[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
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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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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\
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\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.
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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\
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\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).
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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.
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\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\
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\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\
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\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\
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\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.