through this discussion--where he earned $17 an 
hour. He--and this, I think, speaks to Secretary Reich--he 
subsequently lost that job, and went back to Weyerhaeuser. 
However, the point is that alternative trade adjustment 
assistance helped close that gap when he was making $17 an 
hour, in that interim period, until he got back to his previous 
job.
    So, here are two different cases of--one, a woman who 
needed to get back for financial reasons, and it's a good thing 
that Alternative Trade Adjustment Assistance (ATAA) was there 
and another case where Alternative trade Adjustment Assistance 
served as a cushion while the worker adjusted to the labor 
market conditions, which is, helping him get back to his 
previous job.
    Now, we did hear from some people about the issue of 
training and wage insurance. Another person I spoke to lives in 
southeast Washington, and was laid off from Seneca Foods where 
he made $20 an hour. There weren't a lot of opportunities or 
there training programs there. So, basically he had no option 
but to find another job, which paid $14 an hour. Wage insurance 
helped him by topping off by about $3,000 for the 2-year 
period.
    So, wage insurance kind of fits in there, and fills that 
gap. The only last thing I am going to say is--and I must say 
that I brought this to you back when you invited me to testify 
in the spring. I am totally in agreement that we need to know 
more about how this program is working. We have the luxury of 
having a program in place that we can study to find out more 
about how it would work more generally. Unfortunately, we have 
been unable to get that GAO study because of pressure from 
interest groups. However, I think we should plough ahead and 
get those studies, and learn something about the program, so 
that we can make public policy based on fact, not on--based on 
just impressions.
    Chairman MCDERMOTT. Are you talking about information from 
the Department of Labor, or from the GAO?
    Mr. ROSEN. Well, again, I lament having to say this, but I 
would be dishonest if I didn't say it to you. The Labor 
Department refuses to provide the kind of data we need to 
understand how these programs work. To make it even worse, I 
have recently learned that they have just started, after 5 
years, collecting these data. So, they don't even have a lot of 
the data.
    So, we cannot, unfortunately, count on this Department of 
Labor to tell us how labor programs work. So, what we do is we 
go to the Government Accounting Office. They do a great job, 
and they go out and actually interview workers.
    Now, another option you could do is ask the CBO to do a 
study. Those tend to be more economic-oriented. However, I 
think the GAO study, which would really get to talk to people, 
I think that would be useful.
    Chairman MCDERMOTT. Yes?
    Ms. LEE. I would totally agree with what Howard Rosen said, 
in terms of the lack of data. It's very frustrating for us as 
well, we can't get data about how the program that is in place 
is working.
    What I would say, in terms of the research that has been 
done by the Upjohn Institute, they have done some simulations, 
and they also followed the Canadian pilot program, that----
    Chairman MCDERMOTT. Which organization?
    Ms. LEE. The Upjohn Institute.
    Chairman MCDERMOTT. Upjohn. Okay.
    Ms. LEE. This is a 1995 study, a somewhat old study, which 
ran simulations that found that virtually all the employment 
gains experienced by dislocated workers as a result of the wage 
subsidy come at the expense of other workers. They raise the 
same question with respect to the Canadian pilot program, as 
well, that the possibility that gains from dislocated workers 
would come at the expense of other groups of workers.
    So, I think that we have no information from the ATAA 
program. The little we know of the Canadian program, I think, 
is somewhat problematic.
    Chairman MCDERMOTT. You are suggesting that there is a 
reason to do a good study?
    Mr. ROSEN. Yes. I will respond very briefly. Those studies 
that were cited are based on a different structure of a 
program.
    As I mentioned before, the program that you are 
considering, the program that is in place now under TAA, only 
the worker--the worker and the Federal Government have the 
relationship. The employer doesn't even know about it. No one 
else needs to know about it. So, the outcomes would be 
different.
    Mr. EMSELLEM. That's not true, as far as I know. That study 
simulates a wage insurance program that provides $10,000 a 
year, exactly what is proposed here.
    Our concern, to be honest, is even more than what's been 
documented in the Upjohn study, in their simulations, that when 
you get into the situation--take Michigan--where you have lots 
of layoffs, so have a lot of concentration of unemployed 
workers, that that creates even more pressure, this crowding 
out effect that we're talking about.
    So, at the same time that you're trying to help those 
workers where there is a lot of need, you're hurting a lot more 
workers with a lot of need. That is--and we just don't know. I 
think the answer is--and that's why we are--have a lot of 
concerns about wage insurance. These are huge questions that we 
don't know the answers to. However, we----
    Chairman MCDERMOTT. So, I am--have already abused my seat, 
so I am going to move to Mr. Weller. Mr. Weller?
    Mr. WELLER. Thank you, Mr. Chairman. Of course, you have 
the gavel, so I think you certainly have the privilege of going 
over your time, if you so wish. I thank you for this hearing, 
because I feel it's an important one.
    Mr. Chairman, I think one thing that has come clear is I 
think people question sometimes, who pays the payroll tax? I 
think it's really important that we, as a Subcommittee, 
understand exactly who pays the payroll tax. Since payroll tax 
for unemployment insurance is different than the Social 
Security payroll tax. For the Social Security payroll tax, half 
is paid by the worker, half is paid by the employer.
    In the case of the unemployment insurance tax, it is paid 
solely by the employer. Many would argue that when you tax the 
employer more, there is less money available to provide better 
wages, that that tax competes with the ability of that employer 
to give a pay raise, or salary increase, to the workers.
    Also, I think it's important we understand how much we 
currently generate from the payroll tax. Right now, the 
permanent Federal unemployment insurance tax generates about $6 
billion a year. Since the seventies, Congress--because we 
always need a revenue to disguise the deficit--has extended the 
temporary surtax from the seventies, and that generates about 
$2 billion a year.
    The Chairman has proposed extending the surtax, and you're 
absolutely right, it was in the Administration budget, 
extending it. The Secretary of Treasury, when I asked why, he 
said, ``Well, we put it in there,'' and would not explain that 
they wanted the revenue just to disguise the deficit, which is 
the reason they included it.
    Also, the Chairman's proposal also adds an additional 
surtax on top of the permanent payroll tax, on top of the 
temporary surtax, of an additional $6 billion a year. So, we 
would go from collecting $6 billion from the permanent tax 
today, the additional $2 billion from the temporary surtax--
that totals $8 billion--and then add on top an additional $6 
billion more in new taxes. That would be a total of about $14 
billion a year being collected each year for this expansion of 
the unemployment tax system, so more than doubling the current 
tax burden on employers. Again, I note that tax burden is not 
paid by the employee, the worker, it's paid by the employer.
    We have a $35 billion surplus. If you look at annual uses, 
expenditures out of the unemployment system, out of that trust 
fund even, considering the so-called business, or economic 
cycle, that's about 7 years' worth of surplus that is currently 
in the system.
    Mr. Rosen, Ms. Lee, and Mr. Emsellem have raised questions 
and concerns about the concept of wage insurance, which I think 
has real merit. I would ask, for the record, if you would 
submit answers from Ms. Lee's testimony, pages 9 through 11. It 
has a series of questions. If you would submit answers for the 
record answers, I would certainly appreciate it. Mr. Holmes?
    Mr. HOLMES. Yes, sir.
    Mr. WELLER. You are the one on the panel that raises 
concerns about the increasing taxes on employers, even though 
we have a $35 billion surplus.
    First, this additional $35 billion, even if Congress were 
to decide to expand assistance to the states, do you feel we 
need to raise taxes in order to do that, considering the 
surplus that is in the current trust fund?
    Mr. HOLMES. No. I think that the continuation of the FUTA 
tax at the existing level without the two-tenths, combined with 
the existing balances that are in the fund, is more than 
sufficient.
    In fact, I would go further to suggest that the--some of 
that money, particularly that in the Federal unemployment 
account, is not needed, and could be used to assure that we 
didn't have tax increases in the--or need tax increases in the 
foreseeable future.
    Mr. WELLER. Mr. Holmes, I have proposed in my legislation 
that states be given greater flexibility in designing 
unemployment programs. A possibility would be maintaining 
unemployment assistance, plus a wage insurance program.
    Would you support giving states greater flexibility to 
experiment and design programs that may adapt to their 
particular states?
    Mr. HOLMES. Thank you. Yes, Mr. Weller, I think that makes 
sense, from the standpoint of I know, from my own experience in 
administering these programs, that there is a need for a 
combination of re-employment services, and in certain 
circumstances, additional wage supplementation can be helpful 
in moving somebody into work.
    Mr. WELLER. Yes. Mr. Rosen, how do you feel about giving 
states greater flexibility to experiment?
    Mr. ROSEN. Flexibility in Washington translates into fiscal 
burden in states. I work a lot now with states, and they have 
heard about this word, ``flexibility,'' and every time they do 
it, it means that they have to do more with less money.
    So, I think that we have got to stop playing that game. We 
do need to open it up so, as I said, we have a system that is 
one size fits all. We need to have more flexibility in that 
system. However, we can't do that at the expense of the--at the 
provision of services at the state level.
    Mr. WELLER. Mr. Rosen, under the Chairman's proposal--and 
he is well-intended; we disagree on some things--but his 
proposal provides, essentially, temporary assistance to the 
states, and then takes it away. So, how is that not imposing a 
future financial burden on that particular state?
    Mr. ROSEN. Right. Well, I am not here to defend the 
Chairman's proposals.
    Mr. WELLER. However, you can comment.
    Mr. ROSEN. I can comment on them. As I said at the 
beginning, we have a very strong feeling about the program. We 
may differ about specifics.
    The proposal that I have put forward is to raise the 
maximum income level in the FUTA tax, and that is how I would 
finance all of this. I will say this outright, that I am 
concerned about taking money out of the trust fund. We have 
already robbed the Social Security trust fund, why are we going 
to start robbing the UI trust fund?
    So, I think we just need to do a correction that has been 
long overdue--over 25 years. You could actually raise the 
maximum income level. Let's say, over time, you took it from 
$7,000 to $45,000, which would be the inflation adjusted, and 
you could reduce the payroll tax. You could remove the 0.2 tax, 
if you just corrected----
    Mr. WELLER. Mr. Rosen, we have $35 billion surplus in the 
fund, and it can only be used for one purpose, so----
    Mr. ROSEN. That's why I would only use it for that purpose.
    Mr. WELLER. However, the point is, if you want to argue 
about raiding the unemployment fund--no one has proposed doing 
that--if you just allow that surplus to stay there, it's used 
to disguise the deficit----
    Mr. ROSEN. Again, let's----
    Mr. WELLER [continuing]. In the same way that the Social 
Security trust fund has been used to disguise the deficit in 
the past.
    So, based on that argument, Congress, over the decades, has 
already been raiding the unemployment trust fund, solely to 
disguise the deficit, as we have the Social Security trust 
fund.
    Mr. ROSEN. As you, yourself, said----
    Mr. WELLER. Short answer.
    Mr. ROSEN. Excuse me?
    Mr. WELLER. Short answer.
    Mr. ROSEN. I am sorry. As you, yourself, said, the payroll 
tax actually is paid by people. That trust fund is not there 
for general revenue. That is people's money that they give to 
the Government, to hold in a bank----
    Mr. WELLER. Paid by employers.
    Mr. ROSEN [continuing]. To pay back for unemployment 
insurance. If I could just quickly, we do have to have this 
conversation based on facts--the amount of benefits paid in 
2001 was $31 billion. In 2002, $40 billion. The esteemed 
previous head of the Fed is suggesting that we might move into 
a recession. No one knows when that's going to come. However, 
when it comes, I can tell you that unemployment is going to go 
up. The question is, are we going to have that money in the 
trust fund at that time?
    So, it may look very nice right now, but the trust fund has 
not always looked that way. It looks nice now, because 
unemployment is at 4.5 percent.
    Chairman MCDERMOTT. Thank you.
    Mr. ROSEN. It could----
    Chairman MCDERMOTT. We are going to move on to Mr. Lewis.
    Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. I 
will be very brief.
    Mr. Holmes, you mentioned some concern in your testimony 
about the trend of increasing unemployment compensation 
duration. However, you seemed to miss the point. The real trend 
seems to be in increasing unemployment duration about 40-
percent increase in duration from the fifties to the present.
    Are you saying today that you disagree with your fellow 
panelists? Mr. Rosen, do you disagree with the Secretary of 
Labor, and others, who argue that changes in the economy have 
made employment less--temporary, and make structure of 
employment more----
    Mr. HOLMES. Not at all. Thank you for the question, if I 
was unclear about that. I very much agree with what Mr. Rosen 
has laid out, in terms of increasing duration. I think that is 
something that is of a concern to us. I think it's also true 
