Unemployment Insurance (UI)

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Payroll taxation toward unemployment insurance (UI) and State-level UI implementation practices.

How it is now

In 47 of the 50 United States (meaning, except Alaska, New Jersey and Pennsylvania), employers pay taxes on wages to fund the state’s unemployment insurance program. During periods of unusually high unemployment, as it is now, unemployment benefits are extended with federal help and sometimes voluntarily by the states themselves.

Even though employers pay taxes on their employee wages, these taxes are passed on by the employers to the employees through wage reduction (lower wages, lower UI taxes, meaning, UI employer taxes can depress wages) and into the prices the employers’ charge for their goods and services.

Relevance to the people

During periods of economic decline, the states cannot collect UI taxes because of layoffs and lower levels of employment. If the states do not have the discipline of lock-boxing UI taxes collected during the upturns of the business cycle, they will not be able to pay UI benefits in a prompt and professional manner during the downturns of that same cycle, when unemployment levels rise. The people have no incentive to save for the times when they are unemployed and factor those savings into their wage demands.

What the Congress and the Executive Should Do? 

1. Existing UI programs in states must be streamlined to automate entry and exit from the program through employers. The workers should not have to file for UI benefits separately.

2. To reform UI, unemployment insurance must be federalized through federal payroll taxation of employees toward their individual UI accounts which can only be tapped into during periods of unemployment, high or low, voluntary or involuntary.

3. UI must pay at least the minimum wage for the state of residence of citizens.

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