January 28, 2021
December 2020 total nonfarm payroll declined for the first time since April 2020; employers face increased unemployment insurance costs due to federal loans
The U.S. Bureau of Labor Statistics reports that the national rate of unemployment remained at 6.7% in December 2020, the same rate as for November 2020. For the first time since April 2020, and due to the resurgence of the COVID-19 virus, total nonfarm payroll declined by 140,000 in December 2020, down from November 2020. (USDL-21-0002, the employment situation for December 2020.)
At the start of the pandemic, the national rate of unemployment was 3.5% for February 2020 and 4.4% for March 2020. Following are national jobless rates for the months following March 2020:
The labor market showed some strains at the end of 2020 and into 2021 due to COVID-19 resurgence
The overall US labor market showed some strains towards the end of 2020 and into 2021 with the loss 140,000 jobs during December and a rise of initial weekly UI claims to one million, a level not seen since August.
The loss in jobs for December 2020 were pronounced in leisure and hospitality (498,000), private education (63,000), and government (45,000), and job gains were realized in professional and business services (161,000), retail trade (121,000), and construction (51,000).
The unemployment rate remained at 6.7% in December, well below its peak of 14.7% in April, but above the 3.5% rate prior to COVID. As of December, a total of 12.2 million jobs have been added since May, recouping 56% of the combined 22.2 million jobs lost in March and April. The unemployment rate is forecast to reach roughly 6% by the end of 2021.
The number of unemployed persons remained at 10.7 million in December, the same level as in November and about five million higher than the number of unemployed in February 2020, before the pandemic began. The labor force participation rate was 61.5% in December, unchanged from November and 1.8 percentage points lower than before the pandemic began. (EY QUEST Economic Update, January 2021.)
COVID-19 and the cost of federal loans to shore up state UI trust funds
State UI benefit payouts in connection with COVID-19 have been substantial, placing an unprecedented strain on the state UI trust funds. As in the financial collapse of 2008–2009, several states have needed to request and receive federal UI loans to meet the demand.
Under the Coronavirus Aid, Relief, and Economic Security (CARES)Act, federal UI loans taken in 2020 are interest free if repaid by the end of 2020 and interest begins to accrue in 2021. However, enacted on December 27, 2020, the Consolidated Appropriations Act, 2021, extends, under Division N, Title II, Subtitle A (the Continued Assistance Act), the period that interest will not accrue to March 14, 2021. Most states pass the cost of federal loan interest on to employers in their states through surcharges that are added to the regular SUI tax rate. (See U.S. Department of Labor Program Letter No. 9-21.)
Under federal law, if all or a portion of a federal UI loan received in 2020 is still outstanding after two years, employers in those states are required to make payments toward the outstanding federal UI loan balance in the form of a FUTA credit reduction that increases the FUTA taxes employers pay. For the states that began borrowing in 2020, and still have an outstanding loan balance as of November 10, 2022, a FUTA credit reduction of 0.3% would go into effect in 2022.
As of January 23, 2021, 22 jurisdictions have applied for, and been approved to receive federal UI loans. As of January 13, 2021, a total combined loan amount of $46,939,113,921 is outstanding. Of these states, only Indiana, Maryland and Virginia do not currently have an outstanding federal loan balance. (Title XII Advance Activities Schedule, UI Department of Treasury website.)
Federal unemployment insurance loan data as of January 23, 2021
Several states (e.g., Alabama, Georgia, Idaho, Iowa, Louisiana, Maine, North Carolina, North Dakota, South Carolina, and Tennessee) chose to use federal CARES Act funds to bolster state UI trust funds to help mitigate employer state UI tax increases for 2021. This is in addition to most states choosing to not charge regular COVID-19 UI benefits to employer UI accounts for experience rating purposes.
Ernst & Young LLP insights
The last time the nation saw a substantial increase in UI benefit payouts was during the great recession of 2007 and 2008. At that time, most states received federal loans to shore up their trust fund reserves, and at the recession's peak in 2011, 21 states fell subject to the FUTA credit reduction.
Once the FUTA credit reduction is triggered, it can take years for it to go away. California, for instance, began borrowing in 2009 and its federal UI loan balance was not repaid until 2018, subjecting California employers to the FUTA credit reduction for seven years (2011 to 2017). The Virgin Islands has yet to repay its federal loan balance from this period, and for 2020, a FUTA credit reduction of 3.0% applies, for total FUTA tax of 3.6%. (US Department of Labor website.)
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