Testimony of Douglas J. Holmes
President, UWC- Strategic Services on Unemployment & Workers’ Compensation
Subcommittee on Human Resources
Committee on Ways and Means
United States House of Representatives
Hearing on Improving Efforts to Help Unemployed Americans Find Jobs
February 10, 2011
UWC- Strategic Services on Unemployment & Workers’ Compensation
910 17th Street, NW, Suite 315, Washington, D.C. 20006
Phone (202) 223-8904 Fax (202) 783-1616 www.UWCstrategy.org
Chairman Davis, Ranking Member Doggett, and members of the Subcommittee on Human Resources, thank you for the opportunity to testify on the topic of improving efforts to help unemployed Americans find jobs.
I am Douglas J. Holmes, President of UWC- Strategic Services on Unemployment & Workers’ Compensation (UWC). UWC counts as members a broad range of large and small businesses, trade associations, service companies from the Unemployment Insurance (UI) industry, third party administrators, and unemployment tax professionals. The organization traces its roots back to 1933 at the time when unemployment insurance was first being considered for enactment.
Thanks, Mr. Chairman, for your leadership in scheduling this hearing early in the Congressional session to enable a fresh analysis of the economy on the heels of recent unemployment and jobs information released last week by the US Department of Labor and the Bureau of Labor Statistics. As the economy turns the corner to recovery, new strategies are needed to address lingering high unemployment rates and continuing large numbers of long term unemployed claimants. The new year calls for new solutions to match the problems at hand.
The following observations and data may help frame the discussion.
The Unemployment Rate remains too high. In a December, 2010 Issues paper prepared by James M. Borbely, an economist in the Division of Labor Force Statistics, Office of Employment and Unemployment Statistics, U.S. Bureau of Labor Statistics (BLS), Mr. Borbely provides a revealing comparison of the impact of the 2007-2009 recession and the previous four recessions with respect to the proportion of the labor force that is unemployed.
For the first 8 months of all five recessions, the unemployment rate followed a similar upward trend, increasing by about 1 percentage point. During the 2007-09 recession and the two long recessions of the 1970s and 1980s, the unemployment rate increased by an additional 3 percentage points or so during the next 8 months of the downturn. However, after 16 months, the similarity disappears as the unemployment rate in the 2007-09 recession continued to trend upward for several months. The 2007-09 recession ended in June of 2009, the trough of the high unemployment rate following the recession was 10.1 percent in October of 2009. It has now been 16 months since the trough of high unemployment yet the unemployment rate remains much higher than at this time during any other of the post recession periods since the 1970s.
Job openings are lagging the recovery. The number of job openings reported by the Job Openings and Labor Turnover Survey Highlights published by BLS on January 11, 2011 shows that job openings declined to their lowest point one month after the end of the recession in July of 2009 and employment levels declined through December of 2009. Since that low point job openings and employment have trended up, but the number of hires only increased by 9 percent from June of 2009 to November of 2010. Hires totaled 4.2 million in November.
The number of mass lay-offs has fallen. The number of mass layoffs reported by BLS for December, 2010 decreased from the prior month and reached its lowest level since April 2008. The number of mass lay-offs fell from 2009 to 2010 for temporary help services, school and employee bus transportation, motion picture and video production, professional employer organizations, automobile manufacturing, and discount department stores.
The number of initial applications for state unemployment compensation is declining. The number of initial state applications has dropped from 682,176 at the end of January of 2009 to 490,000 in 2010 and now to 415,000.
Despite the reduction in the number of initial applications, the number of ongoing federal and state unemployment compensation weekly claims remains much higher than at this point after any of the previous recessions. The series of federal measures taken to enact emergency unemployment compensation, additional compensation, relaxation of the triggers for extended benefits, and incentives to states to expand benefits enacted in the American Recovery and Reinvestment Act (ARRA) have resulted in a much larger number of unemployment claims being filed and unemployment compensation paid than any of the prior four recessionary periods. We now have 14 million unemployed individuals, and of those claiming unemployment compensation the average duration of claims is more than 34 weeks.
Total unemployment rates vary considerably state by state. The industrial mix and volatility of the local economies in the states varies considerably. Ten states; Hawaii, Iowa, Kansas, Nebraska, New Hampshire, Oklahoma, South Dakota, Vermont, Virginia and Wyoming, have three month total average unemployment rates of less than 7.0%. Ten states; California, Florida, Georgia, Kentucky, Michigan, Nevada, Oregon, Rhode Island, and South Carolina have unemployment rates of 10.0% or above.
