Policy Documents

Research & Commentary: Extension of Unemployment Fund a Bad Idea

Matthew Glans –
June 11, 2009

Florida has taken a sharp turn in the wrong direction with the recent bailout and expansion of the state’s unemployment insurance program. Using $418 million in federal stimulus money, the extension provides benefits for 250,000 unemployed Floridians who previously had exhausted their benefits.

This bailout came with a hefty price. To receive the additional funds, Florida lawmakers were required to increase the taxes paid by companies into the unemployment trust fund by increasing the minimum taxable wage per employee from the first $7,000 to $8,500.

Florida Extends Unemployment Benefits for about 250,000 Jobless
http://www.tampabay.com/news/business/article1006544.ece

Federal Money Extends Fla. Unemployment Pay
http://www.theledger.com/article/20090602/NEWS/906025070/1374?Title=Federal-Money-Extends-Fla-Unemployment-Pay

Florida’s Jobless Benefits Money Dwindles as Claims Climb
http://www.tampabay.com/news/business/article983242.ece

Florida Unemployment: Benefits Running Out for Many
http://www.tampabay.com/news/business/article1003174.ece

Extended Unemployment Insurance Benefits: The Heritage Foundation 2009 Labor Boot Camp
http://www.heritage.org/research/labor/wm2211.cfm

But tax increases and federal bailouts do little to address the systemic deficiencies in the unemployment system; they merely allow the existing problems to survive and continue to grow.

Before any increase in taxes or a federal bailout should even be considered, a full review of the existing system must be conducted to determine where the current problems lie. Fraud, waste, and chronic inefficiencies plague unemployment programs in every state, and Florida is no exception.

Supporters of the unemployment benefits extension say it will provide an economic boost to the state. Research conducted by The Heritage Foundation disputes these claims, finding unemployment insurance (UI) extensions subsidize and extend unemployment.

“For each dollar spent extending UI benefits to 46 weeks, GDP expands in the first year by just $0.17,” writes James Sherk, Bradley Fellow in Labor Policy for the Center for Data Analysis at The Heritage Foundation. “Almost any other use of resources would provide a greater short-term boost to the economy.” (http://www.heritage.org/research/labor/wm2211.cfm)

Florida’s unemployment fund continues to approach insolvency due to the growing number of unemployed citizens entering the system, a number likely to grow with the 20-week extension of benefits. The state’s unemployment rate currently stands at 9.6 percent, and the state’s unemployment insurance trust fund has shrunk from $2 billion a year ago to around $750 million as of March 31. Florida currently pays out roughly $200 million per month in unemployment benefits—clearly unsustainable without continued infusions of cash into the program.

Real reform—reform that fundamentally re-examines the state’s role in providing unemployment benefits—must get underway. Two important questions need to be asked before any additional program expansion: Is the program working effectively to achieve its goals at minimal cost to the taxpayers? Are the benefits currently being provided fiscally responsible?

Of the available alternatives to unemployment insurance, privatization through the use of individual unemployment accounts (IUA) may be the best option for Florida employers and employees alike. IUAs are a mandatory and portable individual trust to which the employer and employee contribute. The IUA system provides incentives to minimize unemployment. By moving away from a use-it-or-lose-it system, workers would not forgo benefits when they find a job quickly, because they own the portable unemployment account and take that money with them for possible future use. Employers would be discouraged from seasonal hiring by removing artificial subsidies, leading to more steady, year-‘round employment.

Florida legislators should keep in mind two points regarding the needed modernization of the state’s failing unemployment insurance fund:

Move away from a government-based system and towards privatization
Privatization through individual unemployment accounts (IUAs) shifts control of and responsibility for unemployment coverage from the employer and the state government to the employer and the employee. This allows for greater individual choice and flexibility at less cost to the state’s taxpayers.

Do not penalize part-time and temporary workers
In several states, part-time and temporary workers receive no unemployment benefits despite their tax contribution to the system, and workers who never need to use the unemployment safety net pay into a system for benefits they will never receive. A private IUA follows a worker and guarantees the benefits are not lost.

A Heartland Research & Commentary on unemployment insurance is available at http://www.heartland.org/policybot/results/23753/. It examines the changing role of unemployment insurance and the different approaches available to employers and employees through privatization.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at http://www.heartland.org and PolicyBot, Heartland’s free online research database.

If you have any questions about this issue or The Heartland Institute, you may contact me at 312/377-4000 or mglans@heartland.org.