State Cuts to Jobless Benefits Did Not Help Workers or Taxpayers

Source: Josh Bivens, Joshua Smith, and Valerie Wilson, Economic Policy Institute, Briefing Paper #380, July 28, 2014

From the summary:
The first section of this brief provides an overview of the U.S. UI system, explaining the interaction between federal and state financing flows and detailing the workings of the federal Unemployment Trust Fund. The next section reviews the academic and research literature on the impact of UI benefits on the U.S. labor market. The last section looks at those states that decided to shorten the duration of jobless benefits, reviewing possible reasons why state policymakers made this decision, and examining the (admittedly thin) data record of pre- and post-duration changes to see if the shortened durations had measurable impact on state labor markets. Following are key findings of the brief:
∙ Most state accounts in the federal Unemployment Trust Fund became insolvent in the wake of the Great Recession. The accounts of only 15 states (Alaska, Iowa, Louisiana, Maine, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, Oregon, Utah, Washington, West Virginia, and Wyoming) plus Washington, D.C., and Puerto Rico, remained solvent.
∙ It was largely trust fund adequacy before the Great Recession—not significantly less-severe state-level recessions—that differentiated the states with solvent UTF accounts from other states: Fourteen of the 15 states that retained solvency in their UTF accounts ranked in the top half of states on a key measure of trust fund adequacy (a ratio of fund balance to future payouts) going into the Great Recession.
∙ The adequacy of state UTF accounts before the Great Recession was largely driven by whether the states collected enough revenue during the economic recovery and expansion between 2001 and 2007: State accounts that remained solvent following the Great Recession had not cut UI-dedicated state taxes (also known as State Unemployment Tax Acts or SUTA taxes) nearly as deeply as did other states during the 2001–2007 period.
∙ Failure to adequately fund state UTF accounts does not just lead to fiscal problems. It can weaken the function of UI as an automatic stabilizer and make the UI system as a whole less countercyclical than it should be by requiring tax hikes or benefit cuts during periods of depressed aggregate demand.
∙ Trust fund imbalances largely cannot explain why some states shortened UI durations while others did not. Only eight of the 35 states whose UTF accounts became insolvent following the Great Recession tried to address the situation by cutting the duration of their benefits. These states’ UTF accounts as a whole were not appreciably worse off than those of states that chose to either increase revenues by raising the SUTA tax rate or enlarging the tax base, or to simply wait for labor market improvements to shrink their UTF accounts’ debt burden naturally. What most of the eight states do share is a recent history of not supporting safety-net programs.
∙ Despite the widespread accounting distress in state UTF accounts following the Great Recession, the cuts that eight states made to the duration of unemployment benefits did very little to change their fiscal condition. Compared with a tax hike that would have achieved the same boost to the state UTF account’s balance, the savings per covered worker in the six of these eight states for which data are available ranged from $0.06 to $0.14 per week. In short, unemployed workers lost an average $252 per week of curtailed benefits just so states could save roughly nine cents per covered worker per week in SUTA taxes, holding trust fund account balances equal…..
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