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How Unemployment Insurance Abroad Compares To The U.S.

The unemployment rate right now has jumped to fourteen point seven percent. Those numbers are just absolutely brutal. Unemployment insurance or adding another six hundred dollars. We continue to hear about people not being able to get their benefits. Since the start of the Covid-19 outbreak, millions of Americans have lost their jobs, according to the U.S. Department of Labor. 



More than thirty eight point six million Americans have applied for unemployment insurance benefits as of May 21st. Five weeks into the crisis, all the job gains that the U.S. economy made since the Great Recession have been wiped out. In April, the U.S. economy lost a record twenty point five million jobs, causing the unemployment rate to skyrocket to fourteen point seven percent. Experts say this number may go higher. The St. Louis Fed projects the unemployment rate may get his high as 32 percent more Americans than ever are turning to government run unemployment insurance programs. 



Terrence Jerard Shepherd was furloughed from his job at a restaurant in Charlotte, North Carolina. As a result of the coronavirus pandemic, I then realized that I probably wouldn't be back to work for a while. So I did. I went ahead and I applied for unemployment and if I could possibly get food stamps to help me out with food. The increased demand is calling attention to the role of the social safety net and its potential shortcomings. A strong safety net, advocates say it will help the economy rebound once lockdowns begin to ease.


 I don't feel like North Carolina was ready for this many people to all be out of work at the same time, or when a vaccine or Covid-19 treatment hits the market. Greg Casar is a city council member in Austin, Texas, who is working to deploy emergency funding to citizens at the local level, everyday working people. Not only need to survive the virus, they also usually have to work to survive. We have so many people in our city and in this country that live paycheck to paycheck, and when they're not working, we've got to make sure they can make ends meet. So how does the United States unemployment insurance system compare to those in other countries? And how will it hold up under the stress of the coronavirus crisis?


 The federal state unemployment insurance program in the United States was created by the Social Security Act of 1935 during the Great Depression. Suddenly you had millions and millions of people who didn't have the means to take care of themselves and take care of their families. And the aggregate impact of that on the economy was tremendously negative. The unemployment system is set up as a partnership between the federal government and the states in order to provide temporary financial aid to certain workers. That's an old joke in the social policy and unemployment insurance space that we don't really have one unemployment insurance system.


 We have a collection of 50 different unemployment insurance systems and what kinds of benefits you get and then how easy it is for you to access those benefits is going to look very different, depending on whether or not you're in California and Florida, for example. Most states offer unemployment for a maximum of 26 weeks while workers look for new jobs. But there are several states that make the maximum period either longer or shorter. Federal law sets the general criteria that workers must meet in order to receive benefits across all states. 


Beneficiaries must have lost a job through no fault of their own, be able to work and are actively seeking work and have earned at least a certain amount of money prior to becoming unemployed. But each state can apply these guidelines differently. One example states can decide how much money the program pays out in February 2020, just before the coronavirus crisis started. Average weekly benefits were about three hundred and eighty seven dollars nationwide. Mississippi offered the lowest amount and benefits at two hundred fifteen dollars per week. 


While Massachusetts gave recipients the most at five hundred and fifty dollars per week. Each state has a trust fund that collects all the payroll taxes from employers. Employers pay into that fund based on their workers earnings, taking them out of each paycheck. Payroll taxes like these increased for companies if their workers end up using unemployment insurance system more frequently. Payroll taxes are experience rated, meaning firms are supposed to incorporate some of the costs they impose on the system by laying off. However, states don't want to raise payroll taxes on firms. And for example, in California, the wage base is ridiculously low and hence the trust fund runs out of money all the time. And then California has to borrow from the federal government and to repay those loans. There are automatic payroll tax increases on all firms. Still, many eligible workers don't know they qualify for benefits or they have trouble navigating the system. 


The recipients rate is really low, meaning the response rate is the fraction of unemployed workers who actually obtain unemployment insurance benefits. That rate nudges upward to 40 to 50 percent. In the big recession and can be as low as 20 percent during regular time. So unemployment insurance effectively does not cover the majority of the unemployed. The United States isn't alone in the downturn. Spain experienced the country's single biggest job loss on record. 300000 people lost their jobs in Spain between February and March. Increasing the unemployment rate there by nine point three percent. So Spain actually does something similar to what the U.S. does right now, which is to allow companies to furlough workers and allow companies to to reduce working time down to 100 percent or zero. And then these workers become eligible for unemployment benefits, even though, technically speaking, the employment contract is still valid. Sweden's economy is also taking a hit from the virus. Swedish officials expect the country's GDP to shrink by four percent and unemployment to rise as high as 10 percent in 2020. 


The Swedish government expects an economic contraction as deep as during the global financial crisis. Unemployment could reach its highest rate in more than 20 years. This downturn occurred despite Sweden not implementing the same sort of restrictive social distancing measures as other countries. But many Swedish residents and businesses have been voluntarily social distancing, which has lead to the economic strain. One thing I would consider a bill is to an extent, it was also sort of government induced. It was a government decision to say we shut everything down. Everyone has to stay home. Businesses are closed. People need to be laid off. 


