California's Unemployment Insurance Program: Gaining Insight Through Comparison to Other States

California’s Unemployment Insurance Program: Gaining Insight Through Interstate Comparisons M AC TAy lo r • l e g i s l A T i v e A n A l y s T • o C To b e r 13, 2011 7.7% 7.6% 9.3% 5.9% 7.8% 3.5% 5.3% 7.2% 7.4% 9.6% 8% 9.2% 4.7% 7.9% 11.2% 9% 10.6% 5.8% 8.2% 9.4% 6.1% 4.2% 9.1% 8.1% 13.4% 9.9% 8.7% 8.1% 7.3% 7.6% 6.3% 12.1% 8.5% 6.7% 8.8% 9.5% 10.4% 9.7% 5.6% 11.1% 8.3% 9.3% 6.6% 10.3% 9.9% 10.2% 7.2% 8.5% 10.7% 6.2% An LAO RepORt 2 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt ExECUTIvE SUmmary The Unemployment Insurance (UI) program provides weekly benefits for workers who have lost their job through no fault of their own. The UI program is authorized in federal law, administered by California’s Employment Development Department, and financed by contributions paid by employers. This report compares the state’s UI system with those of other states to provide context to the Legislature in considering potential solutions to California’s UI insolvency. California’s UI Program Pays Low Weekly Benefits, Yet Has High Total Costs. Currently, California’s UI program provides lower weekly benefits, in relative terms, than the majority of states. However, it pays weekly benefits for a longer duration and to a relatively larger caseload. Overall, California’s higher caseload and longer average benefits duration more than outweigh its lower weekly benefits, resulting in comparatively high total benefit costs. Despite High Costs, California’s Tax Rates Are About Average. California’s UI program taxes employers at a level about equal to the national average. However, as its costs are comparatively higher, California’s total UI benefit costs are significantly underfunded. Since 2001, California’s total benefit costs have exceeded its revenues in all but two years. This imbalance led to an insolvency in California’s UI fund beginning in 2009. Since then, California, along with many other states, has borrowed from the federal government in order to continue paying UI benefits. California’s UI Program Faces Unique Challenges. For more than a decade, California’s UI program has consistently paid UI benefits for a longer duration and to relatively more claimants than the majority of other states. While a portion of California’s comparatively high caseload and longer benefits duration can be attributed to California’s UI policies, it appears that a significant portion is attributable to other factors, such as consistently higher unemployment rates and longer average spells of unemployment. UI Fund Solvency Is Significantly Related to Unemployment Levels. Our analysis suggests that, during the recent recession, variation in UI fund solvency across states is more closely related to differences in unemployment rates and program caseloads than differences in UI tax and benefit policies. www.lao.ca.gov Legislative Analyst’s Office 3 An LAO RepORt InTrodUCTIon Since 2008, due primarily to historically high no action is taken to address the insolvency of demand for UI, the cost of providing UI benefits California’s UI trust fund, the state will be required in many states has exceeded available resources. to pay roughly $3 billion in interest payments to the As a result, by 2010 the UI funds in 32 states were federal government over the next decade. Given the insolvent, forcing those states to obtain loans from issues that could arise from insolvency, it is likely the federal government to continue payment of that changes will need to be made to California’s UI benefits. As of August 2011, outstanding loans UI program in the coming years to ensure its to these states totaled $36 billion, with California long-term stability. comprising about $8 billion of this total. In this report, we conduct a comparative Continued federal borrowing poses several analysis of the UI programs in all 50 states and problems for California, which we discuss in depth Washington D.C. to provide context for the in our July 2011 report, Managing California’s Legislature in considering potential solutions to Insolvency: The Impact of Federal Proposals on California’s UI insolvency. Unemployment Insurance. Most significantly, if BaCkGroUnd UI Program UI trust fund—the account to which employer contributions are deposited and from which benefit The UI program, which provides weekly payments are made. Generally, as the balance of benefits to individuals who are unemployed a state’s UI trust funds falls, tax rates increase. through no fault of their own, was established Second, the tax rate paid by a particular employer under the federal Social Security Act of 1935. is dependent upon the history of UI claims made by Although the UI program is authorized in federal its prior employees, also known as its experience. law, it is administered by states, which are given More specifically, as claims paid to past workers of broad discretion to determine program policy— a particular employer increase, the tax rate of that including setting tax and benefit levels. employer will also increase. This method of rate Financing