Statement of Maurice Emsellem, Director of Public Policy,
National Employment Law Project, New York, New York

Testimony Before the Subcommittee on Human Resources
of the House Committee on Ways and Means

Hearing on Unemployment Compensation and the Family and Medical Leave Act

March 9, 2000

Good morning, Madam Chairman and members of the Committee. My name is Maurice Emsellem, and I am Director of Public Policy with the National Employment Law Project. Thank you for this opportunity to testify in support of the Administration's action, proposing regulations that authorize the states to provide eligible workers with unemployment benefits while caring for a newborn or newly-adopted child. For the reasons described below, we believe that the proposed regulations represent sound public policy and a critical step forward in the evolution of the unemployment compensation (UC) system.

The National Employment Law Project (NELP) is a non-profit organization that specializes in the unemployment compensation system, the Family & Medical Leave Act of 1993 (FMLA), and other employment laws that are of particular concern to the working poor . We provide technical assistance to state lawmakers and advocates in support of reforms of the UC system. We have published extensively on the unemployment system, including several scholarly articles, a popular resource guide entitled Women, Low-Wage Workers and the Unemployment Compensation System: State Legislative Models for Change (Revised 1997), and a recent state report co-authored with the Institute for Women's Policy Research (IWPR) entitled, The Texas Unemployment Insurance System: Barriers to Access for Low-Wage, Part-Time & Women Workers (February 1999). We are also working with policy-makers in the states as they develop legislation to establish Birth and Adoption, Unemployment Compensation (BAA-UC) programs.

In today's testimony, I will address the following key issues related to the BAA-UC initiative.

1. The BAA-UC initiative is part of a growing movement in the states to expand access to the unemployment system to meet the needs of the changing workforce.

2. BAA-UC advances the goals of the unemployment program to increase attachment to the labor market, especially for low-wage working families.

3. State unemployment laws cover workers who are temporarily separated from their jobs for family reasons and many other circumstances not strictly limited to coverage of the "involuntarily unemployed".

4. As set forth in the proposed regulations, the federal unemployment laws do not preempt the states from enacting BAA-UC programs.

5. With the sustained low unemployment rate, state trust funds are well-equipped to support UC eligibility expansions, including the BAA-UC program.

6. State trust funds are building despite dramatic cuts in UC taxes.

• The BAA-UC initiative is part of a growing movement in the states to expand access to the unemployment system to meet the needs of the changing workforce

Over the past several decades, access to the unemployment system has declined to unacceptably low levels due largely to the failure of the program to keep pace with the changing needs of today's workforce. Nationally, the proportion of the unemployed receiving unemployment benefits has dropped from an average of 49% in the 1950s, and over 75% during the 1974-75 recession, to just 35% in the 1990s. As documented by the Advisory Council on Unemployment Compensation and the National Commission on Employment Policy, low-wage, part-time and women workers are the hardest hit by this lack of access to the UC system. The Texas study authored by NELP and IWPR illustrates how these negative trends impact individual groups of workers at the state level. In Texas, only 21% of unemployed women workers received UC. The rate for part-time workers was 8.5% and only 18.4% for low-wage workers, despite the significant labor force attachment of both these groups.

As a result of these conditions and the vast growth in state trust funds caused by the low unemployment rate, a movement has taken hold to expand access to the unemployment program. Just in the past few years, states as politically diverse as Wisconsin, California, New Hampshire, Florida, Massachusetts, Georgia, Washington, North Carolina, New Jersey and Connecticut, have enacted or are now actively debating broad reforms specifically intended to reach more lowwage and women workers. ⁽¹⁾ For example, Governor Thompson of Wisconsin recently signed a comprehensive package of UC reforms that included the "movable base period," broader coverage for workers who leave their jobs due to a wide range of family circumstances, and the creation of a study commission to consider options to expand UC for part-time workers.

