Unemployment Insurance: A Tried and True Safety Net

What happens when workers lose their jobs through no fault of their own? How do they manage with the loss of income? Today, every state has an unemployment insurance (UI) program that provides some income to these unemployed workers. But how did UI begin and how does it work?

The prosperous times of the 1920s set an expectation of having employment and money to spend. Electricity, radios, refrigerators, and even cars became more affordable. And with employment opportunities, people grew accustomed to the good times of the "Roaring Twenties" and thought they would last forever.

But beginning in 1929, things changed. The Great Depression brought an economic catastrophe with a challenging crisis. Between 1929 and 1933, the unemployment rate soared to 25 percent of the labor force (Figure 1 below). The effects were alarming and in stark contrast to the 1920s. Without a safety net, a lost job meant no income. Many became homeless with no means to support their families. And the struggles began. 

Figure 1: Civilian Unemployment Rate, 1919-2006

SOURCE: Federal Reserve Bank of St. Louis, The Great Depression: Economic Lessons and History.

Federal-State Partnership

Struggles and crises can bring innovative ideas and reform. And that's exactly what happened during the Great Depression. The ugly picture of severe depression with despair and poverty brought a renewed interest in and attention to providing unemployment compensation (UC).

Programs were tried at the state level. Wisconsin led the way and in 1932 became the first state to enact a UI law. A few other states followed with similar programs, which were funded by a tax on employers.¹ But most states did not. They feared a loss of business and jobs to states that did not tax employers. This created an interstate problem and was, therefore, a direct concern of the federal government.

In 1935, as part of the Social Security Act, the Federal Unemployment Tax Act (FUTA) created the federal-state unemployment insurance program.² This act mirrored the earlier state plans, with the purpose of temporarily replacing a portion of wages for workers who had been laid off and who were looking and available for work.

The act gave oversight responsibility to the U.S. Department of Labor (DOL). Within federal guidelines, states were given the freedom and flexibility to set criteria and design their programs. State unemployment offices were created to implement their UI programs and make payments to workers who qualified.

Today, all states have UI programs, but they vary in design. For example, eligibility requirements for receiving benefits vary based on duration of prior employment and whether full-time or part-time status. Also, the normal maximum amount of benefits, the duration of benefits, and claim procedures often differ. And UI program guidelines within each state are periodically subject to change according to economic conditions; this can be done by state governments or by the federal government in times of recession or special conditions. (See table below.)^3,4

Eligibility for Unemployment Insurance

All states require that workers be able to work, available for work, and actively seeking work for UI eligibility. Most states require a work history listing a minimum time worked and a minimum amount of earnings based on a 12-month period.⁵

Workers must file claims weekly to maintain eligibility. Any earnings for the period, including job offers accepted or declined, must be reported. This can affect eligibility for receiving benefits and the amount received. Additionally, workers must continue to meet state requirements.⁶

In all states, workers can be denied benefits. Knowingly making false statements to obtain benefit payments is one reason for a denial. Other reasons include voluntarily leaving work without good cause and being discharged for misconduct connected with work. And even after being determined eligible for UI, workers can become ineligible if they're unable to or unavailable for work, not actively seeking work, or refusing an offer of suitable work.⁷ UI does not cover people who leave their jobs voluntarily or people looking for their first job. Individuals who are self-employed are normally not entitled to regular UC. Also, certain types of employment, such as charitable work, are excluded from UI coverage.⁸

Benefits

Each state has its own formula for determining unemployment benefits. And the number of unemployed workers receiving UC changes according to economic conditions (Figure 2 below).⁹ Generally, benefits are calculated as a percentage of a worker's income over the past year, up to a certain maximum. And some states pay reduced benefits for part-time work, which provides only a small amount of income. Since payments are capped, UI may replace a smaller share of previous earnings for higher-income workers than for lower-income workers. The earnings and work history requirements can especially affect low-wage workers. They may not qualify for unemployment benefits, because many may not have had previous steady employment. States' eligibility rules may require a certain amount of steady earnings from a worker over the previous year.¹⁰

Figure 2: Percent of Labor Force Getting Unemployment Benefits, August 27, 2020

SOURCE: Stateline analysis of U.S. Department of Labor and U.S. Bureau of Labor Statistics.

