DISCUSSION PAPER 2015-02 | MARCH 2015 Strengthening Reemployment in the Unemployment Insurance System Adriana Kugler The Hamilton Project • Brookings 1 ADVISORY COUNCIL MISSION STATEMENT The Hamilton Project seeks to advance America’s promise of opportunity, prosperity, and growth. We believe that today’s increasingly competitive global economy demands public policy ideas commensurate with the challenges of the 21st Century. The Project’s economic strategy reflects a judgment that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments. Our strategy calls for combining public investment, a secure social safety net, and fiscal discipline. In that framework, the Project puts forward innovative proposals from leading economic thinkers — based on credible evidence and experience, not ideology or doctrine — to introduce new and effective policy options into the national debate. The Project is named after Alexander Hamilton, the nation’s first Treasury Secretary, who laid the foundation for the modern American economy. Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that “prudent aids and encouragements on the part of government” are necessary to enhance and guide market forces. The guiding principles of the Project remain consistent with these views. 2 Informing Students about Their College Options: A Proposal for Broadening the Expanding College Opportunities Project Strengthening Reemployment in the Unemployment Insurance System Adriana Kugler Georgetown University MARCH 2015 NOTE: This discussion paper is a proposal from the author(s). As emphasized in The Hamilton Project’s original strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to put forward innovative and potentially important economic policy ideas that share the Project’s broad goals of promoting economic growth, broad-based participation in growth, and economic security. The author(s) are invited to express their own ideas in discussion papers, whether or not the Project’s staff or advisory council agrees with the specific proposals. This discussion paper is offered in that spirit. The Hamilton Project • Brookings 1 Abstract Helping unemployed workers return to work has long been a policy challenge in the United States, and the urgency of the problem tends to increase during and after economic downturns. Immediately after the Great Recession the average duration of unemployment reached forty weeks, and even by the end of 2014 the average duration of unemployment remained above thirty weeks—higher than the worst it had been during previous periods of recession. Such spells of long-term unemployment impose enormous costs on individuals, their families, and the economy as a whole; the longer an individual is out of work, the harder it is for her to find new employment. While the unemployment insurance system is structured to provide benefits to unemployed workers while they search for work, many of its eligibility requirements can effectively discourage a large number of unemployed workers from pursuing job opportunities that may be to their advantage. This paper offers three pilot programs to reform the unemployment system by encouraging different ways to return to work. The first program would allow the unemployed to continue claiming benefits while receiving entrepreneurial training and other assistance for setting up a business. The second program would support the unemployed through temporary positions and internships that might lead to full-time jobs. The third program would provide partial benefits to claimants who accept part-time jobs. By helping the unemployed transition back to work, these programs have the potential to break the cycle of long-term unemployment before it starts. 2 Strengthening Reemployment in the Unemployment Insurance System Table of Contents ABSTRACT 2 CHAPTER 1. INTRODUCTION 5 CHAPTER 2. REQUIREMENTS FOR RECEIVING UNEMPLOYMENT BENEFITS 8 CHAPTER 3. PROPOSAL: SELF-EMPLOYMENT ASSISTANCE 13 CHAPTER 4. PROPOSAL: BRIDGE-TO-WORK PROGRAMS 18 CHAPTER 5. PROPOSAL: UNDER-EMPLOYMENT ASSISTANCE 22 CHAPTER 6. QUESTIONS AND CONCERNS 25 CHAPTER 7. CONCLUSION 28 CHAPTER 8. APPENDIX 29 AUTHOR AND ACKNOWLEDGEMENTS 32 ENDNOTES 33 REFERENCES 34 The Hamilton Project • Brookings 3 4 Strengthening Reemployment in the Unemployment Insurance System Chapter 1. Introduction period of unemployment, whether short or long for example, the unemployment rate does not reveal how term, imposes significant costs on unemployed long people were unemployed. Figure 1b shows the average workers and their households. The longer the spell of duration of unemployment. After past recessions the duration Aunemployment, the more difficult it becomes for a household of unemployment rose to about twenty weeks at its worst. to cope with these costs, both financially and in terms of But after the Great Recession the duration of unemployment mental and physical