Responding to the Recession: The Challenge for Unemployment Insurance

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By any measure, the U.S. labor market is in poor health, a condition that is not likely to immediately improve. In early February, Federal Reserve Chair Ben Bernanke cautioned that ‘‘with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level.’’1 Ongoing high unemployment is placing an unsustainable strain on the unemployment insurance (UI) system. Many states already face insolvent UI trust funds and mounting debt. Significant tax increases will be required to shore up the UI system. To address the UI budget woes, President Obama proposes in his fiscal 2012 budget a two-year forgiveness of interest and penalties for states and employers, followed by a dramatic increase in the minimum unemployment tax base from $7,000 to $15,000 in 2014 (indexed by wage growth after 2014).2 The latter policy would have a direct effect on the 35 states that have a UI tax base less than $15,000. This article provides an overview of the UI program, a description of the impact of the recession, an assessment of state preparedness pre-recession, and a brief analysis of Obama’s proposal.

Alex Brill is a research fellow at AEI.

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