Expanding Unemployment Insurance Benefits – All Pain for No Gain
Wayne Winegarden
April 2024
SB 1434 would dramatically expand unemployment insurance benefits to current eligible workers. If implemented, it would expand benefits by over 55 percent, raise the number of workers who qualify for maximum benefits, increase the benefits for workers who hold two jobs but lost one, and create a new “Excluded Workers Fund.”
The specific tax increases necessary to fund the expansions are not defined in the bill as of this writing. The California Chamber of Commerce has estimated that the necessary tax increases would be large. Referring to the necessary tax increase as conservative, the Chamber estimates “that SB 1434 would more than double UI-related taxes for all employers in California to fund its generous benefits increases.”[1]
Before judging the merits of the bill, the timing of any expansion in California’s UI benefits is terrible. The California Employment Development Department is projecting that the $20 billion unemployment insurance debt the state currently owes to the federal government, a consequence of the Covid-19 recession, will increase to $21 billion by 2025. It is irresponsible to create new spending obligations at a time when the unemployment insurance fund must repay such a large debt.
Even if the UI fund were not in debt, there are several ways that the proposed expansion of the UI program would harm California’s economy. If implemented, the expanded benefits will layer another burden on in-state businesses, discourage employment, and harm economic growth.
Excessive Unemployment Insurance Tax Rates Create Unemployment
The structure of unemployment insurance disincentivizes businesses from hiring workers, particularly low-income workers. As a 2021 analysis published in Economic Policy explained that
each firm has its own tax rate that rises in response to layoffs and falls when the firm avoids them. Because tax rates are linked to layoffs, firms face higher payroll taxes as they emerge from downturns, and troubled firms bear the largest tax increases. A potential unintended consequence of this regime is that it may discourage hiring when unemployment is already high, and firms are under strain.[2]
In other words, unemployment insurance already discourages businesses from hiring workers when the economy is weakest. The higher the UI tax rate that businesses must pay, the greater the disincentive to hire workers. SB 1434, if implemented, would increase the UI tax rates. As Cal Chamber explains, “SB 1434 would create a new ‘Excluded Workers Fund’ based on an additional 0.5% tax on the taxable wages of California employers to fund this new program.” [3]
Based on the results of the Economic Policy study, increasing a firm’s UI tax rates by 1 percentage point decreases overall employment by 1.5 percent. Applied to California’s current labor market, these impacts indicate that the proposed rate increase would reduce employment by over 135,000 jobs. Valued at the average annual wage in California ($76,960), the increased unemployment insurance rates would reduce total earnings in the state by $10.4 billion.
Higher Costs Will Reduce Competitiveness of California’s Businesses
The benefit increases contained in SB 1434 go beyond the Excluded Workers Fund. Covering the other proposed higher benefit levels will require the state UI fund to dramatically increase total revenues raised from businesses. Rather than raising the marginal tax rates, revenues can also be raised by expanding the UI taxable wage base. Currently, California imposes the UI tax against the first $7,000 in earned wages. Expanding the wage base allows the state to raise more revenues with the same tax rate. Although the marginal tax rates will not increase, this change will still harm the state’s economy.
While nominally imposed on California’s businesses, the added layer of costs from this proposal must, by definition, be paid by California’s households. In this case, the costs would be borne through some combination of higher prices on consumers, lower wages for workers, or lower profits for the owners of California’s businesses.
Relying on California Chamber of Commerce’s estimate that the taxable wage base needs to be doubled to cover these additional benefits, the expanded benefits will cost approximately $4.5 billion.[4]
For illustrative purposes, this additional $4.5 billion is assumed to be passed through to consumers through higher prices. In this case, based on PRI’s Tax and Budget Model, the adverse consequences from these additional costs include a $10.1 billion reduction in GDP growth and a loss of approximately 33 thousand jobs.
Conclusion
SB 1434 will meaningfully reduce the incentives to expand employment in the state and will reduce income and job growth. By piling even more costs on to businesses, the proposal will put in-state companies at an additional competitive disadvantage compared to businesses in other states. The result will be an even more difficult environment for business to thrive, especially small businesses and start-ups.
[1] “California Chamber of Commerce Letter to the Honorable Maria Elena Durazo”, April 3, 2024, https://ct3.blob.core.windows.net/23blobs/50adb2e0-9c52-4339-b7da-dd2ff2eef14f.
[2] Johnston AC “Unemployment Insurance Taxes and Labor Demand: Quasi-Experimental Evidence from Administrative Data” American Economic Journal: Economic Policy, 2021, 13(1): 266-298, https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20190031.
[3] “California Chamber of Commerce Letter to the Honorable Maria Elena Durazo”, April 3, 2024, https://ct3.blob.core.windows.net/23blobs/50adb2e0-9c52-4339-b7da-dd2ff2eef14f.
[4] Currently there are approximately 18 million employed works in California. Based on the current taxable wage base of $7,000, the current total aggregate taxable Wages are $126.4 billion. Based on the average UI tax rate of 3.6% (https://lao.ca.gov/Publications/Report/4543), total UI payments are approximately $4.5 billion. Doubling the tax base would double these payments.
KEY TAKEAWAYS
- SB 1434, a proposal
to increase unemployment insurance benefits, will discourage employment growth. Of particular concern, the disincentive to hire workers is greatest when the economy is weakest – precisely when job growth is most important. - The disincentives to hire workers from the proposals to increase the UI tax rate could cost California over 135,000 jobs and $10.4 billion in potential earnings.
- Additionally, the higher tax burden on businesses imposed by SB 1434 could reduce GDP growth by $10.1 billion and cost the state an additional 33,000 jobs.