setting is known as experience rating. In all states, the UI program is financed by Benefits unemployment tax contributions paid by employers Although several factors determine the for each covered worker. Each state selects both level of benefits paid to claimants in a given a taxable wage base (the portion of annual wages state, those under the immediate influence of paid to covered workers which are subject to UI program policies can be grouped into three taxes) and the tax rates to be applied to the taxable general categories: (1) weekly benefit calculation wage base. For this reason, both taxable wage bases methodology, (2) duration, and (3) eligibility and UI tax rates vary significantly across states. requirements. However, rate-setting procedures in all states share Weekly Benefit Calculation Methodology. two common characteristics. First, tax rates for Each state must develop a methodology for all employers vary with the balance of the state’s calculating a claimant’s weekly benefit amount. 4 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt In general, weekly benefits are calculated of a claimant’s earnings during his/her base period by multiplying a wage replacement rate (the (hereafter referred to as the prior earnings limit). percentage of recent earnings to be replaced by For example, in California a claimant may not benefits) by a claimant’s average weekly earnings receive benefits totaling more than 50 percent during his/her base period (a 12-month period of his/her base period earnings. Once the prior used to determine a claimants recent earnings). earnings limit is reached, the claimant may no For example, weekly benefits in California are longer receive benefits, even if this limit is reached equal to 50 percent of a claimant’s average weekly before 26 weeks. This prior earnings limit can earnings during the quarter of highest earnings effectively reduce the maximum number of weeks in his/her base period. While the majority of of benefits available to many claimants. states calculate benefits based on a claimant’s Eligibility Requirements. All states have both highest quarter of earnings, some states consider monetary and nonmonetary eligibility require- earnings in multiple quarters or an entire year. ments. A monetary eligibility requirement is The calculation of weekly benefits is also subject the minimum prior earnings threshold that an to statutory minimum and maximum benefit unemployed worker must meet to be eligible to amounts; the latter typically limits the amount of claim benefits. In most states, to meet monetary weekly benefits a claimant can receive. eligibility requirements, a claimant must have Duration. The number of weeks a claimant is earned more than a certain dollar amount eligible to receive benefits is based on two factors, ($1,125 in California) during his/her base period. both of which are at each state’s discretion. First, Nonmonetary eligibility requirements are all states set a statutory limit for the maximum conditions unrelated to prior earnings that an number of weeks any claimant may receive unemployed worker must satisfy to be eligible for benefits. For most states, including California, this benefits. Typically, nonmonetary eligibility require- statutory maximum is 26 weeks. Second, most ments mandate that claimants must be actively states limit total benefit payments to a percentage seeking employment and able and willing to work. mEThodoloGy In this report, we use data maintained by measures Used in our Comparative analysis the U.S. Department of Labor (DOL) to compare For our comparative analysis, we selected UI program statistics across all states during measures to capture three primary aspects of the the 12-month period ending in June 2011. In UI benefits cost structure—weekly benefit amounts, addition to comparing individual states, we also duration, and caseload levels—as well as measures examine statistics for the nation, the ten largest to examine the adequacy of program financing. In states (excluding California), solvent states as a most cases, we use measures generally accepted and whole, and insolvent states as a whole. We note reported by the DOL. However, we note that these ten states have taken action in 2011 to reduce measures are imperfect and we provide relevant benefits, while two have increased employer caveats in our discussion. contributions. As many of these changes have yet Below, we provide a brief definition of each to take effect, they are not reflected in currently measure. In addition, we provide a brief discussion available UI program data. of the factors which theory suggests should affect www.lao.ca.gov Legislative Analyst’s Office 5 An LAO RepORt each measure. However, it should be noted that three primary factors affect average benefits several factors which are outside the scope of this duration: (1) statutory limits on duration, analysis—such as demographics, culture, and (2) magnitude of weekly benefits, and (3) labor other characteristics unique to states—are also market conditions. First, as previously discussed, likely to have an influence on these measures. (The California and the majority of other states provide appendix of the report provides the basic formula UI benefits for up to 26 weeks. However, most used to calculate each of our measures.) states also impose a prior earnings limit which can Average Weekly Wage Replacement Rate. The effectively limit the number of weeks a claimant weekly wage replacement rate is the percentage of may receive benefits to less than 26. These limits a worker’s average weekly earnings (as determined vary significantly across states, with some states by his/her earnings during a base period) lost due imposing no limit and some limiting benefits to to unemployment that are replaced by UI benefits. 