The BAA-UC initiative, now being considered in eight states (Connecticut, Illinois, Indiana, Maryland, Massachusetts, New Jersey, Vermont, Washington), is part of this growing movement to make the unemployment system more accessible to low-wage and women workers. Although not without its critics, the BAA-UC initiative has successfully generated an unprecedented public debate that has begun to address the many misperceptions about the limits of the unemployment program and spark discussion about the need for reform. ⁽²⁾ Today's hearing provides another critical opportunity to publicize the need to reform the UC system to keep pace with today's workers, and the opportunities to enact BAA-UC programs consistent with the purposes of the federal unemployment laws.

• BAA-UC advances the goals of the unemployment program to increase attachment to the labor market, especially for low-wage working families

As stated in the proposed regulations, the goal of the BAA-UC program is to "help employees maintain or even promote their connection to the workforce by allowing them time to bond with their children and to develop stable child care systems while adjusting to the accompanying changes in lifestyle before returning to work." 64 Fed. Reg. at 67974. The Labor Department's position is supported by the legislative history of the Social Security Act of 1935, reflected in the statement in the Senate Report emphasizing that unemployment benefits "should encourage the regularization of employment." S. Rep. No. 628, 74^th Cong., 1^st Sess. 16 (1935) (emphasis added). ⁽³⁾

As described in President Clinton's speech on May 23, 1999 announcing the BAA-UC initiative, large numbers of working families cannot take advantage of the 12 weeks of jobprotected leave provided by FMLA because they do not have the financial means to support their families while on unpaid leave. As the report of the Commission on Family and Medical Leave found, 64% of those who wanted to take advantage of FMLA could not because the leave was unpaid. The absence of paid family leave has had a devastating impact on lowincome families in particular. For example, 21% of those families with incomes of less than $20,000 a year reported having to resort to public assistance given the absence of paid leave. The benefits provided by BAAUC will thus help keep these low-income families who sought to take family and medical leave from losing their attachment to the labor market and falling into poverty. See California Dept. of Human Develop. v. Java, 402 U.S. 121, 132 (1974) (unemployment benefits are necessary to "maintain the recipient at subsistence levels, without the necessity of his turning to welfare or private charity.").

In fact, years of research in the United States and abroad demonstrates empirically the value of family leave policies to workers and their employers. According to Professor Janet C. Gornick, an expert in family leave policies in Europe and the United States, "paid family leave benefits for new parents strengthen women's labor market attachment, in both the shortand longterm." ⁽⁴⁾ Specifically, the studies show that access to maternity benefits is strongly associated with new mothers' probability of returning to work within six months of giving birth. Women with access to paid leave were also found to work later into pregnancy and to start working sooner once the infant was at least two months old. In addition, Canada has successfully offered family leave benefits through its unemployment system for many years, covering qualified employees unable to work "due to maternity" (since 1971) and "due to parental caring" (since 1990).

The BAA-UC program thus represents a logical next step in the evolution of the UC system to accommodate the changing circumstances of today's working families. As documented by the successful Canadian experience and the empirical research on paid family leave policies, the BAAUC program will reap significant benefits for workers, their families and employers thereby serving the essential goals of the unemployment system.

• State unemployment laws cover workers who are temporarily separated from their jobs for family reasons and many other circumstances not strictly limited to coverage of the "involuntarily unemployed"

The "involuntarily unemployed" is a phrase that has been relied upon often in this debate in an effort to distinguish BAA-UC recipients from all other claimants who collect unemployment benefits. For the purpose of this hearing, therefore, it is appropriate to explore whether it is true that only the "involuntarily unemployed" are entitled to unemployment benefits. Thus, is it accurate to portray BAA-UC recipients as somehow "pitted" against all other UC claimants? In our view, the phrase "involuntarily unemployed" does not accurately characterize all workers who are covered by today's state unemployment laws. Nor should it, as this narrow statement of the purposes of the unemployment program represents a substantial step backward in the evolution of state UC programs as they develop the flexibility to serve the changing needs of today's workforce.

