Racial Inequality in the U.S. Unemployment Insurance System

Abstract

The U.S. unemployment insurance (UI) system operates as a federal-state partnership, where states have considerable autonomy to decide on specific UI rules. This has allowed for systematically stricter rules in states with a larger Black population. We study how these differences in state rules create a gap in the unemployment insurance that Black and White unemployed workers receive. Using administrative data from random audits on UI claims in all states, we first document a large racial gap in the UI that unemployed workers receive after filing a new claim. Black claimants receive an 18% lower replacement rate (i.e., benefits relative to prior wage, including denials) than White claimants. In principle, the replacement rate of each claimant mechanically depends on the rules prevailing in her state and on her work history (e.g., the earnings before job loss and the reason for separation from prior employer). Since we observe claimants’ UI-relevant work history and state, we are in a unique position to identify the role of each factor. After accounting for Black-White differences in work history, differences in rules across states create a 8% Black-White gap in replacement rate (i.e., slightly less than half of the overall gap). Using a standard welfare calculation, we show that states with the largest shares of Black workers would gain the most from having more generous UI rules. Altogether, our results highlight that disparate state rules in the UI institution create racial inequality without maximizing overall welfare.

Keywords: unemployment insurance, inequality, race

JEL Classification: J65, J15, J78