Unemployment Premiums – Several trading associates have begun discussing unemployment premiums, the money that companies are assessed by the states to cover unemployment insurance.

The major impact on companies will be felt as the new year begins. Each January 1st, the states set the rates for the new year. The rates for 2010 maybe large and potentially onerous. We know that by looking at the huge amount of money that states have had to borrow to cover this year’s claims.

One friend passed along an analysis of this topic written by Mish Shedlock a well known financial blogger. It begins with a look at North Carolina:

North Carolina’s high unemployment rate has stuck the state with $1.4 billion in debt – money that officials don’t know how they’ll pay back. It gets worse. The debt is still rising. The problem is that with about 500,000 people out of work, the state has more unemployment claims than it can pay. So it has been borrowing from the federal government since February, sometimes as much as $20 million a day. The tally will rise to at least $2billion by the end of the year, said David Clegg, deputy chairman and chief operating officer of the N.C. Employment Security Commission. Next year, depending on the economy, could add another $2 billion to the tab, he said.

For purposes of comparison, the state budget for the current fiscal year is $19 billion. Let’s do the math. The state budget is $19 billion. Potentially $4 billion will be borrowed to pay unemployment benefits. In other words the state is borrowing an amount equal to 21% of its total budget just to pay unemployment benefits. Wow.

Only five states have borrowed more than North Carolina. Altogether, seven states have borrowed more than $1 billion each – more than $15 billion collectively – to shore up their unemployment insurance systems, according to the U.S. Department of Labor. A total of 24 states plus the Virgin Islands have borrowed money from the federal government.

Many states “are in pretty dire straits right now,” said Ingrid Evans, unemployment insurance director at the National Association of State Workforce Agencies. The best hope for North Carolina, said Clegg, is for Congress to forgive a portion of the debt, if not all of it. Another solution would be to raise the tax on employers that funds jobless benefits. Indiana, which owes about as much as North Carolina, recently took that move, but North Carolina officials worry it would increase financial pressure on businesses when they can least afford it.

“I would love to hear some U.S. Department of Labor official explain how they expect the states to pay billions of dollars from an employee base which is, at best, 20 percent smaller than it was before the recession started,” Clegg said.

Based on this year’s sour experience, the pressure on the states to raise unemployment taxes is evident. But, will those raises be so huge as to be counterproductive? That could raise the risk of a double dip.

COMMENT: High sustained unemployment is forcing states to issue more debt, which at this point will be hard to afford. A likely solution would be for tax increases for employers to fund the jobless benefits. This additional financial pressure during a economic recovery could force further job cuts creating a dangerous loop.

Unemployment by all measures is higher than at any point during the past 16 years.

The duration of U-3 unemployment continues to increase and is now greater than it was during the double dip ressession of the early 1980’s.

Preliminary State GDP per Capita

Source: BLS