health. This discussion paper proposes climbed to forty weeks. Even by the end of 2014 the average three ways to help the unemployed transition back to work and duration of unemployment remained above thirty weeks— thereby reduce the risk of long-term unemployment. These higher than the worst it had been during previous periods of proposals emphasize the importance of removing hurdles recession. Figure 1c shows the percentage of the unemployed currently built into the unemployment insurance (UI) system who have been without a job for more than twenty-six weeks, and of introducing a combination of incentives and services which is the standard definition of long-term unemployment. so that the unemployed can return to work more quickly. The After past recessions, the share of the unemployed who were first proposal is to conduct pilot programs in five states to long-term unemployed climbed to the range of 20–25 percent, adopt Self-Employment Assistance (SEA), which would allow but after the Great Recession this share rose to 45 percent, the unemployed to continue to claim unemployment benefits and even by the end of 2014 it had only fallen to 30 percent. while receiving entrepreneurial training and other support The long-term nature of recent U.S. unemployment is one for setting up a business. The second proposal is to conduct reason that the costs of being unemployed are higher than the Bridge-to-Work (BTW) pilot programs in five states so that the standard unemployment rate measure would suggest. unemployed can continue to claim benefits while returning to work through a direct placement with an employer, and to The most salient costs of unemployment—especially long- provide a bonus to employers who hire the unemployed and term unemployment—are economic losses. During the Great retain them for an established period. The third proposal Recession and its aftermath, for example, many long-term is to conduct Under-Employment Assistance (UEA) pilot unemployed workers saw their family income fall by 40 percent. programs in five states to test the importance of allowing the They were twice as likely to experience poverty as workers who unemployed to continue to claim partial benefits when they get had been unemployed for shorter periods of time, and almost a part-time job or a job that pays less than their previous job. four times as likely to experience poverty as workers who To select states for participation in these pilot programs, the had never been unemployed (Nichols, Mitchell, and Linder U.S. Department of Labor would evaluate applications from 2013). Historically, those who return to work after a period of states based on a competitive process similar to the one used in unemployment are paid less, which probably reflects in part an setting up demonstration projects created through the Middle erosion of work skills, and in part the attitudes of employers Class Tax Relief and Job Creation Act of 2012.1 toward the long-term unemployed. In a recent study researchers sent highly similar résumés to real-world employers, with some Finding ways to reduce the length of unemployment is an résumés indicating a lengthy period of ongoing unemployment. especially pressing problem because long-term unemployment Employers were much less likely to call back and offer an has been prevalent during and since the Great Recession. interview in response to the résumés showing long-term Figure 1a shows the civilian unemployment rate since 1950. unemployment (Kroft, Lange, and Notowidigdo 2013). Another If you look across the figure at the level of 8 or 9 percent recent study presents strong evidence in macroeconomic labor unemployment, you will see that unemployment at these levels market data of duration dependence, or the finding that the occurred for a much longer period after the Great Recession longer someone is out of work, the more likely she is to remain than after other recessions since 1950. Figure 1a also shows unemployed (Katz et al. 2013). the good news that by the end of 2014 the unemployment rate But the costs of unemployment extend beyond costs that are had dropped about 4 percentage points from its post-recession explicitly economic, and include costs measured in terms of high of 10 percent. But this good news is not the entire story: dignity, human connectedness, mental health, and physical The Hamilton Project • Brookings 5 FIGURE 1A. Civilian Unemployment Rate, 1950–2015 12 12 10 10 8 6 Percent 4 2 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Bureau of Labor Statistics 2015b; National Bureau of Economic Research 2012. Note: Gray bars indicate periods of recession in the United States. FIGURE 1B. Average Duration of Unemployment, 1950–2015 45 40 35 30 25 Weeks 20 15 10 5 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Bureau of Labor Statistics 2015b; National Bureau of Economic Research 2012.