The July jobs report that shook Wall Street with unexpectedly weak job creation numbers is also a wake-up call for our broken unemployment insurance system. The labor market has begun to show signs of deterioration from the record low unemployment rates of last year, and 1 million more people are now unemployed compared to the beginning of 2024.
These latest jobs numbers are a warning to prepare for a potential economic downturn should the deterioration continue. Policymakers should look to the lessons from the COVID-19 pandemic, when few of our economic structures were revealed to be as fundamentally broken as unemployment insurance.
As unemployment skyrocketed from record lows to record highs within a matter of weeks in spring of 2020, UI portals across the country collapsed under the weight of millions of new claims. Millions of Americans who lost their jobs were forced to wait for weeks to get the benefits to which they were entitled, exacerbating the effects of the recession.
Meanwhile, scam artists swooped in to exploit vulnerable systems to the tune of over $163 billion in fraudulent or improper payments. California lost over $1 billion to claims made on behalf of ineligible incarcerated individuals, a scheme that one district attorney called “the biggest fraud of taxpayer dollars in California history.” Criminal syndicates in countries like Russia, China, and Nigeria made off with billions more through stolen identities and hacking campaigns.
COVID inspired many vigorous policy disagreements among Congressional Republicans and Democrats, but on unemployment insurance they speak in similar tones about the urgent need to ensure this never happens again. Now that the dust has settled from the pandemic, unemployment rates have returned to the low rates that prevailed until 2020. While economic anxieties remain heightened, unemployment claims are a fraction of what they would be in a recession, making this the perfect time to enact reforms to improve underlying systems.
Improved incentives for states to engage in UI fraud investigations would be a good place to start. The UI system is administered primarily by state and local agencies but operated pursuant to federal law. As a result, any dollars recovered via fraud investigations flow back to the federal treasury, leaving states with little incentive to spend their own administrative dollars on investigations to help refill federal coffers. Allowing states to retain a portion of recovered funds would give them stronger incentives to build robust fraud detection and recovery efforts.
We must also improve data matching to help weed out fraudulent or improper UI claims. In the depths of the pandemic many UI systems engaged in few, if any, attempts to match an applicant’s claim against existing databases that would identify discrepancies, such as ineligibility due to incarceration or because the claimant is in fact employed.
Comparing claims against the best data available can help prevent improper payments before they happen. Some states have begun implementing these checks already, but enshrining best practices in federal law will ensure that all states are taking common sense precautions to avert fraud.
These reforms are reflected in two bills currently before Congress. Senators Ron Wyden (D-OR) and Mike Crapo (R-ID), respectively chair and ranking member of the Senate Finance Committee, joined by a long list of bipartisan cosponsors, introduced legislation last week to implement these changes. On the House side, Ways and Means Committee Chairman Representative Jason Smith (R-MO) ushered a similar bill to passage earlier this year.
The election in November promises to attract most of Washington’s attention through the end of the year, but smart reforms with bipartisan support like the Wyden-Crapo and Smith bills could hitch a ride to the president’s desk. Enacting these common sense changes before next year would give the next president and next Congress a stronger platform from which to plot further reforms.
Legislators should continue this work in the next Congress as well. Whether it’s strengthening administration of employment records, streamlining identity verification and data sharing, or shoring up rickety technology platforms, lawmakers should pursue further reforms to place the UI system on stronger footing. Doing so now, while unemployment is low and agencies are not stretched to their limits, gives us the best chance of being prepared for a future economic downturn or, God forbid, something like another pandemic or national security event.
The best time to begin fixing America’s antiquated unemployment insurance system was five years ago, when unemployment was low and few had ever heard of something called a “coronavirus.” The next best time to start that work is right now.
