President Obama has announced a package of reforms to repair some of the damage done in recent years to the unemployment insurance system and to provide more help to workers at risk of losing jobs—incentives for employers to retain workers, more income support for job losers, and more help getting retrained and back to work. Reforms are needed, and most of the president’s proposals are obviously helpful.

Background

When the economy crashed in 2007 the federal-state system of unemployment insurance (UI) was far from ready. States had had five years since the previous recession to replenish their UI trust funds, improve coverage (with the help of generous federal grants provided during the Bush administration) and plan for the next downturn. Yet when the crash came and the unemployment rate rose to 10 percent, UI trust funds had not been refilled. Many states had unwisely cut taxes rather than accumulate surpluses that could be drawn down in a recession. By 2007, only 17 states were minimally solvent. Some states—but not many—had extended coverage to workers with unstable employment histories, seasonal workers, and poorly paid individuals who previously would not have qualified for benefits. If you had to give the states a grade on preparedness, a D+ would be generous.

The result was a disaster. Thirty-six states ran out of money and had to borrow in order to pay benefits, with the loans peaking at $47 billion in 2010. Most of the state UI trust funds are still in bad shape, and—according to the White House—only 20 states have sufficient reserves to weather a single year of recession. As of January 13, 2016, California still owes $6.5 billion to the Federal Unemployment Account, Ohio owes $773 million, and Connecticut owes $100 million.

After the economy crashed, Congress quickly passed extended, federally funded unemployment compensation (EUC) for workers who exhausted their state benefits (the program was renewed several times and expanded, eventually paying a maximum of 73 weeks of 100 percent federal benefits in addition to the normal 26 weeks of state benefits). The EUC program was a huge success: it supported hundreds of thousands of jobs, kept millions of families out of poverty, and helped get the economy back on a growth path. More than $250 billion was paid to jobless workers, most of whom had no other substantial source of income. But EUC was ad hoc and temporary, and was terminated at the end of 2013, even though unemployment was still high and millions of people needed help.

Moreover, many states reacted to the Great Recession as if it had been the fault of the workers who lost their jobs, rather than the mortgage industry, the Wall Street banks making reckless loans and even riskier bets on derivatives, or the credit rating agencies that gave junk investments AAA ratings. Republican politicians in Congress and in the states began blaming unemployment on unemployment compensation, as if the way to create jobs were to starve the jobless. Even though the $250 billion in EUC benefits had kept millions of families above water and enabled consumption that fueled local economies that would otherwise have kept collapsing as businesses shrank or shut down, Republican leaders claimed that UI was a job killer.

In nine states, beginning with Arkansas in March 2011, politicians reduced the maximum duration for regular state benefits—not to be better prepared for the next recession, but to make sure that workers would get less help and would suffer more when they lost their jobs. In the most extreme case to date, North Carolina cut its maximum duration to a sliding scale of from 12 to 20 weeks and also reduced the dollar amount of weekly benefits.

These reductions have contributed to a quiet crisis for the unemployed. As of October 3, 2015, barely a quarter of unemployed workers, 26.3 percent, were receiving jobless benefits.

Obama’s proposals

The foregoing is the context in which the president announced a three-pronged strategy to better assist the unemployed. The best part of his proposal deals directly with UI.

The president wants to expand coverage to include more part-time workers, newer labor market entrants, certain low-income and intermittent earners, and workers who leave work for compelling family reasons such as to move with a spouse, escape domestic violence, or care for an ill family member. The proposed legislation would mandate that the states cover each of these groups and provide incentives to encourage states to improve benefit levels and cover temp workers.

Most importantly, the president wants to roll back the tide of benefit cutbacks the states enacted and restore the historic norm of 26 weeks as the shortest duration for regular state benefits. This is crucial, since states are beginning to engage in a race to the bottom with respect to UI. Most recently, Ohio has been debating whether to adopt extreme benefit cutbacks modeled on North Carolina’s legislation. The president’s proposal would foreclose such reductions.

Solvency is also addressed head on. The president wants to restore the solvency of state unemployment trust funds by requiring states to raise appropriate taxes and compelling them to build up enough reserves to last through a six-month recession, rather than cutting benefit levels or weeks of entitlement.