that there has been a shift, as many of us know, in the numbers 
of individuals in the manufacturing sector. That's something 
that can be tracked, going back to post-World War II.
    So, I think that's a concern for us, and I think that we 
would support strategy and resources to try and move people 
more effectively into work, once they become unemployed. 
Absolutely.
    Mr. LEWIS OF GEORGIA. Well, let me ask--okay, maybe one of 
you can tell me. What happened to low-income workers? Lose a 
job, run out of benefits. Do you have data or research? What 
happened to that?
    Mr. HOLMES. If I may, I think that the low-income workers 
are served through a number of systems, including unemployment 
insurance. If they do not qualify----
    Mr. LEWIS OF GEORGIA. Years ago, I used to hear people say, 
``I am going down to the office to collect my pennies.'' That 
was many, many years ago, right? That was during the forties, 
the fifties, and maybe sixties, ``I'm going to collect 
pennies.'' It was so small. Right?
    Mr. EMSELLEM. Right.
    Mr. LEWIS OF GEORGIA. It's still small, right? Are you 
agreeing, Mr. Rosen?
    Mr. ROSEN. Well, one of the proposals----
    Mr. LEWIS OF GEORGIA. Are people still collecting pennies?
    Mr. EMSELLEM. Yes. Yes.
    Mr. ROSEN. It's just directly deposited now, they don't 
collect it.
    Mr. LEWIS OF GEORGIA. Well, okay. So,----
    Mr. HOLMES. The percentages are similar to what they have 
always been, the 50 percent of their wages. If their wages are 
low, the amount----
    Mr. LEWIS OF GEORGIA. Mr. Rosen is shaking his head.
    Mr. ROSEN. You want to do it?
    Mr. EMSELLEM. Yes. Low-wage workers, on average, probably 
get about $100 to $150 in unemployment benefits a week. One of 
the proposals that we put forth in our testimony was to help 
increase that by adopting what is called dependent allowances, 
because that's a special burden with low-wage workers with 
families. The dependent allowance provides an extra $15 to $25, 
per dependent, to raise that check, which would help a lot. A 
lot of states have done that, and that's a big priority, to 
raise the benefits.
    Obviously, like Mr. Rosen said, it would be great to bring 
up the unemployment benefits for everybody. That's a tough sell 
in the states. However, we think a good place to start, because 
we're promoting state experimentation, not mandates on the 
states; none of this is about mandating any state to do 
anything, it's all about promoting the states that want to do 
good things with extra money. There is a real need, and a real 
opportunity to raise the benefits for low-wage workers, if the 
bill includes those provisions.
    Could I comment on taxes real quickly, just because it's 
come up so much?
    Mr. LEWIS OF GEORGIA. Yes.
    Mr. EMSELLEM. I just want to set the record straight. 
Number one, the trust funds have $30 billion. The last 
recession, a mild recession comparatively, the extension cost 
$25 billion on its own. Then you take into account the loans 
that were made out of the Federal trust fund. That adds another 
$10 billion. There is your $30 billion, out the window. Take a 
more severe recession, it's all gone.
    Employer taxes. Employer taxes, before the surtax in 1977, 
they were paying $25 per worker. Now they are paying $56 per 
worker. If you adjusted for inflation before the surtax to 
today, they would be paying $86 to $84 a worker. So, that's 
more, not including the surtax.
    So, the burden on employers--and then the real story of the 
unemployment system, when you get behind some of what's been 
going on in congress is that the unemployment system has been 
subject to record employer tax cuts during the eighties, which 
puts a lot of pressure on the states to deny benefits. In the 
nineties, taxes went down 33 percent. In 2001, they hit a 
record all-time low of one-half of 1 percent of total wages, 
okay?
    So, there is not a huge demand on employers right now, 
relatively speaking to prior years. In fact, I think it could 
be argued that they are not paying their fair share of 
unemployment taxes.
    Mr. LEWIS OF GEORGIA. My time has run up. Mr. Chairman, if 
I could have just another 30 seconds, maybe for Mr. Rosen and 
maybe Ms. Lee to respond?
    Mr. ROSEN. To this? In 1935, when the program was created--
and this is documented--it was hoped that we would get a 50 
percent replacement rate, meaning that the UI payment would be 
50 percent of the previous wage.
    We have almost never achieved that. The last time we came 
any kind close was in the seventies. Right now, the national 
average is a little bit above 30 percent. Some states do it 
better. Washington State does a really great job. There is 
almost double the national average. They give the family 
support that other states don't give.
    We have a national phenomenon in this country right now. 
Unemployment rates are converging. We are all starting to look 
alike, we are all facing technology change, international 
trade, and demand changes. That's not something that hurts just 
the Midwest or the Northeast. So, why is it that we have this 
accident of where you live, and how much a state can pay? It 
should be based on if you lose your job we should come up with 
trying to help you readjust, regardless of why, or where you 
live.
    Mr. LEWIS OF GEORGIA. Ms. Lee?
    Ms. LEE. Nothing to add, thank you.
    Mr. LEWIS OF GEORGIA. Okay. Thank you, Mr. Chairman.
    Chairman MCDERMOTT. Thank you. Mr. English?
    Mr. ENGLISH. Thank you, Mr. Chairman. Mr. Rosen, just so I 
am clear from some of the testimony, fear has been expressed 
that wage insurance is some sort of a stocking horse for 
repealing TAA. Do you favor repealing TAA?
    Mr. ROSEN. I certainly don't. In fact--and thank you very 
much, Mr. English, for that question. I just want to say, for 
the record, in this town there are a lot of people who take 
credit for things that they do. You don't. I will just say that 
you have been one of the champions of the trade adjustment 
assistance program, and thousands of people in this country 
should be grateful for what you have done.
    I actually would argue that our general programs should 
start looking more like the trade adjustment assistance 
program. You don't need to go all the way, trade adjustment 
assistance gives you 2 years of unemployment insurance if 
you're in training. Okay, we may not need to go all that far. 
However, I think we need to move the general programs into that 
direction.
    One of the great things the congressman brought into this 
program, in addition to wage insurance, was a health care tax 
credit. We are all lamenting here today what to do about health 
care for the unemployed. By the way, they account for about 25 
percent of that 47 million people without insurance that we 
hear about. Having a health care tax credit could deal with 
that problem right away. IRS is----
    Mr. ENGLISH. What sorts of changes would you recommend to 
make the health care tax credit more usable for more work?
    Mr. ROSEN. The tax credit right now is at 65 percent. 
Again, they have come up with, I think, a wonderful way that it 
works. You don't get the credit at the end of the year, you get 
it in the month that you must pay your insurance, so you can do 
the cash flow. However, what we hear from people is that the 65 
percent is too low. There, maybe we should raise it some. I 
think we should expand it to more people, at the same time.
    However, back to this comment on flexibility, I don't think 
we should go 100 percent, because we should give the 
opportunity to states--and some states do--to top it off, if 
they want. If I could just take this as an opportunity?
    Mr. ENGLISH. Sure.
    Mr. ROSEN. The wage insurance program that was set up under 
Trade Adjustment Assistance was clearly the beginning. It was 
never meant to be the end. There are some things in there that 
need to be corrected.
    For example, there is a 26-week requirement, under TAA, to 
opt into one or the other program. We have now had 5 years of 
experience. There are people who complain that that forces 
people to take jobs too early. There are Members of Congress 
who are seriously considering adjusting that requirement. We 
learn over time. We had to start somewhere.
    The other second thing is this issue of training. Well, 
maybe we can provide training to people while they are in wage 
insurance at the same time. To me, that raises the question, is 
someone who is working full time going to take training at 
night?
    Well, maybe then we think--and I'm sorry to use this 
opportunity to be even more bold----
    Mr. ENGLISH. Very helpful.
    Mr. ROSEN [continuing]. Maybe we provide wage insurance for 
part-time people, people who go back to jobs part-time, and 
then take training on their own. These are all things--my point 
is, the comments that are being made, I think, can all be 
addressed in the structure of the program, and I think that--
not undermine the whole idea.
    Mr. ENGLISH. On that point, the concern has been raised 
that an expansion of wage insurance is somehow--potentially 
could be financed at the expense of FUTA, or through FUTA. 
Isn't this something that, in fact, could be financed from 
general fund dollars, let alone by dedicated taxes unrelated to 
the financing mechanism for unemployment insurance?
    Mr. ROSEN. I will be very brief, and I would be happy to 
provide you with more detail. However, the genesis of this is 
that Trade Adjustment Assistance was seen as a way to--and 
excuse me for using these terms--redistribute the wealth that 
we get from international trade to those people who pay a 
price.
    So, it was understood--these programs have been in place 
for 40 years--it was understood that the Federal Government is 
the best way to do that. The Government gets the benefits for 
all people, so the Government would pay for trade adjustment 
assistance. It was a very small program. That's how it 
originally came out of general revenues.
    It is an entitlement. Just so that you know, the budget, 
we're talking about $1 billion right now. I believe that, as a 
labor market program, it would make sense to start 
consolidating these things, and maybe we should think about 
moving these, looking at at least the funding part of Trade 
Adjustment Assistance, as part of a broader scheme.
    Why is it that TAA is funded out of general revenues, but 
yet UI is funded out of a payroll tax? I'm not ready to suggest 
any one way to go about it. I am just giving you the history. 
The fact that the program, TAA, is now getting larger, I think 
we should think about that. Is it still the right way to do it, 
to come out of general revenues, or should we bring it out of 
trust funds, like or other labor market programs?
    Let me just add--again, to put all this in context, another 
proposal that has been discussed is we should finance the 
trade-related assistance out of import tariffs. That's the tax 
that we impose on foreigners to import their goods. So, why 
don't we use that money to help those people who are adversely 
affected by those imports?
    I am just putting this out there, so you know the quantity. 
Again, I am not advocating. We collect about $19 billion a year 
in import tariff revenues. So, we could take some of that money 
and use it to pay for adjustment assistance. It would be a very 
kind of logical way to do that----
    Mr. ENGLISH. My time is up, so I am going to yield back to 
the Chairman.
    Mr. ROSEN. Sorry, what did you say?
    Mr. ENGLISH. I will leave it to the Chairman to----
    Chairman MCDERMOTT. Well it's a----
    Mr. ROSEN. What did you say, Mr. Chairman? I didn't hear 
what you said before.
    Chairman MCDERMOTT. I said it's kind of a user fee.
    Mr. ROSEN. Right, right.
    Chairman MCDERMOTT. Ms. Lee, you had something you were 
going to say, and I would like to--in response to what Mr. 
English is talking about.
    Ms. LEE. Just very briefly, in terms of this question about 
whether wage insurance is a stalking horse for the TAA program, 
it's certainly the case that the Heritage Foundation has 
explicitly proposed that if the aim of wage insurance programs 
is to help workers find new jobs, then TAA should be eliminated 
over time, and replaced by a program that provides incentives, 
not disincentives, for workers to do just that. So, it's not in 
only our mind that this has been a proposal. This is what many 
of the proponents of wage insurance have explicitly put 
forward.
    In terms of the issues that Mr. Rosen raised, I certainly 
would agree with Mr. Rosen, that one issue is whether the ATAA 
is available only for workers not taking training. That has 
been one of our criticisms. We would like to see that issue 
addressed in the future, in terms of the ATAA.
    The other issue that we have with ATAA pilot program is 
whether the age limit is reduced from 50 to 40. We would have 
objections to that. It's one thing for a 50-year-old worker, 
where maybe it doesn't make as much sense for that worker to 
invest in the training, but at the age of 40 it's more 
important, we think, that that worker get the new skills that 
he or she needs to get a better job in the future, and not 
the----
    Chairman MCDERMOTT. Well, done at 50?
    Ms. LEE. Excuse me?
    Chairman MCDERMOTT. You're done at 50?
    Ms. LEE. Not done at 50.
    [Laughter.]
    Ms. LEE. I hope not. I certainly hope not.
    Chairman MCDERMOTT. Be careful, ma'am. Well, I want to say 
thank you to this panel, and I want to say that this bill will 
not pass in the next week, but I wanted to get this discussion 
started, because I think it's an issue that everybody on the 
panel cares about and wants to come to some kind of resolution 
that will benefit the workers of this country.
    Both--the workers are Republicans and Democrats, and we 
really have to find a program that deals with what is best for 
the workers. Thank you all for your time.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]
    [Submissions for the Record follow:]
                     Statement of Jeffrey R. Kling
    During the hearing on Increasing Economic Security for American 
Workers on Thursday, March 15, 2007, Mr. Weller asked for responses to 
questions posed in the written testimony of Thea Lee. My responses to 
these questions are provided below, assuming that the wage insurance 
program is structured as in the draft Worker Empowerment Act provided 
to witnesses for review.
Responses to questions
      To what extent would a universal wage insurance program 
shorten unemployment spells?

