NC Policy Watch top stories of 2014: It’s workers who are actually paying down NC’s unemployment insurance debt

[Editor’s note: During the holidays, NC Policy Watch is taking a look back at 2014 by featuring some of our top news stories and commentaries from the past 12 months. We hope you will enjoy them and feel inspired to participate in the state policy debate in 2015.]

North Carolina’s unemployment insurance debt is being paid down, but a little recognized fact is that it is workers who have contributed the most towards its repayment — not employers.

The debt itself was a result of the historic job loss of the Great Recession and the tax cuts that were provided to employers during good times that left the Unemployment Insurance Trust Fund underfunded when it was needed the most. Borrowing from the federal government was the only way in which the state could meet its commitment to provide workers who had lost their jobs through no fault of their own with a temporary and partial replacement of their wages until the economy recovered.

The good news is that unemployment insurance payments not only mitigated even worse fallout from the Great Recession for workers and their families, they likely stopped a further decline in consumer spending and the resulting spiral of job loss that would have hit businesses harder and made the economic recovery even longer for everyone.

Unfortunately, North Carolina policymakers took these economic conditions and the debt as a reason to enact some of the country’s harshest cuts to unemployment insurance, many of which are unlike what any other state does in designing their unemployment insurance systems. Among the results: jobless workers now receive just 14 weeks of unemployment insurance, half of the 26 weeks most states offer, and $300 less each month on average in benefits, far less than what is needed to maintain their spending and meet a family’s most basic needs. These changes and others delivered “savings” that translated into nearly two-thirds of the debt being repaid by workers.

Last week, North Carolina received a waiver from the federal government which will mean that employers won’t pay a penalty going forward after the state pays down the debt it owes — which is expected to occur by May 2015. That penalty was the primary way in which employers were contributing to the debt repayment as can be seen in the chart above. State tax changes under the 2013 changes represented just 0.7 percent of total contributions by employers.

So here are a few things to keep in mind about unemployment insurance and employers: While the employer penalty went up $21 per worker each year or for a full-time employee, this represents only about a penny for every hour that worker worked. By 2013, employers were paying three cents more per hour worked per employee. Unemployment insurance taxes, however, represent only about 0.1 percent of total business costs. These are obviously relatively minor costs for employers. In return, they receive the benefit of a system that ensures they have consumers during a downturn and the economy doesn’t nosedive into a depression.

And here is the real kicker: the Congressional Budget Office has found that the difference in unemployment insurance taxes from one state labor market to another is actually passed on to workers in the form or reduced earnings. So, even when employers were paying the penalty, actually workers most likely paid for it in the form of lost wages.

Businesses have been the first to experience the strength of the official economic recovery: reporting record profits and increased productivity. The recovery hasn’t been nearly as kind to workers whose wages have fallen despite increased productivity and many are without jobs or have left the labor market entirely.

So the likelihood that the waiver received last week is going to usher in an era of robust job creation is unlikely. Meanwhile, jobless workers will continue to suffer the consequences of the diminished effectiveness of unemployment insurance resulting from the cuts, and the economy will be held back from achieving its full potential.

With North Carolina businesses about to see the temporary increase in federal unemployment taxes reversed once the debt is repaid, it’s only fair to reconsider the permanent and severe cuts made to the unemployment insurance system that are affecting North Carolina’s workers.

Alexandra Sirota is the Director of the North Carolina Budget & Tax Center.