In spring 2020, a record number of Americans were out of work, as the Covid-19 pandemic took hold and state and local officials ordered mandatory lockdowns in most places. Within weeks America went from full employment to something out of the Great Depression, as unemployment claims soared from 218,000 a week to 2.4 million. By May, more than 40 million people had filed for unemployment benefits.
And, yet, something surprising happened. The economy did not collapse as it had during the Depression. And sooner than anyone expected, the jobless numbers began to reverse. By November, the unemployment rate was 6.7 percent, which is 3.2 percent higher than just before the pandemic but less than half what it was in April.
Why didn’t the economy collapse in the spring and summer of 2020, and why did employment recover so quickly? There were several reasons but first among them was unemployment insurance, which acted, as designed, as an “automatic stabilizer,” keeping millions of households financially afloat during long weeks without work. That meant demand for food, utilities, and consumer goods remained relatively stable. In fact, Congress helped out considerably by adding a $600-a-week boost to unemployment checks. As these stabilizers kicked in, employers began slowly bringing back workers to meet the demand.
2020 was an extraordinarily bad year. But it was saved from disaster because of a program that had its start in the worst economic crisis of the 20th century, the Great Depression. And it illustrates something we’ve seen before: When done right, federalism (that is the sharing of responsibilities between levels of government) really does work in America.
But, first, an explanation. Unemployment insurance is a benefit paid to workers who are laid off. It comes with a number of qualifications: You must have worked for a period of time; you cannot have been fired for cause; and you must be willing and able to work if the right job comes along. Benefits are paid for a limited period (usually six months at most), and the amount depends on the state. In 2017, payments ranged from $783 a week in Minnesota to $235 in Mississippi.
And, as mentioned, it’s an example of federalism. Unemployment insurance is financed by taxes paid by employers to state and federal governments, with the larger share going to the states. States set the benefit payments and eligibility requirements and administer the program. If a state is hit hard by an economic downturn, it can borrow from the federal government to pay benefits. In major recessions, Congress can supplement state payments, extend benefits beyond six months, or both.
So how did unemployment insurance get started? And what is its guiding philosophy? In a way, the idea is in its name, unemployment insurance. Like other insurance, you pay during good times for protection in bad.
The concept isn’t new. European trade unions offered unemployment benefits to their members as far back as the late 1700s. The first country to offer unemployment insurance to all workers financed by taxes was Great Britain in 1911. But it was still a new concept in America as the Great Depression took hold in the 1930s.
As often happens in America, the idea began in the states, and then spread to the federal government. Wisconsin was the leader, establishing a state unemployment program in 1932. It did not take long for President Franklin D. Roosevelt to see the value of the idea—and the danger of some states having tax-supported unemployment programs while others did not. He included a national unemployment insurance program in his legislation establishing Social Security in 1935.
And here’s where it’s important to have federalism that is designed well. The problem lies in the economic concept of a “race to the bottom.” In an effort to attract economic growth, some states will do anything—discourage unions, deregulate businesses, break strikes, cut taxes, allow pollution—unless the federal government establishes a floor of acceptable behavior.
The 1935 legislation did exactly that. It established a federal unemployment tax and encouraged states to set up unemployment agencies financed by state taxes. If they did, employers from their state would receive a 90 percent credit on their federal unemployment taxes for every dollar paid to state unemployment funds. This sounds complicated but it worked because state officials quickly got the message: The federal government was going to tax your state’s employers. If you wanted any benefits from the money collected in your state, you needed to set up your own programs financed by your own taxes.
And act they did. By the end of 1936, 35 states and the District of Columbia had agreed to set up unemployment agencies and levy taxes to support them. (Today all states, plus D.C., Puerto Rico and the U.S. Virgin Islands, have unemployment programs.) And the 10 percent that Washington keeps? It finances the loan program states can borrow from when unemployment reserves run low.
The results speak for themselves. The U.S. has not experienced a collapse similar to the Great Depression in nearly a century, thanks, in part, to economic stabilizers like unemployment insurance. We saw why, one more time, in 2020.
Labor economists say there’s another way unemployment insurance helps economies. By offering laid-off workers a little breathing room, they help them find work more suited to their skills. Otherwise a graphic designer might take a job as a grocery clerk, just to pay the rent. If she could hold out a little longer, she might find a job better suited to her skills and leave the grocery position to an unemployed supermarket worker. This allows job markets to work better, economists add.
Finally, offering unemployment payments to those who are laid off is both humane and reasonable, in exactly the way that insurance in general is. As one advocate explained in 1933: “It is practical sense to build a system which will gather the funds in good times and disburse them in bad times.” And for this practical, workable solution, we can thank government.
Footnote: While unemployment insurance played a big role in saving America’s economy in 2020, thanks largely to the $600-a-week supplements added by Congress, it also exposed problems with the program. The greatest: States have wildly different rules about who can collect unemployment. So while 58 percent of unemployed workers in New Jersey collect benefits, only 9 percent of those in North Carolina do. Obviously a program aimed at helping the unemployed that ends up serving only a sliver isn’t a serious help. It’s a fig leaf. It’s time for Congress and the states to take a close look at who gets unemployment insurance—and who should.
Give the credit to: state governments 40%, federal government 60%