25 percent of base period earnings. Second, greater The weekly wage replacement rate effectively takes weekly benefit amounts may act as a disincentive into account differences in wage levels across states. for unemployed workers to aggressively pursue The weekly wage replacement rate is generally reemployment and/or may discourage them from considered an effective measure of the generosity accepting less agreeable offers of employment. of benefits paid to UI claimants. However, it does For this reason, higher weekly benefits amounts not take into account the number of weeks that are likely to increase average benefits duration. benefits are provided and therefore should not be Finally, in addition to policy factors, labor market considered a comprehensive measure of generosity. conditions also have a significant impact on average Average Total Wage Replacement Rate. benefits duration. More specifically, structural The total wage replacement rate measures labor market issues (barriers which impede the the percentage of a claimant’s prior earnings employment of a significant number of workers in a which are replaced by total UI benefit payments particular industry or demographic), labor market received over the entirety of a UI claim. This frictions (hindrances to workers’ job search efforts measure approximates the generosity of benefits or transitions between jobs), and/or general macro- provided to an individual over the whole period economic downturns can significantly increase of unemployment coverage. For this reason, the average benefits duration. total wage replacement rate may be considered a Benefits Exhaustion Rate. An exhaustion more comprehensive measure of individual benefit occurs when a UI claim ends because a claimant generosity than the weekly wage replacement rate. has received all of the benefits to which he/she However, it is important to note that the total wage is legally entitled. In other words, the claimant’s replacement rate is more likely to be affected by benefits ran out before he/she found a new job. changes in macroeconomic conditions than the The exhaustion rate measures the percentage of weekly wage replacement rate. This is because, in claimants who ran out of benefits before finding a general, the length of UI claims will vary substan- new job. In general, the exhaustion rate is affected tially across a business cycle as it becomes easier or by the same factors which influence average harder to find a job. benefits duration. However, unlike average benefits Average Benefits Duration. Average benefits duration, as the prior earnings limit is increased, duration measures the number of weeks that an the exhaustion rate is likely to decrease. average claimant receives UI benefits. In general, 6 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt Insured Unemployment Rate. The insured greater weekly benefits will increases recipiency unemployment rate (IUR) is the percentage of rates (and vice versa). Greater availability of alter- workers covered by a state’s UI program which are native sources of income—such as social services, currently receiving UI benefits. The IUR measures spousal income, or assistance from friends and the size of a state’s UI program caseload relative family—will also likely reduce recipiency rates. to the size of its covered labor force. In general, Benefits–to–Wages Ratio. The benefits-to- the IUR is driven by three factors: (1) overall wages ratio is equal to total benefits paid to all unemployment rates, (2) recipiency rates (see UI claimants as a percentage of total wages paid below), and (3) benefits duration. Typically, the to all covered workers. The benefits-to-wages IUR will increase (decrease) if any of these factors ratio measures the total cost of providing UI increase (decrease). benefits relative to total wages paid to all covered Recipiency Rates. The recipiency rate is employees. Therefore, it reflects the effective the proportion of all unemployed workers who tax rate (see below) on total wages that would are currently receiving regular UI benefits (this be necessary for a UI program to cover its total does not include recipients of federally funded benefit costs. Total benefit costs are determined emergency benefits). Recipiency rates are influenced by the magnitude of benefit payments (weekly by several factors: (1) eligibility requirements, benefit amounts), the length of benefit payments (2) magnitude of