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



 
   MODERNIZING UNEMPLOYMENT INSURANCE TO REDUCE BARRIERS FOR JOBLESS 
                                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

                               __________

                           SEPTEMBER 19, 2007

                               __________

                           Serial No. 110-59

                               __________

         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 HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL, JR., New Jersey       JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

                                 ______

           SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT

                  JIM MCDERMOTT, Washington, Chairman

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

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


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of September 12, 2007, announcing the hearing...........     2

                               WITNESSES

Cynthia Fagnoni, Managing Director, Education, Workforce and 
  Income Security, government Accountability Office..............    13
Amy Chasanov, former staff Member, Advisory Council on 
  Unemployment Compensation......................................    35
Lynette Hammond, Deputy Secretary of Commerce and Trade, 
  Commonwealth of Virginia.......................................    52
Vicky Lovell, Ph. D., Director of Employment and Work/Life 
  Programs, Institute for Women's Policy Research................    60
Jeffrey Kling, Ph. D., Senior Fellow and Deputy Director, 
  Economic Studies, The Brookings Institution....................    71

                       SUBMISSIONS FOR THE RECORD

Douglas J. Holmes, statement.....................................    85
Idaho Department of Labor, statement.............................    92
On Point Tech, statement.........................................    94
UWC--Strategic Services on Unemployment..........................    94


                  HEARING ON MODERNIZING UNEMPLOYMENT


                    INSURANCE TO REDUCE BARRIERS FOR


                            JOBLESS WORKERS

                              ----------                              


                     WEDNESDAY, SEPTEMBER 19, 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 call, at 1:00 p.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
September 12, 2007

                     McDermott Announces Hearing on

   Modernizing Unemployment Insurance to Reduce Barriers for Jobless 
                                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 on reducing 
gaps and disparities in access to unemployment insurance, especially 
for low-wage and part-time workers. The hearing will take place on 
Wednesday, September 19, at 1:00 p.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. 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, 
provides temporary and partial wage replacement for unemployed workers. 
Since the establishment of the program, there has been a significant 
rise in the number of women in the workforce, an increase in low-wage 
and part-time employment, and a decline in manufacturing employment.

    Past reports from the Advisory Council on Unemployment Compensation 
and from the government Accountability Office (GAO) have highlighted 
certain features in many States' UI programs that prevent them from 
more adequately responding to these long-term employment trends. For 
example, an estimated 31 States do not consider any wages earned by a 
dislocated worker from either their last completed calendar quarter of 
employment or from the quarter in which they file for benefits--
excluding up to 6 months of earnings. Not counting a worker's most 
recent earnings makes it more difficult for some low-wage workers to 
achieve minimum earnings levels for UI eligibility. Other barriers to 
coverage include restrictions on UI receipt for former part-time 
workers seeking reemployment in a part-time job and for those leaving 
employment for compelling family reasons.

    Subcommittee Chairman McDermott has introduced legislation, the 
Unemployment Insurance Modernization Act (H.R. 2233), to provide up to 
$7 billion from the Federal unemployment insurance trust funds to 
encourage, assist and reward States for removing such barriers for 
jobless workers.

    In announcing the hearing, Chairman McDermott stated, ``Too many 
workers, especially those in low-wage and part-time employment, are 
excluded from the Unemployment Insurance system. Women in particular 
are hampered by policies that were crafted five, six and seven decades 
ago. We should actively encourage States to make further progress in 
covering all unemployed workers who have worked hard and who have had 
taxes paid into the system on their behalf.''
FOCUS OF THE HEARING:

    The hearing will focus on policies designed to modernize the 
Unemployment Insurance system and reduce barriers to coverage for low-
wage and part-time workers.

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noted above.

                                 

    Chairman MCDERMOTT. The Committee will come to order.
    We are here today to discuss the importance of a strong and 
equitable insurance system. Now that economists are openly 
expressing concerns about the impact of the declining housing 
market on employment, this discussion may be sort of relevant. 
More relevant, actually, but the truth is that unemployment 
insurance is always important. It prevents temporary periods of 
joblessness from forcing families into poverty. It helps 
workers stay connected to the workforce, and it mitigates the 
impact that unemployment has on the economy, both legally and 
nationally.
    The UI system was created over 7 years ago after the worst 
economic crisis in U.S. history. It was established, really, to 
ensure that Americans would have some help in weathering 
economic setbacks. It was created because great Americans like 
Franklin Delano Roosevelt vowed Americans would stand together 
and protect one another and live in a nation that really 
understood the power of ``we'' versus ``me.''
    Today as we look at America and how it has changed over the 
years and how we can adjust the UI program to continue its role 
in protecting Americans against economic hardship, as we 
examine the unemployment insurance system, it is disturbing to 
see a long-term trend of fewer jobless workers receiving UI 
benefits. Barely over one-third of all unemployed workers 
receive unemployment compensation. The rate of receiving that 
benefit is even lower, much lower for low-wage workers.
    I put this chart up there for everyone so you can look at 
what happens to the low-wage workers. They are almost 2\1/2\ 
times more likely to be unemployed, and they are about one-
third as likely to get the unemployment benefits.
    So, we are really talking about what happens to low-wage 
workers here. The very workers who are least able to cope 
financially with a spell of joblessness are also the least 
likely to get unemployment benefits.
    As GAO will testify today, and as highlighted by the chart 
in front of you, low-wage workers are almost 2\1/2\ times more 
likely to be unemployed, and one-third are likely to receive 
unemployment benefits.
    Now, part-time workers also have greater difficulty in 
accessing UI benefits, as do individuals who leave work for 
compelling family reasons such as avoiding domestic violence, 
taking care of a sick child, or following a spouse to a 
different part of the country. These barriers to unemployment 
insurance fall particularly hard on women who are more likely 
to work in part-time and/or low-wage jobs.
    Now the legislation we have introduced, the Unemployment 
Insurance Modernization Act, is to encourage and reward States 
for implementing a few basic reforms to help low-wage, part-
time and other workers gain access to the UI system.
    For example, the bill calls on States to count a worker's 
most recent earnings, and to count them when calculating 
eligibility for unemployment benefits by implementing a so-
called ``alternative'' base period. Not counting a worker's 
most recent wages makes it more difficult for some low-wage 
workers to achieve the minimum earning levels for UI 
eligibility.
    Under this bill, up to $7 billion would be disbursed from 
the Federal unemployment trusts to the States implementing 
provisions related to the alternative base period as well as to 
making UI more accessible to part-time workers, making the 
system more family friendly and supporting long-term training.
    Those States that have already put in place an alternative 
base work period would be eligible for an immediate 
distribution. For example, Illinois recently enacted an 
alternative base period and would therefore automatically 
receive $100 million under this bill. The State would 
potentially receive another $200 million depending on the 
implementation of additional reforms.
    Now, in addition to the $7 billion conditional transfer to 
the States, the legislation also set out an automatic $500 
million to help States with the administrative cost of UI, 
which the Federal Government has really failed to adequately 
address in recent years. Admittedly, this legislation will not 
single-handedly eliminate disparities in UI coverage for low-
wage and part-time workers, but it will take a meaningful step 
in the right direction without a single Federal mandate and 
without raising the Federal debt by one penny.
    The bill accomplishes this task simply by extending the 
current law unemployment tax that has been on the books for 
over 30 years. It costs employers $14 per year, per employee. 
The FUTA tax was last extended by the Republican Congress in 
1997, and President Bush has proposed that it be extended this 
year in his current budget.
    My bill differs in only one way from the past extension and 
President Bush's budget proposal. Under my legislation, States 
were eligible to receive every dime of revenue raised from the 
extension of the FUTA test.
    Well, I have one more page here I would like to tell you 
about.
    There are certainly some policies that we can examine to 
help dislocated workers, but we really have to start by having 
a more effective unemployment insurance system. We have had 
this for generations and it is time for some very common sense 
reforms.
    I remember making them when I was in the State legislature 
when we were squeezing down on the system. It used to be you 
could work in the summer, get some unemployment benefits, and 
live all through the college year on your unemployment 
benefits. Those kinds of things are no longer happening, but 
there are some common sense things that ought to happen now.
    Chairman MCDERMOTT. I yield to my Subcommittee Ranking 
Member, Mr. Weller.
    Mr. WELLER. Thank you, Mr. Chairman, and I thank you for 
convening today's hearing. Before I make my opening statement, 
I want to extend a congratulations to you. You and I have 
spoken a little bit, but this is the first formal meeting of 
our Subcommittee since you were given a great honor in Africa, 
and I do want to congratulate you on your knighthood granted to 
you by the King of Losoto. As one who has known a long time of 
your personal interest in developing countries, particularly 
Africa, it is nice to see it recognized.
    You and I may disagree on policy. I enjoy working with you 
as my Chairman and having the opportunity to work together. I 
know your family is very proud of you, as are your friends.
    Today is one area in which we do disagree.
    I noted when the Subcommittee put out a press release 
announcing this hearing, it suggested that it was about, quote, 
``modernizing unemployment benefits,'' and apparently it 
appears my Democratic colleagues think modernizing means 
increasing taxes, in this case by $7 billion over the next 5 
years.
    I would note almost every other major Democratic initiative 
this year, from energy to food to children's health policy, 
includes tax increases. So, the majority party's position has 
been a consistent one so far this year.
    Another apparent feature of modernization means more of the 
same of our Washington-knows-best attitude. On the legislation 
we will discuss today, only States that choose to provide 
benefits to certain, quote, ``federally approved categories of 
unemployed workers'' would get a share of the $7 billion in tax 
increases back. That is despite the fact that those taxes are 
collected in each and every State and amount to lost wages for 
American workers. This naturally creates State winners and 
losers, with the Federal Government deciding who wins and who 
loses.
    As several of our witnesses today will note, many States 
have already decided to broaden eligibility for unemployment 
benefits in the ways promoted by the Chairman's bill. This 
suggests that as the economy has changed, States have adapted. 
Many, like my home State of Illinois, adopted newer technology 
that allows them to count more recent wages in determining 
worker eligibility for benefits. Others provide benefits to 
part-time workers or certain individuals who have quit their 
jobs, but when States have done so, they knew they needed to 
increase payroll taxes in the long run to cover increased 
benefits costs.
    The Chairman's bill masks those true costs behind the 
shield of incentive payments today, quote, ``incentive 
payments,'' which is really a promise to raise State payroll 
taxes tomorrow to cover higher long-run costs.
    It is not too late for us to take a different and decidedly 
more pro-worker and more pro-work direction. As we will hear 
today, we can and should do a much better job helping laid-off 
workers get back on the job.
    Mr. Chairman, you were on to something when you proposed 
the creation of a new wage insurance program to assist laid-off 
workers who return to work at lower wages. It is my 
understanding that this idea is not unanimously endorsed on 
your side of the aisle, but it seems to me at the very least we 
should encourage States to test whether this enhanced safety 
net can help workers.
    That is the principal legislation I have introduced in H.R. 
1513, the Unemployment Compensation Improvement Act. Recent 
research confirms that, especially for older workers, helping 
them get back to work quickly can be key to recovering their 
former level of earnings.
    In contrast of tax increases that are proposed today, my 
legislation is cost-neutral and does not raise taxes, and I 
believe it is worth testing out.
    In my view, the real test of a modern unemployment benefit 
system is not how many people we can sign up for unemployment 
benefits. Instead, the real test is how many people we help get 
back on the job quickly and at good wages, especially since 
unemployment benefits average only about half of what workers 
earn in wages. That should leave workers, firms, and the 
economy all far better off by getting them back to work at good 
wages.
    I look forward to the hearing today, and I look forward to 
hearing the witnesses' testimony.
    Chairman MCDERMOTT. Thank you.
    [The information follows:]

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    Chairman MCDERMOTT. I want the other Members to know if 
they have statements they want introduced in the record, they 
simply need to submit them.
    We are going to have votes in about, we think, 35 or 40 
minutes. I am going to stay pretty tight to the 5-minute rule 
here. In the past, I had been somewhat loose and let people go 
on at some length, but we are not going to do that today. It is 
because we want to get you all in before the time runs out, and 
then we can maybe expand on what you have to say.
    Your full testimony will be put into the record. Ms. 
Fagnoni.

