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Unemployment Insurance in Iowa: Positive Impacts for Working Families and the Economy
By National Employment Law Project
Unemployment insurance is our nation's first line of economic defense in a recession. Since the mid 1930’s, unemployment insurance has kept unemployed workers attached to the labor force and out of poverty while they search for new work. The system is designed to benefit workers, their families, their communities and the economy.
Iowa’s unemployment insurance (UI) program is among the nation’s stronger UI programs. The state’s trust fund is more than solvent, ending 2003 with $627.2 million in reserves. UI payroll tax rates average only 0.66 percent of Iowa’s total wages in 2002. And, in calendar year 2003 alone, Iowans have received over $381.5 million in regular state UI benefits and $73.83 million in federal emergency extension benefits.
Unemployment insurance is designed to pay weekly benefits to laid off individuals so that unemployed workers and their families can maintain essential family spending. In addition, by using accumulated payroll taxes from trust funds, unemployment insurance (UI) automatically boosts our economy by maintaining consumer spending during a recession. This briefing paper provides an overview of Iowa's UI program, its positive impact on the state's economy and citizens, and reforms needed for modernizing Iowa’s UI program in order to better serve today’s workforce and economy.
Positive Economic Impacts of Unemployment Insurance
One of the main goals of unemployment insurance is to accumulate payroll tax revenues in a trust fund during the growth phase of an economic cycle and to automatically stimulate the economy by using those funds to pay increased benefit claims during economic downturns. An affirmate statement of the goals of UI was provided by the federal Advisory Council on Unemployment (ACUC), a bi-partisan body created by Congress in 1993 to evaluate the nation’s UI system. According to the ACUC (1996):
The related goals of the UI program are providing involuntarily unemployed workers with adequate, temporary income replacement as well as automatically stabilizing the economy by using accumulated trust funds to maintain consumer spending during an economic downturn. Secondary goals include supporting the job search of unemployed individuals by permitting them to find work that matches their prior experience and skills, as well as enabling employers to retain experienced workers during layoffs.
Virtually every dollar of UI benefits is immediately spent by laid off workers on expenses of daily living, including rent or mortgage payments, utility bills, groceries, gasoline, and medical bills. In other words, UI benefits are tantamount to payments to Iowa businesses for goods and services. Critics of unemployment insurance essentially view UI benefits as disappearing from the economy after the benefit checks are sent to jobless workers. This one-sided approach considers only the costs and not the benefits of UI programs.
Economists in general agree that UI programs help the economy. A study of UI's economic impact, commissioned by the U.S. Department of Labor in 1999, found that UI benefits produced $2.15 of increased economic activity (GDP) for every $1.00 in UI benefits paid to jobless workers. Focusing on the last five recessions in the United States, the report's authors estimated that these recessions were 15 percent milder and had fewer layoffs than otherwise would have occurred if not for UI's contribution toward consumer spending. The report employed a widely used Wharton economic forecasting model for the national economy. While the degree of economic stimulation from UI benefits estimated by economists has varied from study to study, a positive economic impact from UI benefits is invariably reported. (Chimerine, 1999).
In 2003, the UI program pumped $381.5 million in regular state UI benefits into the economy of Iowa. An additional $73.83 million in federally-financed emergency extended benefits kept the long-term unemployed out of poverty and attached to the workforce. These UI funds were spent with Iowa businesses, assisting communities hit by layoffs and increased unemployment, and reducing their adverse impact on the economy. Hundreds of millions more UI dollars have been put into the Iowa economy since the 2001 recession, and the Iowa economy is performing better than it would be today because of the positive impact of its UI program.
Iowa’s UI program has a good financial base and adequate solvency because its taxable wage base is $19,200. More importantly, Iowa is one of 18 states that indexes its taxable wage base to keep pace with the growth in statewide average weekly wages. UI financing experts identify indexed taxable wage bases as the single most important policy that states can have to ensure its UI trust fund’s adequacy.
