In a reversal from last week’s results, total initial claims rose in the US and more sharply in California.

In California, initial claims processed in the regular program rose nearly a third at 29.7% compared to the prior week, while PUA claims were up 37.7%. In the national totals, regular claims grew 10.2%, while PUA claims soared 65.5%. Combined, total claims processed were up 31.4% in California and 19.2% in the US numbers. In the unadjusted numbers, the total once again exceeded the 500,000 barrier.

By industry, the pattern changed in response to seasonal factors with the largest number of initial claims (all programs) filed by workers in Accommodation & Food Service (14.9%), Retail Trade (11.0%), Health Care & Social Assistance (10.5%), Educational Services (9.3%), and Administrative & Support & Waste Management Services (8.9%).

The California surge basically took the state total back to the extended term level since mid-April. The US numbers reversed a longer trend decline, but it remains to be seen whether these results are a one-time deviation.

With the reopening of the state on June 15, the various state restrictions allocated through county tier status no longer apply and at least from that source will no longer be a factor in the high number of workers applying for unemployment insurance. However, in the most recent results for April, California had the second-highest unemployment rate in the country, only 0.2 percentage point behind Hawaii. That number only covers workers who are counted as unemployed under the statistical definition, and does not include workers who have given up on trying to find a job, workers who are fearful of contracting the disease if they get a job, and parents who had to quit their jobs to take care of their children while the California public schools have remained closed and while substantial uncertainty remains in many districts over when, how, and still if they will reopen. The updated numbers for May will be released on Friday and provide some insights into how the economy was reacting to the easing but not total elimination of the tier restrictions.

The removal of the tier system, however, only addresses one set of factors that have led to the historically high number of workers continuing to file for benefits. There are still many uncertainties facing both employers and workers, in particular the service industries and lower wage workers that sustained the bulk of the economic harm from the previous restrictions. These do not necessarily rise to the level of a “what if they gave a reopening and nobody comes” issue, but are factors that likely will affect the pace, extent, and duration of employers’ ability to return workers to jobs. Among these are the following key issues that raise uncertainty for both employers and workers:

• Continuing chaos over the adoption of the Cal-OSHA Emergency Temporary Standard (ETS) and inconsistencies both within the rule and compared to CDC statements further increase labor costs directly. This situation also substantially increases liability risks in a state that is already one of the most litigious business environments, made doubly so by only-in-California enhancements such as the Private Attorney General Act (PAGA). Further adding to uncertainty is that the state ETS is only a floor, with local governments still retaining the ability to add other restrictions that in particular raise the compliance costs and risks for multi-location employers and businesses that by their nature cross jurisdictions such as delivery services. Layering on confusing and contradictory regulations as is being done through this process is an open invitation to litigation that will impede the course of the jobs recovery.
   
• The tier restrictions may have been retired, but the ETS provisions are only one of the several other measures put into effect during the pandemic that increase the cost of employing each worker. Directly, these costs limit the number of jobs the most affected businesses will be able to restore especially as they face an extended climb in returning to prior sales levels. Longer term, these costs have already begun to reduce the share of jobs that can be restored, as these rising costs of labor have stimulated shifts to automation and other changes to business practices such as greater reliance on alternative sales channels like internet sales. The Department of Finance economic projections behind the May Revise already indicate several industries where jobs recovery will be affected by these factors. These job mix shifts are of particular importance to California’s labor pool as the state continues to lead the nation in the share of adults with less than a high school education—16.0% of all persons age 25 and over in the most recent data from 2019.
   
• Adding to these costs are the automatic employment tax increases associated with the state’s rising unemployment insurance fund debt. Employers will be subject to higher taxes from two sources: (1) rising federal tax rates that ratchet up in 0.3% increments each year until the debt is retired and (2) continuation of the highest F+ state tax rates for at least a decade and likely more. Instead of these resources going to wages, more employees, and faster recovery, they will be redirected to paying down the state’s debt.
   
• The ability of workers to return to jobs remains limited by several factors, notably continued uncertainty over the reopening of the schools that has forced many workers, especially lower income workers, to stay at home. As indicated in last week’s report, National Center for Education Statistics data places California only a few notches up from the bottom in the share of students being offered full time in-class instruction. The recently approved framework budget includes funds to allow the reopening of schools, but still contains no provisions to require it to happen. Other measures will hinder an easy return to work such as the continued budget focus on mass transit—a mode that saw rapidly declining use even prior to the pandemic—rather than the roads workers use and on which they will increasingly depend both in response to continuing infection fears and to the failure of the state to adopt broader solutions to its housing crisis.
   
• A new record of 9.3 million unfilled job openings in the April Job Openings and Labor Turnover Survey (JOLTS) for the US illustrates some of the unintended consequences in the high levels of assistance being provide through the enhanced unemployment benefits and other assistance under the emergency packages. In an effort to counter these effects, EDD just announced restoration of the work search requirements beginning a month from now. These provisions, however, will add substantially to a workload that the agency already has difficulty handling. Several other states instead have announced early ends to the enhanced benefit levels. The comparative effects from these two approaches will begin to be shown in the labor force data that will be released in August.

