Marketplace Scratch Pad

Unemployment begets unemployment

Scott Jagow Jan 20, 2010

Last June we reported, along with Pro Publica, on the cracks starting to show in the unemployment benefits system. Today we have a follow up. Those cracks have ripped the whole thing wide open.

Take a look at the map. In 25 states, the unemployment trust funds have run out of money. Those states are borrowing from the federal government to pay benefits. Pennsylvania, Michigan, New York and California are currently borrowing more than $2 billion each. More from Pro Publica:

According to our projections Arizona, Colorado, Hawaii, Kansas, Maryland, Massachussetts, New Hampshire, Tennesse, and Vermont will find themselves in the red within six months.

How did it come to this? For starters, the unemployment system established in the 1930’s gave states a wide latitude. They each came up with their own way of doing things. But the federal government encouraged states to keep a certain amount in reserve for a rainy day. The states didn’t listen particularly well, and in the 1970’s, many state trust funds went bust. They had to borrow from the feds then, too.

Some states learned their lesson. Others did not. From our story last year:

As a result of the experience, some states, such as Oregon, changed their laws to ensure that money would be available for unemployment insurance when they needed it…

Other states did not plan as well. Many have been maintaining close to zero reserves for years, well before the economy headed south. California, for example, got into trouble by raising benefits without increasing taxes. Other states, like Michigan, lowered taxes to unsustainable levels and watched their reserves dwindle.

On the map, notice what color Oregon is and what color Michigan and California are.

Guess what the “in the red” states are doing now? They’re raising unemployment taxes — in some cases, big time. Indiana jacked up its tax on employers 35% last year. Businesses in 36 states face tax increases this year. They range from a few dollars per employee to more than $1,000. From Pro Publica/USA Today:

In 2009, the average business owner paid $95 per employee. This year, the tax will be $171, according to estimates by the state workforce agency. “It’s another added expense to hiring somebody,” Miller says. “Everything’s going up, and business is going down.”

Similar tax increases are hitting employers nationwide this year as states struggle to pay the 5.5 million Americans currently collecting state jobless benefits.

Some states are already at or near the highest payroll tax rate allowed by law. In addition to taxing businesses, states are cutting or restricting benefits. For example, Pennsylvania unemployment checks will be 2.4% smaller starting this month.

To sum up:

  • States have to borrow more money from a tapped-out federal government.
  • People without jobs are seeing their benefits shrink.
  • Employers are getting soaked with new taxes, which deters them from creating jobs. It might even mean they have to cut more jobs.

I don’t hear many solutions to this problem. A couple come to mind. One — if they aren’t going to do it on their own, states must be forced to maintain a level of reserve. Two — the whole system needs an overhaul with federal consistency and a rethinking of the level/duration of jobless benefits. There may be other solutions.

What do you think?

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