Statement of Van Doorn Ooms
Senior Vice President and Director of Research
Committee for Economic Development

Testimony Before the Subcommittee on Human Resources
of the House Committee on Ways and Means

Hearing on Unemployment Compensation Reform

February 29, 2000

Madam Chairman and Members of the Committee:

My name is Van Doorn Ooms and I am the Senior Vice President and Director of Research of the Committee for Economic Development (CED). ⁽¹⁾ I am honored to accept your invitation to testify on behalf of CED on the Unemployment Insurance system (UI). Before joining CED in 1991, I served as the Chief Economist for the Senate Budget Committee, the Office of Management and Budget, and the House Budget Committee. My curriculum vita is attached, as requested in your letter of invitation.

CED is a nonprofit, nonpartisan, and nonpolitical research and policy organization of over 200 business and education leaders. Its purpose, pursued throughout its 58-year history, is to recommend policies to promote economic growth, higher living standards, and equal opportunity for all Americans. CED's policy positions are adopted by a vote of the 62 members of its Research and Policy Committee, who speak in their individual capacities.

In line with these concerns about national economic growth and equal opportunity, CED produced a number of policy statements during the 1980s and 1990s recommending measures to improve the functioning of our labor markets and to extend the opportunities for all workers to participate in the nation's growth and prosperity: Work and Change: Labor Market Adjustment Policies in a Competitive World (1987); An America That Works: The Life-Cycle Approach to a Competitive Work Force (1990); American Workers and Economic Change (1996); New Opportunities for Older Workers (1999); and the recently released Welfare Reform and Beyond: Making Work Work (2000).

CED has not addressed directly some of the unemployment compensation reform proposals before you today and therefore does not have an official policy position on them. However, CED has considered and made recommendations on certain aspects of the UI system, and in particular the extent to which it covers the American workforce. I will address that issue in this testimony.

In summary, CED's view is that a number of longer-term trends and recent developments in the American economy have significantly changed the nature of the American workforce and employment. As is well known, one important result of these changes is that the proportion of unemployed workers that receives unemployment compensation has fallen sharply, from roughly one-half in the 1950s to about one-third recently. CED believes that the fundamental purposes of unemployment compensation, and the national economy, would be better served by somewhat broader UI eligibility. Consequently, CED has supported the proposals to broaden eligibility among certain low-wage, part-time, and seasonal workers made by the Advisory Council on Unemployment Compensation in 1996.

Functions of Unemployment Compensation

CED believes there are at least three major functions to be served by a well-functioning UI system. It should:

1.  provide temporary, partial wage replacement for involuntarily unemployed workers who are significantly attached to the labor force and actively seeking work;

2. facilitate the dynamic economic change on which our higher living standards depend by shifting some of the costs of adjusting to that change to the larger society; and

3. help to stabilize the national economy by supporting consumer purchasing power when unemployment rises.

Economic Changes Affecting the UI System

A number of major changes in the American economy have affected, or soon will affect, the effectiveness with which the UI system performs these functions. Some of these changes have been ongoing for decades, while others await us in the future, but all have important implications for unemployment compensation.

Technological change New knowledge and its applications are the major source of growth in our productivity, incomes, and living standards. Productivity growth has accelerated in the last 4-5 years, driven both by rapid technical change in information technology and the investment boom associated with it. But while the benefits of technological change are large, they carry with them the costs of adjusting to that change. In the process of "creative destruction," as new sectors, firms, and workers advance, others decline. "Downsizing" and growth now often go hand-in-hand. The transfer of resources, including labor, required for this process is neither instantaneous nor smooth; the larger the resource transfers required, the larger the likely temporary unemployment and demands on the UI system. These effects, of course, remain in abeyance during periods of very strong labor demand such as the present, but are likely to appear when demand again slackens.

The organization of work Both rapid technical change and the increasingly competitive structure of the U.S. economy have brought major changes to the operations of American business and the workplace. New structures of production, decentralized operations, new relationships with suppliers, and increased flexibility have characterized the last two decades in particular. A major result of these changes has been an increase in the importance of temporary, part-time, and other "irregular" employment arrangements. Our UI system, of course, was designed with a more traditional model of employment arrangements in mind, and does not always cover such workers when unemployed.

Skill requirements and earnings During the last several decades, the changes described above have increased the demand for highly skilled workers relative to those with fewer skills. This "skill bias" has produced a sharp increase in the wage premium paid for skills and in the earnings differentials between high- and low-wage workers. Indeed, the real earnings of low-wage male workers declined absolutely and substantially until very recently. As a result, earnings per se have become less reliable indicators of employment and labor force attachment. The UI system, of course, bases benefits eligibility primarily on an earnings history. Given the large population of low-wage workers potentially affected, a reexamination of the minimum earnings required for UI eligibility may be warranted.

Globalization Like technical change, the expansion of international trade, investment, and immigration has produced both large overall economic benefits and significant adjustment costs that impact particular industries, workers, and communities. While some of the reactions against globalization recently displayed in Seattle reflect misunderstanding and misplaced apprehension, those concerns must be addressed if further progress is to be made in trade and investment liberalization. This will require safety-net mechanisms that equitably share adjustment costs. Trade-specific mechanisms appear less promising in this respect than a UI system with broad coverage that addresses economic adjustment generally.

