Unemployment Insurance: A Hand Up or A Hand Out?

Washington’s Unemployment Insurance (UI) program has a noble sounding mission:

The mission of the Unemployment Insurance Program is to enhance the well-being of the state workforce and business community through the timely and equitable payment of benefits and the collection of taxes and overpayments. The program promotes economic security for individuals, their families and their communities, and assists employers to maintain a stable workforce.

Unfortunately, like many government programs created with good intentions, the UI program is now contributing to our state’s anti-business climate rather than helping to solve it. The program’s implementation has resulted in fewer jobs, higher unemployment, and less security for businesses.

The UI program has five major problems that need to be resolved: 1) high rates, 2) high benefits, 3) perverse incentives, 4) lack of accountability and enforcement, and 5) insufficient return on federal contributions.

While just one of the identified problems would be a burden for state businesses, the combination of all five has resulted in a program that could single-handedly convince prospective businesses to avoid Washington, and convince existing businesses to minimize their investments or leave the state entirely.

1. UI rates are highly inflated.

Washington businesses are taxed an average of 2.2% on the first $26,000 dollars of an employee’s wage. This gives our state the dubious distinction of ranking second in the nation for taxable wage base per employer. By comparison, California only taxes the first $7,000 dollars of an employee’s earnings.

With a current UI trust fund of $1.8 billion, Washington has the nation’s ninth highest business contributions to the unemployment program. Because UI rates are not based on the state’s real average wage, but also include additional compensation like stock options, businesses operating in Washington are burdened with a UI rate substantially higher than businesses in other states. With the highest unemployment rate in the country at 5.7% (the US average is 4.5%), Washington businesses face a significant expense when it comes to paying UI benefits to unemployed workers.

2. Unemployment benefits are high.

Employers in Washington pay the nation’s fourth highest maximum weekly benefits to UI claimants. While the average weekly paycheck in our state is about $719, a recipient of UI is eligible for a maximum of $496 dollars a week. Further complicating matters is the unequal distribution of benefits. Many claimants receive benefits based on wages they never actually earn. When presented with a choice between finding a new job and staying at home to collect $11,940 over a six month period, it is not difficult to understand why Washington ranks first nationwide for the number of initial UI claims filed. The state registered 150,295 claimants in the first quarter of 2001. With an average payment of $4,282 per person, Washington has the nation’s second highest average UI payments per recipient. Rather than simply aid an individual or family in temporary need, Washington’s UI program provides long term income.

3. The current UI program offers perverse incentives to remain unemployed.

Even with one of the highest minimum wage requirements in the nation ($6.72 per hour), a person can still collect more money from the average UI check in Washington. When individuals can make more by staying home than by going to work, it is probable that they will be tempted to do so. The result is a program that offers perverse incentives for remaining unemployed.

4. The UI program lacks enforcement and accountability.

Individuals receiving UI benefits are required to show that they have followed up on at least three job possibilities a week. They are not required to physically report to any state office, or even set foot in any place of business during their search. Glancing through the classifieds and making an inquiry by phone fulfills the state’s requirements. Individuals who belong to a full referral union qualify for benefits if they are a "member in good standing" (their dues are current), and have followed the union rules for dispatch. However, the Employment Security Department (ESD) has no system in place to monitor a member’s attendance for dispatch or a member’s rejection of a suitable job.

When provided with data showing that members of a full referral union were not present for dispatch or refused a suitable job, the ESD responded by shifting the burden of proof from the individual to his or her former employer. While ESD does have a fiduciary responsibility to protect the UI fund, the measures it has adopted allow individuals to abuse the system.

5. Washington gets insufficient returns on contributions to Federal UI.

While all states pay into the federal UI program administered by the Department of Labor, only a portion of these UI payments ever make it back to the states. The federal program was set up to provide administrative funds to help operate state UI programs and to create an emergency fund for states in which UI trust funds are depleted during times of high unemployment. Rather than holding these funds in a trust and returning the unused portion to the states, millions of the dollars collected have been spent to pay down the national debt. Since the money is not being used for its intended purpose, states should be allowed to keep the full amount of UI revenues collected from businesses.

Until these five issues are resolved, Washington’s UI program will continue to work against our economy and citizens rather than for them. Two clear options exist regarding this situation: 1) to reform Washington’s UI program, or 2) to allow the status quo to imperil Washington’s economic future. It is obvious which option will serve to balance the needs of employees, employers, and our economic future and make our state a better place to live, work, and do business.

EFF will discuss these problems and potential solutions in more detail in future publications.

Contact: Jason Mercier, Deputy Communications Director, (360) 956-3482 or jmercier@effwa.org

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org