While the phrase "involuntarily unemployed" is not found anywhere in the federal unemployment laws, it is mentioned in the Senate Report accompanying the Social Security Act of 1935. Putting aside the legal arguments for the moment, we'll explore how this phrase has been applied in actual state practice. This is an important exercise to clarify that the unemployment laws are open to interpretation by the states and that narrow terms do not capture the broad range of state unemployment policies that have been established to respond to the everyday needs of workers, employers, and the labor market more generally. It is also important to correct any public misperceptions about the scope of the unemployment program. Otherwise, fewer workers who now qualify for unemployment benefits will actually apply for benefits, thus contributing to the low "take up" rate for the unemployment program. Already, less than half (45%) of the jobless who have significant labor force attachment apply for unemployment benefits with many believing, incorrectly, that they do not qualify.

Accordingly, we begin by examining how the general rule has been applied to the process of qualifying for unemployment benefits. First, if workers have to be "involuntarily unemployed," are they also entitled under federal law to leave work for compelling family reasons or other reasons not limited to an employer-initiated layoff? Yes they are, according to the states. In fact, going back to the early days of the unemployment program, there are numerous examples of state laws that consider an employee's initiation of his or her separation from work involuntary under a broad range of circumstances. About one-third of the states cover compelling personal circumstances requiring an individual to leave his or her job, including many situations that qualify for coverage under FMLA. ⁽⁵⁾ A number of states also provide benefits to striking workers, which was upheld by the U.S. Supreme Court in the case New York Tel. Co. v. New York State Department of Labor, 99 S.Ct. 1328 (1979), despite the argument that these workers were "voluntarily" unemployed.

Second, is it always the case that unemployment recipients have to be "able and available" for work to be considered "involuntarily unemployed" and therefore qualify for UC? Again, the states have seen fit to create appropriate exceptions from this rule especially where, as in the case of the BAA-UC program, the goal is to increase attachment to the labor market. For example, as described in the proposed regulations, at least eight states now provide unemployment benefits to workers on temporary layoff. Not unlike the situation of those taking a family leave, the states in this situation have made the decision that it is not always good public policy to require workers to accept new work - even a superior job, with better pay and benefits - when the worker, in fact, still retains a connection, a commitment of employment, with his or her current employer. This rationale applies as well to the 22 states that exempted workers in training programs from having to meet the work-search rules before this policy was adopted as the law of the land in 1976.

Finally, by generally limiting unemployment benefits to those who are "involuntarily unemployed," are states prevented from providing benefits to workers who are not necessarily "unemployed"? Again, states have acted within their discretion to define these terms broadly. Indeed, there are many circumstances where workers are entitled to unemployment benefits while maintaining an on-going relationship with their employers, as in the case of BAA-UC. For example, nearly all states operate a "partial" unemployment program, meaning that benefits are paid to workers who are still employed but whose hours have been reduced below full-time. The same is true of "short-time compensation" or "work-sharing" programs that have been adopted by at least 17 states, where unemployment benefits are paid to current workers whose hours were reduced in order to avoid layoffs. The state courts have also decided several cases in which unemployment benefits were provided to "unemployed" workers who were only temporarily separated from their jobs yet still received job-related benefits, as in the case of the BAA-UC program. ⁽⁶⁾

While everyone may not agree with all the policy decisions described above, the point is that many states have expanded the scope of their unemployment programs to serve not just those workers who are narrowly defined as the "involuntarily unemployed." The states have put in place unemployment programs that expand the flexibility to serve a wide variety of employment needs, including family and workforce development needs. By expanding the scope of the program, the states have not "pitted" one group of workers against another. To the contrary, they have created a situation where the program benefits a greater proportion of those in need. Similarly, in the case of the BAA-UC program, the states are taking advantage of their flexibility to expand the program to serve newly-defined needs. Thus, while everyone may not agree with the merits of the BAA-UC program, it is not accurate to conclude that those states that have proposed such legislation are acting outside their rights to expand benefits beyond a narrowly defined group of the "involuntarily unemployed."

• As set forth in the proposed regulations, the federal unemployment laws do not preempt the states from enacting BAA-UC programs

The states have exercised vast discretion in developing unemployment laws to meet the needs of today's workers, including unemployment policies designed to reach beyond a narrowly-defined group of "involuntarily unemployed" workers. Thus, as set forth in the proposed regulations, the federal unemployment laws also allow for the adoption of BAA-UC programs. Rather than restate the legal analysis of the U.S. Department of Labor in support of this position, we take this opportunity to underscore certain key legal issues.

