A wise investment in people: Reform Pa. unemployment so thousands of laid-off workers aren't excluded

Poverty is on the rise across the nation and in Pennsylvania.

That was the news last week from the Census Bureau in its annual update on poverty rates. One bright note in an otherwise gloomy report: it could have been a lot worse were it not for unemployment compensation.

Unemployment benefits kept millions of people in the United States from slipping into poverty in 2009—and as many as 120,000 Pennsylvanians.

That’s the good news. What policymakers should be asking themselves now is why Pennsylvania’s poverty rates are still up sharply from a decade ago?

One factor, ironically enough, is the structure of unemployment compensation in Pennsylvania.

While unemployment benefits have kept a large number of Pennsylvania families out of poverty, thousands more are falling between the cracks of a somewhat antiquated system for determining benefits.

At the heart of the problem is the method used to calculate unemployment benefits. Although workers pay into the system from day one on the job, the three to six months of earnings prior to a layoff don’t count when deciding whether workers have earned enough to qualify for benefits.

Eligibility and the level of benefits are both based on a year’s worth of income, but the most recent earnings are excluded from the calculations. As a result, 30,000 Pennsylvanians - many scraping by with low-wage jobs - are denied unemployment benefits when they lose their job.

Why do we exclude the most recent earnings in deciding whether workers have sufficient income to qualify for benefits?

Because decades ago—the unemployment compensation system was first established in 1935—it took a long time for employers to report wage information to the government. So there was no choice but to exclude the most recent earnings from the calculation of unemployment benefits.

Today, however, computers and automated reporting systems make recent wage data readily available. Yet Pennsylvania law still excludes recent earnings from the benefit calculation.

The good news is that the federal government is giving states a mighty incentive to modernize their unemployment compensation systems. Pennsylvania could tap into $273 million in additional funding for unemployment benefits if it agrees to consider recent earnings when necessary for workers to qualify for benefits, among other small changes.

Extending unemployment benefits to workers with more recent work is the smart thing to do for Pennsylvania’s economy. Economic research shows that unemployment benefits tend to be spent quickly on groceries, medicine, utility bills and mortgages, jolting a sluggish economy.

Furthermore, federal funding will cover any additional costs to the system for at least the next four years. By year five, the costs of this reform will be a tiny fraction of all benefits—a penny or two of each dollar spent on the overall unemployment compensation system.

Unemployment compensation was established primarily to help full-time workers, mostly men, who were expected to return to their old production jobs once manufacturing rebounded from a recession. Today more people are engaged in part-time work and in service sector positions, some of them with high turnover. That means more workers lack the continuity of earnings necessary to qualify for benefits—especially if you don’t count their most recent pay.

That’s why 39 states have already made reforms like this to their unemployment systems. Even South Carolina Governor Mark Sanford, who once vowed to reject federal recovery funds, signed legislation qualifying his state to accept the federal dollars.

It is true that the state Unemployment Trust Fund has taken a hit from the recent spike in jobless claims, but the fund is not in trouble because of any amount of spending on benefits. The culprits are a depressed economy and an inadequate tax system that only requires employer contributions on the first $8,000 of each worker’s annual wages, a figure that has not changed in more than 25 years.

Pennsylvania should address how it finances unemployment compensation once the economy is stabilized, but now is absolutely the wrong time to do that.

In Pennsylvania and the United States, there are currently four to five unemployed people for every job opening. In times like this, the unemployment compensation system was designed to keep Pennsylvania families from slipping into poverty. It was also designed to help maintain buying power to stop a slow economy from spiraling downward. We should let it perform those two vital functions.

Denying low-wage workers benefits because we can is simply unethical. And as anyone interested in building a strong Pennsylvania workforce will tell you, it’s also bad for the economy.

Mark Price is a labor economist at the Keystone Research Center in Harrisburg. This op-ed originally appeared in the Patriot News.