weekly benefits, (3) the availability (duration), and the number of claimants to which of alternative sources of income or aid, and benefit payments are made (caseload). As any of (4) labor market conditions (as described above). In these factors increase (decrease), total benefits general, less stringent eligibility requirements and costs will also increase (decrease). Figure 1 Understanding the Unemployment Insurance Cost/Financing Structure Components of Benefit Costs = X X Weekly Benefits Duration Caseload Total Benefit Costs Average Weekly Wage Average Benefits Insured Benefits-to-Wages Ratio Replacement Rate Duration Unemployment Rate Exhaustion Rate Recipiency Rate Average Total Wage Replacement Rate Adequacy of Funding - = Total Revenues Total Benefit Costs Program Surplus (Deficit) Average Effective Tax Rate www.lao.ca.gov Legislative Analyst’s Office 7 An LAO RepORt Average Effective Tax Rate. The average and caseload. For our analysis we have selected effective tax rate is equal to total UI taxes paid by measures to examine California’s comparative all employers as a percentage of total wages paid position on all three of these components. In by those employers. It is a measure of the cost addition, we included measures to consider the of a state’s UI program for an average employer. adequacy of California’s UI program financing. As mentioned above, to the extent that a UI Figure 1 (see page 7) provides a visual represen- program’s average effective tax rate falls below the tation of the relationship between these compo- benefits-to-wages ratio, its total benefit costs will be nents and connects each measure to the specific underfunded. cost or financing component which it helps to explain. In this figure, the component is listed first What do These measures Tell Us about the followed by its associated measures in italics. UI Program Cost and Financing Structure? Total UI benefit costs are comprised of three components: weekly benefit amounts, duration, FIndInGS Individual Benefit Payments Individual Benefit Levels in California Are Comparatively Low. The average UI claimant in Figure 2 shows two measures of individual California receives comparatively lower weekly benefit levels, the average weekly and average benefits (4.5 percent lower than the national total wage replacement rates, for California, the average wage replacement rate). In addition, UI nation, and the average for the ten largest states. claimants in California receive, on average, lower (Throughout this report, state rankings are benefits over the entirety of a UI claim. Taken presented from highest to lowest.) together, California’s weekly wage replacement rate of 28.9 percent (ranked 43rd Figure 2 in the country) and total Comparison of California’s Individual Benefit Payments to Other States wage replacement rate of 2010-11 20.3 percent (ranked 34th California in the country) indicate Ten Largest Measure Value Rank U.S. States that California’s individual Average Weekly Wage Replacement Rate 28.9% 43 33.4% 33.9% benefits levels are lower Average Total Wage Replacement Rate 20.3 34 22.3 23.3 than those in the majority of other states. Figure 3 Comparison of California’s Average Benefits Duration and Benefits duration and Exhaustion Rates to Other States Exhaustion rates 2010-11 In Figure 3, we California Ten Largest compare California’s Measure Value Rank U.S. States average benefits duration Average Benefits Duration (weeks) 19.3 10 18.0 18.1 and exhaustion rates to Exhaustion Rate 56.0% 9 50.9% 52.0% the average of the United 8 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt States and the ten largest states. As seen in the and exhaustion rates as compared to the national figure, UI claimants in California, on average, average and the average of the ten largest states receive benefits for just over one week longer from 1998 to 2010. than both the national average and the average of What Factors Contribute to California’s High the ten largest states. Also, about 5 percent more Benefits Duration? California’s prior earnings claimants exhaust their benefits in California limit and labor market conditions both contribute than the national average. to its comparatively higher benefits duration, as California’s Average Benefits Duration and explained below. Exhaustion Rates Are Consistently Higher Than The overwhelming majority of states have Other States. California’s comparatively higher set a statutory maximum duration of 26 weeks. benefits duration and exhaustion rates are not Consequently, it is the variability in states’ prior unique to recent years. For more than a decade, earnings limits which contributes toward differ- California has consistently exceeded both the ences in duration rates. The prior earnings limit national average and the average of the ten largest in the majority of states falls below California’s states in both of these measures. During the limit of 50 percent, with the most common limit period 1998 through 2010, California’s average being one-third. California’s limit is considerably benefits duration has exceeded the national average more restrictive