First, the U.S. Supreme Court has consistently held that the states are provided with the discretion under the Social Security Act of 1935 to decide basic issues of eligibility unless specifically prohibited by federal law. This rule was upheld most recently in the case of New York Tel. Co. v. New York State Department of Labor, 99 S.Ct. 1328 (1979), the decision upholding the right of states to provide unemployment benefits to striking workers. The Court cited several prior decisions and concluded that, "These cases demonstrate that Congress has been sensitive to the importance of the State's interest in fashioning their own unemployment compensation programs, especially their own eligibility criteria." Id. at 1340 (emphasis added). Thus, "when Congress wishes to impose or forbid a condition for compensation, it did so explicitly; the absence of such an explicit condition was therefore accepted as a strong indication that Congress did not intend to restrict the State's freedom to legislate in this area."

Accordingly, DOL's interpretation of the federal unemployment laws as set forth in the BAA-UC regulations is clearly supported by a consistent line of U.S. Supreme Court decisions directly addressing the right of the states to determine the scope of their eligibility rules . The case in support of the agency's action is even more compelling given the absence of any explicit reference in the federal statutes to the terms "involuntary unemployment" or "able and available" for work. Finally, the law is clear that the interpretation of the federal unemployment statutes by the U.S. Labor Department is entitled to great deference. Certainly, the agency's action is not "arbitrary and capricious," which is the standard that applies to overrule a regulation properly promulgated pursuant to the federal Administrative Procedures Act (APA).

• With the sustained low unemployment rate, state trust funds are well-equipped to support UC eligibility expansions, including the BAA-UC program

The decision to expand UC is made by each state legislature based on a balancing of many factors, including the solvency of their UC trust funds, the projected funding coming in and benefits being paid out, the UC tax structure, the size of the new program, and its projected cost. Based on this analysis, most states -- but not all -- are well prepared to support UC eligibility expansions, including the BAA-UC program.

The cost considerations of the BAA-UC program will vary significantly from state to state, depending on the scope of coverage, the number of weeks of benefits provided, birth rates, UC "take up" rates, and each state's benefit levels. For example, some states have proposed benefits lasting just six weeks, while others have proposed providing benefits for a maximum of 12 weeks. DOL, in the proposed regulations, estimates that the BAA-UC program would cost in the range of zero to $68 million. The higher estimate optimistically assumes that all the states which introduced legislation last year will actually enact the program. In individual states, the cost of the program ranges from $1 million in Vermont to $34 million in Massachusetts.

Since the end of the last recession in 1992, state trust fund reserves have increased significantly as the unemployment rate has remained consistently low (now at just 4.1%). This makes it possible to advance a range of UC expansions to bring the rates of access back up to more acceptable levels, especially for women, parttime and lowwage workers. State trust fund reserves have almost doubled since the end of the last recession, growing from $26 billion in 1992 to over $50 billion in 1999. And since the economy show no signs of slowing down significantly, the trust fund reserves are expected to continue to build as long as the unemployment rate remains low.

As measured by the generally-accepted solvency standard, most state trust funds are thus well-positioned to handle UC expansions including the BAA-UC program. The standard, known as the "average high cost multiple" (AHCM), measures the number of years that a state can pay UC benefits at peak recessionary levels. The recommended AHCM is 1.0, meaning that a state trust fund can afford to pay at least one year of benefits during a severe recession without collecting any additional revenues. The AHCM for the states has increased by 48% since 1992, now averaging .93. As of the end of 1999, 33 states were above the trust fund solvency standard.

• State trust funds are building despite dramatic cuts in UC taxes

The state trust funds would be even more solvent, and even better equipped to handle long-overdue UC expansions, were it not for the record level of UC tax cuts that have been enacted in recent years.

