Iowa’s Unemployment Insurance Reforms Made It the Envy of Its Neighbors

Overview  

Unemployment insurance is a valuable program vital to workers, especially during economic downturns. But if the rules surrounding eligibility are not managed properly, the system can be abused. Leaders in Iowa realized this and made two key reforms to the program that took effect in 2022.^1-2

These reforms allowed Iowa to make improvements in key areas of unemployment insurance like the recipiency rate, average collection duration, trust fund amount, and tax rate. Over 10 quarters, Iowa’s program performed admirably compared to its peer states: Illinois, Minnesota, Missouri, Nebraska, South Dakota, and Wisconsin. The state is not alone in this path to success. States like Alabama, Florida, Kansas, and North Carolina, among others, have also passed reforms and reaped the rewards.^3-6

More states should look to follow these examples and reform their unemployment insurance programs. Doing so benefits workers, employers, and consumers alike.

Iowa strengthened job search requirements and reduced maximum benefit time

Done correctly, unemployment insurance serves as a temporary safety net while individuals look for their next job. However, the program does not work well when benefit amounts are too high, the maximum duration is too long, or work-search requirements are too lenient. This encourages people to continue collecting unemployment benefits even when jobs are plentiful.^7-8 

This was the case for Iowa in 2021, with nearly 50,000 initial unemployment claims filed while there were more than 100,000 job openings across the state.^9-10 Even with all these available jobs, the average claimant remained on unemployment benefits for more than 20 weeks and nearly a quarter of claimants exhausted their benefits by staying on for 26 weeks.¹¹

In response, Governor Kim Reynolds worked with the legislature to reform the program and encourage Iowans to get back to work faster. First, the governor signed into law a bill that right-sized unemployment insurance benefit duration, lowering the maximum availability of unemployment benefits from six months to four months.¹² Second, using executive action, the state doubled the required work-search requirements for people collecting unemployment benefits.¹³ 

These reforms help workers, employers, and consumers. Workers benefit from increased incomes by getting back to work sooner. The average job in Iowa pays more than 50 percent more than the maximum weekly unemployment benefit.^14-15 Employers benefit, since more workers seeking to re-enter the workforce quickly means open jobs are filled more quickly. Customers benefit from greater access to the goods and services they want. Think of the long wait times experienced at restaurants because it is difficult to find and hire workers in the hospitality sector.^16-17

The two reforms quickly put Iowa on a superior path compared to its neighbors.

Iowa sets the pace in the region for recipiency rate and average benefit duration

Recipiency rate is an important figure in unemployment insurance. It shows th e percentage of estimated eligible claimants who claim benefits. A lower percentage shows that states are doing a good job of incentivizing people to find work when it is plentiful, rather than staying on the sidelines collecting unemployment benefits. An action that harms themselves, potential employers, and consumers all while slowing the state’s economy and limiting its growth.

From Q2 2021, before the reforms were implemented, to Q4 2023, the latest data available, Iowa dropped its recipiency rate from 38 percent to just 18.1 percent—a drop of 52 percent.¹⁸ Over this same timeframe, Iowa’s neighbors started with a similar recipiency rate of 39.2 percent but only dropped their average rate to 28.9 percent.¹⁹ South Dakota was the only state with a lower rate than Iowa, likely due in part because of its lower maximum weekly benefit, and no state was able to drop its rate by a larger percentage.^20-21

Duration, or the length of time the average recipient spends collecting unemployment insurance is another important figure. Each week of receiving unemployment is another week of not working, slowing recovery and negatively affecting all involved.

Before the reforms, in Q2 2021, the average duration in Iowa was more than 20 weeks, a longer period than the maximum duration signed into law by Governor Reynolds in 2022.²² Thanks to the reforms, by Q4 2023, the average duration was less than 10 weeks.²³ This means Iowans were earning paychecks again twice as quickly as before the reforms.

This move took Iowa from the 14th longest average duration to the sixth shortest.²⁴ All while the number of claimants who exhausted their benefits dropped from roughly 6,000 in Q2 2021, to fewer than 3,000 in Q4 2023, despite the 10-week reduction in maximum duration.²⁵

Peer states also saw a drop in average duration during this time, but the drop was 31 percent less than what Iowa experienced.²⁶ In the end, these states still had an average duration of more than 13 weeks, over three weeks longer than Iowa’s.²⁷ Not only did Iowa beat the average duration, but every one of its neighboring states had an average duration of at least one week longer than Iowa’s.²⁸

Accounting for the thousands collecting unemployment insurance, if Iowa had not implemented reforms, more jobs would be left unfilled and hundreds of thousands of fewer hours would be worked by Iowans. Instead, leaders in Iowa encouraged people to get off the sidelines and back into the workforce, helping to grow the economy.

