United States
Digging into Unemployment Insurance: A Primer
July 26, 2010

By Richard Berner, David Greenlaw, Ted Wieseman & David Cho | New York

Background

Initial and continuing claims for unemployment insurance (UI) are key, high-frequency US labor market indicators.  But the extension of eligibility for jobless pay and the introduction of emergency programs as the recession deepened in 2008 have made the unemployment insurance data harder to interpret and less reliable indicators of the state of labor markets.  The expiration of benefits, the substitution of benefits under one program for another, and the growing number of ineligible filers all add noise to the data.  This primer attempts to explain the programs, the distortions in the data and how to interpret them.

Those distortions probably intensified on May 31, when UI benefits expired for about 1.3 million recipients.  The debate over whether and how to pay for extended benefits in Congress has been resolved in favor of extension, with retroactive benefit checks likely to go out next week.  But the extension is good only through the November mid-term election, and with unemployment receding slowly, UI policies and data will likely remain a key focus of investors.

Overview

Approximately 10 million people in the US are currently receiving unemployment benefits, reflecting the high level of unemployment and the extended duration of jobless spells experienced by many workers.  The depth and duration of the recession and the moderate pace of economic recovery have doubled the median duration of unemployment compared with past severe downturns; today the median duration of unemployment stands at 23.2 weeks, versus 12.3 in May 1983.  Nearly half of all unemployed workers have been out of a job for more than six months.  As a result, many workers have long since exhausted the unemployment insurance benefits offered under regular state programs (typically 26 weeks), prompting Congress to authorize extended and emergency programs to supplement jobless pay. 

Fast Facts

• Average weekly payout of $300

• Federal government sets broad guidelines, within which states set own rules

• Benefits are taxable

• An individual must file weekly or bi-weekly claims

• Calculation of benefits takes into account previous income and length of employment

• Regular unemployment benefits are usually limited to 26 weeks (but up to 99 weeks are now allowed due to extensions)

• A special provision of the ARRA stimulus legislation raised weekly payments by $25

• Of the 10 million recipients of unemployment insurance, 5.3 million are currently receiving extended benefits

Unemployment insurance provides payments to individuals who have lost their jobs through no fault of their own, whose claims for compensation have been accepted by their state.  Employers contribute to the state and federal trust funds that ultimately distribute benefits.  Typically, claimants receive benefits for 26 weeks, although this can be extended in environments of financial distress.  About half of applicant claims are rejected nationally, but this number seems to have climbed recently, as can be seen by comparing filed claims and initial handout figures. 

Eligibility varies by state and is determined by thresholds relating to hours worked and wages earned.  First and foremost, an individual must have been employed by an actual employer (i.e., self-employed workers are not eligible).  Second, an individual's highest quarterly wage must exceed the state-determined minimum level by 1.5 times in order to qualify for jobless benefits.  States usually provide 50% of lost wages, up to the average wage for the state.

Four Primary Unemployment Insurance Programs

Unemployment Compensation Program (UC): A joint federal-state program providing basic unemployment benefits for up to 26 weeks.  It is funded by federal and state taxes paid by employers.  General federal guidelines are drawn up by the US Department of Labor, and states formulate their own rules within these limits.  During periods of high unemployment, the federal government helps fund payouts.

Extended Benefits (EB): If high unemployment exists in a state, UC benefits can be extended through EB at the state level for either 13 or 20 weeks.  Whether a state falls into this category is a function of their IUR and TUR. (IUR is the ratio of workers eligible for UC to those located in UC covered jobs. TUR is the ratio of unemployed workers to all workers, and is essentially a weekly translation of BLS's monthly unemployment rate.)

Emergency Unemployment Compensation (EUC08): EUC08 provides up to 20 weeks of benefit extension for those who qualified for UC benefits, and up to 33 weeks of additional benefits in states with particularly high levels of unemployment.  These first two tiers of benefits are available in all states, and additional tiers are triggered at varying state levels of IUR and TUR.  This program was instituted in July 2008 by the Bush Administration and represents the eighth time the government has created a temporary program to deal with high unemployment in a slow economy.