At the same time that U.S. businesses are experiencing optimal profits, they have also been lobbying aggressively, and successfully, for dramatic cuts in state UC taxes. According to a recent tally prepared by NELP, at least 25 states have cut UC taxes dramatically over the last few years. Not surprisingly, therefore, the average rate of employer contributions has dropped by one-third, from .92% of total wages in 1994 to just .57% in 1999. (See the attached table for more detail on the yearly drop in the rate and the state figures). According to our estimates, employers would have contributed almost $34 billion more into the state UC trust funds for the years 1995-1999 if they had continued to be taxed at the 1994 contribution rate.

The following examples illustrate the dramatic impact that UC tax cuts have had on the state trust funds:

· In 1998, Georgia enacted a tax cut costing the trust fund $122 million over the next two years. In 1999, the Governor signed legislation to further cut UC taxes by $1 billion over the next four years.

· In 1998, Idaho enacted legislation that cut UC taxes by $31 million in 1998 and by a projected $112 million over the next fours years, reducing the rate of the UC tax by 30%.

· In Illinois, the UC tax rate was cut by 16% in 1996, costing the trust fund $128 million. Legislation has been proposed to reduce the rate this year by another 12%, with an impact of $150 million.

· In 1995, a tax cut was enacted in Maryland that the Governor estimates will save employers $410 million over five years.

· At the end of last year, the Massachusetts Governor sought a UC tax cut of $203 million, while the Legislature agreed instead to freeze a scheduled tax increase thereby costing the trust fund $120 million.

· In 1996, Michigan enacted a 10% cut in its UC tax rate, costing the trust fund about $500 million over three years. The 1996 legislation included a provision for future cuts in the event that the fund balance continued to rise, causing a second round of cuts costing the trust fund $750 million since 1996.

· In 1996, UC taxes were reduced in New Jersey costing the trust fund $200 million a year, which was followed by a second round of cuts in 1997 resulting in a total tax cut of $450 million a year.

· In 1998, New York employers received a $420 million tax break, reducing the average UC tax rate by 27%.

· In 1998, South Carolina cut its UC taxes by 50%, costing the trust fund an estimated $50 million.

· In 1999, Washington froze its tax base at 1999 levels, stopped an automatic shift to a higher tax schedule, and provided additional tax reductions for employers in some rate classes. These tax cuts will cost the trust fund $590 million over six years.

For today's hearing, we have also prepared an estimate that documents the impact of the reduced tax rates of the past several years on the state trust funds. We found that, if taxed at the 1994 U.S. average rate of .92% on total wages, employers would have contributed almost $34 billion more into the state UC trust funds for the period from 1994-1999 (i.e., $159 billion as opposed to $126 billion). ⁽⁷⁾ As reflected in the attached graph, it is significant that the amount of actual employer contributions has in fact been going down over these years, and the gap between actual contributions and estimated contributions at the 1994 tax rate is growing substantially. Despite these reduced employer contributions, the state trust funds are still building as a result of the low unemployment rate.

Unfortunately, the data does not exist to document precisely the impact of tax cuts alone on the trust funds. Thus, given the data limitations, our estimate also takes into account the impact of experience rating on the tax rates (which generally brings down the tax rate for those employers who are laying off fewer workers), and the automatic triggers that exist in some states that decrease or increase the tax rates depending on the solvency of the trust fund. Therefore, while not an estimate of the impact of tax cuts alone, the calculation accurately reflects the significant impact on the trust funds of the reduced tax burden on employers over the years 1994 to 1999.

Ironically, many business groups have been highly critical of the BAA-UC initiative, claiming that it will result in a "raid" of state UC trust funds. For example, in Massachusetts, business interests are opposed to the expansion of UC to cover workers on family and medical leave, yet they have actively lobbied for a UC tax cut that would have cost the UI trust fund $203 million. According to state labor department officials writing in support of the tax cut proposal, "the current status of the Massachusetts UI Trust Fund is extremely positive, and a better time for taking additional action to keep UI costs down could hardly be found." These business and state officials are, of course, hard pressed to demonstrate how the trust fund can handle these massive tax cuts if they cannot afford reforms expanding access to the UC system, including UC to cover workers on family leave.