By reducing the unemployment insurance recipiency rate and duration, Iowa was able to increase its unemployment trust fund account and still give much-needed relief to business owners.

The state replenished its trust fund even while reducing its tax rate on businesses

By the middle of 2021, Iowa’s unemployment insurance trust fund was less than $1 billion.²⁹ At this level, another economic downturn could force them to borrow money from the federal government if the fund went empty. This is something 22 states did in 2020, with some still struggling to pay back the federal money.³⁰

By Q3 2023, the trust fund sat at a comfortable $1.8 billion, an increase of 83 percent.³¹ The state had the sixth-highest trust fund as a percentage of total wages in the country.³²

All of this was accomplished without raising taxes and was actually done while lowering them.³³ In August 2022, Governor Reynolds announced that the tax rate would drop to its lowest levels in 24 years, the lowest rate allowed by state law.³⁴

While Iowa was able to lower its unemployment tax on businesses by 15 percent over just two years, border states raised taxes on businesses by an average of 10 percent.^35-36 Iowa was able to accomplish this because its reforms reduced both claimants and average duration, resulting in lower payouts. The state was then able to pass the savings onto the state’s job creators.

Iowa’s success was a direct result of its reforms to the unemployment insurance program to increase work-search requirements and reduce the maximum duration allotment. States looking to benefit their businesses and boost their economy should follow Iowa’s example.

States looking to help workers, employers, and customers should follow Iowa’s lead

Legislators looking for similar results should follow Iowa in reforming their unemployment insurance programs. But Iowa is not the first state that reaped benefits by reforming this system.

North Carolina started scaling benefit duration according to the unemployment rate, a process known as indexing, in 2013, which led to unemployment costs declining by 87 percent and employer taxes cut by nearly 75 percent.³⁷ After Florida indexed unemployment insurance in 2011, enrollees cycled off the program twice as quickly, allowing employer taxes to be reduced by 79 percent.³⁸ Reforms made by Alabama ensured far fewer Alabamians were dependent on unemployment during the pandemic and encouraged them to re-enter the workforce more quickly.³⁹

By joining these states in reforming their unemployment insurance programs, legislators can put their states on a more solid footing. Like Iowa, they can do this by strengthening work-search requirements and reducing the allowable time covered by unemployment insurance, whether through flat cuts or indexing.

These reforms would move workers from the sidelines to the workforce, creating a more vibrant economy. This movement will reduce unemployment insurance program spending, allowing the state to give much-needed tax breaks to employers.

The Bottom Line: Iowa’s reforms to its unemployment insurance program benefited both workers and employers.

Unemployment insurance reforms adopted by Governor Reynolds put the program on solid footing financially. The reforms allowed the state to cut its unemployment tax rate to the lowest point in more than two decades. 

Iowa is not unique in seeing gains from making smart reforms to its unemployment insurance program. States from Florida to Kansas have reformed their programs and seen similar results.

More states should follow this trend to encourage workers to get off the sidelines and contribute to their state’s economy. Doing so would mean workers get a paycheck, employers have the workers necessary to stay open, and customers are able to obtain the goods and services they require, a win-win-win.

