Loss of low-wage jobs fuels larger unemployment benefits for highly paid workers

The average weekly wage went up an unprecedented 14 percent, to nearly $1,700, between March 2020 and March 2021, triggering changes that business groups note would put employers on the hook for higher taxes that feed the state’s unemployment trust fund.

This fund, which provides benefits when people are laid off, is billions of dollars in debt — due to record-high payouts during the COVID-19 pandemic and legislative actions that for decades have allowed employers to pay less than required into it. Earlier this year, the Legislature authorized borrowing $7 billion to pay off the deficit and cover future shortfalls.

A new state commission set up to reform the unemployment trust fund is examining the many factors that go into propping up the precarious system. Workers’ advocates are pushing for companies to pay more into the fund, noting that any tax increases tied to the average weekly wage going up would be relatively small and employers’ concern is a “red herring” to justify slashing unemployment benefits. Business associations, on the other hand, are lobbying to adjust how benefits are paid out to keep employers’ contributions in check.

“UI is a crisis right now,” said Christopher Carlozzi, Massachusetts director of the National Federation of Independent Business and a member of the new Unemployment Insurance Trust Fund Study Commission. “The cracks in the system were really shown during the COVID crisis.”

Average weekly wages went up across the country this year as low-paid workers — many of them women and people of color — were laid off during the pandemic. That, in turn, caused a larger proportion of the overall workforce to be made up of higher-income earners.

The rise was the most significant in states with highly skilled workforces, such as Massachusetts, New York, and California, according to Wayne Vroman, an economist at the Urban Institute. A number of states have seen larger-than-normal increases to their maximum weekly unemployment benefits — they went up $85 in Washington and $60 in Oregon — but the $119 jump in Massachusetts, which already had the highest maximum unemployment payout in the country, is one of the steepest, according to the Century Foundation think tank.

This sharp increase in the maximum benefit is an anomaly due to the pandemic, according to those who study unemployment insurance, and will most likely moderate and maybe even decrease in the years to come. Between 2019 and 2020, for example, the maximum benefit went up by $32. Most years, it rises about 3 to 4 percent.

The real problem is what drove the maximum benefit up: all the lower-wage workers who lost their jobs or had to quit during the pandemic and weren’t counted in the wage average, said state Senator Patricia Jehlen, who co-chairs the unemployment trust fund commission.

“Many of those workers are still out of work and now out of unemployment benefits, and I am deeply concerned about their livelihood and ability to support their families,” she said in a statement to the Globe.

Meanwhile, white-collar employees who could work from home were much less likely to lose their jobs during the pandemic.

“It’s just another example of the tragedy of the two-tier economy. The rich got richer and the poor got poorer,” said Monica Halas, an attorney focusing on employment at Greater Boston Legal Services.

But many low-wage earners deemed as essential workers were given raises during the pandemic, said Jon Hurst, president of the Retailers Association of Massachusetts, noting that they also contributed to the rise in average weekly wage and could be eligible for higher unemployment benefits in the future.

In Massachusetts, unemployment insurance is funded by taxes paid by employers based on the first $15,000 of workers’ annual wages, and the tax rate depends on how much each employer uses the system. (Unemployment payouts are set at 50 percent of a claimant’s wages, up to a maximum amount determined by the average weekly wage.) Employer groups are concerned that if the rise in maximum unemployment benefit puts more stress on an already insolvent trust fund, those taxes could be raised. But worker advocates note that high earners are less likely to be laid off and the impact would likely be negligible.

In Massachusetts, the $15,000 taxable wage base is much lower than in some states, including Washington, where the base is $56,500, and Alaska, where it’s $43,600. For a Massachusetts employer with workers who make $150,000, only 10 percent of those wages are subject to the unemployment insurance tax, while employers with workers making $30,000 are paying taxes on roughly half of their wages, noted Phineas Baxandall, senior analyst at the Massachusetts Budget and Policy Center. That means that companies with low-income employees, whose wages generate the same amount of employer taxes to the fund as more highly paid workers, are in effect subsidizing unemployment payments for higher-wage workers, he said.

Raising the amount of wages subject to unemployment insurance tax and indexing it to keep up with wage growth would not only put more money into the fund, he noted, it would also make the system more equitable. But the large corporations that tend to pay higher salaries would likely protest.

“They would cry bloody murder, and unfortunately their voice is often louder than others,” Baxandall said, noting that the unemployment system has been a “savior” for businesses during the pandemic by putting money into the hands of customers who otherwise wouldn’t have had the ability to spend. “We should be praising the UI system for having saved the economy. The challenge is to ensure it will be robust for the next downturn.”

Increasing employers’ contributions to the unemployment fund would make it even more expensive to do business in Massachusetts, business groups said, noting that the rise in average weekly wage would also trigger other tax and premium increases. So discussions about fixing the unemployment system must also include benefits freezes, tighter eligibility requirements, and adjustments to how frequently the average weekly wage is calculated.

Worker advocates note that many people are already left out of the unemployment equation. Those with fluctuating work schedules are sometimes denied benefits outright due to the way eligibility is calculated, they said.

Given all the issues with the state’s unemployment system, there is at least one thing everyone seems to agree on: It’s in dire need of reform.

During a virtual meeting of the unemployment trust fund commission on Friday, Rosalin Acosta, the state’s labor secretary, cautioned that although there were many “levers you can pull on both sides” to adjust employer contributions and workers’ benefits, change won’t happen overnight.

“UI is an extraordinarily complicated animal, and that is why we are where we are, because it’s kind of been a little bit of a third rail, a little bit of an untouchable,” she said. “At the end of the day though ... there is a finite number of things you can do.”

Katie Johnston can be reached at katie.johnston@globe.com. Follow her @ktkjohnston.