"One Size Fits All" Doesn't Work for Unemployment Benefits
Recent years have been trying for unemployed Americans — and for the nation’s unemployment insurance (UI) system. Government-imposed pandemic shutdowns, accompanied by record federal benefit expansions, supercharged demand for weekly benefit checks and resulted in long delays in claiming benefits alongside record fraud. But as the pandemic wore on, one of the strengths of the UI system began to appear: its flexible federal/state nature.
UI is governed by broad federal rules that allow states to set benefit terms and establish tax rates that make sense for their local economies. Key federal responsibilities emerge in recessions, when additional weeks of benefits are made available on a temporary basis. In those temporary programs, states simply have to agree to pay extended benefits to long-term unemployed individuals, and the federal government covers the cost.
Before the pandemic, few even considered that the same relative ease worked in the other direction: States could decide to turn off expanded federal benefits, too. But that’s exactly what happened in mid-2021, when an unprecedented 26 states announced their intention to stop paying federal unemployment benefits because they no longer made sense for their fast-recovering economies.
The first state to opt out was Montana, where Governor Greg Gianforte said that "I hear from too many employers throughout our state who can’t find workers.” Gianforte argued federal unemployment benefits were “doing more harm than good” and didn’t make sense while “nearly every sector in our economy faces a labor shortage." Montana replaced federal benefits with a new state incentive program that offered former benefit recipients a $1,200 bonus after they completed four weeks in a new job. Montana’s unemployment rate has since dropped from 3.6 percent in May 2021 to 2.8 percent in December 2022.
Within a few weeks of Gianforte’s announcement, another 20 red states followed Montana’s lead and released plans to end federal benefits during the summer of 2021 — months before their scheduled expiration nationwide. Eventually 26 states, including Louisiana headed by democratic governor John Bel Edwards, announced plans to opt out of some or all federal unemployment benefits.
Despite this display of state discretion, some liberal policymakers are intent on “modernizing” the UI system by having Washington set all the rules. For example, under one plan crafted by senior Senate Democrats, all states would be forced to adopt the same minimum benefit levels, benefit durations, and eligibility terms. That would force disproportionately large benefit expansions and state payroll tax hikes on red states where local lawmakers — in response to local economic conditions — have long preferred lower benefits and taxes.
Instead of this one-size-fits-all federal approach, federal policymakers should play to the strengths of the UI system and adopt more appropriately tailored policies. With many economists expecting a recession to unfold in the coming months, lawmakers should build such a tailored approach into any temporary help for the unemployed they provide.
What might that entail?
First, states should again be expected to pay their half of the costs of the federal/state extended benefits (EB) program created in 1970. In the past two recessions, the federal government picked up the entire tab, in effect creating a duplicative second federal extended benefits program and encouraging states to expand eligibility since they didn’t bear any of the costs. Especially given trillion-dollar federal deficits, and comparatively flush state budgets, doing that again makes little sense. Eligible states can and should support their half of EB program costs.
Second, if the federal government creates another temporary extended benefits program as it typically does in recessions, it should give states where unemployment remains relatively low discretion over how best to use federal funds to meet local needs. Instead of offering lengthy extended benefits where jobs are available, states could instead help workers find new jobs, pay reemployment bonuses, make systems improvements, or even set funds aside to prevent payroll tax hikes. States were given similar flexibility in the wake of 9/11 and the nonpartisan Government Accountability Office confirmed that many used it to keep payroll taxes low, boosting job creation and wage growth that benefitted all workers. That flexibility would also limit the cost of such a policy—a welcome feature as Congress wrestles with the debt limit this year.
While some want to force more Washington-designed uniformity into the UI system, dozens of states just showed that they have better answers than one-size-fits-all federal policies. That is an enduring lesson from the pandemic, which federal lawmakers should recall whenever they design their legislative response to the next recession.
Matt Weidinger is a Rowe Fellow in poverty studies at the American Enterprise Institute.
