Why Unemployment Insurance Isn’t Working

By Richard Eisenberg

(Editor’s Note: This story is part of a partnership between Next Avenue and Chasing the Dream, a public media initiative on poverty and opportunity.)

The 4.1 percent unemployment rate, its lowest since 2000, is great to see. But it’s worth remembering that there are still 6.6 million unemployed Americans and the unemployment rate for people 55 and older (3.2 percent) has actually risen since January 2018. One more thing that’s not so great: the way the unemployment insurance system doesn’t work for today’s unemployed people.

When Franklin Roosevelt established unemployment insurance in 1935 — 83 years ago — the federal-state system was designed to help full-time workers return to traditional, full-time work if they lost their jobs through no fault of their own. But what if you’re one of the 16 percent of Americans with “alternative work arrangements” and are an independent contractor, freelancer, temp, part-timer or self-employed, or if that’s the only type of work you can find?

“Those types of workers are not able to access unemployment insurance in the same way full-time workers can,” says Alastair Fitzpayne, executive director of The Aspen Institute Future of Work Initiative and co-author of its report, Modernizing Unemployment Insurance for the Changing Nature of Work. “Unemployment insurance is biased toward putting people in traditional full-time work. But in many cases, those jobs are not available and non-traditional options can be an important way to get back into the workforce.”

In the 1950s, according to Fitzpayne’s report, 49 percent of unemployed workers received unemployment insurance benefits. In the 2010s, only 27 percent do — a historic low. “That number jumps out at me,” says Fitzpayne.

Where the Unemployment Insurance Rules Falter

One reason the percentage has fallen so much is because, typically, to qualify for unemployment benefits, you must have left a traditional W-2, employee job and be looking for traditional, full-time work, even if your previous job was part-time.

So alternative workers like independent contractors (think Uber and Lyft drivers) and freelancers (like graphic designers and content marketing writers) usually don’t qualify for unemployment insurance. Increasingly, people in their 50s and 60s are becoming alternative workers, sometimes by choice and often by necessity.

But in 41 states, you can’t receive unemployment insurance benefits while starting a business (the exceptions: Delaware, Maine, Mississippi, New Hampshire, New Jersey, New York, Oregon, Pennsylvania and Rhode Island, which offer what is called Self-Employment Assistance).

And as many as 21 states require unemployment insurance beneficiaries to pursue full-time work to remain eligible for benefits, even if they’d earned unemployment benefits from part-time work at their previous job.

The Problem Applying for Part-Time Jobs

“In most states, if you go into the unemployment office and say ‘This week, the two jobs I looked for were part-time jobs,’ they will say ‘You will lose unemployment benefits because you were not looking for traditional full-time work,’” says Fitzpayne.

Also, independent contractors and freelancers don’t qualify for unemployment benefits if they lose their gigs because they don’t work for traditional employers who make contributions on their behalf.

Why, you may wonder, haven’t Congress, the U.S. Department of Labor and states revamped the unemployment insurance rules for the way people work in 2018?

“When the labor market is as tight as it is now, with unemployment so low, policymakers are less likely to look at this as something to reform,” says Fitzpayne.

Ways to Improve the Unemployment Insurance System

There are, according to the Aspen Institute, a few ways the unemployment insurance program could better serve the unemployed:

Unemployment insurance could be offered to independent contractors as part of a portable benefits system. Or, as the Century Foundation has proposed, policymakers could try letting permanent self-employed workers with long, stable earnings histories “opt in” to traditional unemployment insurance coverage. These workers would need to have paid into the unemployment insurance program first, though.

The Aspen Institute report notes that in some states, such as Virginia, self-employed workers can opt in to the unemployment insurance system if they incorporate and in effect, “hire” themselves as W-2 workers and then pay unemployment insurance taxes.

The government could create a “jobseeker’s allowance” that would provide a weekly stipend to fund job search activities for low- and middle-income unemployed workers who don’t qualify for unemployment insurance. The United Kingdom has this. The jobseeker’s allowance proposal of The Center for American Progress, the National Employment Law Project and the Georgetown Center on Poverty and Equality would give unemployed workers a weekly cash benefit that’s smaller than the unemployment benefit. It would be about $180 a week; unemployment benefits range from $235 to $742 a week, depending on the state, and average around $300.

The benefit, available to people who haven’t paid into the unemployment insurance system or who have limited recent work histories, would last up to 13 weeks — half as long as the usual period for unemployment insurance. And it would apply to unemployed people looking for non-traditional work.

Unemployment insurance recipients could be allowed to look for part-time work. Part-time jobs may be especially suited to some unemployed people because of their health or caregiving responsibilities or the field they’re in. During recessions, part-time jobs are sometimes the only positions that are open.

More states could have, or expand, Self-Employment Assistance (SEA) programs. The 2012 tax law appropriated $35 million in grant money for states to start, improve and promote such programs, but less than $3 million has been disbursed. Yet a 2017 study showed positive outcomes for SEA participants, both for their future rates of employment and earnings, the Aspen Institute report said.

The three think tanks behind the jobseeker’s allowance idea have also proposed requiring all states to offer SEA programs in order to get the entire federal unemployment tax credit that reduces the tax burden on businesses.

Time for Action by Policymakers

“State governments who want to could take the lead and look at alternative models on ways to run their state unemployment system,” says Fitzpayne. But few are.

“I haven’t seen any bill on the federal or state level” to permit unemployment insurance-like portable benefits, says Fitzpayne. And in a 2017 paper for the Center for American Progress, Karla Walter and Kate Bahn said “it is unlikely that the federal government will take action to provide independent contractors with unemployment benefits under the current administration.”

But Fitzpayne thinks that now — when the economy is faring well and before the next recession — is the ideal time to update the unemployment insurance system.

“It’s better to prepare for a crisis and make reforms when you’re not in the middle of a crisis,” says Fitzpayne. “I was at the Treasury Department in 2009 and I remember how difficult it can be to respond to a whole set of problems. But that’s when policymakers look it.”

Incidentally, the United States tends to enter a recession cycle every five years. Our last one ended in 2009. And, according to the 2017 Freelancing in America study by Upwork and Freelancers Union, the nontraditional workforce will comprise a majority of the entire U.S. workforce by 2027.

This story is part of our partnership with Next Avenue. Next Avenue is public media’s first and only national journalism service for America’s booming older population. Their daily content delivers vital ideas, context and perspectives on issues that matter most as we age.