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Introduction to Unemployment Insurance

The federal-state unemployment insurance system (UI) helps many people who have lost their jobs by temporarily replacing part of their wages while they look for work.  Created in 1935, it is a form of social insurance in which taxes collected from employers are paid into the system on behalf of working people to provide them with income support if they lose their jobs.  The system also helps sustain consumer demand during economic downturns by providing a continuing stream of dollars for families to spend.

The basic unemployment insurance program is run by the states, although the U.S. Department of Labor oversees the system.  The basic program in most states provides up to 26 weeks of benefits to unemployed workers, replacing about half of their previous wages, on average.  States provide most of the funding and pay for the actual benefits provided to workers; the federal government pays only the administrative costs.  Although states are subject to a few federal requirements, they are generally able to set their own eligibility criteria and benefit levels.

The permanent Extended Benefits (EB) program typically provides an additional 13 or 20 weeks of compensation to jobless workers who have exhausted their regular benefits in states where the unemployment situation has worsened dramatically (regardless of whether the national economy is in recession).  The total number of weeks available depends on a state’s unemployment rate and its unemployment insurance laws.  Normally the federal government and the states split the cost of EB, but the 2009 Recovery Act authorized temporary full federal funding, which continued through 2013.

During recessions and while unemployment remains high during recoveries, the federal government has historically created temporary, wholly federally funded programs providing further weeks of benefits.  The most recent such program, Emergency Unemployment Compensation (EUC), ran from June 2008 through December 2013.  (Efforts to enact a further temporary extension have so far been unsuccessful.)  Some states also may offer additional benefits under separate state-funded programs.

Temporary federal programs implemented during recessions are fully federally funded.  However, the length and depth of the protracted economic slump following the 2007-2009 Great Recession has exacerbated serious solvency problems in most states’ regular UI programs that they have not yet addressed.

The following analysis explains:

  • the structure and goals of the UI system;
  • who is eligible for unemployment insurance;
  • what kind of benefits are available;
  • what additional benefits are available during economic downturns;
  • how unemployment insurance is funded and current solvency issues; and
  • how unemployment insurance affects the economy.

The Structure and Goals of the UI System

UI is a joint federal-state system that features extensive state flexibility.  As Franklin D. Roosevelt’s Committee on Economic Security, which provided the basic blueprint for what would become the Social Security Act, stated, “The States shall have broad freedom to set up the type of unemployment compensation they wish.”[1]

Federal requirements for state UI systems are minimal and are designed to ensure both that UI provides a basic level of protection for eligible workers and that the program serves as a macroeconomic stabilizer in times of economic weakness.  Federal law defines unemployment compensation as “cash benefits payable to individuals with respect to their unemployment”[2] and lays out a few basic requirements, principally the following two:

  • “all money withdrawn from the unemployment fund of the State shall be used solely in the payment of unemployment compensation”;[3] and
  • states cannot impose excessively burdensome “methods of administration” that block access for otherwise eligible individuals.[4]

These requirements ensure that states maintain programs that offer a basic level of protection to workers with a sufficient employment record and who lose their jobs through no fault of their own.  Within these basic protections, states are free to choose and adjust employer tax rates, benefit levels and duration, and eligibility criteria, such as the extent and duration of prior employment necessary to qualify for benefits.[5]

Who Is Eligible for Unemployment Insurance?

To qualify for unemployment insurance benefits, a person must:

  1. have lost a job through no fault of his or her own;
  2. be “able to work, available to work, and actively seeking work;” and
  3. have earned at least a certain amount of money during a “base period” prior to becoming unemployed. 

States vary considerably in how they apply these general criteria.  For example, some states do not cover part-time workers unless they are willing to take a full-time job, while other states allow these workers to qualify even if they are seeking another part-time job.  Also, states have some choice about the base period of employment used to determine eligibility.[6]

Since the late 1950s, fewer than half of unemployed workers have actually received unemployment insurance, except during recessions.[7]  To be sure, unemployment insurance is not designed to cover all unemployed workers; it does not cover people who leave a job voluntarily, people looking for their first job, and re-entrants who previously left the labor force voluntarily.  But the growing percentage of unemployed workers who meet the basic criteria described above yet fail to satisfy their state’s eligibility criteria — established decades ago (in a very different labor market) — has made it harder for UI to fulfill its mission.