In preparation for the next, inevitable economic downturn, President Obama proposes to replace the ad hoc extension of benefits with a permanent program of up to 52 additional weeks of unemployment compensation triggered when states experience rapid job losses or high unemployment.

The details will matter, but all of these goals for UI reform are correct and important. The goals for some of the president’s other proposals, starting with wage insurance, are less clear. Wage insurance over the years has had a split personality, sometimes designed as a cost saver to induce workers to forego unemployment compensation or trade adjustment assistance, but sometimes considered a cushion for workers at risk of long-term unemployment. It has usually been conceived of as a way to get displaced workers to accept the idea of receiving lower wages in the future by giving them a wage supplement to make up half the difference in earnings between their old job and a new one. For example, a worker who was earning $40,000 a year would be reluctant to accept a job paying $30,000, but would be more interested if the government pays him $5,000 a year to take it. This is unlikely to do much harm if the worker has already unsuccessfully searched for a job and exhausted his right to compensation—it’s probably in his interest to start thinking about a lower wage. The downside comes when the government’s goal is to keep the costs of UI low. Wage insurance has sometimes been offered as something a worker has to choose early in his period of unemployment, in hopes that the government will save money by paying fewer weeks of unemployment compensation. The Alternative Trade Adjustment Assistance Project, for example, conditioned wage insurance on the worker accepting a lower-paying job within the first 26 weeks of unemployment, even though his eligibility for trade adjustment assistance weekly benefits could last two years or more.

In a blog post, Jason Furman, the chairman of the Council of Economic Advisors, and Jeffrey Zients, the director of the National Economic Council, argue that wage insurance helps “workers transition out of unemployment more quickly.” They point to a Canadian study, but the study’s results were decidedly mixed. It’s true that workers in the study were 4.4 percentage points more likely than workers in a control group to enter into full-time work by the 26th week after losing a job. But the workers might have been worse off: average earnings in the 15-month follow-up period were 4.6 percent lower for the workers who received wage insurance. And the positive employment effect had disappeared by 12 months after job loss: “By one year after random assignment, full-time employment rates for the supplement [wage insurance] group and the control group were virtually the same once again.” The Canadian pilot program does not engender much confidence that wage insurance will be of substantial benefit to displaced workers. But if it is designed without a cut-off, so that a worker who exhausted UI could still take advantage of the supplement when she found a lower paying job, it would be more helpful. The details of the president’s proposals won’t be available until the budget is released February 9.

The training and reemployment programs the White House announced are also missing key details, and could be a mixed bag. It’s disappointing to see the president reviving the discredited Georgia Works! Program, which had unemployed workers working for free while continuing to receive UI benefits for up to six weeks, with the possibility of a full-time job at the end. Workers in tryout employment should be paid like employees, and not be forced to subsist on unemployment compensation while they work for someone else’s profit. Any tryout program has to require that employers pay employment taxes and guarantee the worker the minimum wage. So-called on-the-job training too easily becomes a subsidy for employers that want cheap labor and have no intention of retaining their “trainees.” Two-thirds of the Georgia Works! participants, for example, were not hired by the tryout employer. On the other hand, the inclusion of “navigators” to provide intensive job counseling seems like a good thing.

Connecting displaced workers to jobs can only be successful if good jobs are there to be taken. That requires a commitment to getting the economy to full employment and keeping it there, which will require big investments in infrastructure, public employment, child care, and education. “Career navigators” could be helpful, but mustn’t be seen as a substitute for the kind of job creation that so many urban areas desperately need. It’s clear, for example, that the creation of 10,000 jobs rebuilding Detroit’s crumbling schools, replacing streetlights, and removing abandoned, derelict buildings would be far more valuable to that city’s unemployed than any number of career navigators. Rebuilding Flint, Michigan’s water supply system would do more to put that city’s residents to work than 100 career navigators.

The White House’s proposal to modernize and strengthen the unemployment insurance system treats the symptoms of serious problems—the economy is nowhere near full employment and, in turn, wages have stagnated. Incremental fixes to improve unemployment insurance systems at the state level and proposals to increase the scope of workers covered by unemployment insurance are certainly needed. But a labor market where workers—both long-time employees and potential new hires— have options and bargaining power should be the focus of the budget.