Weak on Unemployment Insurance Reform

As we head into the end of the first half of the two-year session, it’s a good time to reflect on the promises that we began with.  During the second week in January came a raft of proposals from the governor’s office on reforms.  It was a Week of Reform, with announcements of pending change regarding public housing authorities, budget savings and unemployment insurance.  Not all of the details were fully baked or, to be honest, even truly well thought out, but it seemed clear that the governor was not going to be a lame duck cooped up in the Corner Office.  He was ready and willing to engage the legislature on some key issues that affect the cost of doing business.

The week after came the other glove, which was a proposal to increase taxes by $2 billion, mainly through an income tax jump.  Not much has been heard of these Week of Reform — and one is tempted to call the months that followed Weak Reform.  The transportation/tax hike debate consumed all attention on Beacon Hill.

The fact is unemployment insurance needs to be reformed and now.  It is holding up hiring as employers are afraid in a tentative economy to hire people who might quickly join their rolls of unemployment insurance payees.  This is especially true in the small business sector and the thinner margin businesses outside of “sweet-spot” industries that the executive branch tends to focus on.

Pioneer’s 2006 report, Measuring Up? The Cost of Doing Business in Massachusetts, featured a partnership between economic research firm, Global Insight, and the Institute to explore the policies that put Massachusetts’ top 9 industries at a greatest competitive disadvantage.  One of the major cost drivers identified by the report was unemployment insurance rates.  At the time, we were second in the nation in per-employee costs for unemployment insurance.

In a 2011 follow-up study done in collaboration with Global Insight and the Massachusetts High Technology Council (Creating Jobs:  Reforming Unemployment Insurance in Massachusetts),  two important points were made:

• Massachusetts was the only state to provide 30 weeks of benefits whereas 48 other states provided only 26.
• Massachusetts allowed individuals who had been working for 15 weeks in only one quarter to receive the same level of benefits as someone who had been actively working for 20 years.

These two aspects of the Massachusetts system inhibit job growth.

When scrutinized on a national scale, the disproportionate allocation of these benefits is a clear indicator that meaningful reforms are in desperate need.  In a sense they amount to a “per job” tax that certainly affects the manner by which prospective employers approach their business models.  In 2010, the “per job” tax burden due to unemployment insurance cost in Massachusetts was $638, twice the U.S. average.

The following common sense approaches to restructuring UI are worthy of serious consideration:

• Reset benefit duration to 26 weeks (as is common practice in other states)
• Require greater workforce attachment by moving to the national standard of 20 weeks of work and requiring employment over 2 quarters.
• Advance employer equity by requiring heavy users of unemployment to pay more (by reforming experience calculations).
• Extend the payroll base for calculation of unemployment taxes to smooth out short-term volatility.

These are hardly radical proposals, and certainly nothing like the kinds of deep cuts that Patrick McCrory, governor of North Carolina signed earlier this year.

The controversial measure is intended to speed the state’s repayment of $2.5 billion it borrowed from the Labor Department to continue making benefit payments during the downturn. As previously reported, the changes include cutting maximum weekly benefits to $350 from $530 and reducing the number of weeks recipients are eligible for benefits to as few as 12 from the current 26, depending on the prevailing jobless rate.

The suggestions we are making on UI simply bring Massachusetts into the national norm, rather than penalizing our employers — and costing people the opportunity to work.  The UI system was established to provide temporary financial security to individuals who lose employment through no fault of their own.  As constituted, the current system exceeds many of the financial norms established in neighboring states.  A measured approach to address an overly-generous entitlement system is critical at a time when economic uncertainty lingers and the long-term viability of the program is at stake.

Follow me on twitter at @jimstergios, visit Pioneer’s website, or check out the Rock The Schoolhouse blog.