Composition of the labor force In the last half-century, female participation in the labor force has nearly doubled (from 34 percent in 1950 to 60 percent today) and the need for more flexible and "family friendly" work arrangements has become apparent to many, if not most, employers. A new set of changes lies just ahead, as the baby-boomers age and their preferences or circumstances lead many of them to continue to work past the traditional retirement age. ⁽²⁾ While new models of employment suited to both older workers and employers will certainly evolve, there can be little doubt that part-time, short-term, and seasonal work arrangements will become more important than at present, and that our social insurance systems will have to adapt to such change.

Welfare reform The U.S. is now engaged in a major economic, social, and cultural experiment that attempts to integrate several million low-income and typically low-skill single parents into mainstream American economic life. Although welfare reform, aided by an extraordinarily tight labor market, has been more successful to date than many observers expected, the experiment is far from over. ⁽³⁾ Its ultimate success will hinge on whether welfare-leavers can be incorporated into the labor force on a permanent basis, rather than falling back into dependency of one kind or another. An important test of this will come when the labor market softens. A large proportion of these workers are in part-time, temporary, or short-term jobs that are categorically excluded from UI coverage in some states or in jobs with earnings too low to meet UI eligibility requirements. It is estimated that no more than 20 percent of persons leaving welfare for work are likely to become eligible for UI through their post-welfare employment. ⁽⁴⁾

Recommendations

As a result of these considerations, CED supports four key recommendations of the Advisory Council on Unemployment Compensation that would extend UI eligibility to more low-wage, part-time, and seasonal workers with significant labor force attachment. A number of states already have policies that accord with some or all of these recommendations, but CED urges those that do not to adopt such policies.

The first two of these recommendations would remove the categorical exclusion of part-time and seasonal workers who would otherwise be eligible. Some states categorically exclude workers applying for part-time work even though they have met the state's monetary eligibility requirements. Fifteen states permit workers in seasonal industries to collect benefits only during the season in which that industry is active, and thirteen states do not allow seasonal earnings to count towards the earnings requirement even if the worker later works in a non-seasonal job.

· States should eliminate seasonal exclusions; claimants who have worked in seasonal jobs should be subject to the same eligibility requirements as all other unemployed workers.

· Workers who meet a state's monetary eligibility requirements should not be precluded from receiving UI benefits merely because they are seeking part-time, rather than full-time, employment.

The third recommendation would reduce the number of workers made ineligible by low wages. The base period and "high quarter" minimum earnings requirements in 9 states would exclude workers who worked two days per week for a full year (about 800 hours) at the minimum wage, whereas workers earning $8.00 per hour for the same employment would be eligible in all states but one.

· States should set their earnings requirements so that a worker with 800 hours of work, evenly distributed over the year, at the state's minimum hourly wage would be monetarily eligible for benefits

Finally, a fourth recommendation would reduce the number of workers made ineligible merely because their last completed quarter of earnings was not used in the calculation of monetary eligibility. Many states compute workers' monetary eligibility on the basis of their earnings during the first four of the last five completed quarters of work, a practice once required by pre-computer technology. Some states now use a "moveable base period" to allow the most recent four quarters to be used as an alternative.

· States should use a moveable base period in cases in which its use would qualify a UI claimant to meet the state's monetary eligibility requirements.

CED recognizes, in making these recommendations, that the payroll taxes that finance UI are a tax on labor services that may have a negative impact on employment, especially at low-wage levels. It would be counterproductive to discourage the employment of low-wage workers at the same time that we attempt to facilitate both their labor force participation and their employment by extending UI benefits to them. In addition, there is evidence that, in the longer term, a substantial portion of such taxes is borne by workers themselves in the form of lower wages.

CED therefore also recommends that the federal and state governments consider ways to support broader eligibility for benefits with general revenues rather than higher UI payroll taxes. Some degree of general revenue financing would also seem to be indicated by the fact that the benefit extensions would serve several broad social goals, such as the facilitation of change and the success of welfare reform, in addition to meeting the needs of individual firms and workers. One possible approach would be to credit the UI trust fund with income taxes paid on UI benefits, as is done with the Social Security and Railroad Retirement trust funds. This arrangement would generate at least $3.6 billion annually for the UI trust fund, which would more than cover the estimated $2.0 billion dollar cost of the four recommendations.

CED believes that the implementation of these recommendations in all the states would substantially improve the effectiveness of the Nation's unemployment compensation system in performing its essential economic and social functions.

¹ CED has a long-standing policy of neither seeking nor accepting Federal government grants or contracts, and neither CED nor I personally have received any such grants or contracts during the current or preceding two fiscal years.

² See CED, New Opportunities for Older Workers (1999), Chapter 1.

³ CED, Welfare Reform and Beyond: Making Work Work (2000), Chapter 2.

⁴ See Wayne Vroman, Effects of Welfare Reform on Unemployment Insurance, (The Urban Institute, 1998) p. 2