  STATEMENT OF CYNTHIA FAGNONI, MANAGING DIRECTOR, EDUCATION, 
WORKFORCE AND INCOME SECURITY, GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. FAGNONI. Thank you, Mr. Chairman. I am happy to be here 
this afternoon, Mr. Chairman and Members of the Subcommittee, 
to talk about the extent to which low-wage and part-time 
workers receive unemployment insurance benefits.
    The UI program is a Federal-State partnership designed to 
partially replace lost earnings of individuals who become 
unemployed through no fault of their own and to stabilize the 
economy during economic downturns. Unemployment insurance has 
been a key component in ensuring the financial security of 
America's workforce for over 70 years.
    Since the UI program was established in 1935, the nature of 
both work and unemployment has changed in fundamental ways. 
There have been increases in the share of low-wage jobs, the 
incidents of temporary and contingent work, the number of women 
in the workforce and two-earner families and the average 
duration of unemployment.
    Given these changes, questions arise about the types of 
workers who are most likely to receive benefits. My remarks 
today will focus on, first, the overall trend in UI receipt; 
second, the likelihood that low-wage workers will be unemployed 
and receive UI benefits, especially when compared to higher 
wage workers; and third, the likelihood that unemployed part-
time workers will receive UI benefits. My testimony today is 
based primarily on our September 2007 report as well as work we 
did in 2000.
    Regarding the first issue, the UI recipiency rate declined 
gradually from 1950 through the mid-1980s. While about 50 
percent of the unemployed filed for UI in the fifties, about 29 
percent did so in 1984. Since the mid-1980s, the UI recipiency 
rate has shown a modest increase and was about 35 percent in 
about 2005.
    Several factors are considered significant in the decline 
of UI receipt, including the decrease in the number of workers 
employed in manufacturing jobs, the decline of union membership 
in the workforce, and population shifts of workers from 
northeastern to southern States where unemployed workers are 
less likely to apply for UI benefits.
    Turning now to our second area, low-wage workers, we found 
that they were less likely to receive UI benefits than higher 
wage workers. Between 1992 and 1995, low-wage workers were 
about half as likely to receive UI benefits than higher wage 
workers. For the years 1998 to 2003, they were about one-third 
more likely. Moreover, the gap between the two groups has not 
narrowed over time. That is, UI receipt has gone down by about 
the same for both groups of workers over the years.
    Low levels of UI receipt among low-wage workers can be 
explained by a variety of factors, including States' 
eligibility criteria and how they vary. In determining 
eligibility, many States only consider wages earned in four of 
the last five completed quarters. As a result, the worker's 
most recent work history is not used in making eligibility 
determinations. For low-wage workers with sporadic work 
histories, excluding recent earnings may make it more difficult 
for them to reach the minimum earning level necessary for 
eligibility. Also, to be eligible for UI, workers must have had 
good cause for leaving work. Certain temporary family crises, 
such as having a sick child, may cost some low-wage workers to 
quit their jobs. However, many States do not recognize serious 
illness or disability of a family member as a good cause for 
leaving employment.
    In those cases where low-wage workers do have an earnings 
history that allows them to qualify for UI benefits, other 
factors could still result in a lower likelihood of their 
receiving UI benefits.
    In general, UI receipt is associated with higher earnings 
before unemployment, longer job tenure and more education. 
Earnings and job tenure are associated with longer job searches 
and possibly the decision to rely on UI benefits during that 
search.
    Greater levels of education may be associated with greater 
awareness of the UI program and success in navigating the 
system.
    Prior UI receipt also may play a role. Receiving UI 
benefits in one period of unemployment increases the likelihood 
of using UI again, we found in prior studies.
    With respect to the third issue, part-time workers, we 
found they were significantly less likely to collect UI than 
those who were full-time regardless of whether they were low-
wage or higher-wage.
    State eligibility criteria are a factor here as well. About 
two-thirds of States do not consider workers to be eligible for 
UI if they are only available for part-time work and, like low-
wage workers, some part-time workers may have difficulty 
meeting the requirement that they have a certain level of 
earnings within a given time period in order to be eligible.
    Mr. Chairman, this concludes my remarks, looks like right 
on time. I would be happy to answer any questions you or 
Members of the Subcommittee may have.
    Thank you.
    [The prepared statement of Ms. Fagnoni follows:]
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    Chairman MCDERMOTT. Ms. Chasanov.

   STATEMENT OF AMY CHASANOV, FORMER STAFF MEMBER, ADVISORY 
              COUNCIL ON UNEMPLOYMENT COMPENSATION

    Ms. CHASANOV. Chairman McDermott and distinguished members 
of the Subcommittee, I appreciate being invited here today, and 
I welcome the chance to testify about this bill. It is a 
legislative proposal that encourages States to strengthen their 
unemployment insurance programs and rewards those States that 
have already chosen to do so.
    My name is Amy Chasanov, and from 1993 to 1995 I served as 
a staff member to the Advisory Council on Unemployment 
Compensation. I want to emphasize at the start that the Council 
was bipartisan, with members appointed by the President, the 
House, and the Senate. The Council's 11 members represented 
various groups of stakeholders that included business, labor, 
State government, and the public.
    The Council had a broad mandate, looking at all aspects of 
the unemployment insurance system. During its relatively short 
lifespan, it held nine nationwide public hearings, visited 
numerous State offices and also sponsored significant legal and 
economic research in the area.
    The Council met on 13 separate occasions, held intense 
deliberations, and published three annual reports which 
discussed its findings, and presented 50 recommendations to 
improve the UI program.
    My testimony today focuses on the Council's findings and 
recommendations that relate to the proposed legislation.
    At the outset, I should highlight that the Council either 
directly or indirectly endorsed all of the features of the 
House's UI Modernization Act that is being discussed today.
    Before getting to those recommendations, let me mention two 
overarching issues, one of which Chairman McDermott already 
raised.
    The first is that there have been dramatic changes in the 
workforce since 1935. We have moved from a workforce that was 
made up primarily of married, full-time male workers to one 
where part-time and contingent and women workers now make up 
the majority. The Council noted repeatedly that the States' UI 
programs have not always kept up with these important changes 
in the workforce.
    I would also like to mention that the Council focused much 
of its time on the Federal-State relationship in the UI 
program, which is unique, and about the appropriate division of 
responsibility between the States and the Federal Government.
    The Council believed that some national interests 
transcended State interests, and in those cases it was 
appropriate to establish Federal minimum standards. In 
particular, two of those national standards were minimum 
eligibility and benefit levels and also ensuring macro-economic 
stabilization.
    The bill today represents a carrot and, honestly, the 
Council had more of a stick approach mandating Federal minimum 
standards. Whatever approach is considered, however, the 
outcome is undoubtedly similar.
    Let me now turn to the Council's specific recommendations.
    First, the Council was deeply disturbed that 3 to 6 months 
of a worker's most recent earnings were disregarded when 
determining monetary eligibility in most States, and that low-
wage, part-time and temporary workers were particularly harmed. 
The Council recommended that all States adopt an alternative 
base period that considers the four most recently completed 
calendar quarters of work.
    Second, the Council believed that workers who met States' 
monetary eligibility requirements should not be disqualified 
simply because they were looking for part-time as opposed to 
full-time work.
    Third, the Council recommended that the FUTA tax revenues 
per worker increase, not decrease, over time. They proposed a 
revenue-neutral adjustment that will increase the Federal 
taxable wage base from $7,000 to $9,000 and eliminate the 0.2 
percent surtax at that time. They also recommended annual 
increases in the Federal wage base. I do not believe based on 
the Council's discussions that they would ever allow the FUTA 
surtax to expire without a simultaneous increase in the Federal 
taxable wage base.
    Fourth, the Council recommended extending UI benefits for 
individuals who are long-term unemployed when they are 
participating in education and training services and activities 
that enhance their reemployment prospects.
    Finally, although it was not a formal recommendation, the 
Council expressed concern over many States disqualifying 
workers from benefits if they quit their jobs due to domestic 
violence or to personal or compelling family reasons.
    I encourage you to look at my written testimony which 
discusses the Council's reports in much more detail and also 
discusses two additional recommendations which are not part of 
the bill but should be considered.
    It was a pleasure to talk to you today about the Council's 
work.
    [The prepared statement of Ms. Chasanov follows:]
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    Chairman MCDERMOTT. Ms. Hammond, who is the deputy 
secretary of commerce and trade in the Commonwealth of 
Virginia.

