A Better Form of Unemployment Protection.

• Author: De Rugy, Veronique

When it comes to finding creative ways to expand the size of government--especially with old, tired, and problematic programs--legislators are extremely resourceful. Case in point: 2020's expansion of unemployment insurance (UI) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Expanding unemployment insurance during a recession is to be expected. What's unusual, though, was the scale and means of this latest expansion.

Like UI expansion in the past, and like UI benefits in general, this most recent program created major economic distortions and is likely to continue slowing the recovery even if firms are allowed to get back to business as usual. It is time for a serious reform of the program.

UI today / Unemployment insurance is a joint federal/state program financed through payroll taxes. Each state operates its own program under federal guidelines. States set their own eligibility requirements, coverage limits, financing methods, and formulas for determining benefits. However, in general, most states provide unemployment benefits that replace about half of a worker's previous wages for up to 26 weeks.

Take Virginia for example. The state pays UI benefits equal to half of the worker's prior wages up to a maximum of $378 per week. The 50% replacement of prior wages holds for employees earning up to $39,312 annually, and a smaller and declining percentage for earnings above that amount. For instance, an unemployed worker who earned $100,000 annually receives a 19.6% replacement rate.

During nationwide downturns, the federal government usually provides supplemental funding to increase the UI replacement rate, or to lift the upper limit on benefits, or both. Also available for expansion is the number of weeks unemployed workers are eligible for UI. For instance, during the Great Recession, the federal government allowed UI recipients to receive up to 99 weeks of benefits.

The CARES Act expanded eligibility to many people who would not otherwise qualify for state UI but who nevertheless cannot work because of the ongoing pandemic. This group includes self-employed workers, independent contractors, part-time employees, and those who quit their jobs for coronavirus-related reasons (for example, people who are sick or taking care of a dependent if they do not have paid-leave benefits). In addition, the expansion offered workers an additional $600 a week for four months on top of what state unemployment programs pay. The projected cost to taxpayers for all this relief was $260 billion.

With the CARES Act expansion, Congress meant to address the...