Unemployment Insurance has been the hot economic policy debate topic for a while. This week’s jobs figures again showed labor supply failing to keep up with a soaring demand for workers as the economy reopens, leading to sharply rising wages in pandemic‐​hit sectors and the highest unfilled opening rate among small businesses ever. As I’ve written before, there is good indicative evidence that the $300 per week UI supplement has been slowing rehiring rates by disincentivizing returns to work. Hence why 25 states so far have opted out of the program from June onwards.

Lesser commented on though is how these emergency pandemic‐​related unemployment benefits may be open to fraud and abuse. Yet a damning new audit from the Department of Labor Office of Inspector General this week found that states struggled to implement the required and recommended payment control activities in delivering the CARES Act program last year. This is technical language to say the programs appear to have been open to vast amounts of unnecessary spending.

The audit analyzes how the three pandemic‐​related programs from the CARES Act were implemented through 2020. These programs extended UI benefits to those not traditionally eligible, such as self‐​employed workers and contractors, provided an additional 13 weeks of unemployment compensation for those who had exhausted traditional benefits, and provided a supplement payment of $600 per week. As the pandemic hit, claims soared, such that through January 2, 2021, $392 billion was spent on these three programs alone, even before later extensions from executive orders and the recent American Rescue Plan.

The audit shows, however, that many states did not perform the required and recommended checks for improper payment detection and the recovery of misused funds. States are supposed to cross‐​match claims against new hire databases, wage records, and alien verification. But 40 percent of states did not perform all of these required cross‐​checks. They were “strongly recommended” by the Employment and Training Administration to use eight other cross‐​matches too, including verification of identity and incarceration records. But 88 percent of states did not perform all of these checks.

States are supposed to perform a bunch of recovery activities to account for overpayments. But 38 percent of states did not perform the recovery activities. In addition, states are supposed to report on overpayments and fraudulent payments. But from late March through to late September 2020, 42 percent of states did not complete the required reporting for overpayments, while 60 percent did not complete them for fraudulent payments. Even when they did report, they clearly reported inaccurately—with the audit suggesting underestimation of overpayments by as much as 89 percent.

The audit concludes that, based on very conservative historic assumptions, there are likely to have been “at least $39.2 billion in improper payments, including fraud” from the CARES Act UI provisions, but with the full expectation that improper spending is likely to have been much, much higher given the lack of crosschecks and the inadequate reporting. From March through October 2020, the audit revealed $5.4 billion of potentially fraudulent UI benefits from four activities alone: people claiming in multiple states, using social security numbers of dead people, prisoners claiming, and suspicious email accounts.

For the pandemic as a whole, of course, the figures will be much higher than this, because these programs have been extended since last year. The audit concludes by suggesting that if all the legislated spending from extensions were used, there would be a lower bound of around $87 billion in improper funds from these UI programs. For context: the Committee for a Responsible Federal Budget estimates total federal government spending commitments of $53.4 billion for COVID-19 vaccines and treatments.

For more on unemployment benefits during the pandemic, you can order Ryan Bourne’s recently released book Economics In One Virus from the Cato store or your country’s relevant Amazon store.