The move away from the tier restrictions is an important step towards economic and jobs recovery in the state. It is by no means sufficient, however, to promote a rapid recovery, and issues still remain that could slow progress along that road. The UI data will continue to be an important current metric in tracking this progress.

In the most recent data from the Centers for Disease Control, California again was just above the US average in the share of vaccine doses being administered. The number of doses being delivered has dropped, but the number of shots being administered has largely tracked the state’s overall population share. As of midday June 17, a total of 41.0 million shots have been administered in the state covering 23.5 million people, or 59.5% of the population and 69.7% of the population age 12 and over. In all, 47.5% of the population (US 44.5%) and 55.6% of population 12 and over (US 52.1%) have been fully vaccinated.

Total EDD backlogs rose slightly in the week of June 12. The most current EDD backlog data shows claims awaiting EDD action were up 0.6%, while the total backlog number was up 0.1%. The backlog has remained above the one million mark for 13 weeks running. Backlogged claims are defined as those awaiting action for 21 days or longer.

The related call center data shows an overall rise in activity. The number of calls rose 12.5%, but the number answered showed recovery at a gain of 25.9%. On average—using total number of calls received and the number of calls answered by staff—the average caller put in 13.1 calls trying to reach EDD. Of the unique callers, up to 86% had their calls answered by staff (assuming one call answered per unique caller), a strong improvement from the prior weeks.

While the overall claims backlog remains largely due to applications awaiting claimant action, the extreme difficulty in reaching EDD for clarifications—as indicated by the call data—more accurately likely puts a substantial portion instead under the “pending EDD” category.

As an indicator of long-term unemployment in the state, payments for the extended benefit programs (PEUC and Fed Ed) rose to 24.3% of the total for the week of June 12. While the share is about half its high of 50.3% in March, the overall trend indicates a substantial share of those receiving unemployment benefits still face the risks of lifetime wage and income effects similar to those that afflicted the long-term unemployed coming out of the previous recession that began in 2008.

In the most recent data from the EDD, California paid out a total of $151.5 billion in benefits under all the UI programs since the week of March 7, 2020. The most current estimate from EDD is that up to $31 billion of unemployment benefits was paid out to fraudulent claims, consisting of $11 billion in known fraud and up to $20 billion in suspected fraud. Individual cases of alleged fraud continue to unfold.

Fraud, however, has not been limited to California. The rapid escalation in benefit amounts along with lax controls in many states made this program a target for both individual and organized fraud activities. More recent estimates are that up to half of the program funds during the pandemic period may have been paid out to fraudulent or otherwise improper claims. A recent report by the Department of Labor Inspector General reviewing the three program components added under the March 2020 CARES Act (Pandemic Unemployment Assistance, Pandemic Emergency Unemployment Compensation, and Federal Pandemic Unemployment Compensation) included the following conclusions:

•  . . . The 12 states [including California] we selected for in-depth analysis were generally unable to demonstrate they met the payment promptness standard ETA established for regular UI payments – pay 87 percent of claimants within 14 or 21 days.
   
• Moreover, many states did not perform required and recommended improper payment detection and recovery activities: 40 percent of states did not perform required cross-matches and 38 percent did not perform required recovery activities.
   
• Furthermore, 42 percent of states did not report CARES Act UI program overpayments to ETA as required. States that did report overpayments, understated the total amount reported by an estimated 89 percent.

The most recent data from the US Department of Labor indicates California’s outstanding loans as of June 8 from the Federal Unemployment Account rose to $21.7 billion, or 41% of the total owed to the federal fund. The most recent projections from EDD contained in the May Revise expect the total to reach $24.3 billion by the end of the year. This amount is more than twice the peak of about $11 billion reached during the previous recession that began in 2008. That debt took 10 years to pay off through higher employment taxes imposed on businesses.

The May Revise proposes using only $1.1 billion ARPA funds to offset the current debt. The recently released legislative framework for the budget increases this amount to $2 billion, but applies it over 10 years—thereby leaving it open to legislative reductions under future budgets—and limits the tax relief to an as-yet undetermined subset of small businesses. Both ensure a major tax increase making it more costly for employers to rebuild the jobs lost in the current crisis.

Recent LAO analysis indicates this debt requires $17 to $20 billion in higher tax payments through to about 2030. This amount only covers the higher federal taxes that will be imposed to pay down the state’s debt, and does not include the higher state taxes on employers through continuation of the highest F+ schedule tax rates for another decade or more. Even with these substantial tax increases, the current provisions being considered in the budget although helpful will ensure that this critical safety net fund will remain in deficit for some time to come, and will remain vulnerable to rapid deterioration from any future economic downturn.

Only 18 states and one territory have relied on federal borrowing to maintain unemployment benefits. At least eight states as of last summer had already used a portion of their federal relief funds to shore up their UI funds, while others such as Ohio are now proposing relatively broader use of the ARPA funds for this purpose.