Disaster Unemployment Assistance: These benefits are paid to those deemed ineligible for basic unemployment insurance and whose unemployment can be attributed to a major disaster.  The disaster provisions drawn up by affected local governments often stipulate the form and amount of the unemployment insurance.

There are several other programs that only apply to specific subcategories of the US labor market. Examples include Trade Readjustment allowances (which assist those who have been affected by foreign trade and outsourcing), unemployment compensation for federal employees, and unemployment compensation for former military personnel.

Jobless claims are highly seasonal.  For instance, claims typically surge at the beginning of each quarter when eligibility requirements shift forward.  Filings also fluctuate due to seasonal employment patterns within particular industries such as agriculture.  These seasonal occupations generate ‘repeat beneficiaries', who consistently follow an alternating pattern of work and benefit collection; this can be seen as a public subsidy to the firms who employ these workers.  Recently, continuing claims have seen even greater seasonality, displaying highly unreliable week-to-week movements.

Current Situation

In the current economic climate and with the unemployment rate still at 9.5%, the exhaustion of unemployment insurance is a highly pertinent issue.  We estimate that over 2.5 million unemployed Americans had exhausted even their extended benefits prior to this week's extension.

The number of initial weekly jobless claims spiked to over 650,000 in early 2009 and has remained at elevated levels in spite of the economic recovery.  But this trend has been coupled with an increase in the claim rejection rate as larger numbers of ineligible filers (including former Census hires) and construction workers (who tend to file more frequently) have applied for benefits.  We think this may be the result of (a) the unusually long period of extended benefits and (b) the unusually large role that housing and construction played in the recent recession. 

In contrast, continuing claims have seen a steady decline.  There is no way to tell whether this is due to the unemployed finding jobs or to their exhausting their benefits, although current extension programs provide additional incentives to run through regular benefits and obtain additional payouts.  Thus, we believe that the current initial and continuing jobless claims data present a distorted view of the underlying labor market conditions.   

Benefit Extensions

During times of prolonged economic duress, Congress often authorizes extensions to the standard unemployment compensation program.  In response to the recent downturn, Congress passed the Extended Benefits (EB) and Emergency Unemployment Compensation (EUC08) programs, the latter of which was enacted as a one-time provision of the 2008 stimulus package.  Given the depth and duration of the recession, these programs have seen many extensions, most recently until November 6, 2010. 

During the recent downturn, Michigan has consistently been the state with the highest level of unemployment and aggregate unemployment insurance payouts.  Not surprisingly, this state currently has all available emergency programs in place.  Reflecting the severity of the recession, there are many unemployed persons in other states that offer the maximum 99 weeks of benefits who have exhausted their benefits.  

Debate over Pros and Cons of Unemployment Insurance

The efficacy and usefulness of unemployment insurance are subject to an ongoing debate.  Opponents assert that such benefits provide a disincentive for people to return to work and needlessly add to the country's debt.  Indeed, the dramatic extension of benefits may be one of the factors responsible for the recent rise in the duration of unemployment. Conversely, proponents of these programs argue that unemployment insurance stimulates consumer spending and serves as a form of countercyclical fiscal stimulus during periods of recession. 

Resolving this debate hinges on the actual impact of unemployment insurance on individuals' behavior regarding employment, which is itself open to debate.  Certainly, if the payout for being unemployed increases sufficiently, after a certain point the recipient will be less motivated to seek a new job.  However, the extent of this ‘moral hazard' is unknown and, as The Economist points out, varies over time.  During the current downturn, the Federal Reserve Bank of San Francisco has found this effect to be negligible. 

In addition, the cost of providing unemployment insurance must be weighed against the increased consumption it enables.  According to the Congressional Budget Office, for every dollar of unemployment insurance, up to 1.9 dollars is generated in the economy.  Moreover, jobless benefits (averaging $300/week) can have a material effect on the ability of households to pay their mortgages and stave off foreclosure - a crucial support for the still weak US housing market.  On the other side of the debate, some argue that the historically lower rate of unemployment in the US versus Europe is a result of lower unemployment insurance payments and taxes in the US. 