    The introduction of wage insurance is anticipated to reduce 
unemployment duration for those with wage losses by a small amount. The 
incentives for shorter duration are two-fold. First, the wage of the 
new job is higher with wage insurance, making work more attractive than 
it is without wage insurance. Second, the amount of time during which a 
worker can collect wage insurance decreases for each day since the job 
loss that a new job is not found.
    There is, however, a counter-acting incentive that total annual 
income is higher with wage insurance, which can motivate longer 
unemployment spells in some cases. For example, without wage insurance 
a worker previously earnings $42,000 per year may take a new job at 
$30,000 per year immediately after job loss in order to ensure making a 
minimum annual income (say, to pay a mortgage). If the worker has wage 
insurance, however, and is confident that a ``fall-back'' job at 
$30,000 per year will be available throughout the first several months 
after job loss, she can afford to search for up to two months for an 
alternative and still have at least $30,000 in income during the first 
year after job loss (with $25,000 in earnings from ten months of 
employment on the fall-back job plus $5,000 in wage insurance).
    The evidence from the Canadian Earnings Supplement Project is the 
most directly relevant to this question, as it provided a form of wage 
insurance (although not exactly the same as that being considered in 
the U.S., as it had a requirement of finding a new job within 26 weeks, 
75 percent earnings replacement, more generous unemployment insurance 
benefits, etc.). This project found that unemployment durations were 
reduced slightly, but not significantly. There was a significant 
increase in the percentage working full-time 26 weeks after job loss, 
likely driven by that program's requirement to have full-time work 
within 26 weeks in order to qualify for the wage supplement payments. A 
substantial part of this increase involved switching from part-time to 
full-time work and it was not comprised solely of switching from 
unemployment to full-time work.

