North Carolina’s unemployment insurance system not ready for next downturn

November 17, 2015

The announcement last week that North Carolina’s unemployment insurance system has $1 billion in the Trust Fund is a step in the right direction for our state. But it’s far from sufficient in demonstrating that the system is healthy enough to weather the next downturn.

In fact, the Trust Fund balance meets an arbitrary threshold set in place by state policymakers in 2013 and will trigger the first round of tax cuts for employers. Better measures of solvency exist to determine when sufficient funds are available for the system to serve its function of stabilizing the economy. However, what is also important to the discussion of the health of the unemployment insurance system is just how far it is from providing temporary, partial replacement wages to those who have lost their jobs through no fault of their own.

This measure of reach and adequacy of unemployment insurance to jobless workers is of equal importance in assessing the system’s ability to ensure that jobless workers can maintain their spending and in turn the demand for businesses, goods and services.

North Carolina has had the steepest decline in the percentage of people without jobs receiving benefits since cuts went into effect, according to research by the Economic Policy Institute. Prior to the cuts, North Carolina was just 1.3 percentage points below all other states that did not cut maximum durations. Now, North Carolina’s rate sits 17.1 percentage points below these states. The result is that as of the second quarter of 2015 just 13 percent of jobless workers in North Carolina receive unemployment insurance. By September 2015, there were fewer than 24,000 jobless North Carolinians receiving unemployment insurance.

To stabilize the economy, those who have lost their jobs through no fault of their own must be able to receive unemployment insurance, and the amount they receive must go some way towards adequately replacing their wages so that they will continue to spend in the economy. North Carolina is also moving in the wrong direction on this point as a result of changes to the way benefit amounts are determined.

The average weekly benefit amount as a share of the average weekly wage in employment that is covered by the unemployment insurance has fallen since the 2013 changes. The replacement rate of wages through unemployment insurance averaged 39 percent from 2012 to 1990. As of the second quarter of 2015, the average weekly benefit amount was 27 percent of the average weekly wage in covered employment. Economists generally agree that an ideal replacement rate for wages of jobless workers is 50 percent. While historically that ideal threshold has almost never been met, the replacement rate nationally and in North Carolina has been relatively stable at around 35 percent.

On setting both solvency thresholds and pursuing the goal of partial wage replacement, North Carolina’s policymakers have failed to heed the best evidence and research that shows what it takes to build a stabilizing system for the economy. The challenge of such an approach will continue to hurt jobless workers today and hinder jobless workers and employers in the future as North Carolina seeks to sustain a strong economy.