In 1994, President Clinton and

congressional leaders appointed a bipartisan Advisory Council on Unemployment Compensation to address these problems.[8]   The commission identified a number of serious problems with UI eligibility and other rules and recommended a series of reforms.  While some states instituted some of the reforms, the federal government made no comprehensive effort to consider the recommendations until very recently.  The 2009 Recovery Act made $7 billion available through 2011 to states that modernized their unemployment insurance law to expand eligibility; 38 states plus Washington, D.C. Puerto Rico, and the U.S. Virgin Islands received federal funds under this provision.

What Benefits Does Unemployment Insurance Provide?

Workers receive unemployment benefits from the state where they were employed, even if they reside in a different state.  When someone applies for benefits — typically over the phone or online — the state determines whether the person is eligible and the amount of benefits for which he or she qualifies.  The benefits provided to any particular individual will vary in two respects:  the number of weeks that they last and their weekly dollar amount.

Number of weeks.  While some states simply provide the same number of weeks of benefits to all unemployed workers, most states vary the number of weeks according to the amount of a worker’s past earnings, whether the worker had earnings in each of the four calendar quarters that make up the base period, and how evenly those earnings were distributed over the base period.

In most states, workers are eligible for a maximum of 26 weeks,[9] although many UI recipients qualify for fewer than the maximum number of weeks because of uneven earnings or a brief work history.  In normal economic times, most workers find new jobs before using the maximum number of weeks available; before the recession that began in December 2007, the average duration of benefits for UI recipients was 15 weeks.[10]

Dollar amount.  The average unemployment benefit is a little more than $300 per week.  However, individual benefit levels vary greatly depending on the state and the worker’s previous earnings.  In addition, in several states, workers receive higher benefits if they have dependents.

State laws typically aim to replace about half of a worker’s previous earnings up to a maximum benefit level.  The maximum state-provided benefit in 2014 ranges from $133 in Puerto Rico and $235 in Mississippi (the lowest for a state) to $679 ($1,019 with dependents) in Massachusetts.[11]   Because the benefit is capped, UI benefits replace a smaller share of previous earnings for higher-wage workers than lower-wage workers.  In 2013, the most recent year for which data are available, the average UI recipient nationwide got a benefit that replaced 46.6 percent of his or her earnings, but that “replacement ratio” ranged from 33.9 percent in Alaska to 54.3 percent in Hawaii.[12]

What Additional Benefits Are Available During Economic Downturns?

Three types of programs can potentially provide extra weeks of benefits to workers in states where unemployment has increased significantly:  (1) temporary federal programs that Congress generally establishes during national economic downturns; (2) the permanent federal-state Extended Benefits (EB) program, which is available to hard-hit states even when the national economy is not performing poorly; and (3) additional temporary or permanent programs that states sometimes put in place.[13]   The dollar amount of additional benefits an individual receives is typically the same as his or her regular state benefits and the duration is based on the duration of those regular benefits.[14]

Temporary emergency federal benefits .  When unemployment is high during recessions and in the early stages of recoveries, the federal government has historically funded additional weeks of emergency benefits for workers who have exhausted their regular state-provided UI benefits.  In response to the recent Great Recession, lawmakers enacted the Emergency Unemployment Compensation (EUC) program.  At its peak, EUC provided up to 34 weeks of emergency federal benefits in all states and up to 53 weeks in states with unemployment rates of 8.5 percent or higher.

With long-term unemployment at unprecedented levels in the wake of the Great Recession, policymakers extended the program past its scheduled expiration date several times.  They did, however, reduce the maximum number of weeks available in February 2012[15] (see Table 1) and then allowed the program to expire altogether at the end of 2013.  (Efforts to restore the program in 2014 have foundered.)

The permanent Extended Benefits program .  Congress enacted the EB program in 1970 to provide additional weeks of benefits to workers in high-unemployment states who have exhausted their regular, state-provided UI benefits.  Normally, the federal government and the states split the cost of EB equally.  However, the federal government began to fully fund the program on a temporary basis following enactment of the Recovery Act in February 2009.  States resumed responsibility for their half of the funding in 2014.

A state must provide up to 13 weeks of EB when the insured unemployment rate (IUR)[16] — the number of UI recipients as a percentage of the total number of people working in jobs in which they would potentially be eligible for UI[17] — reaches at least 5 percent and if the IUR is at least 20 percent higher than it was during the same period in each of the previous two years.[18]

Table 1

Additional Weeks of Unemployment Benefits Available, 2013

Category: Insurance

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