When you look at the case of Sweden they, they take a different approach. To avoid, to the extent possible, closing businesses. Sweden has a voluntary unemployment insurance system, so workers must decide for themselves to pay into the program rather than their employer paying taxes on their behalves. Some of the funds are linked to unions for a specific line of work, while others are open to a range of professions. What you would expect, theoretically, is that the system shouldn't work as well as a mandatory system because the people who don't need insurance. De facto, it does work. The Swedish government has passed legislation to provide more resources to benefit funds and has also relaxed the eligibility requirements. Germany's approach to the crisis was also to keep workers attached to their jobs by essentially subsidizing their wages. What they do is they basically freeze the employment contract. So the government says, you know, the employment contract cannot be dissolved,


 so you will stay employed. Your working time might be reduced up to 100 percent and the government will compensate essentially the employer for the wage costs. Germany, notably, is an example of an economy where there was already a lot of economic coordination and sort of industrial policy that that happens in the form of councils that regroup. Government officials and officials from the private sector and representatives from unions. And so they had this existing infrastructure to draw on that made it easier for them to deploy a reform like that. Both Republican and Democratic lawmakers agree that unemployment insurance cannot adequately address the scale of economic devastation caused by the coronavirus pandemic. As a result, Congress passed several bills to provide support to the states. Lawmakers currently remain in talks for future legislation. So far, the federal package is made up of several different bills. Together, they work to fill gaps in the unemployment insurance system. The legislation covers the following measures, provides an additional six hundred dollars to all beneficiaries, regardless of which state they are collecting insurance. It allocates funds to help states administer the benefits more efficiently and allows recipients to collect benefits for up to four months.


 It also expands who qualifies to receive benefits, including self-employed or contract workers, and provides state trust funds with an additional one billion in funding. One characterising feature of the Covid-19 crisis in the labor market is that it has hit low income workers substantially. In California, for example, we see that one in three workers coming from the accommodation and food service industry has applied for unemployment insurance benefits, and one in five workers coming from retail sale has applied for UI. Given these individuals are low earners, their typical UI benefits are not going to be very high. And the six hundred dollars per week from pandemic unemployment compensation makes a big difference here. The legislation also provides incentives for businesses not to lay off workers. Many economists say it is crucial for workers to remain attached to their jobs during the crisis, despite the decline in the demand for labor. The key thing is they keep their jobs and that has these two really important effects. The first one is fewer people face the trauma of job loss, which can have very lasting consequences. 


And then the employers, when the recession is over, don't have to scramble to find new workers, hire them and train them onboard them. And so they'll be able to when that when the lockdown is over to do just turn the lights back on and get things going again. The Paycheck Protection Program is a lending program to help small businesses avoid bankruptcy. But the rollout of the program has run into many problems. Banks and small businesses spoke out about how difficult the process was. One of the problems with that is the administration has been very hard. There's so many businesses that are applying for this work. We don't really have the infrastructure in place to process all of those loans. Shierholz says the program focuses too much on trying to prevent fraud through the application process, which is delaying the distribution of the loans at a time like this. I always think of it's more important to get the money out the door. This timing is everything right now. 


You're going to have people that get laid off unless you can get this money right out the door so you can do that sort of oversight of something like this on the back end, like with the small business loan program. There have been administrative problems. The state run unemployment systems are not prepared to handle the volume of applications the pandemic is creating. The state of Texas has for the longest time had a very, very thin social safety net if they had a social safety net at all. And so everything that was wrong about our system in Texas becomes so much more clear here in the middle of a pandemic or people who've been calling to access their unemployment, some of them calling dozens of times a day and not being able to get access to basic benefits. 


Those state systems have been profoundly underfunded for decades. They're using ancient computer systems. In many cases. They're not set up to be agile, to be able to accommodate an avalanche of claims like we're seeing. So there have been and will continue to be problems. The U.S. system was not equipped to handle a huge spike in unemployment all at once. But could it have been more prepared? The current state highlighted a few drawbacks. One thing, of course, is that the system was not ready for this onslaught of unemployment benefits, and it always takes some time until benefits are processed. Some experts say the U.S. can implement a system that automatically triggers supplemental benefits during a crisis.

 This system is made for sort of regular economic activity. So in every major recession, the federal government starts to extend and pay for benefits. It's called emergency unemployment compensation. But since this is a program paid for by Congress, it's ad hoc. Every time there's a debate, things are delayed. There are also ways experts would like to reform the unemployment insurance system during times when there isn't an economic downturn. One of the big ways in which the system could be reformed is if it were made into a truly national system.

So many of the problems with the unemployment insurance system as it exists now can be traced to the fact that this has been left to the states and they don't really have many of them the capacity to do this properly, whereas the federal government does. States unlike the federal government, are unable to run a deficit. They need to balance their budgets at the end of the year. And even though they can borrow from the federal government to pay for unemployment insurance benefits, they have to repay those loans in about two to three years. So they have a little bit of breathing room, but really at the end of the day, they face a severe budget constraint and they don't have the power of the purse in the way that the federal government does. Latitude afforded to states leads to the strange, patchwork, patchwork quilt. Some states you can only apply by phone. Some states you cannot only apply online.

The rules differ from state to state, and the government just in general, needs to do a much better job informing people about their their eligibility for benefits. We cannot go back to the system that we had before this pandemic. This pandemic has highlighted exactly what's been wrong with our system in states like Texas. We have underfunded and overburdened our employment systems because of this myth that having unemployment insurance somehow makes people not want to work. But the fact of the matter is we need unemployment insurance. So in a disaster like this, people can afford not to work.

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