      To what extent would a universal wage insurance program 
induce workers to accept lower-wage employment they might otherwise 
refuse?

    There is evidence that when searching for a job, the unemployed 
place emphasis not only on the current market valuation of their 
skills, but also on how wage offers compare to their previous wages. 
The availability of wage insurance may help people overcome this 
psychological hurdle and more quickly accept prevailing market wages. 
This may also help avoid prolonged unemployment that can further 
depress wage offers--such as when longer duration is perceived as a 
negative signal by employers, when individuals become discouraged and 
reduce search effort, or when their skills deteriorate.
    Evidence from tax rate changes and from demonstration projects 
including the negative income tax experiments and the Canadian Earnings 
Supplement Project do not provide significant evidence suggesting the 
availability of wage insurance payments would lead individuals to 
choose jobs with lower wages than they would in the absence of wage 
insurance.

      Would these lower-paying jobs lack benefits such as 
health insurance?

    The formulation of wage insurance in the Worker Empowerment Act 
actually creates incentives for workers to prefer a mix of total 
compensation that includes relatively more fringe benefits in exchange 
for lower gross wages. For example, a worker earning previously earning 
$70,000 may be equally happy with a job paying $70,000 without 
employer-provided health insurance or with a new job paying $60,000 
with the employer providing health insurance having post-tax value of 
$10,000. If wage insurance were available, the worker would prefer the 
job providing health insurance. While lower-wage jobs are less likely 
to offer health insurance in general, beneficiaries of the Worker 
Empowerment Act will tend to disproportionately seek out those jobs 
that do offer health insurance.

      What portion of wage subsidy recipients would have taken 
lower-paying jobs even without the subsidy?

    According to the Displaced Workers Survey, one-fourth of those 
permanently laid off in 2002 had wages at least 25 percent lower than 
their previous job without any wage insurance.\1\
---------------------------------------------------------------------------
    \1\ Kling, Jeffrey R. ``Fundamentally Restructuring Unemployment 
Insurance: Wage-loss Insurance and Temporary Earnings Replacement 
Accounts.'' Hamilton Project Discussion Paper 2006-05, September 2006. 
http://www3.brookings.edu/views/papers/200609kling.pdf

      To what extent would the employment of wage-subsidized 
---------------------------------------------------------------------------
workers displace other workers?

    If unemployment durations for those with wage losses decrease as 
anticipated, then unemployment durations for others with skills similar 
to displaced workers (such as new labor market entrants) may increase, 
but total unemployment duration of all groups combined is anticipated 
to decrease. With increased search intensity among those with wage 
losses, the total number of jobs and the total output of the economy 
are likely to be higher, with this increased economic growth reducing 
any impact on the unemployment durations of other groups.
    Davidson and Woodbury (1995) conducted a simulation of what might 
happen if wage insurance were introduced into their model of the 
economy, but there is no actual empirical evidence of any impacts on 
non-recipients of wage insurance.\2\ Davidson and Woodbury claim that 
virtually all the employment gains experienced by dislocated workers as 
a result of the wage subsidy come at the expense of other workers. This 
claim comes about largely because the simulation in this study assumes 
the number of jobs is fixed and there is not any economic growth 
induced by the increase in work from the wage subsidy. The authors 
wrote that: ``Other groups of workers could experience small increases 
in unemployment duration, and decreases in employment levels that 
almost fully offset the gains for dislocated workers ... the crowding-
out results are quite sensitive to one of our assumptions--that the 
total number of available jobs (T) is fixed.'' The assumption of no 
economic growth is unlikely to hold true in practice.

    \2\ Davidson, Carl and Stephen A. Woodbury. ``Wage-Rate Subsidies 
for Dislocated Workers.'' Upjohn Institute Staff Working Paper 95-31, 
January 1995 http://www.upjohninstitute.org/publications/wp/95-31.pdf

      To what extent would employers provide subsidized workers 
---------------------------------------------------------------------------
with on-the-job training?

    If wage insurance is offered for a specific time period, such as 
two years as in the draft Worker Empowerment Act, there is an incentive 
for firms to offer more jobs that have lower initial earnings that 
would rise more rapidly over time than in the absence of wage 
insurance. In order for workers to accept offers of lower initial 
earnings (in the absence of a credible long-term contract), the firm 
would need to offer some incentive to the workers (such as on-the-job 
training) that would reassure the worker that the firm will want to 
retain them at higher wages in the future.\3\ This training would most 
likely be firm-specific, since otherwise the firm would tend to avoid 
training for fear of losing its investment in the worker's training if 
the worker left the firm.

    \3\ In September 2006, I wrote that the impact of wage insurance 
``on types of jobs and on associated on-the-job training is likely to 
be negligible.'' The analysis in this section is more recent and 
reflects my updated thinking on this topic.

      To what extent would any on-the-job training given by 
---------------------------------------------------------------------------
employers provide transferable skills?

