Unemployment Insurance: A Drag on Employment?
NEW POLICY BRIEF EXPLAINS HOW STATE’S SYSTEM DIVERTS FUNDS FROM THE NEEDY AND SLOWS JOB GROWTH
BOSTON – As our economy slows to the verge of recession, it is urgent that state government support the employers and workers who drive growth. Unfortunately, our unemployment insurance system is broken, diverting benefits away from the truly needy and increasing the cost of employing workers in Massachusetts.
Unemployment Insurance in Massachusetts: Burdening Businesses and Hurting Job Creation, a new Pioneer Policy Brief, presents convincing evidence that UI’s problems are serious, but solvable. “Our UI system gets abused by individuals and companies alike,” explains co-author John O’Leary, former director of the Commonwealth’s Division of Unemployment Assistance (DUA). “Helping those who experience unexpected job loss is one thing, but our excessive benefits and loopholes are a massive tax on every worker and company in Massachusetts.”
The following examples are from actual 2004 unemployment insurance claims:
– Ms. Q owns a jewelry store in Nantucket. She earned about $50,000 in the summer of 2004. In late autumn, she laid herself off and headed to Florida. Ms. Q pays the maximum UI insurance rate. In exchange for her tax payment of $1,534.40, Ms. Q gets $17,340 in benefits sent to her in Florida—subsidized by over $15,000 in taxes from other businesses in Massachusetts.
– A 46-year-old man from Brockton earned $33,700 for driving a school bus—plus an additional $7,620 in unemployment benefits. He has collected UI every year for 24 years.
– A 52-year-old self-employed interior decorator from Boston earned $68,000 in 2004, but also took in $3,500 from UI. He has collected UI in each of the past 25 years. These examples highlight the three key factors that jack up the cost of unemployment insurance in Massachusetts: most businesses subsidize the disproportionate benefits paid to employees of certain industries; “frequent flier” or “serially” unemployed workers repeatedly draw income from the system; and benefits are far more generous than those of other states.
Unemployment Insurance in Massachusetts: Burdening Businesses and Hurting Job Creation breaks down the data on these cost drivers:
1. Payments to a few are subsidized by most other businesses and workers.
– In 2004, laid-off workers from 3.9 percent of Massachusetts firms accounted for 32.5 percent of disbursed UI benefits.
– These heavy users paid $124 million in UI taxes, but their employees walked away with $403 million in benefits.
– Construction companies, temporary services firms, school bus companies, and seasonal businesses, such as landscaping and pool maintenance, are represented disproportionately.
2. Too many businesses and workers treat UI as regular income, not insurance.
– About 5,500 companies have been regularly drawing heavily on UI, the benefits to their employees exceeding their UI taxes in 2002, 2003, and 2004. Total subsidy to these companies in those three years: $1.2 billion, or a subsidy of about $73,000 per company per year.
– As seen by the examples above, some individuals have been collecting UI virtually every year of their adult lives. Far from providing help after an unexpected job loss, UI is a planned-for and carefully managed annual income supplement.
3. Massachusetts’ benefits are more costly than any other state’s.
– Massachusetts’ claimants stayed on UI 19 percent longer than the national average (16.3 weeks vs. 13.7 weeks) in 2000. Despite a healthy economy that year, we gave out $744 million in unemployment benefits, 53 percent more benefits than the national average: $283 per covered job here vs. an average of $185 everywhere else.
– In 2004, Massachusetts allowed UI claimants to collect up to $528 per week, more than in any other state. That’s 51 percent above the national average of $348 per week. Massachusetts is the only state in the nation to allow claimants to collect for 30 weeks.
– In 2005, Massachusetts led the nation in UI taxes per employee— an average of $637 per employee, about twice the US average of $315 per employee. In 2006, Massachusetts’ UI taxes cost business an average cost of $629 per employee, more than twice the national average cost of $298. – In 2006, no state had a higher maximum business tax rate than Massachusetts.
An attempt to reform the system in 2003 generated strong opposition, particularly from groups representing highly subsidized industries. In spite of this special-interest obstructionism, effective reform should be a priority.
The reforms detailed on the following pages would treat workers more fairly, benefit most existing businesses, and also help attract new employers to the state.
The key problems with our current system are:
Excessive Cross-Subsidization: The cap on experience rating at -15% results in massive cross-subsidy. Firms that are consistent employers subsidize the former employees of other firms that are seasonal or irregular employers.
Abuse of the Self-Triggering Mechanism: Unemployment insurance is meant as a social safety net for those who lose their jobs and incomes through no fault of their own. The ability for the self-employed or firm owners to “lay themselves off” is an abuse of the system.
“Frequent Fliers”: Too many individuals repeatedly and consistently apply for unemployment insurance. In many instances, the applicant has a number of consecutive applications per year. This has the effect of turning a social safety net into an ongoing wage supplement for a select number of workers.
High Benefits: Massachusetts has the shortest period for individuals to qualify for insurance, the longest payout period, and the highest level of cash benefit.
The authors suggest the following reforms:
Increase the experience rating factor. By increasing the maximum tax that could be imposed on companies that make heavy use of UI, the state could reduce the subsidy of seasonal and casual enterprises, especially in the construction and tourism sectors, by employers in other sectors. These subsidies exceeded $312 million in 2007 much of that to businesses that effectively use UI as a wage subsidy for their workforce.
Limit Repeated, Serial Utilization of Unemployment Insurance. Eligibility for UI should be restricted for those workers who have received benefits in four consecutive years, or received benefits in seven years over a ten-year period.
Expose and Prevent Self-Triggering. A higher standard of scrutiny should apply to repeated applications for benefits. Applicants would have to demonstrate that the business in question actually closed, rather than performing a cosmetic ”layoff” to enable benefit collection.
Enhance the DUA’s anti-fraud powers. Most importantly, the DUA should have the ability to to garnish wages in established fraud cases in which a court judgment has been rendered. Currently, DUA uncovers millions of dollars in fraud that it cannot collect.
Align benefit levels more closely with those of other states. Bringing benefits closer to national averages, in terms of time, eligibility, and/or payment levels, would reduce unemployment insurance taxes and discourage gaming of the system.
John O’Leary is the former director of the Division of Unemployment Assistance and Assistant Secretary for Administration and Finance. Steve Poftak is the Research Director at Pioneer Institute.
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### Pioneer Institute is a non-partisan public policy think tank committed to keeping Massachusetts economically competitive and to strengthening the core values of an open society. To inspire market-driven policy reforms, Pioneer promotes individual freedom and responsibility and limited, accountable government. The Institute has changed the intellectual climate in Massachusetts by commissioning timely and rigorous academic studies from leading scholars. Pioneer injects new ideas into the public debate through forums and lectures, transcripts, the media, and outreach to legislators, business groups and the general public.