Layoffs Flood a Weakened Unemployment System

What safety net? Decades of revision have cut the number of workers eligible for unemployment insurance, as well as the benefits they get

By Moira Herbst

As the ranks of the unemployed surge, worker advocates and some economists are worried that the safety net for those cast into joblessness may be ill-equipped to handle the toll rising in the current recession. That system has not kept pace with demographic shifts in the work force, they argue, and leaves too large a percentage of workers ineligible for benefits. Just 37% of jobless U.S. workers are covered by unemployment insurance, down from 42% during the 1981-1982 recession and 50% during the 1974-75 downturn.

"When only 4 in 10 have access to a safety net, that safety net is pretty weak," says Sharon Parrott, senior policy analyst for the Center for Budget Priorities, a research and advocacy group in Washington. "The unemployment insurance system hasn't kept up with changes in the workforce. The recession is hitting at a time when most workers don't have a basic safety net when they lose their jobs."

Many economists and analysts agree that the U.S. unemployment insurance system needs to be fortified to cope with the depth of this recession. In addition to changes in the system over the past several decades, the jobless have fewer resources to cushion the impact of a lost position. "The unemployed are in a corner now," says John Challenger, chief executive officer of Chicago outplacement firm Challenger, Gray & Christmas. "They've run out of home equity, any savings they had in the stock market have been hammered, and consumer credit has dried up."

jobless benefits shrank dramatically

As companies continue to slash jobs, pressure for a policy solution is mounting. On Dec. 5, the government reported that the U.S. lost 533,000 jobs in November—the largest one-month loss since December 1974—lifting the official unemployment rate to 6.7%. Factoring in discouraged workers who have stopped hunting for jobs and part-timers who can't find full time work, unemployment is closer to 13%.

The system for insuring the unemployed was created in 1935 as part of other New Deal programs designed to help break the Great Depression. Because of demographic and policy shifts, the program now covers a smaller proportion of jobless workers than in the past. Americans today receive a maximum of 39 weeks of unemployment benefits, down from 65 weeks in the 1970s, for example. The average weekly benefit is $293, and replaces just over a third of the average worker's weekly wage.

President-elect Barack Obama is advocating a massive stimulus, including job-creation programs in renewable energy and infrastructure projects—a call he reiterated Dec. 6 in his weekly radio address. But those solutions aren't rapid fixes, while aid to the unemployed provides a quick injection of cash into the economy. Each government dollar spent extending unemployment benefits yields $1.64 in gross domestic product and a temporary dollar increase in food stamps triggers a $1.73 return, says Mark Zandi, chief economist and co-founder of Moody's Economy.com, a subsidiary of Moody's Corp. (MCO). "The bang for the buck is very high," he says.

The Unemployment Insurance Modernization Act

In June and again in November, Congress voted to extend unemployment insurance benefits for 13 weeks on top of the standard maximum of 26 weeks. But these emergency measures may not suffice with the unemployment rate continuing to rise.

Economists predict the official rate will rise to at least 8% in 2009—and possibly as high as 10%. "The [unemployment insurance] system is there; it just needs more money," says Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business.