Employer plans to hire new employees are still uncertain. The results of the monthly January economic survey conducted by the National Foundation of Independent Business (NFIB) showed that 11 percent of business owners reported increasing employment at their firms by an average of 2.8 workers while 15 percent reported reducing total employment an average of 2.9 workers per firm. Improved confidence on the part of small business owners is critical to new job creation.
In addressing how to help Americans find jobs, three steps should be taken; 1) encourage job creation by avoiding increases in the cost of hiring and employment, 2) encourage unemployed workers to seek and accept work; and 3) improve the efficiency of the system to match unemployed workers with jobs available in the market place.
REDUCE THE COST OF HIRING AND EMPLOYMENT
It is generally recognized by economists that increasing taxes during a period of nascent economic recovery is counterproductive. Congress as recently as December reduced the social security payroll tax to help spur the economy. Despite widespread recognition that now is not a good time, there are a number of automatic tax increase provisions in federal and state law that have begun to increase state and federal unemployment taxes paid by employers. These increases come at the very point in the economic cycle that such increases impair employers’ ability to hire employees.
State unemployment taxes are dramatically increasing. State UI taxes as a percent of total wages increased on average from 2009 to 2010 by 34% with larger increases expected for 2011 and 2012 as states and employers in many hard hit states struggle to restore solvency to state unemployment trust funds that have been savaged by the recession and historically high unemployment claims loads.
Special state taxes paid by employers to repay federal interest on loans are increasing. States with outstanding loans with the federal government through Title XII of the Social Security Act, effective January 1, 2011 are required to pay interest on the loans as a condition of receiving administrative funding for the UI program and as a condition of employers in the state receiving the normal state offset against the Federal Unemployment Tax (FUTA).
The first statutorily required payment is due on or before September 30, 2011. As of February 3, 2011, thirty-one states and jurisdictions had outstanding loans of $42.4 billion. States and/or employers in the following states will be impacted with interest charges; Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virgin Islands, Virginia, and Wisconsin.
Interest due to be paid on these loans is estimated on an annual basis to exceed $1.6 billion with the amount to be paid by September 30th of approximately $1.3 billion. Much of this cost will be paid by employers through increases in existing or new special state payroll taxes. The additional tax on payroll will add to the already dramatically increasing state unemployment taxes and discourage the creation of jobs in 2011 and 2012.
FUTA taxes are increasing. Employers are required to pay automatic increases in the Federal Unemployment Tax in states with outstanding federal loans. Employers in Indiana, Michigan and South Carolina have already been required to pay increased FUTA taxes for 2009 and/or 2010, and employers in twenty-one additional states, including Alabama, Arkansas, California, Connecticut, Florida, Georgia, Idaho, Illinois, Kentucky, Minnesota, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Pennsylvania, Rhode Island, Virginia, Virgin Islands, and Wisconsin will be subject to an increased FUTA tax for 2011. The increased tax is projected to cost employers approximately $2 – 3 billion annually for 2011 and 2012.
It is no wonder that employers are hesitant to take on the additional cost of hiring additional employees given the increases in unemployment insurance related payroll taxes and uncertainties as to the cost of doing business. A coordinated effort on the part of the states and the federal government is essential in response to the skyrocketing taxes.
Provide short term relief from Federal Unemployment Tax Penalties
Congress should 1) provide a waiver of the interest on loans to states to pay unemployment compensation for 2011 and 2012, and 2) waive FUTA offset credit penalties for 2011 and 2012.
These steps will reduce the cost of hiring that would otherwise automatically increase without action by Congress.
ENCOURAGE UNEMPLOYED WORKERS TO SEEK AND ACCEPT WORK
The number of unemployed workers being hired is not large enough to significantly reduce the total unemployment rate or the number of long term unemployed workers. This suggests a solution that stresses not only the creation of new jobs but unemployed workers must be more actively engaged in searching for and accepting work that is available in the labor market and/or choose the training needed to obtain the skills and abilities that are in demand in the new economy.
