Published in Economic Development

COVID-19 highlights structural changes needed for unemployment system, researchers say

BY Sunday, May 10, 2020 06:57pm

As some employers express concern about retaining workers who are earning more income through unemployment benefits than their normal paychecks, researchers say long-term structural fixes are needed to state and federal programs.

The $2.2 trillion CARES Act passed in late March included provisions to add $600 in weekly unemployment benefits for people active in their state’s system. In Michigan, this means workers unemployed as a result of the pandemic could receive up to $962 a week. The federal benefits are available for up to 39 weeks, while state benefits were expanded to more workers and extended for 26 weeks.

Susan Houseman, vice president and director of research at the W.E. Upjohn Institute for Employment Research COURTESY PHOTO

Media reports have shown concern among employers who pay less than the amount of benefits workers are receiving. In at least one case in Washington state, a company that received a Paycheck Protection Program loan — which requires 75 percent of the loan to be used for payroll in order to be forgiven — faced backlash from employees, since the loan effectively means workers would be paid their typical wages.

Kelly Presta, vice president at Sturgis Molded Products Co., shared these concerns during an April 22 conference call hosted by the West Michigan Policy Forum. As of early May, Sturgis Molded Products was running at about 10 percent capacity involving transportation and medical devices. The company has about 200 employees.

“I’ve called people and there has been communication that said, ‘I make more by not coming in,’” Presta told MiBiz. “That’s out there.”

Sturgis Molded Products’ operators and first-line positions make less than the maximum amount of benefits, Presta said, while technical positions make more. Meanwhile, the company is looking into starting a work-sharing program, which would allow more workers to come back at reduced hours while still qualifying for federal and some state benefits.

She added that “it’ll be an interesting dynamic” once auto manufacturing ramps back up and more employees are called back. 

Presta’s concerns were for employees who are able to come back but choose not to, as opposed to employees who may be affected by COVID-19 or who are caring for others. If able employees choose not to come back, she added, “We can clearly deny unemployment at that point.”

John Austin, director of the Ann Arbor-based Michigan Economic Center and a nonresident senior fellow at the Brookings Institution, expressed surprise that employers were having these concerns.

“I think that’s a perverse concern,” he said. “Most every worker would rather be working on getting paid for showing up than this very modest safety net that we have really turned on for most workers in this crisis.”

UI underfunding

Presta says a better policy move would have been for the federal government to cover up to 100 percent of an employee’s pay instead of a flat $600-a-week allotment.

But the chronic underfunding of state unemployment systems meant inadequate technology prevented such a tailored option, said Susan Houseman, vice president and director of research at the W.E. Upjohn Institute for Employment Research in Kalamazoo.

“It was a policy choice, and there was not a good one in the situation,” Houseman said of the $600 in weekly federal benefits. “Most unemployment insurance agencies around the country have inadequately funded the administration for many years. It’s completely antiquated. They just weren’t nimble enough to change formulas to calculate something that would be like a wage replacement.

“It underscores the need to update the administration of our unemployment insurance agencies around the country.”

The U.S. Department of the Treasury indicated recently that employers who got funding from the Paycheck Protection Program would not lose loan forgiveness if a laid-off employee opts to continue getting unemployment and declines to return to work.

An interim final rule from Treasury “will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower,” according to the recent guidance.

“This is one of those instances where there’s more to come,” said U.S. Small Business Administration Great Lakes Regional Director Rob Scott. “There are going to be situations where you offer an employee their job back and they don’t want to come back. We do not want to hurt that small business owner who got this forgivable loan and put them in a situation where they’re not successful.”

‘Broken system’

Other researchers say the coronavirus pandemic has exposed fundamental flaws in the federal and statewide unemployment programs.

An April 30 policy paper by Stephen Wandner released through the Upjohn Institute declared that unemployment insurance is a “broken system and should be rethought.” Taxes and benefits are out of balance, while re-employment services are inadequate, he argues.

The paper outlines legislative fixes — such as indexing benefits to the cost of living, standardizing rates across states and bolstering programs that help workers find new jobs — and administrative options, such as bringing more uniformity under a federal program.

“We need a system that encourages retraining and mobility, allowing you to move from job to job,” Austin said. “There are no career ladders anymore.”

With hundreds of thousands of Michigan residents losing employer-sponsored health insurance during COVID-19 layoffs, Austin says pension and health care benefits should be more portable and travel with the worker. This also would benefit workers not eligible for unemployment benefits pre-coronavirus, such as independent contractors and gig economy workers. 

As well, automation is underscoring the need for unemployment benefits to include job training, he said.

“We should all be questioning a system that pays people to stay home until their job comes back. The likelihood is a lot of those jobs aren’t coming back,” Austin said. “We need a system that helps you identify your skills for jobs that will be coming back.”

Meanwhile, COVID-19 is poised to deplete Michigan’s reserves that pay out benefits. As of April 30, more than 1.2 million people in Michigan had filed jobless claims, or about 25 percent. Upjohn Institute Senior Economist Christopher O’Leary expects Michigan to pay out $9.2 billion in state unemployment benefits for the year starting March 21. It started 2020 with $4.6 billion in unemployment reserves.

“I anticipate Michigan will need to borrow about $3.4 billion later this year to meet its obligations,” O’Leary wrote on May 6. 

MiBiz Senior Reporter Mark Sanchez contributed to this story.

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