What happens when more low-earning workers become eligible for UI?

The growth of low-wage jobs, plus new welfare rules requiring work, have likely increased the number of UI applicants whose earnings fall below traditional requirements for UI monetary eligibility.

During the Great Recession the federal government’s American Recovery and Reinvestment Act  encouraged states to relax the rules for UI eligibility in order to broaden access to benefits. These so-called modernization features include using more recent earnings to assess monetary eligibility, accommodating part-time work availability, and establishing new categories of acceptable causes for voluntary job separations.  Expanding eligibility to low-wage workers raises several questions. Did UI receipt cause low earning workers to lose other safety-net sources of income, such as welfare benefits or food stamps? Did UI-ineligible workers find jobs faster than those on UI, thus replacing their lost incomes more quickly and completely? In the end, did broadening UI eligibility smooth income for low-wage workers and allow them to maintain adequate consumption levels? A new Upjohn Institute working paper provides answers to these questions.

Using state administrative data for program years 2005 to 2010, Pauline Leung, Cornell University,  and Christopher O’Leary, W.E. Upjohn Institute, are able to analyze UI recipients in Michigan,  their labor earnings, and income transfers from three means-tested safety-net programs: Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP), and Medicaid.  By comparing the earnings and safety-net use of unemployed workers just above and just below the UI monetary eligibility cutoff, the researchers find that UI eligibility increased the period between one job and the next by about four weeks prior to the Great Recession and by about nine weeks during it.  Becoming eligible for UI had no significant effect on workers’ use of SNAP or Medicaid, and access to UI appeared to stave off use of TANF temporarily.

Most importantly, they find that the net impact of UI eligibility on total income is positive and large. In the quarter following a job loss, being eligible for UI increased income by 46 percent before the recession and by 61 percent during the recession. This means that workers who just cleared the income threshold for UI eligibility had $500 more income per unemployment spell  after a job loss than those who did not reach the threshold. This suggests that expanding UI access to low-wage workers smooths their consumption, especially during recessions.

Finally, the researchers develop a model to assess the overall economic impact of expanding UI eligibility to cover more lower-wage workers. They find that, on net, expanding UI eligibility would benefit the broader economy and offset the potential costs of longer periods of joblessness.

Read Should UI Eligibility Be Expanded to Low-Earning Workers? Evidence on Employment, Transfer Receipt, and Income from Administrative Data, by Pauline Leung and Christopher O'Leary


Research Topics: Unemployment Insurance