    In addition to training of workers receiving wage insurance, the 
existence of wage insurance is also an incentive for firms to offer 
more firm-specific on-the-job training to all workers. In choosing 
between a higher-wage job with firm-specific skills or a lower-wage job 
with transferable skills, the higher-wage job is more attractive to 
workers when there is wage insurance to help insure against the loss in 
the event of a layoff of higher wages that are firm-specific. Rather 
than through on-the-job training, wage insurance would be most likely 
to provide transferable skills in a situation where the wage insurance 
payments were used by a worker to attend a community college class 
providing general skills.

      To what extent would a large-scale universal wage 
insurance program subsidize low-wage employers such as Wal-Mart?

    It would be difficult in most cases for an employer to game the 
system by paying a worker an artificially low hourly wage in order to 
increase wage insurance payments, because some of the firm's new hires 
would not be displaced workers and two pay rates would be needed for 
the same type of work. The gaming would be perceived as inequitable, 
transparently visible to many employees, and easily auditable if 
investigated. This is especially true in a large firm with a human 
resources department and established position descriptions and pay 
scales.

      To what extent would employers be able to capture the 
subsidy by paying subsidized workers less than they would otherwise?

    If a firm did offer wages to a wage insurance recipient that were 
lower than their productivity value, another firm would have an 
incentive to pay a higher wage and hire that worker. In the absence of 
collusion by firms, it would not be sustainable for firms to attract 
workers by offering wages that were lower than their productivity 
value.

      To what extent would wage subsidies lower wages for non-
recipients?

    Increases in total labor supply from increased search intensity due 
to wage insurance may reduce wage levels, in the same manner as any 
other policy that successfully encourages work. The effect on labor 
supply is likely to be small, and the effect on wages is likely to be 
small in magnitude as well. Any effect on wages from increased labor 
supply would be an outcome for the entire market and would not be an 
employer capturing a government subsidy for themselves. In the presence 
of wage insurance, firms may offer more firm-specific training (with 
lower initial wages but higher average wages), or may also offer new 
higher-paying jobs with a greater chance of layoff that were not 
previously offered. These factors could offset or exceed the effect of 
increased labor supply and potentially lead to higher wages for non-
recipients--although the average effect on overall wages is likely to 
be small either way.

      To what extent would the availability of a program 
designed to promote ``rapid reemployment''--such as wage insurance--be 
used as an argument against strengthening programs serving displaced 
workers that have historically been attacked for prolonging 
unemployment? To what extent would it enable critics of programs 
serving displaced workers to make them less accessible or less 
attractive?

    These final two questions posed appear to be outside the scope of 
economic analysis, and no responses are provided here.
Other comments
    I recommend making some modifications to the draft Worker 
Empowerment Act (WEA).

      Introduce a gradual phase-out.

    In WEA, someone whose old job paid $120,000 and whose new job paid 
$100,000 would receive $10,000 a year. If the new job paid $101,000, 
they would receive no wage insurance at all. This abrupt phase-out is 
inequitable, and has incentives for individuals to prefer lower 
earnings in the range from $100,000 to $110,000.
    I recommend removing the eligibility criterion of earning not more 
than $100,000 per year, and replacing this with a gradual phase-out. 
One simple method of implementing a phase-out would be to determine the 
wage insurance payment based on an ``insured wage'' instead of the pre-
separation wage alone. The insured wage would be the lower of the wages 
on the old job or some maximum value, such as $110,000.
    Setting the maximum value of the insured wage involves a trade-off 
between inclusiveness of a program and the targeting of resources to 
those who have the greatest need. The use of $110,000 as the maximum 
value would be consistent with the WEA's current formulation as it pays 
no benefits to those whose new job pays $110,000 and full benefits to 
those whose new job pays $90,000.

      Make the cap on payments monthly.

    WEA includes a maximum payment of $10,000 per year in each of the 
two years since separation from the employer. This cap could have some 
unintended effects for those with very large wage losses. For example, 
if an old job was $220,000 per year and a new job was $100,000 per 
year, then a worker could be unemployed for ten months, work two months 
earning $16,667, and also earn $10,000 in wage insurance for those two 
months. Since payments are to be made on at least a monthly basis, 
these unintended effects could be avoided by capping the maximum 
payment at $833 per month (and could still be accurately described as a 
$10,000 per year cap).

      Allow flexibility in the calculation methods for pre-
separation wages.

    In WEA, the wages received by an individual at the time of 
separation shall be computed based on the wages received by such 
individual for the 52-week period ending before the date of separation. 
It may be dramatically simpler to use the calendar quarter of 
separation and the preceding three calendar quarters, since all firms 
are filing reports on earnings on a calendar quarter basis.

      Allow flexibility in the calculation methods for pre-
separation hours.

    In WEA, an individual is eligible for benefits if she is reemployed 
for substantially the same number of hours each pay period as at the 
time of separation. There are likely to be considerable advantages in 
using a requirement such as ``reemployed for substantially the same 
number of hours per week during the payment period as during the period 
used to calculate pre-separation wages.'' This would clarify that ``at 
the time of separation'' does not mean the hours worked in the single 
pay period prior to separation, which might not be representative of 
the period over which pre-separation wages were calculated. Moreover, 
the hours each pay period will necessarily differ for pay periods of 
different length, and the pay period duration may vary on the old and 
new jobs.

      Allow flexibility to potentially incorporate the value of 
fringe benefits into pre-separation compensation and post-separation 
compensation.

    The underlying principle of wage insurance is to provide a 
supplemental payment when the compensation on a new job is lower than 
the compensation on a job from which there was an involuntary 
separation. When wage insurance payments are based on gross wages, 
there can be some unintended consequences. For example, a worker 
previously earning $70,000 with employer-provided health insurance 
having post-tax value of $10,000 taking a new job paying $70,000 
without employer-provided health insurance is clearly worse off, but 
receives no wage insurance. Conversely, a worker previously earning 
$70,000 without employer-provided health insurance taking a new job 
paying $65,000 with employer-provided health insurance having post-tax 
value of $10,000 is better off, but does receive wage insurance. The 
extent of these unintended consequences could be reduced if the value 
of fringe benefits were included in the calculation of pre-separation 
wages and post-separation compensation.
    The wage-loss replacement rate is one-half, and the duration is up 
to two years in this simulation. They write that ``The results suggest 
that a wage-rate subsidy paid for two years after reemployment would 
shorten the unemployment spells of dislocated workers by nearly 2 
weeks, and would increase employment of dislocated workers by about 900 
to 1000 per 100,000 in the labor force. But the simulations also raise 
the possibility that the gains for dislocated workers could come at the 
expense of other groups of workers; that is, other groups of workers 
could experience small increases in unemployment duration, and 
decreases in employment levels that almost fully offset the gains for 
dislocated workers. Three factors may mitigate these crowding-out 
results--crowding out is widely dispersed over various groups of non-
dislocated workers, the structural changes that result in dislocation 
of some workers (and drive the need for a policy like a wage subsidy) 
benefit non-dislocated workers, and the crowding-out results are quite 
sensitive to one of our assumptions--that the total number of available 
jobs (T) is fixed and exogenous.'' That is, the simulation assumes 
there cannot be any economic growth.

