Scams and job loss make reforming unemployment insurance an imperative

meet john doe.

He earns about $70,000 a year running his own design firm. He’s also been collecting unemployment insurance for 24 years running-and it’s all legal. John Doe is a UI scammer, and he’s not alone. Not by a long shot.

The Massachusetts unemployment insurance system was intended to provide temporary income to those who unexpectedly lose their jobs. Most people still use it that way. But for some, UI has morphed into a government giveaway program of massive proportions. In 2004, some $1.4 billion was mailed out by the Division of Unemployment Assistance. Though impossible to quantify precisely, a big chunk of this money went to legal scammers and outright frauds.

How does this happen? First of all, like most government programs, UI is dictated by legal rules, both state and federal, that allow no discretion to determine the truly needy. Any time cash payouts are governed by a complex set of rules, there will be clever individuals (and, in the case of UI, companies as well) who will find every legal loophole in order to benefit—even if the system was never designed to benefit them.

But there’s also another reason. The generous benefits Massachusetts provides to its unemployed make it a tempting target. With benefits 76 percent above the national average, the Bay State has become a national magnet for scammers, a shining example of good intentions gone horribly wrong. And along with high benefits come a high tax burden. On average, businesses in Massachusetts pay an estimated $637 per employee into the UI system, or roughly twice the US average of $315. Such high benefit levels create perverse incentives, encouraging clever individuals to benefit in ways never contemplated by those who designed the UI system.

For three years now, Gov. Romney has pushed the Legislature to tighten the unemployment insurance system in order to make Massachusetts more competitive, and some progress has been made. But as head of the Department of Workforce Development’s Division of Unemployment Assistance (DUA) for two years, I had the opportunity to see the system up close. I heard from companies struggling with their UI tax bills, and reviewed hundreds of case files. I became convinced that further reform of unemployment insurance is more pressing than ever—to reduce, if not eliminate, the scams and abuse, and to reduce the UI tax burden on business.


What would your insurance company do if your house burned down every single year? Or if your car got stolen year after year, on the exact same day? Well, in Massachusetts, a disturbing number of people file Unemployment Insurance claims every single year—and the DUA has no choice but to pay them.

In 2004, 247,000 individuals filed claims with the Massachusetts DUA. More than half these claimants (54 percent) had also filed for UI in 2003. Of those claiming in 2004, more than 18,000—7.3 percent—had collected UI in at least 11 of the preceding 20 years. And 700 individuals had perfect attendance, having collected UI benefits in each of the past 20 years. DUA workers call these annual claimants our “frequent fliers.”

The following examples are from real claimant filings in 2004:

  • A 52-year-old interior decorator from Boston earned $68,000 from his job that year, but also took in $3,500 from UI. He’s hit the quarter-century mark, having collected UI in each of the past 25 years.
  • A 46-year-old man from Brockton earned $33,700 for driving a school bus—plus an additional $7,620 for when he was not driving a bus. He’s collected UI for 24 years.
  • A 47-year-old restaurant owner from Cape Cod earned $49,000 and then laid herself off, collecting $10,621 from UI. She’s been on the UI dole for 22 years.
  • A 50-year-old owner of a pool services company earned $29,000—then, by laying himself off when pool cleaning was out of season, boosted his income 33 percent by collecting $9,700 in UI.

For these claimants, and tens of thousands like them, UI is not an insurance program. It’s a way of life. These people have been collecting UI virtually every year of their adult lives. Far from providing help after an unexpected job loss, UI is a planned-for and carefully managed annual income supplement. These folks understand the rules of the game, and they game the system for all it’s worth.

Notice that the last two “frequent fliers” were owners of the businesses that laid them off. Unemployment insurance is one of the few kinds of insurance that you can self-trigger—and it is remarkable how many small business owners do just that.

‘Frequent fliers’ game the system for all it’s worth.

The following account, based on a real case, shows how the scam works. Ms. Q owns a jewelry store in Nantucket. She earned about $50,000 in the summer of 2004. In late autumn, she laid herself off and headed to Florida. She was eligible to collect $528 per week for 30 weeks, plus $25 per week for each of her two dependent children, bringing her UI benefits to $17,340—and raising her income for the season from $50,000 to $67,340.

Of course, Ms. Q pays the maximum UI insurance rate on herself—10.96 percent on the first $14,000 of taxable wages, for a total UI tax of $1,534.40. So for a UI premium of about $1,500, Ms. Q gets $17,000 in benefits sent to her in Del Ray Beach—benefits paid for by other Massachusetts businesses.

