The federal government should give states providing low levels of unemployment insurance (UI) benefits an incentive to raise the level of their UI benefits by adjusting the unemployment tax rate and taxable wage base.
Over the last several decades the labor market has become more dynamic while at the same time the safety net of unemployment insurance has become weaker. This has happened because many states have sought to cut unemployment benefits as a way to keep employee UI taxes low. The federal government should reduce this type of race to the bottom competition by raising the UI tax mandated in the Federal Unemployment Tax Act (FUTA) from 0.8 percent to 1.1 percent. Raising the UI tax base would raise many states’ minimum tax rates and help reduce the incentive to keep benefits and eligibility low.