                                 

     Statement of National Association of State Workforce Agencies
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to comment on the Unemployment Insurance Modernization Act 
(UIMA) and the Worker Empowerment Act (WEA). The National Association 
of State Workforce Agencies (NASWA) respectfully submits this testimony 
for the record.
    The mission of NASWA is to serve as an advocate for state workforce 
programs and policies, a liaison to federal workforce system partners, 
and a forum for the exchange of information and practices. Our 
organization was founded in 1937. Since 1973, it has been a private, 
non-profit corporation financed by annual dues from member state 
agencies. NASWA members are the administrators of the Unemployment 
Insurance (UI) and Employment Service (ES) programs, labor market 
information, and other workforce investment programs.
SUMMARY OF THE UNEMPLOYMENT INSURANCE MODERNIZATION ACT (UIMA) AND 
        WORKER EMPOWERMENT ACT (WEA)
    To facilitate our comments on the Unemployment Insurance 
Modernization Act (UIMA) and Worker Empowerment Act (WEA), we summarize 
their key provisions below:
Unemployment Insurance Modernization Act
    The Unemployment Insurance Modernization Act (UIMA) would:

      Extend the 0.2 percentage point FUTA surtax for five 
years through 2012.
      Provide up to $7 billion in special Reed Act 
distributions from the Federal Unemployment Account for UI 
Modernization Incentives to be distributed between 2008 and 2012 to 
states meeting specific criteria related to their UI programs and 
proportionate to FUTA taxes paid in each state.
      One-third of the $7 billion or about $2.33 billion would 
be available for distribution to states that include wages in the last 
completed calendar quarter when determining eligibility or after an 
initial determination of ineligibility.
      Two-thirds of the $7 billion or $4.67 billion would be 
would be available for distribution to states that include wages in the 
last completed calendar quarter when determining eligibility or after 
an initial determination of ineligibility and state law meets at least 
two of the following three conditions:
      The state does not deny UI eligibility because the 
claimant is seeking part-time work (State law may limit the application 
of this provision to former part-time workers.).
      The state includes in the definition of good cause for 
voluntary leaving employment for compelling family reasons to include 
at least: (1) avoiding domestic violence; (2) caring for a sick 
disabled family member and (3) following a spouse whose employment was 
relocated to a different locality.
      The state provides training assistance to claimants' at 
the regular weekly benefit amounts for at least 26 weeks who: (1) have 
been dislocated from a declining occupation; (2) have exhausted regular 
UI benefits; (3) are in a state-approved training program related to a 
high-demand occupation; and (4) are making satisfactory progress in 
such program.
      Provide $100 billion per year in special Reed Act 
distributions to states for 2008 through 2012 for covering the 
additional administrative costs of UI modernization and other 
improvements in administration of UI and employment services.
Worker Empowerment Act (WEA)
    The Worker Empowerment Act (WEA) would establish a national wage 
insurance program to supplement the earnings of dislocated workers who 
become reemployed in lower-paying jobs. It has the following features:

      Workers would be eligible for wage insurance if they 
worked for at least two years in their previous job and lost employment 
through no fault of their own.
      Workers may not go to work with their former employers, 
must work a similar number of hours to that in their previous jobs, and 
must not earn more than $100,000.
      Replace half of a worker's lost wages compared to prior 
employment for two years up to a total of $10,000 per year.
      The program would be financed by a 0.1 percent tax an 
each employee's wages up to the taxable wage base in the Social 
Security program, which is currently just over $94,000.
CURRENT NASWA POLICY
    Before commenting on the bills Chairman McDermott has drafted, we 
would like to set the stage by summarizing relevant current NASWA 
policy. These policies were developed before Chairman McDermott drafted 
his bills, but they have bearing on our comments. The following 
policies influence NASWA's reaction to these draft bills.

      Consistent with the National Governors Association (NGA) 
policy, NASWA opposes the extension of the Federal Unemployment Tax Act 
0.2 percentage point surtax beyond 2007 as unnecessary to fund the 
current ``employment security'' system. The term ``employment security 
system'' is effectively defined by the Social Security Act and the 
Federal Unemployment Tax Act as UI, ES, and labor market information. A 
more general term used today is the ``workforce development system,'' 
which includes the employment security system and other programs, such 
as those operating within the one-stop career centers.
      Consistent with NGA policy, NASWA supports reducing the 
ceiling on the Federal Unemployment Account (FUA) to 0.125 percent of 
covered wages paid in the last year, the ceiling that existed before 
1988. This would fund fully the Extended Unemployment Compensation 
Account (EUCA) and cause an estimated $8 billion Reed Act distribution 
to the States if effective on October 1, 2007.
      NASWA supports current Reed Act provisions, which allow 
states to spend Reed Act funds on UI benefits, UI administration, 
employment services, and labor market information.
      NASWA supports Reed Act distributions of $800 million in 
each of the next two fiscal years to fund the proper and efficient 
administration and services of the ``employment security system.''
      NASWA supports a strong linkage between the unemployment 
insurance program and the Employment Service, both of which are funded 
by employer-paid FUTA taxes. These resources must continue to be made 
available to ensure UI claimants are provided with essential 
reemployment services and to provide for basic labor exchange 
activities within the states' workforce development systems. Further, 
the manner and extent to which these resources are integrated within a 
state's workforce development system and one-stop structure should be 
decided at the state level to ensure that they are effectively used in 
addressing the UI and employment service program needs on a statewide 
basis.
      NASWA supports appropriation of sufficient funds from the 
federal unemployment tax revenue to ensure every state will receive a 
minimum of 50 percent of the Federal Unemployment taxes paid each year 
by its employers. States currently granted more than 50 percent of 
federal unemployment taxes paid annually by their employers under 
current federal grant allocation methods should be held harmless.
COMMENTS ON THE UNEMPLOYMENT INSURANCE MODERNIZATION ACT (UIMA)
    NASWA has long opposed another extension of the FUTA 0.2 percentage 
point surtax. This additional revenue is not needed to fund the 
``employment security system'' fully. We understand the Administration 
and many Members of Congress propose to extend this tax to help make 
the federal budget deficit appear smaller and/or to meet pay-as-you-go 
requirements for funding new spending. Because it is one of the 
``easy'' tax extenders Congress can pass, Congress often has included 
it in deficit reduction packages or in packages to finance new 
spending. NASWA believes other taxes should be used for these purposes.
    Some have suggested Congress will pass the extension of the 0.2 
percentage point FUTA surtax regardless of whether Congress also passes 
Reed Act distributions for state programs. This has happened in the 
past and could happen again this year. Recognizing this might even be 
probable, NASWA must consider the other provisions of the bill that 
could benefit and cost some workers, employers, states and society.
    Without conducting a survey of the states, NASWA has no information 
on how states might react to the proposed modernization incentives. 
Such reactions might break down by whether a state has some or all of 
the provisions that would qualify for incentives. The following is a 
list of this breakdown:
    First, only five states (HI, MA, NJ, NY, and NC) have state UI laws 
that meet the alternative base period and two of the three non-monetary 
eligibility provisions.
    Second, seven states (AK, AR, CA, IA, KS, MI, and PA) have two of 
the three non-monetary eligibility provisions, but no alternative base 
period provision.
    Third, fourteen state programs (CT, DC, GA, ME, MI, NH, NM, OH, OK, 
RI, VT, VA, WA, and WI) have state UI laws that meet the alternative 
base period provision, but do not have two of the three non-monetary 
qualification provisions dealing with part-time work, family reasons 
for leaving employment, and worker dislocation and training.
    Fourth, twenty-seven state programs (AL, AZ, CO, DE, FL, ID, IL, 
IN, KY, LA, MD, MS, MO, MT, NE, NV, ND, OR, PR, SC, SD, TN, TX, UT, VI, 
WV, and WY) do not have an alternative base period, nor do they have 
two of the three non-monetary eligibility provisions dealing with part-
time work, family reasons for leaving employment, or worker dislocation 
and training.
    NASWA supports special Reed Act distributions for administration of 
the ``employment security system.'' The bill's $100 million per year 
for five years totaling $500 million is well short of the NASWA 
proposal of $800 million over each of the next two years for $1.6 
billion. NASWA believes states need these larger sums soon to modernize 
and improve out-dated administrative systems and to upgrade labor 
exchange services for UI claimants.
    Finally, members of NASWA are frustrated and disappointed that the 
Federal government is collecting far more than it needs to fund the 
``employment security system'' and returns a very low percentage of 
annual FUTA taxes to many states. In a given year, some states don't 
even receive one-third of what employers in their states are estimated 
to pay in FUTA taxes. This makes it very hard for states to administer 
their state UI programs in a proper and efficient manner as required by 
the Social Security Act and it erodes support from employers who pay 
excessive taxes in return for severely constrained services. As a 
result of this frustration, NASWA passed a resolution last year, which 
we mentioned earlier as part of current NASWA policy:

      NASWA supports appropriation of sufficient funds from the 
federal unemployment tax revenue to ensure every state will receive a 
minimum of 50 percent of the Federal Unemployment taxes paid each year 
by its employers. States currently granted more than 50 percent of 
federal unemployment taxes paid annually by their employers under 
current federal grant allocation methods should be held harmless.
COMMENTS ON THE WORKER EMPOWERMENT ACT
    The stated goal of WEA is to ``help respond to growing wage 
volatility and diminishing job security in the American workforce.'' 
NASWA members wonder if the evidence on wage subsidies supports the WEA 
program achieving this goal. Other approaches that have been effective 
in pilot demonstrations are assisting and providing incentives for 
workers to go back to work sooner, and providing training for workers 
who have enough years of work remaining to reap enough benefits to 
justify the costs.
    Economists argue uniform payroll taxes, such as the 0.1 percent of 
the social security taxable wage base, are borne by workers even if 
paid by employers. Economic theory suggests the uniform payroll tax 
would be shifted to workers in the form of possibly less employment and 
lower wages. Lesser effects on employment and wages in the labor market 
might occur if the program were financed from federal general revenues 
instead. Of course, we recognize other programs, such as social 
security and medicare, are financed by uniform payroll taxes on the 
assumption the benefits outweigh the costs.
    Based on limited evidence, it is not clear this type of wage 
subsidy induces workers to go back to work sooner than they would or 
that they would sustain employment longer than without the wage 
subsidy. A more cost-effective approach to achieve this end might be 
reemployment bonuses or reemployment services. States could provide 
such bonuses or services if more funds were appropriated from FUTA 
revenue for employment services to UI claimants.
    Investments in training also might yield more net benefit than this 
type of wage subsidy. Investments in human capital in general, and in 
particular education and training for young persons and young workers, 
can yield substantial net benefit and stimulate economic and employment 
growth.
    To control costs of such a program, a longer work history could be 
required for eligibility. However, the UI system currently does not 
retain wages back more than two years, so some provision for acquiring 
the data beyond two years would be needed.
    The cap on earnings at $100,000 seems to create a ``notch effect'' 
in which a worker earning $100,000 gets the full wage subsidy, but a 
worker earning more than $100,000 loses the entire wage subsidy. 
Consequently, some attention to creating a phase-out range for the 
subsidy is needed.
    The WEA program could carry a significantly greater administrative 
burden than UI because the maximum duration of claimants on the regular 
UI program is a half year compared to as much as two years on wage 
insurance. Paying wage subsidies for two years is four times longer 
than for only about a half year. During this two year period the WEA 
program might have to recalculate the wage subsidy many times as 
workers change jobs and as their wages change. This could cost states 
significantly more to administer depending on the ultimate size of the 
program.
    Mr. Chairman, thank you for the opportunity to testify. NASWA 
greatly appreciates your interest in improving the UI system and 
empowering workers. Although this testimony has brought to bear current 
NASWA policy, basic facts, and some speculation on these draft bills, 
it does not provide specific answers to how individual states or groups 
of states would react to their provisions. For this, one needs the 
reaction of specific states at a minimum. NASWA stands ready to assist 
you in this process as you refine these draft bills and prepare them 
for introduction.

                                 

                                 New York State Department of Labor
                                                     March 28, 2007
The Honorable Jim McDermott, Chairman
Subcommittee on Income Security and Family Support
House of Representatives
1035 Longworth HOB
Washington, DC 20515

Dear Congressman McDermott:
    Thank you for the opportunity to provide written comments on two 
discussion drafts under consideration: the Unemployment Insurance 
Modernization Act and the Worker Empowerment Act. As Governor Spitzer's 
leader for the New York State Department of Labor, and with a long 
public service record of advocating for the rights of and benefits for 
workers, these comments are respectfully submitted for the Committee's 
consideration.
Unemployment Insurance Modernization Act
    New York State has gone on record several times in support of 
distributions from the federal Unemployment Insurance Trust Fund to 
encourage, assist and reward states for modernizing and improving their 
UI programs.
    The discussion draft legislation would tie that distribution of 
funds to various changes in state law which broadens eligibility for 
unemployment insurance benefits. New York law currently conforms to 
many of the modernization elements included in the discussion draft 
and, as such, New York would welcome the opportunity to receive 
increased funding to offset the costs of providing these benefits and 
services to unemployment insurance claimants. The language in the 
discussion draft would not preclude New York from receiving benefits as 
our law currently provides for broader UI eligibility and we would ask 
that this language be maintained so the benefits would accrue to all 
states currently meeting the standards, not just those who bring their 
state laws up to the standards set forth in the discussion draft.
    While New York's law currently conforms to many of the 
``modernized'' UI program elements in the discussion draft, the 
discussion draft is silent to the increased workload which has accrued 
to the states to deliver unemployment insurance in a modern, seamless 
manner with continued diminished UI administrative appropriations. Our 
past support for ``Reed Act'' distributions has been tied to using 
those funds to improve. technology infrastructure needs as well as 
other operational needs which would allow states to truly ``modernize'' 
their systems and maintain an emphasis on high quality services. 
Technology provides the opportunity for enhanced and real-time service; 
it does not come without a substantial cost, however, and current UI 
administrative funding to the states constrains our ability to upgrade 
and take advantage of these advances.
    The discussion draft proposes supporting the distribution with an 
extension of the current 0.2% FUTA surtax for five years. Rather than 
continuing and increasing taxes on employers, New York believes that a 
distribution from the federal UI Trust Fund could be accomplished 
without continuing this tax and we would welcome the opportunity to 
explore with the Committee ways to accomplish our mutual objectives.
The Worker Empowerment Act
    The discussion draft would establish a national wage insurance 
program through the imposition of a new employer excise tax to be 
deposited in the Wage Insurance Trust Fund. With approximately 500,000 
tax rated employers in New York State whose excise taxes would 
subsidize this Trust Fund, New York believes the discussion draft 
requires much further dialog with the states, data analysis on who best 
could be served by such a program and how those costs could be 
estimated, and then how such a model might be implemented in a manner 
that synchronizes with existing state unemployment insurance programs. 
States possess a wealth of historical data on unemployment insurance 
claimants, Trade Act and Workforce Investment Act beneficiaries. The 
New York State Department of Labor would be willing to convene a group 
of states to provide some broad data analysis to the Subcommittee to 
provide a foundation for further discussion on a wage insurance model.
    Although the draft has some similarities to the Alternate Trade 
Adjustment Assistance (ATAA) program under TAA as a wage supplement, it 
does not have some the reasonable limitations placed on recipients 
under ATAA. Without these limitations, New York believes the costs for 
the program may be greatly underestimated. Those distinctions include:

      The draft legislation does not limit eligibility as does 
ATAA which is limited to individuals at least 50 years of age.
      The cap on re-employment annual earnings is $100,000, 
ATAA is $50,000.
      Other specific comments and observations include:
      This program would require a separate application and 
determination process, independent of the UI program.
      A separate distinct payment process and determination 
process would have to be created and a tracking mechanism established 
to account for the payments.
      Significant creation or modifications of technological 
systems and programming would need to be created to avoid paper 
processing applications, forms, and determinations.
      Limited English Proficiency issues would have to be 
addressed.
      The draft legislation does not address or identify an 
appeal process which would be necessary when determinations denying 
eligibility are issued.
      The one year timeline for implementation from enacting is 
unreasonable considering the significant changes to systems which would 
need to be made to bring such a program to scale. New York's experience 
with implementing the ATAA program on a much smaller scale has shown an 
intensive amount staff time needed to provide the ATAA benefit.
      A benefit calculation formula and determination system 
would have to be created.
      Section 2B(i) stipulates that wages received at time of 
separation are computed based upon 52-week period ending before the 
date of separation. This would require employers and individuals to 
supply this information as current wage information is received in on a 
quarterly basis from employers. Additionally, an average weekly wage 
would have to be calculated to determine the annual wage from the 
separating employer.
      Section 2C (I) and (II) stipulate that the wages received 
by an individual from re-employment would be based on statement of 
earnings from the re-employing employer by the individual and that a 
periodic recertification to reflect any changes in wages at least on a 
quarterly basis. This would require continual verification of wages 
each quarter up to eight quarters (2 years) and any wage increase in 
that timeframe would result in a redetermination of the wage insurance 
payment.
      Section 2D(i) requires states to regularly conduct random 
audits to verify wage information which would require states to 
establish and staff an audit unit to assure compliance.
      Section 2E (iii) requires a special calculation when 
weekly wages from re-employment are less than 50 percent of median 
weekly wages within the individual state. This would require a separate 
calculation formula and, while not an impossible task, it adds to the 
complexity of the technological and individual processing tasks 
necessary to provide the benefit.
      Section(3)(A) stipulates that an individual is not 
eligible for benefits unless the individual is separated from 
employment for a continuous period for at least two years before the 
date of separation. This would require a verification process to be 
created to determine if the worker qualifies based upon length of 
employment with the separating employer.
      Section 3(A)(i) and (ii) stipulate that separation must 
be involuntary (other than for cause) and voluntary under circumstances 
which would by terms of a collective bargaining agreement result in 
eligibility for the states' unemployment compensation law. This would 
require a process to determine whether the involuntary separation was 
other than ``for cause.'' That is an imprecise definition. Under the 
Trade Act law, for example, the separation must be due to a lack of 
work.
      Additionally, voluntary separations would be determined 
by applicable state law for eligibility for unemployment insurance 
benefits. However, the legislation limits this to terms under a 
collective bargaining agreement. There are many instances of reduction 
in force separations which result in voluntary separations under buy-
out plans which are not part of a collective bargaining agreement.
      Section (b)(2) which reflects Payments to the States 
stipulates that payments of RAA benefits by the state shall be made by 
advance or reimbursement by the Secretary of Labor on a monthly basis. 
This would require a special benefit fund to be established at the 
state levels through state statute and various tracking mechanisms to 
keep an accounting of benefits paid and advances on reimbursements 
received from the Secretary of Labor.
      Section 3 on Administrative Costs stipulates that 100 
percent of the reasonable expenditures of the state as are attributable 
to the costs of the implementation and operation of its re-employment 
adjustment program will be allocated by the Secretary of Labor. How are 
``reasonable'' expenditures to be determined? Current state UI systems 
would not be able to integrate the RAA payment system as the RAA 
program is independent of any current UI program system, unlike other 
Federal programs such as TRA. For states to assume this new program 
responsibility, assurance would need to be provided that ample funding 
would be available to establish and maintain the systems being 
required.

    In closing, I would like to reiterate the availability of the New 
York State Department of Labor to help provide Subcommittee members and 
staff with data analysis to help inform both of these discussion 
drafts. I appreciate the opportunity to comment and look forward to 
working with the Subcommittee on issues of critical importance to New 
York's workers and employers.

            Sincerely,
                                                  M. Patricia Smith
                                 
      Statement of Washington State Employment Security Department
    Thank you for the opportunity to provide a state-level viewpoint on 
these two pieces of proposed legislation. Our comments focus mostly on 
implementation issues.
Unemployment Insurance Modernization Act
    We recommend more leeway in how these incentives must be 
implemented to allow for differences in law and policy among the 
states.
Funding Flexibility
    We have concerns about the proposed uses for Unemployment Insurance 
Modernization Incentives funds. The proposal would allow these funds to 
be used only to pay benefits, including training benefits and dependent 
allowances.
    We recommend allowing state legislatures and governors flexibility 
to determine the most appropriate investments to make in their 
unemployment insurance systems, similar to the flexibility provided by 
the Congress to the states in the 2002 Reed act distribution. If this 
funding is intended to serve as an incentive for state action regarding 
benefit eligibility, limiting state flexibility in using these funds 
sharply limits their value as an incentive.
    Regarding the special Reed Act distributions of $100 million a year 
proposed in the legislation, we appreciate the much-needed flexibility 
to the states the bill would allow. The fact that the bill would allow 
using these funds to improve unemployment benefit and tax operations 
and staff-assisted reemployment services for claimants is very helpful. 
However, the scale of the funding is very small compared to the needs 
of the states.
Unemployment Insurance Administrative Under-Funding
    We recommend that the legislation address the ongoing and severe 
under-funding of states' administrative costs for the unemployment 
insurance system.
    There is an ongoing national shortfall in unemployment insurance 
administrative funding. In federal fiscal year (FFY) 2003, the 
Department of Labor required states to use the Resource Justification 
Model (RJM) to document their operations costs. Each year since then, 
the states have provided actual information on the administrative costs 
of the unemployment insurance system. For FFY 2007, data from the 
states justified the need for $271.4 million more to process the 
unemployment insurance base workload than the amount appropriated.
    But these actual costs do not show up in Administration budget 
requests. Instead, those requests applied 1995 staff compensation rates 
to actual state costs, significantly understating state administrative 
costs. The result has been to sharply under-fund state unemployment 
insurance systems.
    It would be one thing if this funding shortfall reflected 
inadequate federal unemployment tax (FUTA) revenue from employer taxes 
to support administrative costs. In reality, the opposite is true. All 
three of the accounts in the Unemployment Trust Fund are significantly 
in surplus. For example, the balance in the federal Employment Security 
Administration Account is projected to be $3.4 billion at the end of 
FFY 2007; the balance in the Extended Benefit Account is projected to 
be $16.6 billion; and the Federal Unemployment Account is projected to 
reach $14.2 billion at the end of FFY 2007. These balances are enormous 
when compared to this year's $271.4 million administrative shortfall 
for the states.
    This under-funding has significant effects at the state level. 
Washington State's unemployment insurance program is currently under-
funded for its actual costs by roughly $8 million a year. Next year, 
that amount is expected to increase by approximately $4 million as a 
result of higher state salary levels. That figure does not take into 
account recent annual reductions in federal funding for the Employment 
Service or for labor market information that also have affected 
impacted the employment security system.
    This shortfall continues to hamper department operations. The 
department has had to lay off nearly 500 employees in recent years. We 
have closed one of three telephone call centers, consolidated tax 
offices, delayed improvements to key technology systems and faced 
continued erosion of our technological infrastructure, despite the 
increasingly role automation has played in allowing us to continue to 
operate in the face of funding shortfalls.
Worker Empowerment Act
Implementation Problems for Washington State
    Washington would face significant difficulties in implementing the 
proposed legislation as currently drafted because of the differences 
between the proposed wage insurance and current provisions of 
unemployment insurance. As a result, implementation would require 
significant changes in state operations and automated systems.
    Here are some examples:

     The proposed Worker Empowerment Act would direct states to 
base benefits on 50 percent of the difference between pre-layoff wage 
and replacement wages. Our state unemployment-insurance system collects 
wage information by quarter. We do not know hourly, weekly or monthly 
wage levels, only the aggregate amount of wages in a quarter paid to an 
employee identified by Social Security number.
     To calculate wages under the proposed legislation, an 
administering state agency would have to be able to look at wages for 
the 52-week period ending before the date of separation from prior 
work. The department collects wage information by quarter, after the 
end of the quarter. Most other states also collect wage information in 
this way. As a result, weekly wage information is not currently 
available.

    The legislation also requires separate benefit calculations for 
workers earning less from reemployment than median income, requiring 
weekly income information.
    To meet the criteria in the proposed Worker Empowerment Act, 
significant additions would be needed in the department's benefit 
computer system and in the data it would collect from employers and 
workers applying for benefits. This would involve significant expense 
and significant time for computer system development to operate the 
program.
    These issues all originate with requirements that rely on 
information on salary levels more detailed than those currently 
collected as part of the unemployment-insurance system. Administrative 
costs and start-up time would be reduced if the program included 
options for structuring the program to take advantage of current 
quarterly collection of salary information by the unemployment 
insurance system.
    Other proposed elements of the legislation would be costly. These 
include certifying post-layoff wages and random audits.
    We have an additional concern with the administrative funding for 
the proposed program. Under the legislation, this is an authorized 
activity. It is unclear from the legislative language how this funding 
is intended to be appropriated. If such funding were to be allocated 
through the Resource Justification Model currently used by the 
Department of Labor to allocate unemployment insurance administrative 
funds to the states, it is likely that state administrative costs would 
not be fully reimbursed.
    Thank you again for the opportunity to comment on the proposed 
legislation.

                                 
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