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The recession that began in late 2007 posed major challenges for the U.S. labor market, including a high unemployment rate and a steep increase in unemployment durations. The federal policy response to the recession and the lingering weak labor market included substantial changes to the unemployment compensation (UC) system, which is administered as a partnership between states and the federal government. Twelve pieces of federal legislation affected the UC system from June 2008 to January 2013, the most comprehensive of which was the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA included financial inducements to encourage states to adopt several provisions intended to increase the recipiency rate of unemployment benefits among the unemployed. These inducements included 100 percent federal funding of most of the benefits paid through the Extended Benefits (EB) program. The long-standing EB program automatically provides additional weeks of benefits to some unemployed workers who exhausted all of their entitlements to regular unemployment benefits. Before ARRA, the costs of EB benefits were typically split on a fifty-fifty basis between states and the federal government. Other UC-related provisions within ARRA aimed to revise states’ unemployment benefit programs by encouraging states to make permanent modifications, which are referred to as modernization provisions. The U.S. Department of Labor (DOL) offered financial incentives of $7 billion to states to implement the modernization provisions.

In June 2010, DOL awarded Mathematica Policy Research and its subcontractor, the Urban Institute, a contract to conduct the Evaluation of the UC Provisions of the ARRA. The evaluation’s overarching objective is to determine the efficiency and effectiveness of the UC provisions. One component of the evaluation, which is the focus of this report, is to learn about states’ decisions to adopt six optional UC-related provisions of ARRA for which the federal government provided monetary incentives: the total unemployment rate (TUR) trigger for EB and five modernization provisions requiring states to (1) use an alternative base period (ABP) to establish monetary eligibility; (2) permit, under a broader set of circumstances, the payment of benefits to claimants seeking part time work; (3) allow benefits payments to claimants who left previous employment for compelling family reasons; (4) provide dependents’ allowances; and (5) provide for additional weeks of benefits for UC exhaustees enrolled in approved training. The ABP was required to receive any modernization incentive funds. When a state demonstrated to DOL that it had an ABP in place, it received one-third of the funds available to the state. Then, if the state also demonstrated to DOL that it had two of the four remaining provisions in place, the state received the remaining two-thirds of available incentive funds.

Of the 53 UI jurisdictions, (consisting of the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands) that were eligible for the 100 percent federal financing of EB, 39 either already had or newly adopted the TUR trigger for EB. In addition, 41 jurisdictions already had or newly adopted an ARRA-conforming ABP and 36 already had or newly adopted two of the four other modernization provisions. Thus, unlike other components of the ARRA legislation that were implemented uniformly by all states, such as the extension of federally funded emergency unemployment benefits, states varied in their responses to the incentives tied to the six optional UC-related provisions. An analysis of decision factors sheds light on the effectiveness of the incentives in encouraging states to adopt the provisions. In the report, researchers describe which factors were important to states when they decided to adopt provisions. In addition, and importantly, they also present explanations for why some states did not adopt the provisions and accept the incentives that were available to them when it might have appeared to have been in their financial interest to do so.

Key Takeaways

• The 100 percent federal financing of most EB benefits spurred adoption of the TUR trigger in almost all of the states that would have qualified for the EB program using this trigger.
• The modernization incentive funds spurred adoption of the ABP and other modernization provisions.

Citation

Mastri, A., Vroman, W., Needels, K., Nicholson, W. (2016). Mathematica. States’ Decisions to Adopt Unemployment Compensation Provisions of the American Recovery and Reinvestment Act: Final Report. Chief Evaluation Office, U.S. Department of Labor.

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The Department of Labor’s (DOL) Chief Evaluation Office (CEO) sponsors independent evaluations and research, primarily conducted by external, third-party contractors in accordance with the Department of Labor Evaluation Policy and CEO’s research development process.