than the nine states which impose by more than one and a half weeks, while its no prior earnings limit. As such, California’s exhaustion rate has exceeded the national average statutory limits on duration could be characterized by almost 7 percent. Figures 4 and 5 (see next as above average but not among the highest. Thus, page) display California’s average benefits duration California’s comparatively higher prior earnings limit offers a potential Figure 4 explanation for its above average benefits duration. Historical Comparison of California's Average Benefits Duration to Other States However, it is likely that California’s prior earnings Weeks 22 limit only partially explains its above average 20 benefits duration, as we find evidence that its 18 comparatively worse labor market conditions are also 16 a contributing factor. To examine the extent 14 to which labor market conditions can explain 12 California’s high benefits 10 duration, we analyzed data 1998 2000 2002 2004 2006 2008 2010 on unemployment spells California U.S. Ten Largest States in California and the other states. More specifically, we www.lao.ca.gov Legislative Analyst’s Office 9 An LAO RepORt analyzed for all unemployed individuals (including (58.7 percent) exceeded the national average by more those that are not receiving UI benefits) the average than 5 percentage points. These statistics suggest length of an unemployment spell, as well as the that California’s comparatively worse labor market proportion of spells which last beyond 15 and 26 conditions are also a likely contributor to its high weeks. For much of the past decade, the average benefits duration. This conclusion is supported by length of unemployment spells and the proportion California’s high exhaustion rate. California’s rate of unemployed individuals beyond 15 and 26 weeks shows that a comparatively larger percentage of UI in California have exceeded the national average. For claimants run out of benefits before finding a job. example, in 2010 the average unemployment spell in In part, this is likely due to the fact that it is harder California (35 weeks) lasted two weeks longer than for unemployed workers to become reemployed in the national average (33 weeks), while its proportion California as compared to the average state. of individuals unemployed beyond 15 weeks Caseload levels Figure 5 Figure 6 compares Historical Comparison of California’s Exhaustion Rates California’s IUR and To Other States recipiency rate to the national average and 65% average of the ten largest states. During 2010-11, 60 California’s IUR exceeded 55 the national average by more than a percentage 50 point and ranked fifth in the country. On the other 45 hand, its recipiency rate 40 (27 percent) was 2 percentage points 35 less than the national average (29 percent). 30 11999988 22000000 22000022 22000044 22000066 22000088 22001100 Thus, we find a somewhat counterintuitive result: California U.S. Ten Largest States although a lower percentage of unemployed Figure 6 workers claim regular Comparison of California’s Insured Unemployment and UI benefits in California, Recipiency Rates to Other States the state’s relative UI 2010-11 caseload is higher than California the majority of states. Ten Largest Measure Value Rank U.S. States In part, this is because Insured Unemployment Rate 4.3% 5 3.2% 3.4% the recipiency rate only Recipiency Rate 27.0 32 29.0 29.6 reflects claimants in the 10 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt regular UI program (not those in federally funded What Factors Contribute to California’s High emergency programs). Since 2007, the proportion Caseload Levels? Empirical evidence suggests that of workers who have been unemployed beyond California’s high caseload is driven by three factors: 26 weeks has increased considerably—from 17 (1) high overall unemployment rates, (2) high percent to 46 percent in California. For this reason, recipiency rates, and (3) longer benefits duration. recipiency rates in recent years are less reflective An increase in a state’s overall unemployment of historical norms. During the period 2000 to rate will generally result in an increase in its 2007, California’s average recipiency rate was 42.3 UI caseload levels. In each of the last 20 years, percent and exceeded the national average by California’s unemployment rate has exceeded the almost 3 percentage points. unemployment rate of the nation and the ten largest California’s Relative Caseload Is Consistently states. As of August 2011, its unemployment rate Larger Than Other States. Over the past 20 years, exceeded the national rate by 3 percentage points. California’s IUR has consistently exceeded both the A second factor of California’s high caseload national average and the average of the ten largest levels is high recipiency rates. Although California’s states. During this period, California’s IUR, on recipiency rate has been below the national average average, has exceeded the national IUR by almost since 2008, during the remainder of the past decade 1 percentage point each year. Figure 7 shows the California’s recipiency rate exceeded the national IUR for California, the nation, and the ten largest average by almost 3 percentage points on average. states for the period 1990 to 2010. California’s relatively low monetary eligibility requirements may provide some explanation for its historically higher recipiency rates. California’s monetary eligibility requirement for UI Figure 7 benefits, which requires California’s Insured Unemployment Rate Consistently Higher Than Other States earnings of $1,125 in a base period, is lower than the majority of others states. This minimum 6% threshold is equal to less 5 than one and a half weeks 4 earnings at the state’s average weekly wage. 3 By this measure, only 2 five states have a lower threshold than California. 