STATEMENT OF LYNETTE HAMMOND, DEPUTY SECRETARY OF COMMERCE AND 
                TRADE, COMMONWEALTH OF VIRGINIA

    Ms. HAMMOND. Mr. Chairman, Ranking Member, and Members of 
the Ways and Means Subcommittee on Income Security and Family 
Support.
    I am pleased to be here today to testify in support of H.R. 
2233, the Unemployment Insurance Modernization Act. Governor 
Kaine supports this measure and the incentives it provides for 
States to address the compelling needs of our citizens who 
become unemployed through no fault of their own.
    The Governor also requests that the Subcommittee consider 
restoring adequate funding to administer the unemployment 
compensation and job services program.
    Much has changed since 1935 when the unemployment insurance 
safety net was first established. Information technology means 
that States no longer have to wait months to make sure they 
have an employee's wage records. Families are more likely to 
depend on the wages of more than one worker. Workers are more 
likely to not only change jobs but change locations during 
their careers.
    In Virginia we have seen that changes in the global economy 
have eliminated whole classes of jobs, leaving workers stranded 
with outdated skills and crippled one-industry towns.
    Virginia has been comparatively fortunate in recent years. 
Our economy is robust, our unemployment rate is one of the 
lowest in the Nation, and our State has been recognized for 2 
years in a row as the most business-friendly in the Nation by 
Forbes.com.
    Still, our statewide statistics mask large pockets of high 
unemployment. Local unemployment rates in Virginia range from 
1.8 percent in Arlington to 8.7 percent in Martinsville. 
Southside and southwest Virginia are still reeling from the 
loss of furniture and textile industry jobs that were the 
mainstays of their economy.
    In other areas of the State, growth and change present 
their own challenges. In Northern Virginia, for example, a 
tight labor market makes it more difficult for employers to 
find workers. In these areas, as demand on the unemployment 
insurance system decreases, the demands on the job service 
system increase to help place workers in jobs.
    Also in Virginia, at Fort Belvoir and Fort Lee, we are 
preparing for a large influx of military personnel, including 
military spouses who need jobs, have increased family 
responsibilities, and who must move frequently as their spouse 
is assigned to different duty stations.
    Despite these challenges, during this decade we have seen 
the Federal commitment to the Federal-State partnership erode 
between the year 2000 when the unemployment was 2.3 percent in 
Virginia, and 2006 with 3 percent unemployment. Federal funding 
for Virginia's unemployment insurance system fell from 35.5 
million to 34.4 million in unadjusted dollars.
    Congressman McDermott's bill would temporarily help to 
remedy Virginia's difficult financial situation caused by 
persistent Federal underfunding of the State system. Moreover, 
the legislation would provide significant incentives for States 
to change their benefit eligibility requirement to recognize 
the changes in our economy.
     example, Virginia has implemented the alternative base 
period, and did so in 2003, recognizing that information 
technology allows claimants to use their most recent wages when 
determining eligibility. Since the enactment of the alternative 
base period, Virginia has paid $13.3 million in unemployment 
benefits to low-wage claimants who would not have qualified 
otherwise. This $3.3 million average yearly cost also 
undergirds what the State's basic principle is, that 
unemployment compensation should strengthen attachment to the 
workforce.
    In order for claimants to qualify, they have to already 
demonstrate attachment to the workforce. For weekly benefits, 
they have to show they have been searching for work and are 
following through on any job leads provided by the job service. 
We feel these requirements help services and services help 
claimants find new jobs sooner and help keep them in the 
workforce. This is especially important for new entrants and 
lower-wage workers, and those are the ones that are most likely 
to be disqualified by the standard base period.
    We found during consideration of the Virginia legislation 
that those disqualified by the standard base period also tend 
to be young, low-income females with dependents, and these are 
the very people the State is working to help move toward 
independence in our TANF and food stamp programs.
    In conclusion, Governor Kaine supports H.R. 2233 to 
encourage States to modernize their UI programs. While it is 
premature to speculate what the general assembly might do, we 
have found that (or projected that) providing unemployment 
compensation to all trailing spouses, for example, would cost 
about $3 million per year and providing benefits to part-time 
workers seeking part-time jobs would cost about $8.1 million a 
year. This totals $11.1 million a year, and with those changes, 
Virginia would qualify for $128.2 million Reed Act distribution 
and $64.1 million that the State would qualify for having 
enacted the base period.
    However, we also recognize the State is in the process now, 
because of persistent underfunding, of contracting the services 
that we can provide to the unemployed, not expanding them. So, 
providing adequate administrative funding would also be an 
incentive to States to upgrade the systems.
    Thank you.
    [The prepared statement of Ms. Hammond follows:]
 Statement of Lynette Hammond, Deputy Secretary of Commerce and Trade, 
                        Commonwealth of Virginia
    Mr. Chairman, Ranking Member, Members of the Ways and Means 
Subcommittee on Income Security and Family Support:
    My name is Lynette Hammond and I am Deputy Secretary of Commerce 
and Trade for the Commonwealth of Virginia. I am pleased to be here 
today to testify in support of HR 2233, the Unemployment Insurance 
Modernization Act. Governor Kaine supports this measure and the 
incentives it provides for states to address the compelling needs of 
our citizens who become unemployed through no fault of their own. The 
Governor also requests that the Subcommittee consider restoring 
adequate funding to administer the unemployment compensation and job 
services programs.
    As you know, the unemployment insurance program was created as part 
of the Social Security Act of 1935. At that time, Congress had the 
foresight to fashion a unique federal-state partnership that has been a 
major strength of the program for more than 70 years. The unemployment 
compensation system has also endured because the Congress established 
the program as a social insurance program rather than a means-tested 
program, recognizing that everyone who is attached to the workforce may 
need a safety net should they find themselves unemployed through no 
fault of their own.
    Under this federal-state partnership, the federal government 
establishes broad standards that all states must meet, provides program 
oversight, collects an excise tax from employers to fund state program 
administration and various U.S. Department of Labor activities, and 
provides grants to the states to administer the program. States 
establish their own eligibility and qualification requirements in 
conformity with applicable federal standards, assess a payroll tax on 
employers to fund benefits to workers who become unemployed through no 
fault of their own.
    The unemployment insurance program has served our country well for 
more than seven decades. Its success is due in no small measure to the 
federal-state partnership that was established by the Social Security 
Act--a partnership that avoided both the inflexibility of a ``one size 
fits all'' national federal program and the economic chaos that could 
have ensued if the states had enacted a multitude of laws without any 
common policy underpinnings or legislative framework.
    However, as the years have gone by our economy and workforce have 
changed significantly. While these changes do not warrant discarding a 
program that has worked so well for many years, they do necessitate a 
re-examination of the goals, objectives, and program funding to ensure 
that the evolving needs of our dynamic economy and workforce will be 
met in the 21st century.
    Much has changed since 1935 when the Unemployment Insurance safety 
net was first established. The vast capabilities of information 
technology mean that states no longer have to wait months to be sure 
they have an employee's wage records. Families are more likely to 
depend on the wages of more than one worker, placing more stress on 
workers as they try to balance work and family needs. Workers are more 
likely not only to change jobs, but to change locations during their 
careers. Changes in the global economy have eliminated whole classes of 
jobs, leaving workers stranded with outdated skills in crippled one-
industry towns.
    But the basic principles underlying the unemployment insurance 
safety net haven't changed--that workers deserve a buffer against 
economic dislocation. The need for a counter-cyclical stimulus when a 
community loses a major employer is still valid, and Virginia continues 
to see that need in rural areas as manufacturing jobs leave the 
country. I sincerely hope the notion is not outdated that if you work 
hard, pay taxes, and support your family, you won't be cast adrift if 
you lose your job through no fault of your own.
    Virginia has been comparatively fortunate in recent years. Our 
economy is robust, our unemployment rate is one of the nation's lowest, 
and our state has been recognized for two years in a row as the most 
business friendly in the nation by Forbes.com. Still, the statewide 
statistics mask large pockets of high unemployment. Local unemployment 
rates in Virginia ranged from 1.8 percent in Arlington to 8.7 percent 
Martinsville. In Southwest and Southside Virginia, the unemployment 
rate is often double the statewide rate. These regions are still 
reeling from the loss of furniture and textile industry jobs that were 
mainstays of the economy.
    In other areas of the state, growth and change present their own 
challenges. In Northern Virginia, the tight labor market makes it 
difficult for employers to find workers. In these areas, as the demand 
on the unemployment insurance system decreases, the demand for job 
matching and employer assistance increases. At Fort Belvoir and Fort 
Lee, we are preparing for a large influx of military personnel, 
including military spouses who need jobs, have increased family 
responsibilities, and who also must move frequently as their spouse is 
assigned to different duty stations. As service members muster out of 
the military at Virginia bases, we must provide services and benefits 
to help them transition back to civilian life.
    Despite these challenges, during this decade we've seen the federal 
commitment to its federal-state partnership continuously erode. Between 
2000, when the unemployment rate was 2.3 percent and 2006 with 3 
percent unemployment, federal funding for Virginia's unemployment 
insurance system fell from $35.5 million to $34.4 million in unadjusted 
dollars.
    Congressman McDermott's bill would temporarily help to remedy 
Virginia's difficult financial situation caused by persistent federal 
under-funding of state unemployment compensation administration. 
Moreover, the legislation would provide significant incentives for 
states to change their benefit eligibility requirements to recognize 
the changes in our economy that have occurred over the past seven 
decades.
    For example, Virginia implemented the alternative base period in 
2003, recognizing that information technology allows the agency to use 
a claimant's most recent wages when determining eligibility. In 1935, 
wage reporting involved manual record-keeping and mailing time. At that 
time, it was practical to use the first four of the last five completed 
calendar quarters because more recent wage data was not available. Now 
with automated systems, using the most recent wages is not difficult. 
Nearly all employers report wages electronically and they are entered 
onto the state's wage records electronically.
    Since the enactment of the alternative base period, Virginia has 
paid $13.3 million in unemployment insurance benefits to low-wage 
claimants who would not have qualified otherwise. The $3.3 million, or 
45 cents per employee average yearly cost of the alternative base 
period also under girds the state's basic principle that unemployment 
compensation should strengthen attachment to the workforce.
    In order to qualify for compensation, claimants must demonstrate 
sufficient wages to show attachment to the workforce. To be eligible 
for weekly benefits in Virginia, a claimant must show that they have 
been searching for work. They must also register with the Job Service 
and follow up on any job leads. These requirements and services help 
claimants find new jobs sooner and keep them in the workforce. It sends 
the message that their work matters.
    This is especially important for new entrants in the workforce and 
lower wage workers--those most likely to be disqualified by the 
standard base period. We found during consideration of the bill, that 
those disqualified by the standard base period also tended to be young 
females with dependents. These were the very people that the state was 
working to help move towards independence in our TANF and food stamp 
programs. Clearly, we did not want to send the message to these 
claimants that low pay means their work doesn't count.
    The measure passed 35 to 5 in the Senate and unanimously in the 
House. The average annual cost has been slightly less than projected. 
Based on our experience, if Congressman McDermott's bill gives 
incentives to other states to adopt the alternative base period, they 
are likely to find the money well spent.
    HR 2233 will also provide incentives to states to allow 
unemployment compensation for good cause shown. Virginia already 
provides eligibility for many of these cases through its administrative 
adjudication process. Examples of ``good cause shown'' in case 
decisions include leaving a job to escape family violence, and leaving 
a job to care for dependents. However, Virginia's statute specifically 
excludes from good cause leaving a job to accompany a spouse who finds 
work in a new location--trailing spouses.
    In 2004, the Virginia General Assembly considered legislation to 
allow benefits for military spouses in cases where the service man or 
woman is transferred to a new duty station. Arguments against the bill 
at the time were that unemployment compensation eligibility would be a 
disincentive to hiring military spouses, and that it would subject 
employers to separations that are beyond their control. In response, 
the bill was amended to provide that benefit costs be assigned to the 
state's pool instead of the most recent employer. Members also 
expressed concern that Virginia would be paying benefits to military 
spouses from states that did not similarly treat their own military 
spouses moving to new duty stations. In response, the authorizing 
committee amended to bill to provide benefits only when the spouse 
moved to a state that provided similar benefits.
    The Warner administration recognized that Virginia's military 
spouses have been making tremendous sacrifices. Their wages are 
essential to keeping the family afloat, especially when the 
servicemember is assigned to duty overseas. Moreover, members of the 
military have the only job in the state where a worker can be 
prosecuted if he or she refuses to transfer. Clearly, the spouses of 
Virginia's military men and women do not consider it optional to move 
to a new duty station when the orders come.
    The legislation to provide benefits to military trailing spouses 
did not pass the General Assembly. After a hard-fought and narrow 
approval by the House of Delegates, the sponsor pulled the bill in 
response to questions about the cost projections. Had the McDermott 
bills incentives been available, the outcome might well have been 
different. As it is, we risk telling military spouses--mostly low-
income women--that accompanying your spouse to a new duty station is 
not good cause for leaving a job.
    In conclusion, Governor Kaine supports HR 2233 to encourage states 
to modernize their Unemployment Insurance programs. While it is 
premature to speculate what the Virginia General Assembly might enact 
if the bill were to become law, preliminary projections indicate the 
following:
    Extending unemployment compensation to all trailing spouses is 
projected to cost approximately $3 million per year. The National 
Employment Law Project estimates that paying benefits to separated 
part-time workers seeking part time employment would cost $8.1 million 
per year. By making these changes, totaling $11.1 million, Virginia 
would qualify for a $128.2 million Reed Act distribution in addition to 
the $64.1 million the Commonwealth would receive for having enacted the 
alternative base period. These enhanced benefits would go primarily to 
low income workers--workers who've lost their job through no fault of 
their own.
    However, the General Assembly also knows that under the current 
federal funding, the unemployment compensation and job service systems 
are being forced to contract, not expand the assistance we can provide 
to the unemployed. Remedying the persistent under funding of the 
state's Unemployment Insurance and Job Services program will also go 
far as incentives for states to modernize their systems and benefits.
    Thank you for your time.

                                 

    Chairman MCDERMOTT. We will now turn to Vickie Lovell, who 
is the director of employment and Work/Life programs, Institute 
for Women's Policy Research. I want to enter into the record a 
letter from 60 organizations that--organizations that are in 
support of this piece of legislation because of what it does 
for women.
    [The information follows:]
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 STATEMENT OF VICKY LOVELL, Ph.D., DIRECTOR OF EMPLOYMENT AND 
   WORK/LIFE PROGRAMS, INSTITUTE FOR WOMEN'S POLICY RESEARCH

    Dr. LOVELL. Thank you, Chairman McDermott, Ranking Member 
Weller, and Members of the Subcommittee. Thank you for 
providing me with the opportunity to present research from IWPR 
and others on the need to modernize the UI system to better 
meet its original objective for working women.
    H.R. 2233 addresses two key facts about women. First, women 
are disproportionately represented in our low-wage workforce; 
and second, women continue to be our primary family care 
givers. These two facts put women in a different position than 
men on average in terms of both employment and unemployment.
    Most of our low-wage workers are women, and nearly one-
third of working women earn a poverty-level wage or less. Women 
are more likely than men to be low earners because pay in some 
jobs that are considered to be women's work is depressed by the 
fact that women are doing the work. Take child care, for 
instance.
    In other instances where men and women do the same job, 
women continue to be paid less than men. For example, in 
dishwashing, women receive 87 cents for every dollar earned by 
men.
    We have just heard that although low-wage workers are more 
likely than higher wage workers to suffer unemployment, they 
are significantly less likely to receive unemployment insurance 
benefits. Thus, unemployed women are at greater risk of not 
receiving support from UI when they are unemployed than is the 
case for men. Women's UI recipiency rate is more than 10 
percent lower than men's, and in some States, the gender gap in 
UI recipiency rates is much higher, up to 44 percent.
    Adoption of an alternative base period would help address 
this, because ABP helps low-wage workers qualify for benefits 
in a timely fashion. We have heard about adoption of the ABP in 
Virginia, and my written testimony discusses this issue in some 
detail so I would like to make one point about the ABP now.
    Arguments against the alternative base rate often assume 
that workers are in complete control of their job tenure. That 
is, that the worker who meets an employer's job performance 
expectations can hold a job indefinitely. From this 
perspective, workers with relatively short job tenure are seen 
as having weak job attachment. The realities of today's labor 
market, however, include higher job instability even when the 
economy is strong. In some industries, high turnover is a 
fairly commonplace occurrence, in part because of the way jobs 
are structured and scheduled.
    In this context, frequent movement into and out of jobs 
does not necessarily reflect workers' desires but may instead 
be an artifact of the types of jobs made available by 
employers. With fewer opportunities for long-term employment, a 
gap in a worker's earnings record should not be interpreted as 
a lack of labor force attachment, and UI benefits should not be 
denied or postponed on that account.
    Two other reforms address women's work caring for families.
    The first is coverage of part-time workers. In many States 
UI claimants looking for part-time work are not eligible for UI 
even if they have historically worked part-time and would 
qualify for UI based on that work history, or if they have 
family obligations that preclude full-time work.
    Here again, our 21st century economy is creating jobs that 
are often excluded from UI coverage regardless of workers' 
intent. More than one in every six workers is on a part-time 
schedule, and contrary to common misperception, these are not 
only young workers who are still in school; 12 percent of part-
time workers are on part-time schedules involuntarily. They 
would rather work full-time but can't find a full-time job.
    Thirty-five percent of part-time workers are women in their 
prime working ages of 25 to 54 years, and a quarter of them 
cite child care problems and other family or other personal 
responsibilities as the reason for working a reduced schedule.
    When workers looking for a part-time job are denied UI 
benefits, women are the primary losers because 67 percent, or 
two-thirds, of all part-timers are women.
    H.R. 2233 would also encourage States to provide UI 
benefits to workers whose jobs end because of compelling family 
situations or domestic violence.
    These changes would provide benefits to workers caring for 
a seriously ill or disabled family member or moving with a 
relocating spouse. Again, these are modest UI reforms that 
would disproportionately benefit women, and this is why the 
Committee has received a letter of support from women's 
organizations for this bill.
    While job loss in these situations is described as a 
voluntary quit, in a very real sense it is not voluntary. It is 
a worker's only option, given the obligations at home or in the 
face of sexual violence. I encourage the Subcommittee to 
incorporate sexual assaults and stalking into this language to 
ensure that all victims of domestic violence, as defined by the 
Violence Against Women Act, are supported by UI.
    In addition, the requirement for reasonable and 
confidential documentation of domestic violence should be 
carefully defined to avoid imposing onerous burdens on women 
whose safety is in jeopardy due to domestic violence.
    I would also like to see job termination that is caused by 
a lack of child care included in the list of compelling family 
reasons. This would address situations in which child care 
arrangements suddenly fall apart or workers cannot accept a 
shift change because child care is not available.
    Our UI system has been amended many times at both the 
Federal and State levels in order to expand coverage, reflect 
changing norms, respond to fiscal realities and stay aligned 
with the changing economy.
    One of my favorite examples of this was in the forties when 
many States made women ineligible for unemployment insurance if 
they were fired from their jobs because they became pregnant or 
got married.
    The UI system is one that should be updated periodically to 
continue to be effective as the workforce and economy evolve. 
H.R. 2233 will help return the UI system to its former coverage 
levels, improve income stability for many families, and move 
this important program in the direction of greater equity and 
improved adequacy.
    Even if the Subcommittee chooses to explore wage insurance 
policies, there will continue to be a role for our existing UI 
approach to provide a known, effective safety net for all 
workers.
    Chairman MCDERMOTT. Thank you very much for your testimony.
    [The prepared statement of Dr.Lovell follows:]
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    Chairman MCDERMOTT. We will now go to Jeffrey Kling who is 
a senior fellow and deputy director of economic studies at the 
Brookings Institution. Dr. Kling.

