Sunday, January 27, 2013

Tough choices in NC on unemployment insurance

Today's N&O runs two stories on the unemployment insurance system in NC, one focusing on an unemployed Durham worker and the other looking at a small Raleigh firm.  The system is broken, with a negative balance owed to the federal government of $2.5 billion (to cover benefits paid to NC residents that could not be covered by UI payroll taxes), the largest of any state.  Assuming the feds insist on being paid back, some painful adjustments will be necessary.

Unemployment benefits are mostly funded by a state tax levied on employers.  In normal times, the tax paid by a firm will be sufficient to cover the benefits received by its employees.  Taxes are levied on the first $20,900 earned by each employee; the rate in NC can be as low as zero (for someone who has been open two years or more and never had an employee claim benefits) to as high as 6.84%.  The federal government also administers a tax of 1.2% on the first $7,000 earned by each employee.

The NC General Assembly is likely to cut benefits and raise taxes later this year.  Maximum weekly benefits are likely to be cut from $535 to $350 and eligibility for benefits is proposed to be cut from 26 weeks to a range of 12 to 20 weeks.  There is a proposal to increase the employer tax by 0.06%, which amounts to no more than $12 per employee.  Of course, even though this tax is not withheld from wages and salaries, employees end up paying most of this tax because it gets shifted back to them via lower wages or salaries. 
The economics of unemployment insurance are straightforward: we face a tough tradeoff between compassion and incentives to get back to work.  Higher benefits over a longer period have been shown, time after time, to lead to higher unemployment rates; more generous benefits reduce the incentive to search for a job.  However, the system was designed to be a form of social insurance to provide a buffer against unemployment risk.  If skilled workers end up taking minimum wage jobs out of desperation, the incentives for finding a job fast run counter to maintaining incentives to invest in skills and education.  (Aside: I always have wondered why we do not insist on school or training for workers collecting benefits more than six months so they can get an extra boost toward employability.) 

Higher employer taxes spread the pain of adjustment across all employees and businesses.  Cuts in benefits and their duration focus the pain on those who become unemployed after July 1.  My take: right now the bill is being shifted to those who can least afford it; employer taxes should be raised more and benefits be reduced less. 

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