1 A final factor which 0 likely contributes to 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 California’s high caseloads California U.S. Ten Largest States is its high average benefits duration—as discussed previously. In general, www.lao.ca.gov Legislative Analyst’s Office 11 An LAO RepORt if it takes the average claimant longer to cycle Why Are California’s Total Costs High through the program, the number of claimants in Despite Comparatively Low Weekly Benefits? the program at any given time is likely to be higher Although California’s UI program has a lower than otherwise. weekly wage replacement rate than the majority of states, it pays weekly benefits for a longer adequacy of Funding duration and to a relatively larger caseload. Figure 8 compares California’s benefits-to- Overall, California’s higher caseload and longer wages ratio and average effective tax rate to the average benefits duration more than outweigh its average of the nation and the ten largest states. lower weekly benefits, resulting in comparatively As Figure 8 shows, California’s total benefit costs high total benefit costs. As discussed above, are comparatively higher, while its taxes are about a portion of California’s comparatively high average. California’s benefits-to-wages ratio of caseload and longer benefits duration can be 1.02 percent exceeds that of both comparison attributed to California’s UI policies. However, it groups and ranks 15th highest in the country. Its appears that a significant portion is attributable average effective tax rate of 0.79 percent is slightly to other factors, such as consistently higher below both the national average (0.80 percent) and unemployment rates and longer average spells of the average of the ten largest states (0.82 percent) unemployment. For this reason, irrespective of and falls just below the national median, ranking California’s UI program policies, the total cost 27th in the country. of providing a particular level of weekly benefits The disparity between California’s total benefit to unemployed workers is likely to be higher in costs and its average effective tax rate reflects the fact California than the majority of other states. that during this period California underfunded its Solvent versus Insolvent States total costs by about 20 percent. While a portion of this can be attributed to the recent recession, we note that In addition to comparing California’s UI since 2001, California’s benefits-to-wages ratio has program to other states, we compared the average exceeded its average effective tax rate in all but two solvent state to the average insolvent state. In years (2005 and 2006). This suggests that California’s Figure 9 we compare an average solvent state to UI program has a structural mismatch between its an average insolvent state on several statistics revenues and total benefit costs. Absent significant and measures. Our objective in doing so was to improvement in California’s labor market, this determine if a discernable pattern existed among mismatch is likely to persist in the out years. solvent states which could be used to inform California’s UI policies. For instance, we sought to determine if solvent Figure 8 states tax employers at a Comparison of California’s Total Benefit Costs and comparatively higher rate Average Effective Tax Rates to Other States or, alternatively, provide 2010-11 less generous individual California benefits. Ten Largest Measure Value Rank U.S. States Below, we summarize Benefits-to-Wages Ratio 1.02% 15 0.88% 0.88% our key findings drawn Average Effective Tax Rate 0.79 27 0.80 0.82 from Figure 9. 12 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt Solvent States and Insolvent States Have Labor Market Conditions Differ Significantly Similar Individual Benefit Levels. We find a small Between Solvent and Insolvent States. Our difference in benefit levels between solvent states and analysis finds that the several external factors, insolvent states, with solvent states having slightly such as unemployment rates, labor force size, higher benefits. Weekly wage replacement rates in and wage levels, differ significantly across solvent the average solvent states (36 percent) exceed those in and insolvent states. In general, we find that the average insolvent state (34.9 percent) by about 1 unemployment in solvent states was impacted percentage point. For the total