With bond markets flashing warning signs of a possible recession on the horizon, a new paper from the National Employment Law Project examines how state unemployment insurance programs have been weakened by benefit cuts and policies discouraging unemployed workers from applying for jobless aid. The paper calls into question whether state UI programs are still up to the task of helping communities and the broader economy weather and mitigate the next recession.

“As the employment rates have fallen to record lows, states have quietly undercut their unemployment insurance programs. These cuts have stayed out of the spotlight because many fewer people have had to deal with these systems,” said NELP researcher Michele Evermore, co-author of the new paper. “The real test of this social experiment will come when the next recession hits – will enough people have sufficient compensation to avoid catastrophe?”

NELP researchers looked at a disturbing trend—that workers are both applying for and receiving jobless aid at much lower rates than in the past—and found that, to the extent that these lower rates are the product of legislative and administrative policies intended to discourage application for and receipt of benefits, there is evidence to suggest states may not be prepared to withstand future recessions.

Unemployment insurance provides more than a benefit for workers who are involuntarily unemployed. When mass unemployment takes place, the collective buying power that this benefit bolsters helps to stabilize the entire economy and limit the depths of a recession.

During the last recession, states appropriately spent the money in their unemployment trust funds to pay benefits. The system is designed so that money is set aside when the economy is doing well to pay benefits when the economy declines. States can do two things to replenish that trust fund – ensure sufficient contributions, or cut benefits. Cutting benefits may contribute to a positive trust fund balance, but creates risk that the system will not maintain enough buying power to recover from subsequent recessions.

State legislatures looking to reduce the number of people eligible for unemployment insurance have cut benefits:

   (a) increasing the amount of earned wages needed to qualify

   (b) redefining who qualifies

   (c) reducing duration of benefits

   (d) imposing stricter ongoing eligibility requirements.

In addition, many states have narrowed workers’ access to UI benefits by implementing technologies that may limit accessibility of the application processes. As fewer people are eligible for lower benefits, workers become discouraged and some do not even apply for benefits.

If there is time to restore benefit levels and access before the next recession, the paper recommends several policy solutions to help blunt future economic downturns. Key recommendations include reversing cuts, improving system transparency, and improving public education efforts.

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Are State Unemployment Systems Still Able to Counter Recessions

Original News Release