Positive Impacts of Adequate UI Benefits
In November 2003, the most recent month for which figures are available, the Bureau of Labor Statistics reported that there were 8.67 million jobless workers in the U.S. while there were only 2 million job openings. While Iowa’s unemployment rate is lower than the national rate, there is no evidence that significant numbers of job openings were available for the 71,208 Iowans without jobs in December 2003. While durations of payments typically climb during economic downturns, this increase reflects the greater difficulty in finding scarcer jobs during a downturn, rather than an increased willingness of jobless workers to stay on UI benefits. Only 29.1 percent of jobless Iowans exhausted their UI benefits during the 12-month period ending September 30, 2003. Nationally, almost 44% of jobless workers exhausted their UI benefits during this period.
Iowa’s UI benefit amounts provide adequate, but not excessive, support to its jobless workers. Generally, a replacement rate of pre-layoff wages by UI benefits in the range of 50 percent is recommended (ACUC, 1995). Iowa’s replacement rate in the third quarter of 2003 was 44.7 percent. Weekly benefits on average in Iowa were $255 for the third quarter of 2003. The national average weekly benefit for the third quarter of 2003 was $260. Iowa’s UI benefits are not out of line with recommended UI policy or benefit levels in states that maintain adequate benefit levels. Obviously, Missouri and South Dakota are making no attempt to pay adequate UI benefits and should not be models for Iowa.
Adequate weekly benefits promote the income replacement and economic stimulation goals of UI. Iowa’s UI benefit levels should be maintained, especially during the lasting job slump that is continuing into 2004. A very significant positive feature of Iowa’s UI program is that maximum weekly UI benefits are indexed to growth in statewide wages. Thirty-four states index their maximum weekly benefits, and these states have a much better track record in paying adequate benefit levels than states that rely upon their legislatures to update weekly benefit levels.
Preventing economic hardship remains a bedrock principle underlying UI programs. This anti-poverty impact is obviously greater if adequate UI benefit amounts are provided by a state. During the early 1990s recession, UI prevented tens of thousands of workers from going into poverty. (Corson, 1999) This study found that without regular and extended UI benefits, over 70% of UI recipients would have fallen into poverty, compared to the 40% who experienced poverty after exhausting their regular UI benefits. An earlier study conducted by the Congressional Budget Office in 1990 similarly found that 'for about one-fourth of long-term recipients, UI benefits made the difference between a monthly income above or below the poverty line.” Maintaining Iowa’s UI safety net must be a priority during this continuing economic downturn.
Expanding UI Eligibility in Iowa to Help Low-Wage Workers and Working Families
Less than half of the unemployed receive UI benefits in Iowa when measured by the relationship between “insured unemployed” workers (those getting UI benefits or serving a waiting week) and its “total unemployed” workers (those without work that actively sought a job). Iowa's UI program paid benefits to 46% of the unemployed during the twelve months ending in the 3rd quarter of 2003. The average national recipiency rate in the country during that time period was 41%. The states with the highest recipiency rates pay closer to two-thirds of their jobless workers.
While Iowa has a strong UI program, there are steps it could take that would expand UI eligibility and strengthen its UI safety net. Fortunately, policies needed to expand UI eligibility by assisting involuntarily unemployed individuals with active labor market attachment are found in other states. Iowa could increase its UI recipiency by counting recent wages when determining UI eligibility. Iowa could assist working families by recognizing that compelling family circumstances provide a valid reason for leaving work. And, Iowa can resist adopting restrictions found in other states that add nothing positive to a state’s UI program and cause needless denials of UI to jobless workers.
The reason for not considering recent wages goes back to the early days of UI, when state agencies kept manual records of wages relying upon paper-based reports from employers. For this reason, states defined their “base periods” to include a “lag quarter” in order to give agencies more than a 3-month period to put their wage records into order prior to taking claims that used those wages to establish monetary eligibility. The traditional base period definition, still used in Iowa, is the “first 4 of the last 5 calendar quarters.” Figure 1 shows how the traditional base period works. Wages in the “filing” quarter and the “lag” quarter fall outside the definition of the base period and are not considered in determining monetary eligibility.