  STATEMENT OF JEFFREY KLING, Ph.D., SENIOR FELLOW AND DEPUTY 
     DIRECTOR, ECONOMIC STUDIES, THE BROOKINGS INSTITUTION

    Dr. KLING. Chairman McDermott, Representative Weller, 
Members of the Subcommittee, thank you for the opportunity to 
testify.
    I fully support the efforts of this Committee to modernize 
UI. Improving coverage for low-wage and part-time workers, 
making UI more family friendly and improving skills are all 
worthwhile, but I also believe that there are higher priorities 
for modernization than those addressed in the Unemployment 
Insurance Modernization Act. So, the main themes of my remarks 
are these:
    The modern UI system should focus more on the larger longer 
term consequences of job loss. This reorientation will 
ultimately require a much more ambitious set of UI reforms. The 
current agenda should include measures that lay the ground work 
for these fundamental reforms.
    In looking toward the future of a modern system, we have to 
have clear goals, and in 1936 the Federal Government powerfully 
articulated what I believe to be the key goal of unemployment 
insurance. That is, ``to lighten the burden which now so often 
falls with crushing force upon the unemployed worker and his 
family.''
    Seventy years later the nature of this crushing force has 
changed. Maintaining living standards immediately after job 
loss, the original focus of UI, is no longer the major 
difficulty associated with unemployment. In the 21st century 
economy, the situation has changed in at least three key ways.
    First, job loss is now more likely to be permanent and 
associated with large drops of wages for the long term and not 
just short-term income loss. Second, the unemployment duration 
has increased. Third, people have greater ability to borrow to 
tide over periods of short unemployment.
    These three facts, more permanent job loss with large wage 
losses, longer unemployment durations, and greater ability to 
borrow, suggest a shift in resources toward larger, longer-term 
consequences of unemployment should be the priority of efforts 
to modernize the UI system.
    The most effective way to target long-term loss is to 
implement a wage loss insurance system similar to that recently 
proposed in the Worker Empowerment Act introduced by Chairman 
McDermott, where a fraction of the difference in wages between 
an old and new job is paid for a period of years.
    A wage loss insurance system can better target the largest 
losses while simultaneously providing more benefits to workers 
in the lower half of the income distribution.
    It would also be valuable to improve the mechanisms that 
trigger extended benefits for those with longer unemployment 
spells. These benefits could be triggered more frequently and 
the durations could be modulated to last for shorter and longer 
amounts of time.
    Smaller, shorter term consequences of unemployment can be 
managed in ways other than through UI benefits. Increasing the 
number of waiting weeks before UI benefits begin or 
establishing personal accounts from which one could borrow and 
repay from future earnings are two possible mechanisms for 
redirecting UI resources toward larger, longer term losses. 
These approaches would also promote reemployment by removing 
the incentive to stay unemployed that is created by UI benefit 
receipt.
    My analysis of studies of the responsiveness of 
unemployment spells to UI benefits suggests that unemployment 
durations would decline by 10 to 15 percent if UI benefits were 
fully replaced at some point by personal accounts. These 
accounts, if implemented along with loans, could ensure the 
maintenance of living standards during the first 6 months after 
a job loss that would be at a level equal to that under the 
current UI system.
    Once mechanisms for supporting living standards are in 
place, the key issue is then how to target assistance to those 
with the largest long-term losses.
    I have found that only one-third of unemployment insurance 
benefit payments currently go to those who have lower wages 
over the 10 years after job loss, and I think we can do better 
than that.
    I have submitted written testimony which makes three 
additional points about modernizing UI. The payroll tax base 
for UI should be broader, with lower tax rates. Compensation 
insured by UI should include the value of major employer 
benefits. A system of temporary earnings replacement accounts 
and wage loss insurance is feasible for the future, and its 
components merit demonstration and evaluation.
    Even if the focus of the UI Modernization Act remains on 
broadening eligibility and other issues currently envisioned, 
additional provisions could be added to begin to explore the 
fundamental modernization I have described today.
    It would be extremely beneficial to facilitate 
experimentation by States interested in focusing on larger 
longer term losses, payroll tax-base broadening, incorporation 
of employer-provided benefits, or other priority areas for 
modernization.
    Just 2 percent of funds in the UI Modernization Act would 
provide $140 million of investment in testing new ideas that 
could provide valuable guidance for the major decisions that we 
will encounter when thinking about fundamental modernization in 
the future.
    I would be happy to talk more about any of these issues.
    Thank you.
    Chairman MCDERMOTT. Almost perfect.
    [The statement of Dr. Kling follows:]
Statement of Jeffrey Kling, Ph. D., Senior Fellow and Deputy Director, 
              Economic Studies, The Brookings Institution
    Chairman McDermott, Representative Weller, and Members of the 
Subcommittee, thank you for the opportunity to testify at this hearing 
on Unemployment Insurance (UI) modernization. I fully support the 
efforts of this committee to modernize UI. Improving coverage for low-
wage and part-time workers, making UI more family friendly, and 
improving skills are all worthy endeavors. But I also believe that 
there are higher priorities for modernization than those addressed in 
the Unemployment Insurance Modernization Act. The main themes of my 
remarks are these:

      The modern UI system should focus more on the larger, 
longer-term consequences of job loss.
      This reorientation will ultimately require a much more 
ambitious set of UI reforms.
      The current agenda should include measures that lay the 
groundwork for these more fundamental reforms.
Focusing on larger, longer-term consequences of unemployment
    In looking toward the future of a modern system, we must have clear 
goals. In 1936, the federal government powerfully articulated what I 
believe to be the key goal of unemployment insurance: ``to lighten the 
burden which now so often falls with crushing force upon the unemployed 
worker and his family.'' \[1]\
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    \[1]\ Advisory Commission on Unemployment Compensation. 
Unemployment Insurance in the United States: Benefits, Financing, 
Coverage. Washington, DC, 1995. (Quoting a statement by the U.S. Social 
Security Board in 1936.)
---------------------------------------------------------------------------
    Seventy years later, the nature of this crushing force has changed. 
Maintaining living standards immediately after job loss, the original 
focus of UI, is no longer the major difficulty associated with 
unemployment. In the twenty-first century economy, the situation has 
changed in at least three key ways. First, job loss is now more likely 
to be permanent, and associated with drops in long-term wages, not just 
short-term income loss. Second, unemployment duration has increased. 
Third, people have greater ability to borrow to tide over short periods 
of unemployment. These three facts--more permanent job loss with large 
wage losses, longer unemployment durations, and greater ability to 
borrow--suggest a shift in resources toward larger, longer term 
consequences of unemployment should be the top priority of efforts to 
modernize the UI system.
    The most effective way to target long-term losses is to implement a 
wage-loss insurance system similar to that recently proposed by H.R. 
2202, the Worker Empowerment Act, introduced by Chairman McDermott, 
where a fraction of the difference in wages between an old and new job 
is paid for a period of years. A wage-loss insurance system can better 
target the largest losses while simultaneously providing more benefits 
to the lower half of the income distribution. It would also be valuable 
to improve the mechanisms that trigger extended benefit payments for 
those with longer term unemployment spells. These benefits could be 
triggered more frequently, and the durations could be modulated to last 
for shorter or longer amounts of time.
    Smaller, shorter term consequences of unemployment could be managed 
in ways other than with UI benefits. Increasing the number of waiting 
weeks before UI benefits begin or establishing personal accounts from 
which one could borrow and repay from future earnings are two possible 
mechanisms for directing UI resources toward larger, longer term 
losses. These approaches would also promote re-employment by removing 
the incentive to stay unemployed that is created by UI benefit receipt. 
My analysis of studies of the responsiveness of unemployment spells to 
UI benefits suggest that unemployment durations would decline by 10 to 
15 percent if UI benefits were fully replaced at some point by personal 
accounts. These accounts, along with forgivable loans, could ensure the 
maintenance of living standards during the first 6 months after job 
loss at a level equal to that under the current UI system. \[2]\ Once 
mechanisms for supporting living standards are in place, the key issue 
is how to target insurance to those with the largest long-term losses. 
I have found that only one-third of unemployment insurance benefit 
payments currently go to those who subsequently have lower wages over 
the 10 years after job loss. We can do better than that.
---------------------------------------------------------------------------
    \[2]\ Kling, Jeffrey R. ``Fundamentally Restructuring Unemployment 
Insurance: Wage-loss Insurance and Temporary Earnings Replacement 
Accounts.'' Hamilton Project Discussion Paper 2006-05, September 2006.
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    I have submitted written testimony which makes three additional 
points about modernizing UI:

      The payroll tax base for UI should be broader.
      Compensation insured by UI should include the value of 
major employer benefits.
      A system of temporary earnings replacement accounts and 
wage-loss insurance is feasible for the future, and its components 
merit demonstration and evaluation.

