Thank you Chairmen Peterson and Schuring and members of the Committee for the opportunity to testify today regarding reforms to Ohio’s unemployment compensation system.  My name is Greg R. Lawson.  I am the Senior Policy Analyst at The Buckeye Institute for Public Policy Solutions, a free market think tank that believes low taxes and limited government regulations will lead to a more prosperous Ohio.

This committee has heard a great deal of testimony on the intricacies of unemployment compensation (UC) and the legislative reforms intended to address it.  It is important, however, to consider this UC reform effort in the broader context of Ohio’s economy. 

For over half a century, Ohio has lagged behind the national average in job creation.  More recently, the decade that opened the 21^st century was economically disastrous for the Buckeye State.  Ohio has not yet rebounded fully from the tech bubble burst in the early 2000s and is still down over 100,000 private sector jobs from March 2000.[1]  Between 2000 and 2010, Ohio lost nearly 620,000 private sector jobs, more than any state in the country—except Michigan.[2]  And with the exception of Central Ohio, the state remains mired in a lackluster economy unable to create new jobs anywhere near the national average.  As a result, the state’s labor force participation rate remains relatively low—just 62.6 percent in September.[3]  This is three-tenths of a percent lower than the national participation rate and signals that although Ohio’s job market is no longer in triage, it still has a long road to a healthy recovery.[4]

To build and maintain a strong economy, Ohio needs as its cornerstone a strong private sector that creates jobs—jobs that reward people for their hard work and offer them viable paths to financial security and prosperity.  A responsive and responsible UC system can and should be part of rebuilding Ohio’s economic structure by offering a “safety springboard” for Ohioans who can work, but need time to transition from job-loss back to the workforce.  In this way, unemployment compensation should act as an insurance policy designed to mitigate the risk of temporary unemployment, but also gives individuals the appropriate incentives to seek and quickly find reemployment. 

Unfortunately, most UC systems—including Ohio’s—rely on funding mechanisms and taxes that have the perverse effect of making it harder for employers to expand their workforce and raise employee wages.  As President Reagan once said, “If you want less of something, tax it.”  By confronting employers with higher tax rates on larger taxable wage bases—as some opponents of reform have recommended—Ohio risks stagnating and diminishing wage growth[5] and fewer new jobs.  Money that employers otherwise could use to enhance their workforces is siphoned off to pay the tax bill,[6] so although it may look like employers fund Ohio’s UC benefits, the employees ultimately bear the burden of the program.[7]  Thus, when reform opponents call for higher taxes on employers and taxable wage-base expansions,[8] they unwittingly ask the General Assembly to sacrifice job- and wage-growth in exchange for what should be a temporary unemployment insurance policy.  That is not a trade-off that builds a sound economy.

Instead of simply raising taxes on employers that will inevitably punish employees, UC reforms should focus on accomplishing three essential tasks.

1. Keep Control in Ohio, Not Washington.  Ohio has wisely retired its debt to the Federal government in order to reduce the Federal unemployment tax (FUTA).  Regaining full state control over Ohio’s UC system will help ensure that all Ohio employers are treated fairly and according to their actual experience rating. 

2. Help Workers Get to Work.  Unemployment compensation reforms should be designed to help prospective workers return to gainful employment as quickly as possible.  Research shows that the longer unemployment compensation is offered, the longer workers tend to remain unemployed.[9]  Even President Obama’s former Chairman of the Council of Economic Advisors, Alan Krueger, has acknowledged this tendency: “The empirical work on unemployment insurance (UI) and workers’ compensation (WC) insurance finds that the programs tend to increase the length of time employees spend out of work.”[10]  In some cases, out-of-work individuals will go right up to the designated benefit week limit while seeking jobs they would prefer over jobs that are available.[11]  This is understandable, of course, but it costs the system and corporate taxpayers money, and negatively affects wages and job creation.  To help counter the natural tendency to milk the system, policy-makers should consider implementing a sliding scale of benefit weeks in order to help move the unemployed back into the labor force.

3. Limit Cross-subsidization.  Ohio’s UC system should adopt reforms that will better calibrate the experience rating under state unemployment tax (SUTA) in order to reduce the current cross-subsidization of high-turnover employers.  In its current configuration, some level of cross-subsidization is unavoidable, but a better calibration of the experience rating along with fewer caps for employers with high turnover will help minimize costs for most employers.[12]  It may be tempting to think of such reforms as tax increases, but that would be a misleading over-simplification.  Instead, think of limiting cross-subsidization as a type of user-fee—the more one uses a service, in this case accessing UC benefits, the more one typically pays.

It is critical to get reform measures for a system of this magnitude right.  Indiscriminately hiking SUTA taxes or expanding the tax base will only dampen prospective job-growth.  Slower job-growth harms all Ohioans—as it has now for decades—but it harms some communities more than others.  In particular, fewer job prospects and slower growth tend to disproportionately harm Ohio’s African-American communities.

Nationally, the unemployment rate among African-Americans remains much higher than among other demographics.  According to the Bureau of Labor Statistics, the unemployment rate last month was 8.3 percent for African-Americans compared to 4.4 percent for whites.[13]  Similarly, unemployment confronts a staggering 27.2 percent of young African-Americans between 16 and 19, and 14.2 percent of young whites.[14] 

As the debate over specific UC reforms continues, it is important to consider whether a more free-market approach might better address the needs of a fluid, 21^st century labor market.  Perhaps the stale, bureaucratic redistributive system has had its day and it is time for a change.  Perhaps, for example, individuals should be able to set aside money in case of unemployment.  Perhaps those same individuals should be permitted to draw down money from their own accounts while they seek jobs that suit their skillsets.  And, perhaps, they should be able to convert unused benefits into savings so that they are better prepared for retirement in this increasingly turbulent job market.

Other countries, in fact, have tried and tested these free market ideas with great success.  Chile, for instance, has a far more free market UC system[15] that permits personal unemployment accounts—jointly funded by employers and employees—and gives employees the ability to use any unused balances during their retirement.[16]  Such a system gives employees “skin in the game,” which gives them a powerful incentive to find jobs faster and re-enter the workforce sooner when money that they might otherwise spend in retirement is drawn down during temporary unemployment. [17]   

Giving employees “skin in the game” by allowing them to contribute directly to the UC system, however, will only work in a substantially reformed UC system.  Such incentives created in an unreformed, non-personalized UC system—such as Ohio’s—will inevitably lead to severe political pressure to raise benefits and drain funding.  And that pressure ultimately leads to tax increases and fewer jobs.

The primary reforms found in legislation this committee has been examining take reasonable, responsible first steps toward a better economic landscape.  They are certainly more growth-oriented than alternative proposals that would simply hike corporate taxes without any significant benefit modifications.  But the kind of small-scale reforms contemplated there will not solve Ohio’s persistent inability to generate job- and wage-growth across the state.  To address that challenge, Ohio needs a long-term rethinking of the UC system in order to free her businesses from the current, failed system and give Ohio workers more incentive to pursue job prospects while saving for the future.

Thank you for your time and I welcome any questions that the Committee may have.