There is no persuasive rationale supporting the exclusion of recent wages from consideration now that technology permits the collection and use of this data more quickly than in the early days of UI, Index cards and manual recording of wage data are no longer required. Increasing numbers of states are adopting ABPs as a way to modernize their UI programs. In all, nineteen states now use ABPs. See Figure 1. UI claims costs have risen by 4 to 6 percent in states that have enacted ABPs in the past. Among those assisted by ABPs are low-wage workers and individuals with part-year work experience. (National Employment Law Project, 2003). Iowa should adopt an ABP in order to expand UI eligibility.
Step 2: Expand Good Cause to Include Quits for Compelling Family Reasons
Like a majority of states, Iowa requires that good cause for leaving a job generally must be “attributable” to the employer. Iowa Code Sec. 96-5(1). Iowa law permits a number of exceptions to this limitation on good cause, recognizing that leaving a job to accept other employment, to care for a sick or injured member of one’s immediate family, or is not reinstated after leaving work under the advice of a physician. Despite these exceptions, there are many other compelling domestic situations that are disqualifying in Iowa.
In recognition of the growth in families with two working parents and single working parent, states have a number of measures to provide UI benefits to individuals with good personal cause for leaving work. Eight states have voluntary leaving provisions that pay UI benefits to that that leave work for personal good causes that would compel a similarly situated reasonable person to leave work.
Another seven states permit quits for compelling domestic circumstances. For example, Kansas UI law recognizes that good cause for leaving exists when there is “a personal emergency of such nature and compelling urgency that it would be contrary to good conscience to impose a disqualification.” North Carolina excuses quits or refusals of work that would create “an undue family hardship.” Twenty-four states have adopted specific provisions excusing quits by individuals escaping domestic violence. The best of these include sexual assault victims and also protect those discharged as result of the consequences of domestic violence or sexual assault from misconduct penalties. (Smith, 2003).
While Iowa has taken some “baby steps” toward expanding the reasons its recognizes as valid good cause for leaving a job, it does not have a family friendly approach that recognizes today’s reality for working families. No one wants to leave a job to care for an elderly parent or to tend to a dying spouse. However, these sorts of dilemmas face Iowa families every day. If otherwise eligible and attached to the labor market, these individuals should not be denied UI benefits because they are forced to quit work.
Conclusion: Iowa Can Do More For Jobless Individuals.
Prepared by: National Employment Law Project
Note: All UI statistics are provided by the U.S. Department of Labor, Office of Workforce Security.
Advisory Council on Unemployment Compensation (1995). Benefits, Financing and Coverage, U.S. Department of Labor.
Advisory Council on Unemployment Compensation (1996). Defining Federal and State Roles in Unemployment Insurance, U.S. Department of Labor.
Chimerine, Lawrence et al. (1999). Unemployment Insurance as an Economic Stabilizer: Evidence of Effectiveness Over Three Decades, U.S. Department of Labor, Unemployment Insurance Occasional Paper 99-8.
Congressional Budget Office, Congress of the United States (1990). "Family Incomes of Unemployment Insurance Recipients and the Implications for Extended Benefits.”
Corson, Walter et al. (1999). “Emergency Unemployment Compensation: The 1990s Experience,” Mathematica Policy Research, U.S. Department of Labor, Unemployment Insurance Occasional Paper 99-4.
National Employment Law Project (2003). “What is an Alternative Base Period and Why Does My State Need One?” National Employment Law Project Fact Sheet.
Smith, Rebecca, et al. (2003). Between a Rock and a Hard Place: Confronting the Failure of State Unemployment Insurance Systems to Serve Women and Working Families, National Employment Law Project.
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