The True Cost of Unemployment Compensation

Pennsylvania’s unemployment compensation fund is bankrupt. Beginning in March 2009, the Keystone State borrowed over $2 billion from the federal government to keep it solvent. Unfortunately, unemployment continues to grow, making a bad situation worse. Since December 2007, Pennsylvania has lost more than 200,000 jobs. It is imperative that policymakers revisit the unemployment compensation system and understand how the existing structure hinders economic recovery.

The Keystone State’s unemployment compensation fund has been in danger of insolvency for years. Even without the recent surge in job losses, it would be bankrupt. Only California, with 3 times the population and much higher unemployment rates, pays out more in unemployment claims than Pennsylvania. Each week the Commonwealth pays between $70 million and $75 million in benefits. Approximately 69% of the state’s unemployed receive benefits, the highest percentage of any state in the union. Pennsylvania’s unemployment insurance woes stem from an inherently flawed system that subsidizes unemployment, stunts job growth, and discourages personal responsibility.

With 435,000 residents dependent on unemployment benefits, the state cannot afford to incentivize people not to work. However, the current system does exactly that. Generous unemployment benefits reward those who take more time to find a new job.

In addition to rising unemployment, the time people spend between jobs is growing. Congress’ extension of benefits from 46 to 79 weeks has nearly doubled the average duration of aid for those out of work. Research shows that extending unemployment benefits lengthens periods of joblessness. When government pays workers about 40% of their previous wage to stay at home for a year, many of them do just that. In other words, benefit extensions increase unemployment.

Had the average unemployment claim duration for Pennsylvania matched the average of the five states with the lowest duration time, Pennsylvania could have added over 41,500 jobs to the economy and saved $727.9 million last year in unemployment trust funds.

Pennsylvania ranks among the top 10 states in highest unemployment taxes per employee, near New Jersey and Illinois. Last year, employers paid approximately $380 per employee in unemployment compensation taxes. For 2010, the average tax per employee jumps to $432 per worker.

Governor Rendell is now advocating for expanding benefits and the threshold of taxable income to qualify for a one-time $270 million federal stimulus, but this is not a solution. Taking the money would cost taxpayers another $60 million each year, long after the stimulus money disappears. Bailing out the bankrupt unemployment compensation trust fund by increasing taxes on employers only exacerbates job loss. Pennsylvanians will pay for this benefit, and tax on each job, through lagging employment growth and reductions in wages.

The state unemployment system is defunct, but there are alternative ways to attain income security. These include:

  • Requiring participation in job search programs,
  • Deducting other benefits, such as severance pay, Social Security, and vacation pay from unemployment benefit rates,
  • Adjusting eligibility for benefits, and 
  • Ensuring that the length of benefits does not exceed actual weeks worked.

Ideally, unemployment benefits should be arranged between employees and employers or other voluntary organizations. The Mercatus Center recently published a report that takes a fresh look at Unemployment Insurance Savings Accounts. These individual accounts operate like a retirement fund. In lieu of compulsory unemployment taxes, employees make contributions to an unemployment fund. If the individual is never unemployed he can roll these funds into a retirement account. The whole system would negate cumbersome government bureaucracy and promote personal responsibility.

Returning unemployment insurance to the private sector, or at least resisting demands for benefit expansions, will better position Pennsylvania for an economic resurgence. We need an individualized unemployment system that encourages personal responsibility and economic productivity.

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Elizabeth Bryan is a Research Associate with the Commonwealth Foundation (, an independent, nonprofit public policy research and educational institute based in Harrisburg.