REFERENCES

1. Stephen Gruber-Miller and Katie Akin, “Iowa unemployment benefits cut by 10 weeks after Kim Reynolds signs bill,” Des Moines Register (2022), https://www.desmoinesregister.com/story/news/politics/2022/06/16/gov-kim-reynolds-signs-law-cutting-iowa-unemployment-benefits-10-weeks-16-weeks-workforce/9570658002/.
2. Ian Richardson, “Gov. Kim Reynolds changing process to receive unemployment benefits: More job searches to be required,” Des Moines Register (2021), https://www.desmoinesregister.com/story/news/politics/2021/10/20/gov-kim-reynolds-announces-changes-iowa-unemployment-process/6104985001/.
3. Hayden Dublois, “How unemployment indexing helped Alabama weather the covid-19 pandemic,” Foundation for Government Accountability (2022), https://thefga.org/research/unemployment-indexing-helped-alabama.
4. Jonathan Ingram and Victoria Eardley, “Unemployment insurance reform has strengthened Florida’s economy,” Foundation for Government Accountability (2020), https://thefga.org/research/florida-unemployment-insurance-reform.
5. Michael Greibrok, “Indexing unemployment set Kansas on solid ground,” Foundation for Government Accountability (2023), https://thefga.org/research/indexing-unemployment-set-kansas-on-solid-ground.
6. Hayden Dublois and Jonathan Ingram, “How North Carolina has led the nation with unemployment indexing,” Foundation for Government Accountability (2022), https://thefga.org/research/north-carolina-led-the-nation-with-unemployment-indexing.
7. Joe Horvath and Jonathan Ingram, “Refusing to work: Handling employee work rejections in light of expanded unemployment benefits,” Foundation for Government Accountability (2020), https://thefga.org/research/refusing-work-unemployment-benefits.
8. Tami Luhby et al., “In some reopening states, unemployment can pay more than lost jobs,” CNN (2020), https://www.cnn.com/2020/04/30/politics/unemployment-benefits-higher-than-work-wages/index.html.
9. Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSummTable.asp.
10. Bureau of Labor Statistics, “Job openings and labor turnover survey,” U.S. Department of Labor (2024), https://www.bls.gov/jlt/data.htm.
11. Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSummTable.asp.
12. Stephen Gruber-Miller and Katie Akin, “Iowa unemployment benefits cut by 10 weeks after Kim Reynolds signs bill,” Des Moines Register (2022), https://www.desmoinesregister.com/story/news/politics/2022/06/16/gov-kim-reynolds-signs-law-cutting-iowa-unemployment-benefits-10-weeks-16-weeks-workforce/9570658002/.
13. Ian Richardson, “Gov. Kim Reynolds changing process to receive unemployment benefits: More job searches to be required,” Des Moines Register (2021), https://www.desmoinesregister.com/story/news/politics/2021/10/20/gov-kim-reynolds-announces-changes-iowa-unemployment-process/6104985001/.
14. Bureau of Labor Statistics, “Percent change in average weekly wages by state, total covered employment,” U.S. Department of Labor (2023), https://www.bls.gov/charts/county-employment-and-wages/percent-change-aww-by-state.htm.
15. Iowa Workforce Development, “Monetary eligibility,” State of Iowa (2024), https://workforce.iowa.gov/unemployment/resources/unemployment-insurance-claimant-handbook/monetary-eligibility.
16. Amelia Lucas, “Restaurants are short-staffed, and that’s taking a big toll on customers and workers alike,” CNBC (2022), https://www.cnbc.com/2022/07/17/customer-service-suffers-at-short-staffed-restaurants-as-covid-takes-toll.html.
17. HungerRush, “HungerRush data shows majority of diners believe the restaurant customer experience is declining due to the ongoing labor shortage,” Business Wire (2023), https://www.businesswire.com/news/home/20230613421517/en/HungerRush-Data-Shows-Majority-of-Diners-Believe-the-Restaurant-Customer-Experience-is-Declining-Due-to-the-Ongoing-Labor-Shortage.
18. Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSummTable.asp.
19. Authors’ calculations based on Q2 2012 to Q4 2023 data from Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSum.asp.
20. Ibid.
21. Equifax, “2024 unemployment weekly benefit amount and taxable wage base information,” Equifax (2024), https://assets.equifax.com/ews/ucm/assets/unemployment_WBA_tax_rate_wage_base_information.pdf.
22. Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSummTable.asp.
23. Ibid.
24. Ibid.
25. Ibid.
26. Authors’ calculations based on Q2 2021 to Q4 2023 data from Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSum.asp.
27. Ibid.
28. Ibid.
29. Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSummTable.asp.
30. Andrea Noble, “10 states didn’t pay off unemployment loans ahead of interest deadline,” Route Fifty (2021), https://www.route-fifty.com/workforce/2021/09/10-states-didnt-pay-unemployment-loans-ahead-interest-deadline/185172/.
31. Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSummTable.asp.
32. Ibid.
33. Ibid.
34. Governor Kim Reynolds, “Gov. Reynolds, IWD announce lowest unemployment insurance rates for employers in over two decades,” State of Iowa (2022), https://governor.iowa.gov/press-release/2022-08-24/gov-reynolds-iwd-announce-lowest-unemployment-insurance-rates-employers.
35. Authors’ calculations based on Q2 2021 to Q2 2023 data from Employment and Training Administration, “Unemployment insurance data,” U.S. Department of Labor (2024), https://oui.doleta.gov/unemploy/data_summary/DataSum.asp.
36. Ibid.
37. Hayden Dublois and Jonathan Ingram, “How North Carolina has led the nation with unemployment indexing,” Foundation for Government Accountability (2022), https://thefga.org/research/north-carolina-led-the-nation-with-unemployment-indexing.
38. Jonathan Ingram and Victoria Eardley, “Unemployment insurance reform has strengthened Florida’s economy,” Foundation for Government Accountability (2020), https://thefga.org/research/florida-unemployment-insurance-reform.
39. Hayden Dublois, “How unemployment indexing helped Alabama weather the covid-19 pandemic,” Foundation for Government Accountability (2022), https://thefga.org/research/unemployment-indexing-helped-alabama.