Sweeping bill undermines states, eliminates effective jobs programs

David E. Balducchi and Christopher J. O’Leary

Recently the U.S. House Appropriations Subcommittee on Labor, Health and Human Services, Education, and Related Agencies (Labor-HHS) voted to defund the Employment Service (ES). Established in 1933 by the Wagner-Peyser Act, the ES is funded through revenues from the Federal Unemployment Tax Act (FUTA).  The House subcommittee’s draft bill for Fiscal Year (FY) 2018 slashed Labor Department appropriations by $1 billion for programs that help jobless workers, but it did not change FUTA tax contributions paid by employers. The appropriation cuts zero out ES grants that have been given annually to all states. The effect on the ES would be a $671 million reduction from the FY 2017 funding level. Since the Wagner-Peyser Act requires states to run the ES, the budget creates an unfunded mandate by unloading the responsibility, along with the financing burden, onto states and local governments.  American Job Centers (AJC) that include the ES in local areas have struggled financially for years to provide effective employment services to job seekers and employers. The draft budget bill is an affront to American businesses and workers.  It is wrong in many ways.

First, ES grants are under the control of state governors. The budget bill eliminates the role of governors in staffing the ES statewide. ES grants ensure the integrity of state unemployment insurance (UI) programs by enforcing the UI work test. Through ES grants, governors are able to adjust staffing of AJC in times of disaster or plant closings.  Many states are already voluntarily supplementing Wagner-Peyer Act grants to support services at AJC. The Draconian action by the House subcommittee exacerbates the structural budgetary shortfall in ES grants to state workforce agencies—a posture that has plagued the program for more than 30 years. It will further reduce access and create more barriers to reemployment services for the jobless.  ES grants help governors complement economic development and give them political leverage to boost help to the jobless in tough times.

Second, rigorous evaluations have shown that employment services are a cost-effective reemployment program. In particular, mandatory employment services shorten the duration of UI benefit receipt, thereby conserving reserves in state UI trust funds.  A strong and balanced relationship between state ES and UI programs is essential to the effective operation of reemployment efforts and other UI integrity programs, because it averts potential malingering by UI claimants or other abuse. A budgetary policy that weakens cooperation between the ES and UI programs does not support robust labor markets for a growing economy. 

Third, the House subcommittee budget proposal heaps the funding responsibility for employment services onto states and localities, but it does not relieve employers from their FUTA tax burden. Policymakers should be reminded that employment services to UI claimants and other job seekers, provided through grants to states under the Wagner-Peyser Act, are prepaid by employers through the FUTA tax. Revenues from the FUTA tax on payrolls are held in the federal unemployment trust fund in an earmarked account for the administration of ES and UI programs by states.  

By eliminating ES grants under the Wagner-Peyser Act, the House subcommittee’s budget for FY 2018 reflects a misunderstanding of the relationship between the states and federal government under the long-standing intergovernmental ES-UI partnership. The draft budget also fails to appreciate the importance of employment services as a key component of public employment policy.

If the Trump administration is successful in stimulating aggregate demand, then domestic labor demand is also likely to increase.  Many businesses with job openings will require staff-assisted ES recruitment services.  For a deeper discussion of this and related issues see, our recent Upjohn working paper, “The Employment Service–Unemployment Insurance Partnership: Origin, Evolution, and Revitalization" at https://doi.org/10.17848/wp17-269.

Posted Friday, July 14, 2017.

Date: July 14, 2017
Categories: Commentary