Here’s another account based on a real case from the DUA files. A family business consists of five employees. The president, treasurer, and director are all related (husband, wife, and child) and collectively take in more than 90 percent of all wages paid out by the business, roughly $150,000 per year. In a remarkable coincidence, every year temporary workload reductions result in various family members being put on reduced work schedules—and collecting UI. In 2004, the family business paid $5,100 in UI premiums, and family members collected $17,770 in benefits. These all-in-the-family corporate officers collected in 2003, collected in 2004, and collected in 2005. Want to bet they’ll be collecting in 2006?


There are many economic activities that result in uneven earning patterns. Roofers can’t work in snowstorms, school cafeterias close in the summer and during vacation weeks, and ice cream stands on the Cape close for the winter. That may be inconvenient, but it’s an economic reality.

Or is it? Companies in industries with uneven earnings patterns often abuse the UI system and “lay off” their workers, sometimes several times per year, and enjoy a company-wide wage subsidy. Guess who ends up subsidizing these industries with uneven earning patterns? Companies that provide steady, predictable employment.

Although unemployment insurance is funded by employers, that doesn’t mean the benefits received by laid-off employees come out of the pockets of the employer that put them out of work. Many industries with frequent layoffs are what we call “maximum negative” employers, their out-of-work employees collecting far more than they paid in UI taxes. In essence, premiums paid by companies that maintain steady employment subsidize employers, and even entire industries, that have frequent layoffs. For certain employers, the UI system is a regular provider of a benefits package for their intermittent and seasonal employees—paid for by other employers, and made possible by the Commonwealth of Massachusetts.

In 2004, laid-off workers from 3.9 percent of Massachusetts firms accounted for 32.5 percent of disbursed UI benefits. These heavy users paid $124 million in UI taxes, but their employees walked away with $403 million in benefits. For a number of companies, UI has morphed into an enormous corporate subsidy, a way to get wage supplements for their own employees and have other employers pay for them.

The unemployment insurance tax on business is experience rated. That is, the more UI benefits are paid out to a company’s employees, the higher the tax rate will be for that company—but only up to a limit, currently $1,530 per employee. Though this a sizable tax, it can be a cheap way for an employer to sweeten the deal when hiring an employee they both know will, at some point, be laid off. In effect, some companies have incorporated UI into their wage structure. Here’s the evidence:

  • In 2004, 30 Bay State companies had employees who received more than $1 million in UI benefits over and above what the company paid in UI taxes.
  • About 5,500 companies have been regularly drawing heavily on UI, the benefits to their employees exceeding their UI taxes in 2002, 2003, and 2004. Total subsidy to these companies in those three years: $1.2 billion. That’s a subsidy of about $73,000 per company per year.
  • About 80 percent of these heavy-user companies had 10 or fewer employees.

Some of these companies may have been going out of business, but many are going concerns. These heavy- user companies come from all sectors of the economy, but represented disproportionately are construction companies, temporary services firms, school bus companies, and seasonal businesses such as landscaping and pool maintenance.

Unemployment insurance was never intended to be part of the business plan for seasonal enterprises. If school bus companies want to hold on to their best drivers for the fall by paying them partial salaries over the summer, let them do so. The same goes for contractors. If you want to give your best journeymen a little something to tide them over during the harsh winter of idleness, keeping them on payroll and ready to go at the first thaw, go right ahead. But there is no good reason for companies that provide steady work year-round to pay hundreds of millions of dollars to subsidize companies that lay off their workers in the normal course of business.

These are not the only ways that claimants and companies game the UI system. The most common, in fact, are forms of petty fraud: working under the table while collecting, and collecting when not looking for work (a statutory requirement of UI eligibility is to be able, available, and seeking work). These are violations of the system, but they are very difficult to enforce. The DUA, working with the Attorney General’s office, has brought more fraud cases to court in the past six months than in the previous three years—including one person collecting from prison, another collecting from the middle of the Atlantic Ocean (a commercial fisherman), and a former DUA employee who was earning on one Social Security number while collecting on another. But it is an uphill battle to catch the laid-off electrician, carpenter, or landscaper who quietly does residential jobs for cash under the table while collecting unemployment.


But what about the legitimately laid-off? Isn’t there a real and important benefit to having a safety net for folks who lose their jobs? And what’s wrong with being generous toward them, and even more generous than other states?

Few would argue against providing a financial cushion to those who lose their jobs unexpectedly and through no fault of their own. But we have to look closely at who is benefiting from this generosity, and at the unintended consequences of rewarding those who are not working, in order to balance the virtues of high benefits against the detrimental impact of high taxes on employers.