Impact as Fiscal Stimulus

Similar to the progressive income tax system and Medicaid, the basic unemployment insurance program represents an automatic stabilizer that helps to cushion the effects of an economic downturn.  As the economy begins to weaken, this measure increases in magnitude and impact.  The augmentation boosts the economy and partially counteracts the overall downward macro trend.  To enhance this function, extended unemployment insurance was one of the primary components of the 2009 American Recovery and Reinvestment Act.  This fiscal stimulus bill extended the emergency unemployment compensation program, allowed states to temporarily lower their unemployment insurance eligibility requirements, and raised weekly payouts for various unemployment programs by $25.  This expansion of UI programs and payments represents discretionary fiscal policy. 

Later this year after the latest extended benefits expire, the debate over whether to renew them yet again will be a lightning rod for the political economy debate about the budget and fiscal policy: Some will repeat their calls for any renewed extension to be deficit-neutral, ‘paid for' by other spending cuts, while others will doubtless view the expiration as a fiscal drag that the uncertain economy can ill afford.  That renewed debate, which will resume after the mid-term elections, will likely be intense because it will come at the same time that officials must decide whether to extend the Bush tax cuts on ordinary income, capital gains and dividends.

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United States
Why Is US Employment So Weak?
July 26, 2010

By Richard Berner | New York

Healthcare headwinds.  US job gains so far in this expansion have been atypically weak, especially considering the record depth of the employment downturn.  Assuming that the recession ended in June 2009, private non-farm payrolls have been flat over the past year, compared with a 2.3% gain in the first year of the past seven recoveries.  Clearly, much of that weakness is cyclical, reflecting the widely expected sub-par rebound.  In our view, however, structural culprits are also at work; of these, we think that high and rapidly rising healthcare costs are one of the most important and certainly the most overlooked.  That's long been a key factor in our view that job gains will remain tepid for now.   

But weak employment gains don't condemn the economy to 1-2% growth, because a rising workweek is a powerful offset that spreads across the workforce.  For example, although private payrolls rose by only 0.6% in the six months ended in June, courtesy of the 18-minute rise in the workweek, private hours worked rose by 1.4%.  A similar percentage increase in private payrolls would average 256,000 monthly.  In addition, temporary hires testify both to the need for labor and to the desire to avoid a commitment to healthcare benefits.  In this recovery, temp hires have jumped 19.6% from the trough versus an average of 3% in each of the past two recoveries.  While payroll gains seem likely to increase to an average of 150,000 monthly in 2H10, hours worked may rise by more as companies continue to substitute increased working hours and temps for full-time hires until the economy is on firmer ground. 

To be sure, there are other structural hiring headwinds.  Among them: Mismatches between skills needed and those available; labor immobility resulting from negative equity in housing; and uncertainty around policies in Washington.  Along with rising healthcare costs, we think all will continue boosting the workweek for now. 

Working longer hours doesn't spread income directly to the unemployed, nor does it create the boost to consumer confidence that comes from stepped-up hiring.  But it does generate income that is helping to make the recovery self-sustaining.  That's evident in the strength of withheld tax payments through June, which are up more than 4% from a year ago.  And it does indicate that employers need more labor services - necessary for an eventual improvement in the employment outlook.

Structural problems surfaced a decade ago.  Healthcare costs have been high and rising for some time, and other structural issues aren't new.  So why do we think they are suddenly a big deal in suppressing hiring?  We don't.  In fact, for the past decade structural factors have been behind the shift from a "high-pressure" to a "low-pressure" economy, according to Treasury Assistant Secretary for Economic Policy Alan Krueger and Lawrence Katz, both noted labor market experts.  Krueger notes that:

From December 1989 through December 1999, the economy gained 21.7 million payroll jobs.  By contrast, from December 1999 through December 2009, the economy lost 944,000 jobs.  This poor performance is not only due to the recession at the end of the decade.  Job gains in the 2000s are weak even if we exclude the losses that occurred during the recession: Over the first eight years of the 1990s, the economy gained almost 16 million jobs; during the first eight years of the 2000s, however, payroll employment rose by somewhat less than 7.5 million jobs, a little less than half of the previous decade's eight-year increase.

