The cost of an individual UI claim depends on how much the employee made, how long they remain on unemployment, and the state’s maximum benefit amount. The average amount paid out on an unemployment claim is $4200, but can cost up to $12,000 or even more.
State governments get the money to pay claims by debiting the employer’s UI account (in states that require an account balance) or by raising the employer’s UI taxes. A deduction in the account balance may also cause a rate increase, as the ratio between taxable payroll and the account balance changes. Each claim assessed to an employer’s account can result in a tax rate increase in future years.
So the real story isn’t the cost of an individual claim (though it can be significant). It’s the higher tax rate that will have a long-term impact.
The state formulas generally use a three-year moving period to assign a tax rate. Each awarded unemployment claim can affect three years of UI tax rates. Employers often don’t realize the real cost of a claim since it’s spread out over a long period.
The average claim can increase an employer’s state tax premium $4,000 to $7,000 over the course of three years. However, it can be far more, eclipsing the cost of the claim itself. Not winning claims can easily cost employers tens of thousands of dollars annually, if not more.
For example, say an employer has a million dollar taxable payroll and a UI tax rate of 1%. That’s $10,000 in unemployment tax premiums. After claims are assessed to its account, the rate goes up to 5%. Premiums rise to $50,000. The UI tax rate clearly makes a difference to an employer’s bottom line.
JP Morgan: At least a decade before employment in the USA returns to pre-virus levels
J.P. Morgan Chief Investment Officer Bob Michele predicted it will take 10-12 years after the pandemic for U.S. employment to get back to its pre-coronavirus level, insisting it won’t be as simple as turning the economy back on.
“No, it’s not that simple … it’s going to take years, or longer to get back to where we are, or where we were,” Michele said on Bloomberg when asked if reopening would be as simple as “turning on the lights.”
Michele noted that there was a huge error when predicting unemployment numbers, as millions of Americans are losing their jobs amid the pandemic. He then compared unemployment rates during the coronavirus outbreak to the 2008 financial crisis.
“When you look at the congressional budget office forecast for the end of 2021, they have unemployment at 9 percent, so sure, materially better than where we’re going to peak in the high teens, but during the peak of the financial crisis, unemployment hit 10 percent,” he said. “So even looking out a year and a half from now, we’re still going to be roughly where we were at the peak of the financial crisis.”