Some of the federal funds projected to be spent on additional weeks of emergency or extended unemployment compensation at this point in the recovery may actually produce a disincentive for active job search. The addition of 13 weeks of federal extended benefits is generally recognized by the Congressional Budget Office (CBO) as having the effect of increasing the duration of state unemployment compensation on average by more than two weeks.
There are record numbers of long term unemployed, many of whom are being paid emergency unemployment compensation and extended benefits. The US DOL report for the week of January 15, 2011, shows 3,653,080 individuals were paid EUC and 898,381 were paid regular extended benefits.
In a recent survey of state unemployment insurance agencies conducted for UWC by the National Foundation for Unemployment Compensation and Workers’ Compensation, 39 states reported exceptions to the general work search requirements and one state reported that it had no work search requirement as a condition of eligibility for unemployment compensation.
Exceptions to work search requirements ranged from a general exception when the state unemployment rate exceeded 8.5% to situations where individuals are attached to prior employment and expect to return to work, seek work through hiring halls or temporary services, are in approved training, or are between terms of employment for a seasonal employer.
The advent of claims systems designed to enable easier claims processing and faster payment, unfortunately, has resulted in a lower degree of verification of individuals actively seeking work as a condition of weekly payment. Although millions of individuals are filing tens of millions of weekly claims, there are very few individuals who anticipate that their claims will be denied for failure to seek work. Individuals in many states may be able to apply on line, submit claims for unemployment compensation on line with electronic self-attestation of their work search activities, and have benefits directly deposited into their bank accounts. The entire application and weekly claims and payment process may be completed with very little contact by the claimant with a one-stop or employment services office.
Increase Job Search Requirements and Reform Federal Extended Benefit and Emergency Programs
Work search requirements for federal programs and standards for state work search requirements should be enacted to send the appropriate signal to claimants that active work search efforts are expected and required as a condition of receiving unemployment compensation. Work search efforts should be recorded and verifiable.
The federal extended benefit program should be reformed. The circumstances under which federal extended benefits are triggered “on” and “off”, the circumstances under which a federal “emergency” program might be needed, and the conditions of receiving extended weeks of unemployment compensation should be reformed to more effectively target funding and respond to the needs of individuals in finding jobs.
Improve the Integrity of the UI Program
Creating a culture of personal responsibility and accountability is extremely important in assuring that funds available for unemployment compensation are properly paid and individuals for whom the program is dedicated properly receive benefits. According to CBO total state and local unemployment compensation payments jumped to $120 billion in 2009, $159 billion in 2010 and payments are estimated to be $129 billion for 2011. With overpayment rates currently of approximately 10%, the amounts available for collection have increased to $12 – 16 billion per year.
In 2010, Congress recognized the need to provide new tools to identify and collect the growing amount of overpayments by enacting the Claims Resolution Act of 2010 (HR 4783). The new law provides new reporting requirements to capture the new hire date of individuals as part of the National New Hire system. This data will enable states to better identify specific weeks for which individuals are being paid wages while claiming unemployment compensation, reduce fraud and increase recovery. The new law also included provisions to enable the offsetting of income tax refunds with outstanding unemployment compensation overpayments.
These new tools are projected to save $2.4 billion over ten years, but the improved savings will only be realized if administrative funding is provided to properly implement these new tools and other integrity measures. Additional administrative funds for integrity functions are needed not only to be able to combat fraud and to recover overpayments but also as a tool to send a signal to claimants of the need for personal accountability in claiming unemployment compensation and actively seeking work as a condition of being paid unemployment compensation.
IMPLEMENT INTIATIVES AND PROVIDE SERVICES THAT ARE MOST EFFECTIVE IN ASSISTING UNEMPLOYED WORKERS IN RETURNING TO WORK
It has been well established that effective job search reduces the number of weeks that individuals remain on unemployment compensation and serves to more quickly fill the staffing needs of employers. The use of web based job search systems and public/private partnerships has demonstrated that greater efficiency and effectiveness in job search can be a win/win by reducing the duration of unemployment compensation, and returning unemployed workers to the workforce more quickly.
The population of long term unemployed workers is not monolithic. Long term unemployed claimants are broadly representative of the workforce and different strategies are needed for the variety of individuals and their barriers to employment.
