TANGO Partners Perspective – May 2022
The Current Economic Conditions and Labor Market are Quite Puzzling!
Joe Poretto, Vice President, Sales & Marketing
We hear from employers all throughout the nonprofit sector looking for answers to the labor market and how to project where unemployment costs are heading. How can they be facing a staffing shortage when unemployment activity has not returned to pre-pandemic levels? How is it possible to retain existing staff against competing job offers with the offer of higher wages when the organization’s own expenses are already increasing? Employers know that labor market uncertainty leads to escalating unemployment costs. There are no easy answers in this market but that is expected when the market enters a “rarity”. Unless a crystal ball is found quickly, an employer’s best defense against is to have the core strategies in place to combat unemployment cost uncertainty.
According to a recent Barron’s article “Inflation and Unemployment Haven’t Behaved Like This in 70 Years. Why It Matters”, there has only been 15 months in the last the 74 years that the monthly unemployment rate has been below 4% while inflation registered above 8%. This has occurred less than 2% of the time since 1948 but before March of 2022, it had not been seen since 1951. It is far from normal to see high inflation paired with low unemployment but here is the scary part. Every time inflation has exceeded 4% while unemployment was 5% over the past 75 years, the U.S has fallen into a recession within two years. This is the exact situation taking place since September 2021 which puts the U.S. economy in a recession by August 2023.
There is no greater impact on an employer’s unemployment costs than a recession. It touches every factor that can impact an employer’s expense in a negative way regardless of whether they are paying UI (unemployment insurance) Tax or Reimbursing. Here is what you can expect and some suggested strategies to help:
- Increase in cost of State Unemployment Taxes – Recessions drain the state unemployment funds which will require the state to raise taxes on employers to cover the damage. Another important piece to note is the state unemployment funds are still recovering from the pandemic. According to the May 2022 report from UWC’s SUCAP Legislative Advisory as of May 11th, 41 of the 53 UI Funds (states plus DC, PR, VI) are insolvent and 39 of the 52 are still collecting less in UI Taxes compared to what they have paid out in benefits over the last 12 months. Over the course of the last recession the avg UI Tax cost per employee increased from $246 to $473. The current avg is $356 per employee.
SUGGESTION: Contact various third-party programs to receive a quote but be sure the provider’s offering contains some sort of risk transfer product and it does not contain any pooled risk features. On average, most 501c3s pay nearly $2 in UI Tax for every $1 they pay out in benefits. Most 501c3’s are low risk employers whereas construction, food service, and manufacturing are high risk due to their employment profile yet often subsidized by the maximum rate cap. Remember that the state unemployment funds are shared risk pools, and the individualized portion of the employer’s UI Tax rate is normally the minority portion of the overall rate. Since the overall fund’s experience is most of the rating, the broadness of the recession often compounds the effect of shared risk thus driving costs up even higher. See what your organization’s pricing looks like in the third-party market!
2. Increase in cost of Unemployment Claims – Recessions increase the duration in which a claimant draws unemployment benefits thus leading to higher claim pay outs. Currently the avg duration for claimant drawing benefits is for 17.8 weeks which is 20% higher than it was pre-pandemic (14.8 weeks) and 23 of the 52 UI Funds passed benefit award increases in 2022. Recessions normally see a 33% increase in claims duration from the onset. The current avg claim value is $5,803.
SUGGESTIONS: If you are self-insuring the benefits, first I would suggest contacting a third-party provider, and just as I mentioned in the Unemployment Tax section, to make sure their offering contains some sort of risk transfer product and that it does not contain any pooled risk features. The last thing you want to do is end up picking up unknown liabilities from other employers in which you have no idea what they are dealing with in a difficult time. Second, re-entering the UI Tax may be an option. This would only be an option in certain states in which you could re-enter the UI Tax without any tail liability on existing claims and you were facing significant uncertainty in which the result was major layoffs. If you are currently using a third-party provider, review your current agreement/policy and ask questions about possible exposures. There have been significant changes since the pandemic to some forms to be sure to know the changes, if any. Do I have any shared risk exposures? Finally, look at your state’s Shared Work programs. It can be a great way to reduce layoffs and keep a greater share of your staff employed. If you are using a third-party, I would recommend letting them know as well, and again, check to make sure it is covered as some provider’s forms do not cover Shared Work claims.
3. Increase in Overpayment Rate by state – Recessions drive up claims volume and both State and Territory Depts of Labor are already short staffed. The more volume, the more errors occur on the claim processing and adjudication. During the pandemic, 17 of the 53 UI Funds had an overpayment rate of over 20%! In addition, it was estimated that over $163 billion were paid out in fraudulent claims. It is very common to see an uptick in fraudulent claim filings went unemployment agencies are experiencing higher claims volume.
SUGGESTION: Engage an unemployment claims administrator. This is also very common offering included in third-party provider programs. Between the increase in claims volume responses, the expanded time allocated to each claim due to the state unemployment agencies deficiencies, the claim audit or fraudulent claim defenses, your staff will thank you. Unless you are comfortably staffed with seasoned HR personnel, trying to navigate a recession using only in house assistance is extremely taxing and frustrating for internal staff. The time saved and reduction of overpayments is well worth the engagement.