wage replacement rate, significantly less than insolvent states by the recent this gap is almost eliminated. Altogether, the differ- recession. The average unemployment rate among ences in individual benefit levels between solvent and solvent states is 7.5 percent as compared to 9 percent insolvent states appear to be minor. among insolvent states. In addition, both the size Employer Taxes About the Same for Solvent and of the labor force and the number of employers are Insolvent States. On average, effective employer tax significantly smaller in solvent states, on average, rates are about the same in solvent states (0.87 percent) than insolvent states. The average labor force among and insolvent states (0.85 percent). In addition, solvent solvent states is 1.1 million, as compared to 3.2 states appear to be about evenly distributed between million among insolvent states. Similarly, the average lower tax and higher tax categories. The effective tax rate number of employers among solvent states (66,947) is below the national average in nine solvent states and is less than among insolvent states (194,219). Finally, above the national average in ten solvent states. the average annual wage in solvent states (about $40,000) is around $5,000 less than insolvent states. The observations Figure 9 above suggest that Comparative Statistics for Solvent and Insolvent States adherence to a particular set of polices (that is, 2010-11 higher taxes and/or lower Measure Solvent (19) Insolvent (32) benefits) was far less Total Unemployment Rate 7.5% 9.0% significant to solvency Labor Force (in millions) 1.1 3.2 Number of Employers (in thousands) 66.9 194.2 than non-policy factors Average Annual Wage $39,579 $44,944 (such as the state’s Averages Benefits Duration (in weeks) 17.4 17.5 unemployment rate). Average Weekly Wage Replacement Rate 36.0% 34.9% Average Total Wage Replacement Rate 22.9 22.7 Insured Unemployment Rate 2.8 3.2 Benefits-to-Wages Ratio 0.82 0.92 Average Effective Tax Rate 0.87 0.85 ISSUES For lEGISlaTIvE ConSIdEraTIon In this section, we summarize the key • California’s UI Program Pays Low findings of our analysis that may assist the Weekly Benefits, Yet Has High Total Legislature in considering potential solutions to Costs. Although California’s UI program California’s UI insolvency. pays comparatively lower weekly benefits, it pays these benefits for a longer duration www.lao.ca.gov Legislative Analyst’s Office 13 An LAO RepORt and to a relatively larger caseload. As comparatively high UI costs, it may a result, California has comparatively consider changes to UI program policies, higher total program costs. This implies such as reducing the prior earnings that providing unemployed workers a limit or tightening program eligibility given level of weekly benefits in California requirements. However, we do note that results in greater total UI costs than in the the ability of policy reforms to reduce UI majority of other states. costs may be limited, as factors beyond the immediate control of program • Major Factors Contributing to California’s policies, such as the state’s labor market High UI Costs Have Persisted for Several conditions, significantly contribute to Years. California’s comparatively higher California’s higher UI costs. caseload and longer benefits duration are not unique to recent years. For both of • State Economic Health Has Strong these measures, California has consistently Impact On UI Solvency. During the recent exceeded the national average for more recession, differences in unemployment than a decade. rates and program caseloads appear to explain varying levels of UI fund solvency • Changes to California’s UI Program better than adherence to specific policy Policies Could Somewhat Mitigate paradigms (higher taxes and/or less Its High Costs. To the extent that the generous benefits). Legislature wishes to address California’s 14 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt APPENDIX How Are the Unemployment Insurance (UI) Measures Calculated? Measure Formula (Total Benefit Payments/Total Benefit Weeks) Average Weekly Wage Replacement Rate Average Weekly Wage (Total Benefit Payments/Total Claims) Average Total Wage Replacement Rate Average Semiannual Wages Total Benefit Weeks Average Benefits Duration Total Claims Total Exhausted Claims Benefits Exhaustion Rate Total Claims Total Recipients Insured Unemployment Rate Total Covered Workers Total Recipients Recipiency Rate Total Unemployed Workers Total Benefit Payments Benefits-to-Wages Ratio Total Wages Paid to Covered Workers Total UI Tax Revenues Average Effective Tax Rate Total Wages Paid to Covered Workers www.lao.ca.gov Legislative Analyst’s Office 15 An LAO RepORt LAO Publications This report was prepared by brian Uhler, and reviewed by Todd bland. The legislative Analyst’s office (lAo) is a nonpartisan office which provides fiscal and policy information and advice to the legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the lAo’s website at www.lao.ca.gov. The lAo is located at 925 l street, suite 1000, sacramento, CA 95814. 16 Legislative Analyst’s Office www.lao.ca.gov