    Even if the focus of the UI Modernization Act remains on broadening 
eligibility and other issues currently envisioned, additional 
provisions could be added to begin to explore the fundamental 
modernization I have described today. It would be extremely beneficial 
to facilitate experimentation by states interested in focusing on 
larger, longer term losses, payroll tax base broadening, incorporation 
of employer-provided benefits, or other priority areas for 
modernization. Just 2 percent of funds in the UI Modernization Act 
would provide $140 million of investment in testing new ideas now that 
could provide valuable guidance for major decisions about fundamental 
modernization in the future.
    I would welcome further discussion on any of these issues. Thank 
you.
Additional testimony submitted for the record
    UI is the primary form of insurance for job lossin our country. The 
basic structure of our UI system has remained essentially the same 
since it was established 70 years ago. Our economy, however, has 
changed a great deal over this time, creating a need for modernization. 
\[3]\
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    \[3]\ For an overview, see Stone, Chad, Robert Greenstein, and 
Martha Coven, ``Addressing Longstanding Gaps in Unemployment Insurance 
Coverage.'' Center on Budget and Policy Priorities (August 7, 2007). 
http//www.cbpp.org/7-20-07ui.pdf
---------------------------------------------------------------------------
    Today more job losses are permanent and more unemployment spells 
are long ones. For instance, looking at similar points in the business 
cycle 1961 and 2002, the percentage of UI recipients exhausting their 
benefits (often after 26 weeks of unemployment) increased from 30 
percent to 43 percent. \[4]\ Perhaps most importantly, many workers can 
find new jobs only at reduced wages. In 2002 over one-fourth of job 
losers had earnings losses of 25 percent or more eighteen months after 
the job loss. \[5]\ It is the devastation of permanent income declines 
after job loss is that is the crushing force of unemployment in today's 
economy.
---------------------------------------------------------------------------
    \[4]\ http:workforcesecurity.doleta.gov/unemploy/hb394.as (accessed 
September 17, 2007)
    \[5]\ Kling (2006).
---------------------------------------------------------------------------
    Meanwhile, financial innovations ranging from credit cards to home 
equity loans have made it possible for many individuals to borrow funds 
to maintain living standards in the weeks immediately after job loss. 
For example, the first credit cards were issued in 1951. By 1983, over 
one-third of lower-income households (and about two-thirds of UI 
recipients) had at least one credit card; by 2001, over one-half of 
lower income households (and about three-quarters of UI recipients) had 
a credit card.[6] Since it is increasingly feasible to borrow during 
unemployment, larger UI payments could be targeted to those who will 
have difficulty in repaying, rather than spending UI resources on those 
who have an unemployment spell and go on to have higher income than 
prior to job loss.
---------------------------------------------------------------------------
    \[6]\ The percentage of households in the lowest third of the 
income distribution with a head younger than 60 where someone in the 
household has a credit card was 34 percent in 1983 and 54 percent in 
2001. The percentage of households receiving unemployment insurance or 
worker's compensation with a head younger than 60 where someone in the 
household has a credit card was 65 percent in 1983 and 76 percent in 
2001. (Karen Dynan, personal communication, September 17, 2007).
---------------------------------------------------------------------------
Broadening the payroll tax base for UI
    In 1937, the maximum amount of taxable earnings for Social Security 
and for UI both was $3000. Today the taxable earnings base for Social 
Security is $97,500, while the taxable base for UI is $7000. The narrow 
earnings base for UI translates into high tax rates for low earners. 
\[7]\ The UI tax rate is over 2.5 percent for the bottom quarter of the 
wage distribution and less than 1 percent for the top quarter of the 
wage distribution. Shifting from the current earnings base to the 
Social Security earnings base could collect the same amount of revenue 
while allowing tax rates to fall. The tax rate on the bottom quarter of 
the wage distribution could be cut approximately in half, making the 
tax much less regressive. The UI taxable wage base has not increased 
since 1983; it is one of the features most in need of modernization and 
would be relatively simple to address. Leadership by the federal 
government would likely motivate states to make adjustments as well.
---------------------------------------------------------------------------
    \[7]\ Anderson, Patricia M., and Bruce D. Meyer. Unemployment 
insurance tax burdens and benefits: Funding family leave and reforming 
the payroll tax. National Tax Journal 59:1 (2006), 77--95.
---------------------------------------------------------------------------
    Regarding UI taxes, note that my recommendations for modernizing 
the UI system are not at all contingent upon whether the temporary FUTA 
surtax is extended. In past hearings before this Committee I have 
observed the testimony from witnesses degenerate into discussion of a 
change in tax revenue. However, an order of magnitude more is being 
spent on the underlying program itself, and opportunities to engage in 
public discourse about the fundamental structure of the unemployment 
insurance system have been missed. Even if large-scale changes are not 
feasible at this moment in time, there are things we can and should do 
now to set the stage for making informed choices about fundamental 
modernization in the future.
Compensation insured by UI should include the value of major employer 
        benefits
    In 1950, pension and health plans were about 3 percent of total 
compensation; in 2006, employer contributions to pension and health 
plans had increased to 15 percent of total compensation. \[8]\ When an 
individual loses a job however, these contributions are lost. Moreover, 
UI benefits are based on earnings, and do not incorporate the value of 
these employer contributions. Partly as a result, the loss of health 
insurance can be a particularly difficult aspect of unemployment.
---------------------------------------------------------------------------
    \[8]\ Gary Burtless, personal communication, September 15, 2007.
---------------------------------------------------------------------------
    The rising importance of fringe benefits over time has not been 
incorporated into the UI system, and their incorporation would be a 
valuable addition to a modernized system. Employers could include 
pension contributions and the per-employee costs of employer provided 
health benefits in quarterly reports of compensation. States could then 
either collect more revenue and increase outlays based on the total 
compensation (which would be higher than earnings alone) or adjust 
their tax rates and outlays to reach desired targets.
Temporary earnings replacement accounts and wage-loss insurance
    In recent work I have discussed issues involved with a fundamental 
shift toward insurance for persistent, long-term effects of job loss, 
based on the core principle that smaller, short-term needs can be met 
through savings, borrowing, and repayment, so that the funds for 
insurance can be targeted to assist those facing larger, longer term 
losses. \[9]\ This is not a change that I recommend making immediately, 
but it outlines a direction for modernization that suggests key issues 
that merit exploration, experimentation, and demonstration.
---------------------------------------------------------------------------
    \[9]\ This section draws upon Kling (2006).
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    In the remainder of this section, I outline what would be involved 
in creating a future system where two-thirds of the financial resources 
currently used for UI would be shifted to wage-loss insurance to 
augment the hourly wages of individuals who find new jobs at wages 
lower than their previous jobs. Temporary Earnings Replacement Accounts 
(TERAs) would provide the same amount of cash as under UI to be 
withdrawn during unemployment. Unemployment would be reduced by 
removing subsidies for temporary layoffs and by creating stronger 
incentives to return to work. The proposed system would provide a 
significantly greater share of net program benefits to workers in the 
lower half of the income distribution when compared to the current 
system of UI benefits alone. By targeting system resources to those 
whose hourly wages are lower on their new jobs after an involuntary job 
loss, significant hardship would be reduced.
    To compare current UI with this proposed modernization in the 
context of a concrete example, consider an aircraft assembly employee 
in California who was making $14 per hour and working 40 hours per week 
before her plant closed and she was laid off. If she were to apply for 
UI under the existing system, the state would check to see that she 
worked for an employer covered by UI, that her earnings in the past 
year were above a threshold, that her employment was terminated 
involuntarily, and that she is available now to work. When verified as 
eligible, she would receive benefits replacing half of her income--in 
this case, $280 per week. Benefits are financed by a payroll tax on the 
wages paid to employees at all covered firms, with the firm's tax rate 
depending in part on the amount of UI benefits paid to former employees 
of the firm. Payroll taxes from firms are paid to the government, and 
the government pays UI benefits to eligible individuals. The workings 
of the proposal are illustrated by continuing with this example, first 
taking the viewpoint of the individual, then the firm, and then the 
government.
    From the individual's viewpoint, during the course of her 10 years 
of employment at the firm, the worker voluntarily contributed $2,000 to 
her TERA. (The default on initial employment was a payroll deduction of 
1 percent of pretax earnings contributed to her TERA, and she did not 
opt out of this contribution schedule.) The account was maintained by 
the government, and her investments were in government bonds. Funds in 
the account were excluded from asset tests for food stamps, Medicaid, 
and other government programs, so they did not reduce any potential 
eligibility for assistance from these programs.
    After being laid off from her aircraft assembly job, she could 
apply to receive the same amount of income as under UI--$280 per week, 
replacing half of her previous earnings. This amount is treated as 
taxable income as it would have been under current UI. The eligibility 
criteria would also be the same as under UI. The difference is that the 
funds would come from a combination of previously accumulated savings 
in the TERA and borrowing against future employment income. Say that 
she remains unemployed for 10 weeks, receiving $2,800. She thus draws 
down the $2,000 in her TERA and borrows an additional $800, leaving her 
TERA balance at negative $800. She then takes a new job that pays $10 
per hour. Her new firm deducts 5 percent of her earnings from her 
paycheck until she has repaid the $800 (plus interest).
    The proposal's other main component involves wage-loss insurance. 
To be eligible for wage-loss insurance payments, a period of 
unemployment between the involuntary job loss and the next job would 
not be required, but all other requirements for initial UI eligibility, 
such as requirements regarding earnings history and nature of the job 
loss, would still need to be met. In addition, wage-loss insurance 
would be available only to those with at least 1 year of tenure with 
their previous employer; obviously, individuals would need to have 
taken a new job with a different employer. The amount of the wage-loss 
insurance per hour worked on the new job would be based on an insured 
wage rate--either the wage on the previous job or the fixed amount of 
$15 per hour, whichever is lower--and calculated as 25 percent of the 
difference between the insured wage rate and the hourly rate on the new 
job. The insured wage for each individual would be adjusted each 
quarter for price inflation, as would the level (initially at $15) of 
the fixed maximum potential insured wage for future claimants and other 
parameters of the system based on dollar values.
    In this example, the aircraft assembly worker experiences a $4 per 
hour reduction in wages ($14 per hour at the previous job, $10 per hour 
at the new one). Assuming no inflation, her wage-loss insurance 
payments are 25 percent of this $4 reduction--in other words, the wage-
loss insurance payment amounts to $1 per hour. These payments are 
initially deposited directly in her TERA. They would be used first to 
repay her incurred $800 loan, which would take about 14 weeks of work 
at the new job. She would then receive the wage-loss insurance payments 
for 6 years, which is a period based on total hours of work in her 2 
years prior to job loss (3 hours of insurance coverage for each hour 
worked, excluding hours worked in the first year on the job). After her 
TERA balance reached a maximum threshold ($5,000), additional payments 
from wage-loss insurance would be sent to her by check. Assuming her 
wage rate did not change, her income drop would be reduced from 28 
percent (based on labor earnings falling from $14 to $10 per hour) to 
21 percent (including the $1 per hour insurance payment) over the 6 
years she receives payments. If her wage in the new job did rise or 
fall, the wage-loss insurance payments would be adjusted as well, so 
that the wage-loss insurance payments in each calendar quarter would be 
based on the average hourly wage since job loss through that quarter.
    The amounts of transfer payments would vary with individual 
circumstances. Generally speaking, transfer payments to individuals 
would be smaller under this proposal than they would be under 
traditional UI for those experiencing unemployment spells followed by 
employment at wages the same or higher than at the time of layoff. 
Transfer payments would be the same to minimum wage workers and those 
who never return to work following a period of unemployment, and 
transfer payments would be larger after permanent job loss for those 
working at a new job with a lower hourly wage.
    Four special conditions that don't apply to our hypothetical 
aircraft assembly worker are worth noting here. First, those with very 
low wages on their previous job would receive supplemental assistance 
if they needed to borrow funds from their TERA. The members of this 
group are unlikely to benefit much from wage-loss insurance because the 
wages of their previous jobs were already so low, limiting their 
potential wage losses at new jobs, given minimum wage laws. The 
coinsurance rate for this supplemental assistance would run on a 
sliding scale, such that someone earning $5.15 per hour would not have 
to repay any borrowing from the TERA--but also would not receive any 
wage-loss insurance payments. Such a worker would be in exactly the 
same position under current UI and under the proposed system.
    Second, if our hypothetical worker reached retirement age and filed 
for Social Security benefits, any positive balance remaining in her 
TERA would be transferred to an Individual Retirement Account (IRA) for 
her. If her earnings had been too low to repay any loans from her TERA 
at the point she would begin collecting Social Security, then TERA 
repayment insurance would pay off the remaining balance.
    Third, if she had opted out of making payroll contributions to her 
TERA, instead of accepting the default option of making such 
contributions, her withdrawals during unemployment would have been 
entirely a loan from her TERA, which she would repay with interest 
through deductions from paychecks at her new job.
    Fourth, if she held two or more jobs with separate employers, each 
job would be separately insured. Withdrawal amounts would be based on 
earnings at the specific job that was lost, and the insured wage for 
wage-loss insurance would be set based on earnings and hours on the 
lost job. A new job started a week before being laid off from one's 
main job and a job started a week after a layoff would be treated the 
same way for the purposes of wage-loss insurance eligibility and 
payments, with calculation of the post--job loss hourly wage beginning 
in the calendar quarter after job loss.
    From the firm's viewpoint, the aircraft-manufacturing firm laying 
off the individual in the example would submit three types of payments 
to the government over time. Initially, the firm would send payroll 
deductions for voluntary saving to the TERA; these deductions reflect 
contributions made by workers who do not opt out of the default saving 
mechanism for the TERAs. Taxes based on the firm's payroll, as under 
the current UI, would support the administration of the system and 
finance two types of payments: repayment insurance to pay off loans for 
individuals who retire but who had earnings too low to fully repay 
their TERA withdrawals, and low-wage coinsurance to reduce potential 
TERA repayments for those with low hourly wages.
    Regarding the flow of funds for wage-loss insurance, firms would 
reimburse the government for wage-loss insurance claims of former 
employees, and the government would pay the employees. Firms would also 
be required to purchase insurance on the private market to cover wage-
loss insurance claims in the event that the firm became insolvent, and 
the insurer would then make payments to the government in the event of 
firm insolvency.
    In total, firms would make payments to the government for wage-loss 
insurance, repayment insurance, assistance on TERA repayments for those 
with low wages, and other costs of the proposed system that would be 
approximately the same as the current UI system. In terms of funds 
currently paid in UI benefits, nearly two-thirds of the money would be 
reallocated to wage-loss insurance, about 30 percent would go to 
repayment insurance, and 6 percent would be used for supplemental 
assistance for TERA withdrawals by those with wages near the minimum 
wage. Thus, revenue from new payments for wage-loss insurance 
reimbursement would combine with reduced revenue from the payroll tax 
so that a change to the proposed system would be revenue neutral.
    The UI taxable earnings base would be increased from the current 
caps (e.g., 27 states had caps on taxable earnings of $10,000 or less 
in 2005) to the Social Security earnings base (which was $90,000 for 
2005, and which increases annually with the national wage index). The 
reduced revenue needs from the UI payroll tax combined with the broader 
tax base would allow average payroll tax rates to be substantially 
reduced. UI tax rates would continue to vary by firm as under 
traditional UI (according to previous use of TERAs by former employees, 
as opposed to previous payments of UI benefits to former employees). 
These rates would be more tightly linked to firm layoff histories 
through the combination of lower average tax rates and a lowering of 
the minimum rates that states require firms to pay. Since firm-varying 
rates would be less constrained by the floors and ceilings that 
characterize the current system, firms that lay off workers would see 
higher UI payroll taxes in the future.
    A firm that hired a previously unemployed worker would carry out 
mandatory payroll deductions for repayment of loans when that 
employee's TERA withdrawals had resulted in negative TERA balances. 
Such deductions would appear on pay stubs as pretax deductions, similar 
to health insurance, retirement plans, and dependent care expense 
accounts.
    From the government's viewpoint, UI is run under current law by the 
states under the oversight of the federal government, and this pattern 
would remain in place under this proposal. States would continue to be 
responsible for verifying a person's eligibility for unemployment 
benefits. States would also determine how much each unemployed person 
could withdraw from his or her TERA per week. States would continue to 
collect payroll taxes, which would be used for TERA repayment insurance 
and low-wage coinsurance.
    The flows of funds to the government from firms and insurers and 
from the government to individuals would involve individuals making 
TERA withdrawals and receive wage-loss insurance payments. It is 
sometimes proposed that a minimum size should be set for the level of 
payments because, for example, very small wage losses could lead to 
very small payments. However, once an employee has borrowed from a TERA 
and the wage-loss insurance program has been established, the 
administrative cost of making these payments would be very low. Once a 
claim has been approved, benefit amount determination and deposits can 
essentially be automatic, based on employer reports of earnings and 
hours for each quarter.
    The federal government would manage the TERAs in this system. The 
government can take advantage of economies of scale to keep costs low, 
and it can avoid TERA transfers when individuals change employers or 
move across state lines. The interest rate on government bonds would be 
the rate of interest required for repayment of borrowed funds.
    Funds in the TERAs would be invested and earn a rate of return on 
positive balances. The automatic default investment would be in 
government bonds. Such a safe default investment seems appropriate 
given that job loss is an unpredictable event and the savings may be 
needed at any time. For positive TERA balances, workers could opt into 
a portfolio with a mixture of stocks and bonds, where the portfolio 
composition varied depending on the retirement age of individual, 
modeled on the federal Thrift Savings Plan's life-cycle funds. Changes 
from bonds to life-cycle funds would be allowed once per calendar 
quarter.
    The federal government would also have the power to authorize 
extending the standard 26-week period in which the unemployed person 
can make withdrawals from a TERA, just as the federal government now 
can extend eligibility for unemployment benefits when the economy is in 
or near a recession. During the extended period, individuals could 
continue to make withdrawals and borrow from their TERAs. Firms would 
not have their future payroll tax rates increased because of 
withdrawals during the extended period. federal unemployment taxes 
would contribute to the repayment insurance that would cover borrowed 
funds that were not repaid.
    The transition to a system of TERAs and wage-loss insurance would 
phase in naturally. In the first year of the program, firms would be 
charged the full amount of withdrawals by their former employees from 
TERAs because the former employees would initially have no savings and 
the system would need funds to loan out from TERAs. Wage-loss insurance 
payments would not be paid in the first year, however, so total outlays 
by firms would not increase.
    In the second year of the program, some workers would begin to 
qualify for wage-loss insurance and firms would begin to make wage-loss 
insurance reimbursement payments to the government. The parameters of 
the system could be set so that the combined cost to firms for TERA 
withdrawals and wage-loss insurance payments would be no larger than 
the firms' costs under the current UI system.
    The proposal could be adopted by one or more states, while other 
states could opt to remain with the existing system. Coverage for 
compensation after involuntary job loss would be determined by the 
location of the employing establishment at the time of job loss, just 
as under the traditional UI system. Individuals who worked in a state 
adopting this proposal would be covered under it even if they relocated 
to a state that had not adopted this proposal.