The Reemployment & Eligibility Assessment Program (REA) is currently provided with a small amount of federal funding to promote rapid reemployment of UI claimants, reduce overpayments and cost-savings for the UI trust fund. The REA combines in-person interviews with assessment of individual claimant skills and abilities, labor market information and the development of a work-search plan. The REA program has been demonstrated in many states to reduce the duration of unemployment for individuals participating in the program and should be expanded as a priority to additional claimants.
Implement Effective Reemployment Initiatives
An analysis of the makeup of the 4.4 million long term unemployed claimants and those who are likely to exhaust unemployment compensation who are currently claiming state unemployment compensation is needed at the state and one-stop local area level to determine the most effective ways to assist them in returning to work.
Once there is a determination of the size of the population to be served and an evaluation of resources needed, assessments of workers should form the basis on which to determine whether the individuals are in need of additional job search, training, and/or support services.
The publicly funded workforce system in place today is limited in its capacity, and an effective plan must combine public as well as privately funded services, and an emphasis on active work search, reemployment services, targeted training and incentives to create jobs.
The leveraging of public funding across program areas as well as private funding driven by employers who are making hiring decisions can be extremely effective in developing the training and support needed to return unemployed workers to work.
UWC supports the continued use of reemployment rate measures by the US Department of Labor as part of the evaluation of the UI system. The goal of employment security should be employment, and performance measures should reflect this priority.
Promote Targeted Employment Based Training
The assessment and referral to training and placement of unemployed workers can be effective in enabling workers to find new work. Employer based programs, such as customized training, on the job training, and programs such as Georgia Works that permit individuals to work as employees or trainees in anticipation of long-term employment are the most effective in moving unemployed workers into training which is likely to lead to employment.
Active participation by employers is the key to successful training as employers ultimately make the hiring decisions. Targeted initiatives in the areas of health services, manufacturing, and other growth areas make sense in the current economy as a way to meet employer needs and to reduce unemployment.
Individuals qualifying for unemployment compensation benefits typically have work experience and training from prior work that enables them to find similar work. However, particularly during a long term recession such as we have experienced, a larger number of individuals become structurally unemployed and may find themselves with skills that are no longer in demand in the labor market.
These individuals may require services well beyond the temporary partial wage replacement provided by the UI program and job search services, and are best served in partnership with private and public programs. Trade Adjustment Assistance and the Workforce Investment Act provide a broader array of support services, assessment, testing, skills training, and referral services.
Keep the Role of the UI program Focused on Returning Unemployed Claimants to Work.
A long list of social safety net programs and services has been established since unemployment insurance was enacted in 1935. The list includes TANF, TAA, WIA, SNAP, Medicaid, Medicare, heating assistance, subsidized housing, subsidized child care, subsidized health care, and earned income tax credits. Many of these programs include a cash assistance component.
Unemployment Insurance is the primary social safety net program targeted in providing economic security for individuals who rely principally on their employment and wages for support. The role of the program is to provide short term support for individuals as they search for work after becoming unemployed through no fault of their own. The program is not designed or funded to provide support payments over extended periods of time. The goal of the system must be the efficient and effective return of claimants to work.
In developing plans to assist long term unemployed workers in returning to work, the UI program should be used in conjunction with workforce programs dedicated to provide job search, reemployment and training services that may be funded from other sources but are aligned to provide economic security and effective workforce services to the benefit of the individual, employers, and economic development.
Assisting more than 4.4 million unemployed claimants in finding employment is a tremendous challenge that calls for the effective use of federal and state resources across a range of social service programs as well as the active participation of employers and individual unemployed workers. In developing strategies to assist unemployed workers there must first be job creation to provide employment opportunities.
Now is not the time to increase payroll taxes and Congress should act to provide relief from Title XII interest and FUTA tax penalties in 2011 and 2012 to encourage job creation in the private sector.
Federal extended benefit and emergency programs should be reformed to better target benefits while increasing the emphasis on work search and reemployment services.
States should be properly funded to work with unemployed workers and employers to improve initiatives and services designed to return unemployed claimants to work. The REA program, job search services, assessment and referral techniques, and improved integrity should receive priority funding with the expectation that there will be a quantifiable reduction in the duration of unemployment compensation and an increase in the number of unemployed claimants referred and hired.
Training initiatives should be closely coordinated with employers in developing customized training, OJTs, apprenticeships and other employer based training that leads to employment.
Training and services provided for unemployed claimants should also be coordinated with providers in the private sector and with other workforce programs aligned to put claimants back to work.