And Lawrence Katz amply documents the structural labor market problems glaringly apparent in the wake of the recession (with updated calculations):

Two particularly worrisome signs suggestive of longer-term structural labor market problems and persistent costs of unemployment from this recession are the concentration of the rise in unemployment among permanent job losers and the huge increase in long-term unemployment.  Permanent job losers (job losers not on temporary layoff) increased from 1.7% in November 2007 to a peak of 5.6% in October 2009 and remained at 5.0% in June 2010. The number of long-term unemployed (those unemployed 27 weeks or longer) reached over 6.75 million in March 2010, representing 45.2% of the unemployed. The long-term unemployment rate (those unemployed 27 or more weeks as a share of the labor force) has increased from 0.9% in November 2007 to 4.4% in June 2010, well above the previous post-war peak of 2.6% in June 1983.

‘Fixed' healthcare costs hobble job gains, boost hours and temps.  That still begs the question of whether healthcare costs or other structural hurdles are the reasons for limiting hiring.  In our view, healthcare costs are critical: Thanks to the high ‘fixed' costs of health and other benefits, and of taxes on labor to pay for the social safety net, US labor costs are out of line with other countries when adjusted for living standards.  We say ‘fixed' costs because benefit costs don't vary with hours worked; they are paid on a per-worker basis.  And healthcare benefit costs, which account for 8% of compensation, have risen by an average 6.9% annual rate over the decade (or nearly doubling over ten years) ended in 2008 versus 4.5% for wages and salaries.  As employers seek to cut the cost of compensation, therefore, these benefit costs drive a growing wedge between total compensation and take-home pay.  Unlike in other countries where healthcare benefits are not directly part of compensation, these rising costs likely have intensified employers' efforts to boost productivity by cutting payrolls.

Moreover, the role of healthcare costs as a brake on hiring intensified in recession, as the fixed or rising cost of healthcare collided with shrinking top- and bottom-line results.  Just as operating leverage crushes earnings in recession as fixed costs are spread over a smaller base, it also crushed employment as layoffs became the only way to cut the per-worker cost of healthcare.  For workers, the recession made the wedge between compensation and wages bigger, as cost-cutting private-sector employers cut take-home pay while leaving fixed-cost benefits intact.  Thus, US relative labor costs go up versus other countries while median pay suffers.

Not simply traditional cyclical behavior.  A rising workweek and stepped-up temp hiring are time-honored leading employment indicators, so it could be that the recovery is simply tepid.  But this time, the strong gains in these two measures signal structural headwinds to full-time hiring.  As noted above, both have exceeded typical cyclical norms as health insurance costs rose.  Careful statistical work confirms that relationship.    

For example, Freeman and Rodgers note that the Kaiser Family Foundation found that between 2000 and 2003, employment for those at firms offering healthcare benefits fell by 2.8%, twice the decline in overall payrolls.  Sarah Reber and Laura Tyson also find support for rising health insurance cost as a deterrent to employment growth.  Katherine Baicker and Amitabh Chandra find that a 10% rise in health insurance premiums reduces the aggregate probability of being employed by 1.6% and hours worked by 1%, and increases the chance that a worker is employed only part-time by 1.9%. 

To be sure, three other structural factors represent hiring headwinds: Mismatches between skills needed and those available; labor immobility resulting from negative equity in housing; and uncertainty around policies in Washington.  Importantly, in an earlier note, we suggested short and long-term solutions to these headwinds; here, we simply outline the problems.