Today, in most states the regular program provides up to 26 weeks of benefits to workers who qualify. However, this does not mean all workers receive the benefits for the entire time—only for the time they qualify.

Benefits can be received on a state-issued, prepaid debit card. Or UC can be directly deposited into a personal bank or credit union account, or onto an existing prepaid card. Some states will send payments by paper check.¹¹ UC payments are taxable income and must be reported on federal income tax returns.¹² Also, in states that have a state income tax, UC may be subject to this tax.

Extended Benefits

UI programs often change. In times of recession or special economic conditions, workers may receive extended unemployment benefits. For example, a state may pay UC for a longer period of time when the state's unemployment rate increases. Also, Congress can approve additional payment amounts, extend the amount of time people can receive benefits, and expand eligibility to include part-time workers during times of high unemployment.¹³ For example, in response to the COVID-19 pandemic, Federal Pandemic Unemployment Compensation (FPUC) was enacted in March 2020. The DOL gave instructions to administer an additional $600 weekly payment to individuals who were collecting regular UC. The additional FPUC benefit payments were fully federally funded. The temporary boost to regular UC was scheduled to end after a person's last week of unemployment before July 31, 2020.¹⁴

Who Pays for Unemployment Insurance?

The regular UI program is generally funded by employers. Most employers pay both federal and state unemployment taxes.¹⁵ The unemployment taxes are based on the amount of wages paid to employees and are determined as a percentage of an employee's wages. The FUTA tax rate is the same for all employers in all states. However, the state employment tax varies from one state to another.

Employers must pay FUTA tax on a regular basis. And at the end of a year, employers must file a FUTA tax return. This tax return requires filers to record FUTA tax payments made for the year and submit any payment due. FUTA taxes are submitted to the Internal Revenue Service (IRS) and are credited to individual state accounts.

As part of the federal-state partnership, the federal government pays for administrative costs and for setting up employment offices that attempt to match workers with new jobs.¹⁶ Determining benefits and issuing payments are state responsibilities.

Data Collection

Data collected by the DOL from state unemployment agencies for the number of UI claims filed weekly are helpful. These data can tell something about the job market. For example, when the number of initial claims is steep, it's an indication of an abrupt loss of jobs (Figure 3 below).

Continued claims (Figure 4 below) indicate the number of unemployed people who have already filed an initial claim and are filing again so that they keep receiving weekly benefits.

However, many workers who lose their job may not file for UC for a while. And many people remain unemployed after benefits expire. So, UI claims data do not precisely show the number of unemployed persons and are not a measure of the unemployment rate. The unemployment rate is measured quite differently by another agency, the Bureau of Labor Statistics (BLS). The BLS does not use the unemployment claims data to figure the unemployment rate. It uses a system of household surveys to collect information from a representative sample of the U.S. population to calculate the unemployment rate (Figure 5 below).

Unemployment Insurance Changes

UI programs are subject to ongoing change. For example, over the years the duration of regular UI benefits has increased from 16 weeks to 26 weeks in most states. Also, in some previous UI programs, workers could become eligible for UI after being fired from their job or quitting work. Over the years this became disallowed in all states.¹⁷ Technology has also changed the UI process. In earlier times, workers had to physically go to an unemployment office to file for unemployment benefits. Today, workers can file most everything via cell phone and/or the internet.

Conclusion

The innovative plan for UI in the United States was first tried individually by a few states. FUTA made it a federal-state partnership. And UI programs have changed according to economic conditions, individual states, unemployment rates, and federal intervention. But some things have remained constant: The UI system helps eligible workers who have lost their jobs by temporarily replacing part of their wages.

The benefits are especially important during economic downturns and recessions. For example, during the 2020 COVID-19 pandemic, the unemployment rate spiked sharply, but workers could apply for unemployment benefits. Unlike the days of the Great Depression, workers today have some protection from unemployment. The federal-state unemployment insurance program continues to serve its intended purpose with reasonable results. UI has been tried and has remained true to the hopes and ideas of the founders of FUTA.