                                 

    Chairman MCDERMOTT. Since I don't know when this thing is 
going to be going off, and we are going to have to go over and 
vote, I am going to give the first chance to ask questions to 
Mr. Weller.
    Mr. WELLER. Thank you, Mr. Chairman, and recognizing we may 
be under time constraints for all of the members to have an 
opportunity to ask questions, I will try and wrap this up 
before the vote break and direct my questions to Dr. Kling.
    Dr. Kling, essentially your message in your testimony was 
it is important to promote workers in getting back to work 
quickly as opposed to collecting more unemployment benefits.
    Can you go more into greater detail on why you feel that is 
the approach we should be looking at as we work to do a better 
job at unemployment benefits?
    Dr. KLING. Sure. Unemployment insurance is an insurance 
system. So, fundamentally what we want to do is have a way of 
providing insurance when there is a loss. The best way to 
prevent there being a loss is to have people who are going back 
to work quickly, in a good job, and if they are doing that, 
then there is no loss. So, that is the number one priority.
    Then when that doesn't work out, either because the labor 
market isn't rewarding the skills that somebody has at the 
level that it used to, or if it is taking a long time in order 
to find a new job, then providing some benefits in that case is 
sort of what the insurance part is for. The primary way of 
avoiding the need to do that in the first place is really to 
get people back to work.
    Mr. WELLER. What does the worker benefit? What is his 
benefit if he is in a program designed to give him the 
opportunity to go back into the workplace?
    Dr. KLING. Are you asking about how can the system provide 
additional assistance to workers in terms of, say, providing 
more job search assistance?
    Mr. WELLER. I also know you have several initiatives that 
you drew attention to in your testimony. If you would like to 
discuss those, because those are new ideas.
    Dr. KLING. Sure.
    Mr. WELLER. Perhaps your wage insurance proposal, your 
accounts proposal.
    Dr. KLING. Right.
    The way to shift assistance toward the larger, longer term 
losses really has two components in what I outlined. One is to 
make sure that there is enough cash availability at the time 
when there is job loss. So, you can do that through accounts 
that have the savings element or an ability to borrow. That is 
a way of making sure that people are able to make their 
mortgage payments and buy their groceries and do things that 
they need to do.
    So, once those needs are being taken care of, then the real 
challenge is how to target assistance toward people who have 
the largest losses. In order to do that, wage insurance is a 
very nice targeting mechanism because it really does give 
assistance to people who have demonstrated they have had a 
large loss and have had it for a long time.
    In order to make this work, another thing that is helpful 
is really to think about what are the incentives that people 
have when they are looking for a job. Right now, there is an 
incentive that is built into the UI system that if you stay 
unemployed longer, then you are receiving more benefits.
    Shifting more toward an account system changes those 
incentives. So, when you are unemployed, then you are either 
drawing on your own savings or you are doing some borrowing, 
and that gets people to think about a way of engaging in job 
searches that are probably getting people toward the choices 
that will lead to both having a good job and getting there 
quickly.
    So, I think that one of the key things is really to figure 
out how to structure a wage loss insurance system that is 
viable in the long run, and having some demonstrations about 
that either allowing States to experiment with that----
    Mr. WELLER. So, you would support giving clear authority to 
the States to experiment with wage insurance or account 
programs such as you have suggested. Do you think that is a 
good idea?
    Dr. KLING. I think that is an excellent idea. One of the 
things we are really lacking right now is an experience base in 
UI about how we would do these things. States have been very 
good in the past about doing that kind of experimentation and 
then letting us really see what works and what doesn't.
    Chairman MCDERMOTT. Ms. Berkley.
    Ms. BERKLEY. Thank you.
    Given the time, can I submit my opening statement?
    Chairman MCDERMOTT. Of course. I want to get you and Mr. 
English in.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] 45995A.052
    
