Via Financial Times

The US unemployment insurance system was designed to encourage people to look for work during a recession. It was not designed to keep them home during a pandemic.

That is what it will have to do anyway. According to estimates compiled from early state reports, as many as 2m people might have filed a claim for cash help in the past week — a number without precedent in any previous recession.

Unemployment insurance was “absolutely the fastest way, full stop, to get money to people”, said Michele Evermore of the National Employment Law Project. The $2tn stimulus package working its way through Congress will dramatically increase aid through the programme, although the exact details remained unclear late on Wednesday.

“Research shows that the US unemployment insurance system provides a valuable backstop for working families,” said Mary Daly, a labour economist and president of the San Francisco Federal Reserve. “The federal government’s consideration of measures to expand federal funding and availability of UI payments makes a lot of sense.”

The unemployment insurance system is funded by both the federal government and the states, which will have to scale up their programmes quickly. Not all states are equally prepared. All states will have difficulty adapting.

How does the US unemployment insurance system work normally?

Under a federal law, every US state runs its own unemployment insurance fund. States build their funds up in good years, and run them down in bad ones. On average at the end of 2019, unemployed workers received $368 per week — or 45 per cent of lost wages. Under normal conditions, most states pay benefits for 26 weeks.

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The law also gives states wide discretion to determine benefits. In Florida, the average benefit was $251, offered for 23 weeks. In Massachusetts that was $518, for 30 weeks.

The federal government acts as a backstop for the state programmes in recessions. States can extend benefits for up to 20 weeks, and a federal fund pays half.

State agencies know more about where people live and how to pay them than federal authorities, said Ms Evermore, and the unemployment insurance system “has a remarkable way of knowing who’s unemployed”.

How will the stimulus bill from Congress change the state systems?

Under the agreement being considered in Congress, the federal government would add as much as $600 a week on top of state benefits, and add a month to the length of time that people can get cheques. That would raise the wage “replacement rate” for some to more than 100 per cent.

The replacement rate is normally set so low to encourage people to find new jobs, said Martha Gimbel, an economist at Schmidt Futures. “That’s not where we are right now,” she said. “We want people to stay home.”

Peter Ganong of the Harris Public Policy school at the University of Chicago said discouraging people from looking for work made sense during the pandemic. When the economy was at full speed just a few weeks ago, workers were well matched with the right jobs. “If we can snap our fingers and three months from now go back to normal and go back to our jobs,” he said, unemployment insurance might be a good way to get as close to that ideal as possible.

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What happens when 2m people file a claim at the same time?

States will have trouble processing a rush of claims, even though many began training extra workers last year after a bond market indicator of recession — known as the Treasury yield curve — suggested a downturn might be on its way.

Several state websites have already crashed under the sudden load. In 2016, the White House requested $5bn for new information technology at state unemployment agencies. It was not appropriated.

“It’s going to be hard for the state [unemployment insurance] systems to ramp up sufficiently,” said Mr Ganong at the University of Chicago. “In general, what we need is a massive cash infusion to state [labour] agencies, to pay the administrative costs of expanding this programme.”

Which states will have the most trouble?

Over the past decade, a few states have worked to drive down their “recipiency rates” — a measure of how many people without jobs receive benefits. They can do this by raising barriers and paperwork, discouraging applicants. They also cut benefits, making application not worth the trouble.

There is a clear divide between red and blue states. Mississippi, Tennessee, Georgia, Louisiana, South Dakota, Florida and North Carolina all have recipiency rates at or below 15 per cent. California, Pennsylvania, Connecticut, Minnesota, Iowa, Massachusetts, Hawaii and New Jersey are all above 40 per cent.

The states with the lowest recipiency rates, according to Ms Evermore and Mr Ganong, were likely to have the lowest staffing levels, and the most difficulty adjusting to rising demand, particularly if legislation from Congress encourages applications by raising benefits, as it is likely to do.

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Will the unemployment insurance system run out of money?

“States are going to burn through their trust funds,” some more quickly than others, said Ms Evermore. About half of the states do not have enough in their funds to cover a year of a normal recession. Congress would probably need to act again in several months, she said, since a deep recession was likely to follow the months-long lockdown of the pandemic — and state funds would be empty.

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