An Insurance System for the Economy: Strengthening the Unemployment Insurance System

There is broad agreement that something must be done to address the solvency of the state’s unemployment insurance trust fund.  Without action, businesses will face a continued federal increase of their taxes and the trust fund will be in no position to support the economy in the next economic downturn.

And the latter, afterall, is the fundamental role of the unemployment insurance system and why it’s funding was designed to build up in good times so that it could pay out in downturns.  In so doing, the unemployment insurance provides workers with a modest payment to meet their families’ most basic needs and continue their search for work. And as most economists note such support to workers redounds to businesses too in sustaining their consumer base and continuing to circulate dollars in local economies.

But the financing principle of forward-financing, or preparing for the winter so to speak, was abandoned in North Carolina in the 1990s when a series of tax cuts effectively reduced the trust fund balance and left the state ill-prepared to sustain the system through two successive, one historic economic downturn in the 2000s.

Correcting for these failings now is critical.  Doing so in a way that aligns with what most reasonable people agree doesn’t harm North Carolinians struggling with joblessness or the fragile economic recovery is fundamental.  

Most importantly reform proposals must actually contribute significantly to the solvency of the trust fund.  That will mean full participation of employers in funding the system.  Much like car insurance where everyone needs it to drive, all businesses should contribute something for the system that kicks in when the private sector is on the ropes.

It will mean making sure unemployed workers are seeking work, supported in their work search and that efforts to cut down on misclassification and the underground economy are in place. Most importantly, it will mean policymakers must remain focused on closing the state’s jobs deficit of nearly half a million, much larger than our neighbors.  It is lack of jobs out there that are putting so much pressure on the unemployment insurance system.  Last check in the South, there was one job for every 5 unemployed workers.  That is not applicants but literally four unemployed workers had no job out there.

Reducing the modest support that unemployment insurance represents (a little more than a third of what the average worker was earning on the job) won’t put the trust fund in the black for years.  Analysis in other states demonstrates the limit of this approach: analysis of Michigan’s proposal to cut both the weeks and maximum benefits found that it would provide little to no benefit in addressing the immediate solvency crisis.  Such a move will, however, increase hardship and pressures on other state systems.

It would also undermine the prospects for long-term economic growth.  National economists from across the political spectrum agree that unemployment insurance payments generate up to $2 in economic activity for every $1 dollar.  Scaling back eligibility or benefit levels reduces the ability of the unemployment insurance system to do its work of stabilizing the economy.

And that is afterall what North Carolina still needs.  Until we see more significant progress towards closing the jobs deficit.

 

 

One Comment

  1. Alex

    January 29, 2012 at 7:41 pm

    We already owe the feds 2.7 Billion ! Where is that coming from ?