    [GRAPHIC] [TIFF OMITTED] 45995A.053
    
                                 
    Ms. BERKLEY. Our Nevada Department of Employment training 
and Rehab, when we spoke to them about this proposal, 
officially they are neutral on the McDermott bill but they 
think it would--they express strong support for Federal 
proposals that would provide Federal funding so that they could 
modernize our State programs, and receipt of Federal incentive 
funds would greatly assist Nevada in implementing modernization 
to its unemployment insurance program.
    Having said that, Nevada, since we don't meet any of the 
criteria right now under your bill, Mr. McDermott, I am kind of 
curious. I don't care who answers this, but as we know, in 
order to qualify for the first third of the funding offered in 
the proposals, we have--the States have to meet the alternative 
base period and look at the applicant's last quarter wages. In 
Nevada, that doesn't exist right now. Nothing else exists in 
the proposal, although it would give us great incentive.
    Here is my question. Nevada, it has a biannual session that 
lasts for 120 days. Our 2007 session is long over, and we are 
not meeting again until January of 2007.
    We are also in the middle of a modernization of the 
computer system and everything because we are still doing 
paper. That is going to take 4 to 6 years.
    Given that problem, given the circumstances, do you think 
Nevada is going to be at a terrible disadvantage of receiving 
Federal funds under this proposal?
    Chairman MCDERMOTT. Having served in the State legislature, 
maybe the Governor could call a short special session of 1 week 
to bring in the members and pass some changes.
    Ms. BERKLEY. Having served with our Governor here in the 
Congress, that would be a remote possibility, Mr. Chairman. 
Short of a special session, that is not ever going to happen.
    Chairman MCDERMOTT. One of the things you have to say is 
they can come in compliance anytime in the next 5 years. So, it 
is not a ``one time, and that is it, they lose it.''
    Ms. BERKLEY. For a State like Nevada that doesn't already 
provide benefits to individuals who lost full-time jobs but are 
now looking for part-time employment or that bases coverage on 
the first of four of the last five completed quarters, how 
large of a difference in coverage would this represent, Mr. 
Chairman.
    Chairman MCDERMOTT. It would be about a half a million 
people. If every State cut the option, it would be about a half 
a million people in the country that would be covered.
    Ms. BERKLEY. Dr. Kling, having come from a family that was 
low-wage earners, the idea that they would have any money to 
save in order to be part of an insurance program, that is also 
as likely as having a special session of the legislature. It is 
a great idea but----
    Dr. KLING. Let me add that--in particular, what I had 
written down in the written part of the testimony is that for 
the very lowest wage workers, there would be essentially 
something that works like current UI, where because there is 
really no way for someone who is earning minimum wage to have a 
wage loss, the program can't really be beneficial to them.
    Ms. BERKLEY. I am not talking about minimum wage workers. I 
am talking about two people working in a family, who have a few 
kids and a mortgage and everything else. Things are tight out 
there right now. They don't have extra money. A third of the 
people don't even have health insurance. They are sure not 
going to put money into a rainy day fund. They are not going to 
make the mortgage if they do that.
    Chairman MCDERMOTT. Mr. English.
    Mr. ENGLISH. Thank you. I want to thank the Chairman for 
opening up this issue.
    There have been, for many years, proposals out there to 
extend unemployment benefits to part-time workers.
    Ms. Fagnoni, one of the issues that has always been raised, 
given the design of the unemployment insurance system in which 
people are being taxed on their job, in effect to give them job 
security in the form of the potential for unemployment benefits 
if they are laid off from full-time work; is there not a 
problem that when you extend these benefits to part-time 
workers, you will create the potential for full-time jobs to 
subsidize part-time work? How do you design a system that 
avoids that form?
    Ms. FAGNONI. We haven't done any work directly on that. I 
would say that with part-time work--in any of these proposals, 
one would need to consider how to balance the goals of wanting 
to support those people who find themselves out of a job and 
who have, to some extent, paid into the system, or their 
employers have for them, and trying to look at what one would 
call the individual equity to how much somebody had put into 
the system.
    Of course, there are experience ratings to try to take care 
of who pays in the most and who takes out the most.
    It is clear, though, that the nature of the workforce has 
changed and there are more part-time jobs now than there were 
at the beginning when UI was first developed, as well as other 
kinds of work changes. I think it is a legitimate discussion to 
have to think about those----
    Mr. ENGLISH. It is indeed. You anticipated my next 
question.
    What issues would be raised in adjusting experience rating 
if you were to move toward providing these benefits to part-
time work? After all, there is the potential for employers to 
design jobs that in effect take advantage of the subsidy.
    So, how would you change experience rating in order to 
anticipate this problem?
    Ms. FAGNONI. You are correct in that with any kind of 
changes, one would want to take a careful look. In the interest 
of helping one group of people, one doesn't want to run the 
risk of creating unintended effects, if you will, including not 
just subsidies, but also perhaps in order to avoid the kind of 
experience rating that would result in a certain kind of worker 
being less likely to be employed.
    So, one would need to carefully consider--I certainly agree 
with the idea of demonstrations. We can often learn a lot from 
what States do to test different things and think about all of 
those interactions.
    Mr. ENGLISH. Ms. Chasanov, in the last report of the 
Advisory Board, there was a significant amount of time devoted 
to the question of State solvency. There were many States that 
in effect had been utilizing Federal subsidies pretty 
aggressively, and the Advisory Board had recommended raising 
the solvency standards for States to participate in the Federal 
system.
    I didn't notice any reference to that in your testimony. Do 
you believe currently there is a need to strengthen the 
solvency of the Federal system by increasing the standard set 
for the States to participate?
    Ms. CHASANOV. At the time the Advisory Council was convened 
in the early nineties, they were certainly looking at a 
different set of post-recessionary trust fund balances as they 
looked across the States. So many of the States were in much 
worse shape than they are at this point.
    My testimony today has been focused on this bill, but I 
would say that the Council thought that the macro-economic 
stabilization role of unemployment insurance was critical. What 
often happened and what we had seen in the research that we had 
done was that, as State trust fund solvency began to decline, 
that ended up either increasing employer tax rates at the wrong 
time in the middle of a recession or ended up crunching down on 
eligibility or benefits for workers.
    So, the main purpose of those solvency standards was to 
help forward-fund the system, and that was a goal that was 
throughout the Council's report.
    Mr. ENGLISH. Is that not a relevant goal now?
    Ms. CHASANOV. I certainly believe that that is one of many 
things that could be improved in the unemployment insurance 
system today.
    Mr. ENGLISH. I notice you testified with regard to extended 
benefits, but I am out of time so I will certainly bounce this 
back.
    I do believe it is very important as we move forward on 
reform that we consider carefully how to reform and protect the 
extended benefits program.
    I thank you, Mr. Chair.
    Chairman MCDERMOTT. Ms. Hammond, you had some comment 
relevant to that discussion that Mr. English was having?
    Ms. HAMMOND. I wanted to point out as far as the experience 
rating is concerned, in Virginia when we have problems that are 
not the employer's fault--it is not the employer's fault that 
her spouse found a job and she has to move with him. It is not 
the employer's fault that, for example, somebody has to leave 
for compelling family circumstances.
    In those cases, what Virginia does is to noncharge those 
benefits to the individual employer and charge them to a 
statewide pool so it spreads the cost over a larger pool and 
doesn't make that single employer responsible.
    Chairman MCDERMOTT. We thank you all for your help today 
and we appreciate your written testimony. I am sorry that we 
are--I have to cut short but we have to go over to vote.
    So, thank you all very much for coming.
    [Whereupon, at 1:55 p.m., the Subcommittee was adjourned.]
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                 Statement of Idaho Department of Labor
    Idaho comments on the special transfers in fiscal years 2008 
through 2012 for Modernization based on modifications of law.
    Tying conditions to Reed Act distributions seems akin to blackmail, 
the federal government needs to recognize that states should be 
entitled to these funds without prejudice. Currently, the federal 
government does not return even 50 percent of the FUTA money collected 
from the respective state's employers.
    All the combinations and permutations of this bill make it 
difficult to nail down the exact cost to the fund. Collectively we 
estimate (not knowing the IT/IS costs) the impact to the fund may be 
offset by the estimated disbursements of $25M over five years. Our 
concern is the impact after 2012 since our tax formula already puts the 
fund in a soft position. With these disbursements ($25M to $30M) it may 
be able to handle it. However, following the final disbursement in 2012 
it is likely we will continue to live with the changes without further 
disbursements to offset the law changes and fall into a deficit 
financial hole we could never get out of.
    (2) The State law of a State meets the requirements of this 
paragraph if such State law-
    (A) uses a base period that includes the most recently completed 
calendar quarter before the start of the benefit year for purposes of 
determining eligibility for unemployment compensation;
    We are not in favor of allowing an alternate base period unless the 
claimant is first not eligible using a ``regular'' base period. 
Currently, employers file wage lists once a quarter with a due date of 
the last day of the month following the end of a quarter. Wages for the 
most recently completed quarter are not known until the due date plus 
the time it takes accounting to process the wage lists. It takes 
accounting 6 to 8 weeks to punch the wages lists. If we adopt this 
change accounting will have to change their process to punch wage lists 
in a shorter time frame. We may also need to adopt rules to encourage 
(or mandate) electronic filing so wages are available as soon as the 
report is filed. The first month of each quarter, when reports are not 
yet due for the most recently completed quarter would require staff to 
contact employers for wage information before a monetary determination 
is made. This would be an administrative burden on the department, 
drive up costs and become a huge inconvenience for employers if needed 
for every claim filed.
    or
    (B) provides that, in the case of an individual who would not 
otherwise be eligible for unemployment compensation under the State law 
because of the use of a base period that does not include the most 
recently completed calendar quarter before the start of the benefit 
year, eligibility shall be determined using a base period that includes 
such calendar quarter.
    We find this much more palatable than ``A'', and we are not opposed 
to this concept. This option has the same problems as ``A'', but 
reduces the administrative burden since fewer claimants would be 
eligible for the alternate base year. However, this would place an 
additional burden on tax collection staff and the employer community. 
Additionally, there would be costs associated with programming our 
legacy system as well as training of staff for administration.
    (3) The State law of a State meets the requirements of this 
paragraph if such State law includes provisions to carry out at least 2 
of the following subparagraphs:
    (A) An individual shall not be denied regular unemployment 
compensation under any State law provisions relating to availability 
for work, active search for work, or refusal to accept work, solely 
because such individual is seeking only part-time (and not full-time) 
work, except that the State law provisions carrying out this 
subparagraph may exclude an individual if a majority of the weeks of 
work in such individual's base period do not include part-time work.
    We are not opposed to extending coverage to part-time workers as 
long as the work was in covered employment and there are rules in place 
to stipulate they must seek work that provides a potential for a 
minimum number of hours, comparable to work used to figure base period 
eligibility, to be worked each week. Idaho currently has very low 
criteria for base period wage qualification. We are concerned about 
higher administrative costs as proper administration would require 
employers to report hours as well as wages on their quarterly reports. 
The department would also have to integrate hours worked into our 
current systems used for claims processing. There would also be an 
impact to the trust fund; potentially significant impacts since many 
workers have more than one part-time job. Additionally there is the 
argument that if we allow part time work seekers to accept only part 
time work to supplement their income, shouldn't we also allow people 
working full time to receive unemployment insurance to supplement their 
income?
    (B) An individual shall not be disqualified from regular 
unemployment compensation for separating from employment if that 
separation is for compelling family reasons. For purposes of this 
subparagraph, the term `compelling family reasons' includes at least 
the following:
    (i) Domestic violence (verified by such reasonable and confidential 
documentation as the State law may require) which causes the individual 
reasonably to believe that such individual's continued employment would 
jeopardize the safety of the individual or of any member of the 
individual's immediate family.
    We are opposed to broadening the eligibility due to purely personal 
reasons. This goes against the basic concept of UI being a program to 
assist workers who are unemployed through no fault of their own due to 
actions of the employer. UI is not an entitlement program. Enactment of 
this concept would set the stage for UI to become another employer 
funded welfare program. This expansion goes too far in defining 
eligibility and blurs the line between entitlement and the insurance 
concept. It begins to move UI to more of a social program rather than 
unemployment insurance based on job attachment/reemployment.
    (ii) The illness or disability of a member of the individual's 
immediate family.
    This proposal also extends coverage beyond the ``covered'' claimant 
to allow benefits when a person that is fully able and available to 
work chooses not to in order to care for an ill family member. This 
would add additional fact finding when adjudicating claims and 
potentially impact timeliness. Additionally, we believe it would be an 
extremely hard sell to the employer community as well as have a 
negative impact on tax rates in the long run. While funding would not 
come directly out of the individual employer's account in the short 
run, in the long run (they would be relieved of chargeability), it 
would ultimately have to be socialized--potentially negatively 
impacting the tax rates for every employer.
    (iii) The need for the individual to accompany such individual's 
spouse----
    (I) to a place from which it is impractical for such individual to 
commute; and
    (II) due to a change in location of the spouse's employment.
    We are in favor of allowing benefits only to the spouse of military 
personnel who must quit their job to follow the spouse.
    (C) Weekly unemployment compensation is payable under this 
subparagraph to any individual who is unemployed (as determined under 
the State unemployment compensation law), has exhausted all rights to 
regular and (if applicable) extended unemployment compensation under 
the State law, and is enrolled and making satisfactory progress in a 
State-approved training program or in a job training program authorized 
under the Workforce Investment Act of 1998. Such program shall prepare 
individuals who have been separated from a declining occupation, or who 
have been involuntarily and indefinitely separated from employment as a 
result of a permanent reduction of operations at the individual's place 
of employment, for entry into a high-demand occupation. The amount of 
unemployment compensation payable under this subparagraph to an 
individual for a week of unemployment shall be equal to the 
individual's average weekly benefit amount (including dependents' 
allowances) for the most recent benefit year, and the total amount of 
unemployment compensation payable under this subparagraph to any 
individual shall be equal to at least 26 times the individual's average 
weekly benefit amount (including dependents' allowances) for the most 
recent benefit year.
    We are opposed to providing initial additional weeks of benefits 
beyond what the claimants initially qualify for. This is a disincentive 
for them to seek and accept work. This would reward workers who have 
not demonstrated a firm attachment to the labor market. There are 
already programs in place (WIA & Trade) to assist these types of 
workers. We do not have the UI resources to perform the type of case 
management this would require.

                                 
                       Statement of On Point Tech

    Having spent most of my adult lifetime involved with the Nation's 
Unemployment Insurance (UI) program, I want to take this opportunity to 
commend you on your sponsorship of the Unemployment Insurance 
Modernization Act [HR2233]. The passage of this legislation will 
remediate several of the most troublesome shortcomings of the UI 
program, which are brought about by developments that could not have 
been envisioned at the time of the passage of the initial legislation 
in 1935.
    These are critically important issues given the changes that have 
taken place in the composition of the labor force, the transient nature 
of employment, and the proliferation of part-time employment that now 
characterize our economy. The $7 billion in new funding that you 
propose will enable the states to improve their programs dramatically, 
particularly in light of the flat and diminished funding that the UI 
program has suffered during the past several years.
    However, I fee obligated to call your attention to the need to 
strengthen the fraud detection and management component of the UI 
program nationwide. U.S. Government Accountability Office (GAO) Report 
GAO-07-635T shows UI fraud to be $3.9 billion in FY2004, $3.3 billion 
in FY2005, and $3.4 billion in FY2006. As new classes of recipients are 
brought into the system and the amount of automation deployed 
increases, the amount of fraud should increase significantly.
    Modernized UI Benefits systems lean more heavily on new processes 
like taking claims over the Internet. The number of staff actually 
observing claims for signals of fraud taking place drops off, almost to 
the point of non-existence. Over the years, almost all major fraud 
incidents uncovered involved diligent UI staffers processing claims by 
hand who notices patterns in the claims data that were unusual and 
unexpected. This ``eyes and hands'' approach disappears with automated 
systems and must be replaced by automated fraud detection software. 
(Disclosure: My firm, On Point Technology, Inc., is the major provider 
of fraud detection and overpayment recapture software to the UI 
community.)
    The above mentioned GAO report data comes from the U.S. Department 
of Labor's Employment and Training Administration's Benefit Accuracy 
Measurement (BAM) program which samples and reviews individual UI 
claims and reports on the improper payments found. The type of fraud 
disclosed is what we refer to as individual fraud. In other words, 
individual fraud occurs when one person misreports information on their 
personal claim in order to qualify for benefits. What is not being 
reported by these figures is organized fraud.
    Organized fraud is when dozens or hundreds of UI claims are filed 
with the direct intent to embezzle funds from the UI program. These may 
be cases of group identity theft or fictitious employer schemes where 
UI employer accounts are established and taxes paid, where the only 
intent is filing claims against the fictitious accounts. (A $50,000 
investment paying IU taxes for 100 fake employees can return over $1 
million in fraud profits. The same scheme can be repeated concurrently 
in multiple states with the same 100 Social Security Numbers.) The 
individual claims appear to be properly processed and paid. Only by a 
macro or pattern level examination can this fraud be readily found. 
Multiple schemes from $3 million to $12 million have been found. The 
State of California is currently prosecuting a scheme perpetrated by 
one extended family that was reported in a conference to be in excess 
of $80 million. (Since it is still under investigation, public 
information has not been released.)
    Be it $3.4 billion in individual fraud or an unknown amount of 
organized fraud, expanding the UI program and modernizing the claim and 
payment process will certainly increase the volume of fraud. I urge you 
and the Committee to consider the multi-year or permanent funding for 
controlling UI fraud and improper payments.
    I am available to expand on the thoughts contained in this letter 
and would appreciate very much the opportunity to meet with your 
Committee staff to share both my concerns and remedies. Thank you very 
much for the opportunity to communicate with you on this very important 
national issue.

