States push back against federal unemployment policies delaying economic recovery

Economists across the ideological spectrum, from Casey Mulligan and Stephen Moore to Lawrence Summers, have warned that expanded unemployment payments – such as the bonus $300 per week benefits authorized by the federal “American Rescue Plan Act” (ARPA) legislation – would encourage people not to work, thereby slowing economic recovery. This should be a key lesson for all of us to remember from economics 101: When you tax people who work, and pay people who do not work, no one should be surprised when we have fewer people looking to work.

New data from the U.S. Bureau of Labor Statistics revealed that the number of job openings across America just reached a staggering 9.3 million — a record number since the bureau started reporting this information in the year 2000. The National Federation of Independent Business (NFIB) released its monthly Small Business Optimism Index. While optimism has increased since January, a record 48 percent of business owners reported job openings that could not be filled. 

NFIB Chief Economist Bill Dunkelberg commented, “Small business owners are seeing a growth in sales but are stunted by not having enough workers. Finding qualified employees remains the biggest challenge for small businesses and is slowing economic growth. Owners are raising compensation, offering bonuses and benefits to attract the right employees.”

Even with small businesses increasing compensation, it is difficult, if not impossible, for them to compete with the federal government’s printing presses, which continue financing the bonus unemployment payments. In many situations, it is possible for individuals to collect more in unemployment and other benefits than if they actually returned to the workforce.

Recently, states have started to address this problem. Gov. Greg Gianforte of Montana and Gov. Henry McMaster of South Carolina led the way, stating that their two states would end participation in a range of federal programs created under the CARES Act last year and extended under ARPA, including the additional $300 per week for unemployment benefits authorized by ARPA.

Now 25 states have announced that they will stop giving expanded unemployment payments over the summer, with many states ending the payments in June. A new report from the Foundation for Government Accountability uncovered some fascinating information. As the first 22 states announced their withdrawal from the unemployment bonus payments, job applications immediately increased by 5 percent.

Last year, after the economic downturn, state unemployment insurance (UI) trust funds were predictably under immense stress. In an annual report on UI trust fund solvency released in March, the Department of Labor found that 37 states fell below the minimum level required to meet “adequate solvency.”

In May, the U.S. Department of Treasury released a statement providing guidance on the use of $350 billion in Coronavirus State and Local Fiscal Recovery Funds from ARPA. Treasury clarified that federal funds can be used to replenish UI trust funds up to pre-pandemic levels, if state policymakers choose to use these resources. If they choose that option, states will avoid damaging tax increases levied on employers who pay taxes into their respective UI state trust funds.

Yet another complicating factor to the stability of state unemployment systems is widespread improper payments and fraud. On top of the millions of people put out of work last year, the United States Department of Justice found that international organized criminal groups used stolen identities to file for fraudulent UI benefits. Recent reports show that billions in unemployment benefits last year were spent on falsified claims, straining state UI funds even more.

The director of Idaho’s Department of Labor commented, “Because of all the federal dollars, there’s a lot more money in it right now, and the relaxed eligibility requirements really opened the door for fraudsters. There are crime rings international and domestic that are trying to exploit unemployment insurance systems to get money.”

 The way forward for states to solve these unemployment insurance issues is to get people back to work by following the examples of Montana and South Carolina, and the states that followed their lead. As people get back into the workforce, state and federal policymakers must seriously consider unemployment insurance reform that will help those who lose their jobs and also prevent future fraud. These efforts will protect state financial solvency — and more importantly, protect hardworking individual taxpayers and employers. 

Jonathan Williams is the executive vice president of policy and chief economist at the American Legislative Exchange Council. Follow him on Twitter @taxeconomist. Thomas Savidge is the research manager of the Center for State Fiscal Reform at the American Legislative Exchange Council.