We’ve already seen that a lot of companies and individuals abuse the UI system through frequent use. But what about the high-wage earner who experiences a once- (or twice-) in-a-lifetime layoff? Many people who collect UI are highly compensated professionals for whom unemployment is a misfortune but not necessarily a disaster. Consider an individual earning $90,000 who is laid off from a high-tech company and given a $25,000 severance package. If that person signs a release promising not to sue the company, the severance doesn’t count for UI purposes (the courts have deemed severance under these circumstances as payments in exchange for the release). This means that he will be eligible for UI after the standard one-week waiting period, and then be able to collect $551 per week (plus $25 for each dependent child) for up to seven months provided he stays unemployed. If he goes back to work, he loses these benefits.

High benefits ultimately lead to high UI taxes.

The high benefits offered by Massachusetts slow down the process of unemployed individuals finding work, both by reducing the incentive to look for work and by making them more choosy about what sort of jobs they will accept. Economists refer to this as “raising the reserve wage,” but the way most UI claimants see it, the first couple of months of unemployment constitute a government-paid vacation. And because UI is not a means-tested program, the well-to-do collect alongside the truly needy.

In fact, the well-off collect more. Because UI benefits are based on earnings, a stockbroker who earns $60,000 a year qualifies for the maximum of $551 a week when he’s laid off, while a janitor who earns $30,000 a year receives only $288 per week. As Monica Halas, an attorney for Greater Boston Legal Services, has noted, “The more you need UI the less you get.”

But the way we finance UI is exactly the reverse: Because UI taxes only apply to the first $14,000 of taxable wages, high-wage jobs are taxed proportionately less than low-wage jobs. A $60,000-a-year job is taxed at half the rate of a $30,000 a year job and one-fourth the rate of a $15,000-a-year job. So we tax the low-wage jobs more and reward the low-wage earner less.

Even so, for people on the lower end of the employment curve, unemployment benefits provide meaningful assistance during times of unexpected job loss. But our current UI system is a highly inefficient mechanism of getting these folks assistance. And high UI taxes tend to drive low-wage jobs—just the jobs these folks need—out of state.

This is an instance where economic theory is supported by empirical experience. Back in 2000, Massachusetts was one of the hottest economies in American history. The biggest challenge facing businesses was attracting and retaining employees.

But despite an unemployment rate well below the national average (2.7 percent vs. 4.0 percent), Massachusetts claimants stayed on UI 19 percent longer than the national average (16.3 weeks vs. 13.7 weeks) in 2000. Despite a super-hot economy, we gave out $744 million in unemployment benefits, 53 percent more benefits than the national average: $283 per covered job here vs. an average of $185 everywhere else.

Why did Massachusetts pay out so much despite an economy that was the envy of the nation? In part, it’s because our “frequent fliers” collect regardless of the economy. In part, it’s because the most generous benefits in the nation encourage folks to stay unemployed a little longer than they otherwise might.

It’s Economics 101: Whatever you reward, you get more of. Whatever you tax, you get less of. Massachusetts rewards the unemployed, so we get more of them, and they stay unemployed longer. At the same time, we tax jobs, so we get less of them.

In 2004, Massachusetts allowed individuals to collect up to $528 per week on UI, more than in any other state. That’s 51 percent above the national average of $348 per week. Massachusetts is the only state in the nation to allow claimants to collect for 30 weeks; 48 states limit UI to 26 weeks and one, Montana, sets the limit at 28 weeks.

Our benefits are 76 percent above the US average.

In addition to high benefits, Massachusetts has some of the most liberal eligibility requirements in the nation. Whereas most states require that an applicant has earned wages equivalent to 20 weeks’ worth of work to qualify, Massachusetts demands only 15 weeks. This makes it easier for those with limited workforce attachment to qualify for benefits. (Claimants who have only 15 weeks of work behind them do not qualify for the full 30 weeks of benefits, but collect for a lesser amount of time based on earnings. The maximum you can collect on UI is 36 percent of what you earned.)

As a result of the nation’s highest benefits, longest collection period, and easiest eligibility, Massachusetts hands out more in benefits per covered employee than any other state in the nation. How much more? In 2004, Massachusetts was a staggering 76 percent more generous than the national average.

There are two ways to compare the size of the UI program in any given year. One way is to look at total benefits distributed per covered employee. The other is to look at UI taxes taken in per employee. In the long run, these figures come out about the same, but in any given year the UI system may pay out much more or much less than it brings in. The key point to understand is that benefit levels ultimately drive taxation levels. Just as with your credit card, the amount you spend per month (on average) drives what you’ll have to pay; likewise, it is UI benefit payouts that ultimately drive UI tax levels.


The chart above shows UI benefits per covered worker in Massachusetts compared with the national average each year since 1990. Even when the Bay State had low unemployment rates, in the late 1990s, we were still handing out half again as much per worker compared with the national average. When the recession hit bottom in 2002, we gave out roughly double the benefits per covered worker—or $741 for every job in the state. (This figure does not include money given out under the federal benefit extension.)