                                 

    Statement of UWC--Strategic Services on Unemployment & Workers' 
                              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 reduce 
barriers to unemployment insurance for jobless workers.
    I am Douglas J. Holmes, President of UWC--Strategic Services on 
Unemployment & Workers' Compensation (UWC). UWC counts as as 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 to assure that individuals who become unemployed 
through no fault of their own are able to apply for, and if otherwise 
eligible, receive unemployment compensation as temporary support during 
periods of unemployment.
    The UI system was designed to provide temporary cash support to 
individuals who become unemployed after a period of employment 
sufficient to meet workforce attachment requirements. Although UI 
provides a social safety net, it is an insurance program financed by 
employers through payment of state unemployment and federal 
unemployment taxes. It was never intended to be the universal source of 
cash payments for individuals that have no or insufficient attachment 
to the workforce to qualify for unemployment compensation benefits 
under the applicable state law, nor should it be. It is axiomatic that 
an individual must first be employed in order to be unemployed.
    In addressing the issue of ``barriers'' to unemployment insurance 
it is important to first define the population that is not benefiting 
from unemployment compensation payments. A close examination of the 
actual workings of the unemployment insurance system reveal that the 
number of individuals who ``should'' receive unemployment compensation 
payments but do not because of state law restrictions is very small.
The ``Recipiency Rate'' methodology is not a valid statistical measure 
        of those who should be paid unemployment compensation who are 
        not
    Measurements such as the ``recipiency rate'' that are used as a 
basis for arguments that there are large numbers of individuals who 
``should'' receive unemployment compensation but do not, fail to take 
into consideration that many individuals who are counted as 
``unemployed'' for purposes of the Total Unemployment Number should not 
be included among those that could or should be paid unemployment 
compensation.
    For example, the total number of unemployed used in the calculation 
of the recipiency rate includes 1) individuals who were discharged for 
just cause from their jobs, 2) those who quit work without just cause, 
3) those who have refused suitable work, 4) new entrants to the 
workforce that have no employment history, 5) reentrants to the 
workforce whose work history is not recent enough to be counted for UI 
benefit eligibility, 6) individuals unemployed due to a labor dispute 
other than a lock-out, 7) individuals receiving severance or separation 
pay, 8) those who have exhausted unemployment compensation benefits, 9) 
individuals who have chosen for whatever reason not to claim 
unemployment compensation, 10) self-employed individuals, and 11) 
undocumented aliens. None of these individuals are typically eligible 
to be paid weekly unemployment compensation, yet the calculation of the 
``recipiency rate'' which compares the insured unemployment number with 
the total unemployment number seems to imply that all of these 
individuals should be paid benefits.
    A study of the ``recipiency rate'' methodology conducted for the 
New Hampshire Employment Security Economic and Labor Market Information 
Bureau in 1999 details the shortcomings of the ``recipiency rate'' 
methodology.
    There are many individuals who may not be working who are not and 
should not be eligible for unemployment compensation.
    In addition, it should be noted that there are some individuals who 
are paid unemployment compensation who are not counted in the total 
unemployment rate, including individuals who file for partial 
unemployment benefits ( i.e. they had some earnings with respect to a 
week of unemployment compensation that they claimed). This group 
typically includes low wage and part-time workers who are receiving 
partial unemployment compensation benefits.
    The actual percentage of individuals who may be eligible for 
unemployment compensation who are not paid unemployment compensation is 
more appropriately estimated by a review of the percentage of ``job 
losers''. The percentage of ``job losers'' who are paid unemployment 
compensation has historically fluctuated with economic cycles in the 80 
percent to 90 percent range.
    The enactment of the new minimum wage legislation significantly 
reduces the number of individuals with lesser workforce attachments who 
may not qualify for unemployment compensation.
    The recent enactment of federal and state minimum wage legislation 
has the effect of significantly reducing the number of individuals 
working 20 hours or more per week on average who may not qualify 
monetarily to establish a benefit year.
    An individual earning $7.00 per hour working 20 hours per week for 
29 weeks during a four quarter base period meets the minimum wage 
requirements for unemployment benefit eligibility in all states. Many 
states have minimum wage requirements that are much lower; as low as 
$130 a year in Hawaii. Thirty-four states have minimum wage 
requirements for a year of $2400 or less.
    The effect of new federal requirements to pay unemployment 
compensation to a new group of individuals would be to reduce benefits 
to existing claimants and/or increase state unemployment taxes paid by 
employers.
    The effect of federal mandates with respect to the use of 
alternative base periods, relaxed work search requirements, payments of 
unemployment compensation to those who choose to quit work during 
periods of domestic violence, payment of unemployment compensation to 
those whose separation from employment results from the illness or 
disability of a member of the individual's family, or payment to those 
whose separation from employment results from a need to accompany a 
spouse, will be to reduce unemployment compensation benefits that would 
otherwise be paid to claimants with greater workforce attachments and/
or increase state unemployment compensation tax rates.
    This is true because unemployment compensation benefit coverage and 
benefit payments are determined under state law and each state is 
responsible to enact legislation that assures that there is sufficient 
dedicated funding in the state's unemployment compensation benefit 
account to pay unemployment compensation benefits.
    Many states have enacted these provisions already without federal 
requirements as the result of state level negotiations between 
employers, legislators, governors, and representatives of organized 
labor and worker advocacy groups. As a practical matter, state laws 
balance the interests of all of these groups in determining benefit 
eligibility and unemployment tax rates.
    Responsibility and accountability for these decisions has been 
maintained at the state level for decades and should remain with the 
states.
The costs of program and system changes related to conversion to an 
        alternative base period system are significant
    As Unemployment Insurance Director in Ohio in 1988, I was directly 
responsible for conversion of Ohio's benefit system to provide for the 
alternative base period. In order to pay for the cost of the state law 
change implementation, Ohio applied for and received funding from the 
USDOL. Federal funds were provided by USDOL but the amount provided did 
not fully cover the costs of the conversion.
    Issues in implementation included 1) policies procedures and forms 
to be used in obtaining the most recent quarterly wage data from 
employers, 2) the use of claimant affidavits in lieu of employer 
quarterly reports to assure timeliness of benefit application 
determinations, 3) revised charging of employer accounts to reflect the 
alternative base period, 4) policies and procedures needed to address 
transitional claims, and 5) system design, programming, system 
capacity, staff training, testing, and interstate coordination.
    An analysis and projection of costs to states and employers of 
implementation of alternative base periods is needed before determining 
the amount of administrative funds needed to assist states choosing to 
adopt alternative base period legislation.
    The increase in unemployment compensation benefits resulting from 
an alternative base period varies by state, depending on a number of 
factors, including the composition of the state workforce and the 
overall benefit eligibility provisions already in place.
    The additional cost in states with low minimum qualifying 
requirements would be more limited than states with higher minimum 
qualifying requirements because fewer individuals are disqualified in 
the first place.
    Studies of the increase in benefit costs associated with 
alternative base periods have estimated the increase in unemployment 
compensation benefit pay-out as a result of the alternative base period 
provision in the range of 1.1 percent to 6 percent annually.
    An analysis of the increased unemployment compensation benefit 
costs resulting from the implementation of alternative base periods is 
needed in determining the impact on state trust funds and employer 
taxes on a state by state basis. Without such an analysis a state 
considering whether to enact an alternative base period would not be 
able to properly assess the cost/benefit with respect to any special 
Reed Act distribution funding that might be available.
    The focus of efforts to assist low wage and part-time workers 
should be to identify and remove barriers to employment.
    Individuals with minimal workforce attachment, particularly those 
with families to support, will not significantly benefit from 
unemployment compensation benefits. An individual working 20 hours a 
week and paid $7.00 an hour, if monetarily eligible, would typically 
qualify to be paid unemployment compensation of $70.00 per week, which 
may be reduced by partial earnings from part-time work during the week. 
This level of support is insufficient to assist in removing barriers to 
employment.
    Other governmental and privately funded support programs for low 
wage workers, particularly those providing support for workers with 
families, are much more significant and targeted in removing barriers 
to employment. Such individuals are typically eligible to receive 
services under the Workforce Investment Act (WIA), the Food Stamp Act, 
and the Temporary Assistance for Needy Families (TANF) program. 
Services under these programs include cash support payments for 
workforce participation, payment of travel expenses to employment, 
education and training, assessment services, treatment for substance 
abuse, English as a second language instruction, job readiness 
training, and subsidized child care. Many of these individuals may also 
benefit from the Earned Income Tax Credit (EITC) and the Workforce 
Opportunity Tax Credit (WOTC).
    A review of the array of programs designed to serve low wage and 
part-time workers, particularly those with families is needed to 
properly evaluate any gaps in the social safety net that should be 
addressed.
    The cost to states and employers of the new federal requirements 
with respect to alternative base periods and other benefit provisions 
should be determined before enacting new federal requirements.
    It has been proposed that if states already have enacted 
alternative base period provisions or enact new alternative base 
provisions and other benefit provisions, that states will receive a 
pre-designated share of a $7 billion special distribution into the 
qualifying state unemployment trust fund account and will receive a 
pre-designated share of $100 million per year in additional 
administrative funding.
    There is no relationship between these distributions and 
appropriations and the increased administrative cost and increase in 
benefit costs associated with the new federal requirements.
    As a result, some states will receive a windfall in additional 
funding while others will be shortchanged or receive no supplemental 
funding if they elect not to enact the required provisions. It should 
be noted that four of the five states with the highest minimum 
qualifying wage requirements are also alternative base period states. A 
special distribution to these states would have no impact on reducing 
the number of low wage or part time workers and effectively reward 
states that have made it more difficult for low wage workers to qualify 
for benefits.
    This is inconsistent with the UI Federal/State partnership designed 
to properly share responsibility for funding of administration and 
benefit costs between states and the federal government. It sets up a 
series of winner and loser states and exacerbates the existing 
imbalance in administrative funding.
    In addition, it should be noted that state UI administration is 
already under funded by at least an estimated $300 million per year. An 
additional $100 million per year is insufficient to properly fund the 
UI system in the first place, let alone to fund the additional 
administrative costs of implementing alternative base periods or other 
federally required provisions.
    There are currently no projections on a state by state basis of the 
long term costs of alternative base period benefit increases and the 
other benefit provisions included in the new federal requirements to 
compare against the one-time special distributions. Without these 
projections, the cost of these proposals to states and employers as 
compared to the one-time distribution can not be determined.
    Also, to the extent that the $7 billion one-time distribution is 
greater than the costs associated with the new federal requirements, 
the federal unemployment trust fund accounts will be unduly depleted, 
putting the fund at risk of insolvency in the event of new legislated 
extended unemployment compensation that may be enacted during a future 
recession.
    States with the lowest percentage of the distribution that do not 
currently have alternative base periods would bear a higher burden of 
implementation.
Conclusion
    An updated evaluation of the number of individuals with workforce 
attachment who are not paid unemployment compensation is needed. The 
evaluation should include a breakdown of the individuals who are not 
working and are not receiving unemployment compensation by causation to 
determine the numbers of individuals who have become unemployed through 
no fault of their own, who are otherwise eligible, and are not being 
paid unemployment compensation benefits through the federal/state UI 
system.
    The review should also address the array of other programs, 
including TANF, WIA, Foodstamps, Medicaid, EITC and WOTC under which 
many individuals who have minimal workforce attachment or are working 
in low wage or part-time jobs.
    Careful analysis of the costs to states and employers of 
implementation and benefit increases due to alternative base periods 
and other benefit provisions on a state by state basis is needed to 
determine the appropriate federal funding to be provided. Without such 
an analysis, states and employers will be short changed in funding and 
federal unemployment trust fund accounts will be unduly depleted.