Employer practices
Research Summary

Challenges to Unemployment Insurance Claims by Some Businesses Limit Access to UI Income Support for Low-Wage Workers

Annabel Stattelman ScanlanLast updated on May 21, 2024
Source: National Bureau of Economic Research Title: Firms and Unemployment Insurance Take-Up Author(s): Marta Lachowska, Isaac Sorkin, Stephen A. Woodbury Original Publication Date: July 2022 Read Full Research Article

Unemployment insurance is a joint federal-state program that provides temporary income support to workers as they search for new jobs after becoming unemployed through no fault of their own. Unemployed workers are required to explain why they are no longer working to qualify, after which their former places of employment are routinely contacted by state UI administrators to confirm the circumstances for being let go. An appeals process happens when the explanations provided by the former workers and their former employers differ. In those cases, the state UI agency in which the unemployed worker resides conducts an independent investigation.

Businesses are assessed higher state taxes based in part on the history of UI benefits claimed by their former workers. This policy was designed to distribute the costs of the program more equitably and improve the integrity of the system by encouraging employers to share information with state UI agencies, thereby preventing ineligible workers from receiving benefits. It was also intended to act as a “layoff tax” to discourage employers from dismissing workers.

In Washington State, for example, if an employer’s former workers claim UI benefits after being laid off, then the business’s UI taxes are expected to increase by roughly the same amount. Despite employers playing a key role in the UI claims process, most research on the use of Unemployment Insurance focuses on workers and their reasons for submitting or not submitting UI claims, overlooking the role of businesses in facilitating or hindering their former employees’ access to UI programs.

In this study, labor economists Marta Lachowska at the W.E. Upjohn Institute for Employment Research, Isaac Sorkin at Stanford University, and Stephen A. Woodbury at Michigan State University analyze administrative data from Washington State’s UI agency collected between 2005 and 2013 to explore the relationship between businesses, UI claim rates, and appeals. These data include wage and hour reports filed by employers to determine whether claimants had sufficient work histories to file for Unemployment Insurance, whether workers claimed it, both parties’ reasons for workers losing their jobs (when reported), and whether workers ultimately received UI benefits.

The three co-authors find that the rate of appeals by businesses and the rate of claims by their former workers differ based on those workers’ wages. They also find evidence supporting a relationship between businesses’ rates of appeals and the rates at which their previous employees filed claims.

Key findings

  • Compared to all workers who “separate” (in economic parlance) from their places of employment through no fault of their own, workers who enter a period of unemployment instead of immediately transitioning to a new job or exiting the workforce are relatively lower-wage earners. These low-wage workers may also face more financial hardship while unemployed as they look for new work because they are less able to rely on savings due to their pay levels in previous jobs.
  • Low-wage workers are less likely to apply for unemployment benefits than median- and high-wage workers. Eligible unemployed workers previously earning $10 an hour submit claims only 30 percent of the time, compared to 50 percent of workers making about $20 an hour. The authors surmise that these eligible low-wage workers may mistakenly believe they either do not fit the criteria for Unemployment Insurance, expect their former employers to appeal their claims, or think the process of filing claims is not worth the trouble.
  • Low-wage workers are twice as likely to have their claims appealed compared to median-wage workers.These appeals are more likely to be decided in favor of their former employers, and the authors hypothesize that low-wage workers may not have the means to present their cases effectively or are more likely to be ineligible to receive UI benefits given the circumstances of their separations.
  • Workers are less likely to claim Unemployment Insurance if their former employers appeal UI claims more often. The authors suggest that former employees may be deterred from claiming because they believe their claims won’t be approved given their employers past behavior.
    • The study finds that a large share of income-level variation in claims rates and appeals rates can be explained by the businesses’ role in the claims process. In other words, the differences in the claims and appeals rates between low- and median-income workers are related to their employers, rather than to differing group characteristics among their former employees.
  • Businesses that appeal UI claims less often pay their employees more and lay off their workers at lower rates. These “high road” businesses also are more likely to be in sectors that have high rates of unionization, such as mining, construction, and public administration. In contrast, some businesses in industries such as food services, retail trade, and accommodation have high appeals rates, low claims rates, and more low-wage workers.
  • The failure of eligible workers to claim Unemployment Insurance is much more widespread than ineligible workers mistakenly receiving UI benefits. The authors estimate that 28 percent of workers who separate from their employers are eligible to receive UI benefits but do not submit a claim. In contrast, 5 percent of workers are ineligible and yet mistakenly receive UI benefits.

Policy and practice implications

WorkRise has identified the following implications for policy and practice:

  • Policymakers should consider revising how Unemployment Insurance is financed. The current UI funding mechanism can potentially incentivize some businesses to appeal claims made by their former employees, preventing their workers from receiving UI benefits and discouraging others from submitting claims. Instead of taxing businesses based in part on the UI benefits paid to former workers, policymakers should consider a new system that uses changes in total employee hours to determine an employer’s tax rate. By adopting an hours-worked formula, federal policymakers can still discourage layoffs without incentivizing appeals challenging former workers’ UI claims.
  • State policymakers should raise the amount of UI income support for low-wage workers who lose their jobs through no fault of their own. On average, UI claimants receive about 40 percent of their previous wages. Workers who face periods of unemployment after separating from their former employers earn lower wages, relatively, and their lack of adequate income during this period based on their prior income histories can make it difficult for them to search for better-paying jobs that best match their skill sets. Passing legislation that ensures low-wage workers do not face financial distress while unemployed would ease the transition between jobs and encourage eligible low-wage workers to submit UI claims so that they can search for the best jobs for which they are qualified.
  • Federal policymakers should examine the UI system for race-based inequities in the UI claims and appeals process per the Biden administration’s “whole-of-government” approach to embedding equity in the UI system. There is ample and compelling research showing these racial inequities in the UI system but not specifically in the claims and appeals process. Additionally, as Black, Latinx, and Indigenous workers are significantly overrepresented in the low-wage workforce, current income-based inequities in appeal and claim rates disproportionately impact these groups.

Unemployed workers eligible for Unemployment Insurance, especially low-wage workers, may not claim UI benefits because they expect that their claims will be appealed by their former employers, believe the process will be too difficult, or think they are ineligible to receive benefits. When these workers do apply for Unemployment Insurance, some businesses are incentivized to appeal the claim to ensure that their taxes to support states’ UI funds remain low. If this system continues, low-wage workers will continue to face financial instability even if they become unemployed through no fault of their own.

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