These highest-in-the-nation benefit amounts are the driver behind our highest-in-the-nation UI taxes. Between 2003 and 2005, UI taxes (on average) just about doubled for Massachusetts employers. DUA estimates that, in 2005, Massachusetts led the nation in UI taxes per employee— an average of $637 per employee, about twice the US average of $315 per employee. The second chart shows a DUA estimate of Massachusetts’s 2005 UI taxes compared with a number of competitor states.

Who would you rather attract to Massachusetts, the folks who come because we have high unemployment benefits, or the folks who would come to start a profitable business? I know my answer.

The choice is real, because every dollar that goes to pay UI benefits comes from taxes on Massachusetts employers. A Massachusetts employer can save an average of $359 in UI taxes per employee per year by moving his manufacturing plant to North Carolina. He can save $519 per employee per year by expanding in Nashua, NH, instead of Tewksbury.

According to the New Bedford Standard Times, “Epec LLC, a New Bedford maker of computer circuit boards, announced it was moving more than 30 manufacturing jobs out of the state to a facility in Kansas because the cost of keeping those positions in Massachusetts was prohibitive.” Differential UI tax cost between Massachusetts and Kansas: $342 per employee per year.

Our high UI tax is a job-killing machine.


Reforming the unemployment insurance system is a challenge for several reasons. The UI system is based on a 1930s notion of a job as a lifetime relationship between the worker and the company. But high UI taxes and other mandates on employment have prompted companies to go to great lengths to avoid actually hiring the individuals who do work for them. Temporary-placement agencies and other arrangements are designed in part to avoid UI taxes. In addition, the entire issue of seasonal or intermittent work simply was not contemplated by designers of this program.

Another barrier to reform is that some interest groups like things the way they are. The AFL-CIO and other labor groups, for example, staunchly oppose any reduction in benefit levels. This, in part, may be because of members they have in construction, school transportation, and other industries that benefit from subsidy.

Nonetheless, reform is overdue. We can reduce the tax burden on responsible employers and also reduce the scams. Here are three proposals:

Bring benefits more in line with other states. Lowering benefits, in terms of time, eligibility, and/or payment levels, would not only allow us to reduce UI taxes, it would also reduce the incentives for both individuals and employers to game the system. A 26-week collection limit is a must. In addition, lowering maximum benefit levels to $450 per week—still well above most other states—would lower weekly UI checks only for those who earn in excess of $46,800 per year, while not impacting low-wage earners at all. These changes would send a strong signal to the business community that Massachusetts is serious about reform.

Enhance the DUA’s anti-fraud powers. The governor and the Legislature deserve credit on this front, with both the 2003 UI reforms and a 2005 law banning certain business transactions designed to artificially lower UI taxes making fraud tougher to get away with. However, one key provision was excised from the 2003 reform—the ability to garnish wages. Right now, DUA uncovers millions of dollars in fraud that it cannot collect. The authority to garnish wages in established fraud cases in which a court judgment has been rendered would be a significant help.

Increase the experience rating factor. In 2004, Gov. Romney and the Legislature agreed to increase the maximum tax that could be imposed on companies that made heavy use of UI from $780 to $1,534 (from 7.225 percent on a wage base of $10,800 to 10.96 percent on a base of $14,000). That was a step in the right direction, but a relatively small one, since UI taxation levels still roughly doubled for companies in general. Despite a hike in the top rate, the subsidy of seasonal and casual enterprises by steady employers is still massive: Some $312 million was transferred to “maximum negative” employers in 2005, much of that to ongoing businesses that regularly use UI as a wage subsidy for their workforce. Adjusting the wage base and rate schedules so as to reduce the overall UI tax burden, while at the same time increasing the amount paid by heavy UI users, would help to lower the burden for those companies that don’t abuse UI.

The system is an outdated creature of the New Deal.

The UI system is a creature of the New Deal, designed around an outdated, static model of economic activity— one in which people stayed in their jobs forever. It also came into being at a time when unemployment was 15 percent or more, and losing a job often meant going hungry. The idea was to temporarily provide for wage earners who lost their jobs. Today, the UI program is abused by those who know the rules of the game and adapt their economic activities to take advantage of the system. In trying to benefit workers, we punish the companies that create steady jobs. In trying to gain greater economic security for workers, we create economic insecurity by making it tougher for a business to succeed in Massachusetts. In the interest of jobs, as well as fairness, it’s time we took action.

John O’Leary, a former director of the Division of Unemployment Assistance, is director of human resources for the state.