* * *

Madam Chairman and members of the Committee, thank you again for this opportunity to testify in support of the BAA-UC initiatives in the states and the Labor Department's proposed regulations.

¹ See, e.g., "Jobless Insurance Ready to Take Friendly Turn," Milwaukee Journal Sentinel, October 24, 1999; "Labor Seeks to Broaden Unemployment Eligibility," The Wall Street Journal (Florida Edition), June 3, 1998; "Texas Ranks Low in Benefits for the Unemployed," Dallas Morning News, April 14, 1999; "Safety Net Repair: Hole in Jobless Benefits Needs Mending," The Sacramento Bee, September 25, 1997; "Revamping Jobless Benefits Could Ease Welfare Burden," The Sacramento Bee, September 7, 1998.

² For example, a New York Times editorial ("Paid Leave for Parents," dated December 1, 1999) supported the proposed BAA-UC regulations stating that, "Although unemployment insurance is traditionally seen as helping only those who have been involuntarily laid off and immediately available for work, many states have granted benefits to workers who are not in that narrow category."

³ Saul Blaustein, in his treatise on the history of the UI system, also emphasizes the key role that unemployment benefits play in maintaining a skilled and productive workforce. According to Blaustein, "The compensation tends to preserve the workforce intact, with its particular skills, training, and experience, until it can be recalled . . . . While this support of workforce retention may somewhat restrict the mobility of labor, it is of value to the employer, as well as to the worker and the community." Saul Blaustein, Unemployment Insurance in the United States: The First Half Century (W.E. Upjohn Institute: 1993), at 63.

⁴ Letter of Professor Gornick submitted in support of the BAA-UC regulations, dated January 14, 2000.

⁵ Thus, under many state laws, an individual who is unemployed as a result of compelling family or medical reasons is considered to be involuntarily unemployed. For example, the Massachusetts unemployment statute provides that, "[a]n individual shall not be disqualified from receiving benefits under the provisions of this subsection, if such individual establishes to the satisfaction of the director that his reasons for leaving were for such an urgent, compelling and necessitous nature as to make his separation involuntary." Mass. Gen. Laws Ann., c. 151A, Section 25(e), para. 2 (emphasis added).

⁶ See, e.g., Donahue v. Dept. of Employment Security, 142 Vt. 351, 355 (1982) (awarding benefits to an "unemployed" group of hourly paid, nonprofessional school employees during the three weeks of Christmas, mid-winter and spring vacations observed by the Vermont public schools); Pennsylvania Electric Company v. Board of Review, 450 A.2d 779 (Pa. Cwmwlth. 1982) (awarding benefits to an "unemployed" woman who was granted an unpaid leave when she became pregnant and presented medical certification that her job threatened the safety of the fetus, during which time she continued to receive holiday pay, life insurance and hospitalization coverage).

⁷ These estimates were prepared with data provided by the U.S. Department of Labor, the only national data documenting UC tax rates and contributions. We calculated the dollar amount of employer contributions that would have been deposited in state trust funds had employers been taxed at the 1994 U.S. average rate of .92% of total wages, which is the year when the average tax rate started declining (see attached table). This calculation was then made for each of the years from 1995 to 1999, and the results were added together to arrive at the $34-billion figure. The contributions included in the calculation are only for experience-rated employers, and they do not include FUTA taxes.

March 2000

Comparison of Actual Employer Contributions to State Unemployment Trust Funds for the Years 1994-1999* With the Estimated Yearly Contributions Calculated at the 1994 Tax Rate

Source: U.S. Department of Labor, Employment and Training Administration
Based on calculations prepared by the National Employment Law Project
*The 1999 U.S. average contribution rate as a percentage of total wages was estimated by the U.S. Department of Labor.

March 2000

Source:  U.S. Department of Labor, Employment and Training Adminustration.
Based on calci;ations prepared by the National Employment Law Project.

*The 1999 average contribution rates as a percentage of total wages were estimated by the U.S. Department of Labor.