Obstacle 1. Skills mismatch.  The problem: For years, employers have complained that they don't find the skills they need in today's workforce.  Worker skills have greatly lagged technical change and tectonic shifts in the structure of our economy.  Immigration restrictions and massive dislocations in several industries in recession have magnified that mismatch as workers who have been trained for one occupation lose their jobs.  A May 2010 Manpower research survey showed that even in recession, 14% of firms reported difficulty filling positions due to the lack of suitable talent available in their markets; in 2006 the same survey reported that 44% of firms couldn't find the skills needed.  That decline speaks to the depth of recession; it is clear that a large portion of the long-term unemployed lack requisite skills.  And even in healthcare, an oasis of job growth, there is a growing nursing and nursing skills shortage that requires new training facilities.   

Obstacle 2. Labor immobility resulting from the housing bust.  America's workers have always been footloose.  Even in the Great Depression, they looked for work wherever it was.  Today, however, about one in four homeowners is trapped in their house because they owe more than the house is worth, so they can't move to take another job - until they sell or walk away.  Unlike in the Depression, when homeownership was less prevalent, negative equity among a nation of homeowners leads to substantially lower mobility rates.  Owners suffering from negative equity are one-third less mobile according to one study.  That is leading to a wave of ‘strategic defaults', in which borrowers who can otherwise afford to pay decide to walk away.  Whether through foreclosure or default, this process is undermining the economic and social fabric of communities and reducing job opportunities. 

It's striking that the current policy debate in Washington and Wall St - focused on whether and by how much to ramp up fiscal and monetary stimulus - has overlooked the severe problems in housing that to us pose the biggest downside risk to our cautiously optimistic outlook.  It is essential to reduce or refinance debt, writing off bad loans while not destabilizing the financial system.  Modifying existing mortgages seems appealing, but policies aimed at mitigating foreclosures under the Home Affordable Modification Program (HAMP) for borrowers whose homes are worth less than what they owe have not worked because they attempt to modify mortgage payments and not the amount of debt owed; re-default rates following modification are 50-60%.  And for the 75% of homeowners with equity in their homes, the refinancing process is blocked by high loan-to-value ratios and joblessness.

Obstacle 3. Policy uncertainty is a negative for the economy and markets.  America's long-term challenges - healthcare, budget and tax reform, financial regulatory reform, retirement saving, infrastructure, education, energy, and climate change - are not new.  Solving them is imperative, and major legislation to address them represents important steps toward those ends - e.g., promoting increased access to healthcare and a safer financial system.  But the uncertainty around the costs of those policy changes and the uncertain magnitude of prospective tax hikes that will be required to address our fiscal problems is weighing on business and consumer decisions to hire, expand, buy homes and spend. 

Recent work confirms this intuition, underlining how uncertainty produces negative growth shocks.  Nicholas Bloom shows how a rise in uncertainty makes it optimal for firms and consumers to hesitate, which results in a decline in spending, hiring and activity.  In effect, the rise in uncertainty increases the option value of waiting as volatility rises.  Moreover, this line of reasoning suggests that uncertainty reduces the potency of policy stimulus.  That's because the uncertainty can swamp the effects of lower interest rates, transfers or tax cuts.  In effect, uncertainty raises the threshold that must be cleared to make a business choice worthwhile, and as uncertainty declines, the threshold falls with it.  This notion squares with our long-held view that policy traction from easier monetary policy, improving financial conditions and fiscal stimulus was lacking through much of last year, but improved as uncertainty fell. 

Market participants are used to thinking that political gridlock is good, that it prevents politicians from interfering with the marketplace.  The financial crisis clearly exposed the flaws in that reasoning with respect to appropriate financial regulation, whose absence allowed abuses.  Indeed, gridlock today is more likely to be bad for markets, as our long-term economic problems are partly the result of past policies and can only be solved with political action, in our view. 

Implications of a rising workweek.  Working longer hours doesn't spread income directly to the unemployed, nor does it create the boost to consumer confidence that comes from stepped-up hiring.  But it does generate income that is helping to make the recovery self-sustaining.  And it does indicate that employers need more labor services - necessary for an eventual improvement in the employment outlook.

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