John Feehery: Speaking Engagements


Unemployment Insurance

Posted on July 13, 2010
The first unemployment insurance plans were created by European guilds and trade unions in the 18th century.  They taxed their members a certain percentage in good times, so that when bad times hit, they would have some money to help them survive.

The business cycle is always with us, no matter how many were hoping upon hoping that we had solved the problems of an uneven economy.

According to one paper put out by the Social Security Administration:  “UNEMPLOYMENT compensation is a method of safe­guarding individuals against distress for a short period of time after they become unemployed. It is designed to compensate only employable persons who are able and willing to work and who are unemployed through no fault of their own...During the periods of prosperity a fund is built up, to be available for the payment of benefits in the periods when the industry fails to maintain employment.”

It was FDR who first signed into law Unemployment Insurance, which was part of the Social Security Act.  Every state has an Unemployment Insurance join-venture, financed by the both the Federal government and by the States, and paid for by the Feds and the states through state and federal taxes.  Employers, not employees, pay those taxes, and then employers embed the costs in the products (or services) that they provide.

The FUTA tax (which stands for the Federal Unemployment Tax Act) was originally three percent of taxable wages collected from employers who employed at least four employees and employers could deduct up to 90 percent of the amount due if they paid taxes to a state to support their system.  But now employers pay 6.2% of taxable wages and receive an offset of 5.4 percent, which means that employers pay about $60 bucks per employee for the Federal FUTA tax.  They pay more at the state level.

States usually give layed off employees about 26 weeks to find another job.  Studies show that, amazingly, most people magically find a job right as their unemployment benefits run out.  Of course, these days, with the economy being like it is, Congress feels the need to continue to extend unemployment benefits, and now somebody can be on unemployment for close to two years.  Hard to keep skills fresh when you are on unemployment for two years.

Of course, as has been often noted, the problem of persistent, long-term unemployment is growing in America.  Many of those who have been on the “dole” as they call it in Ireland for those two years tend to stay unemployed for much longer than that.  They tune out of the job market, possibly for life, surviving on the salary of a spouse, relying on the kindness of friends or strangers, or finding ways to make money that are off the books.  Let’s not underestimate the power of the black market, even in an economy that is seemingly as transparent as ours.

Democrats like to talk about how compassionate they are and how mean the Republicans are when it comes to extending unemployment.  But after a certain point, unemployment compensation ceases to be an insurance program and starts to become a welfare program.  At 99 weeks, we might be at that point.

That can explain the reluctance of some Republicans to continue to extend the UI program for another 26 weeks.  Yes, they use the fact that these benefits need to be paid for, and yes, extending UI benefits will have a noticeable impact on the debt.  But extending these benefits also has a negative impact on job creation.  Why work when you can get a check from Uncle Sam?  Better yet, work off the books and still collect checks from the Federal government.  My guess is that happens more than anybody wants to admit.

I, for one, believe everybody who collects UI should get a laptop with their check, with a requirement that they use that laptop to sign up for a continuing education course.

Is unemployment insurance an economic stimulus?  Perhaps, but it is not cost-free.  It puts additional tax burdens on small businesses, making it harder for them to hire.  It also puts more debt on the backs of future generations, who will ultimately be forced to pay the interest payments than come from bigger debt.

Unemployment insurance works when it serves as an insurance program.  It doesn’t work when it becomes a welfare program.  I fear that the Democrats, with their constant political maneuvers, are transforming it from the former to the latter, and I worry that the likely impact is a sluggish economy and a government that is rapidly running out of money.

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