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Ask the Expert

Do states have enough in their unemployment insurance trust funds to cover workers’ unemployment claims during the next recession?

As appeared in the Cleveland Fed Digest's Ask the Expert

For the four states in our District (Ohio, Kentucky, Pennsylvania, and West Virginia), the short answer to that question is probably not.

The metric used by the Labor Department to gauge a state’s preparedness is the ratio of a state’s current reserve funds to its average historical needs during downturns. Unfortunately, none of our four states meets the Labor Department’s minimum level of funding. In fact, none of them even comes close. This is why policymakers across our District have been scrambling during the past few years to try to shore up their programs. This is a formidable task made more difficult in the wake of the Great Recession, when each of our District states’ unemployment insurance trust funds fell into default.

What does that mean for unemployed workers? States are statutorily bound to continue paying benefits to workers even if the states don’t have the revenues on hand to do so. When that happens, states borrow money from the federal government, but those loans come with a twofold cost: interest payments and higher taxes on employers. For example, between 2012 and 2016, when Ohio owed money to the federal government, the state paid nearly $260 million in interest, and employers in Ohio paid higher unemployment insurance taxes than they would have otherwise.

Policymakers face this constant tension to match revenues, which come in through these taxes on employers, with the money paid to unemployed workers. On the one hand, states want to keep taxes low in order to encourage hiring, while on the other, they want to provide benefits to unemployed workers to help them weather tough economic times and to minimize unemployment’s overall impact on the state’s economy.

The fact that states don’t currently meet the minimum preparedness standard suggests that policymakers have been unable to find the right balance of revenues and payments. Right now it is likely that unemployment insurance trust funds in our District states would come under substantial duress during the next economic recession, even if it is a mild one.

The upshot here is that the recent focus on shoring up unemployment insurance trust funds, evidenced by the fast and furious introduction of bills in various states’ legislatures, is certainly warranted. The current economic expansion is nearing its 10th anniversary, and while expansions don’t die of old age, they all do ultimately end.

See our latest research on recessions.

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