What Is Unemployment Benefits: Who Pays, Rates, How It Works, Other Information Knowinsiders.com
What Is Unemployment Benefits: Who Pays, Rates, How It Works, Other Information Knowinsiders.com
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Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed people. In the United States, benefits are funded by a compulsory governmental insurance system, not taxes on individual citizens. Depending on the jurisdiction and the status of the person, those sums may be small, covering only basic needs, or may compensate the lost time proportionally to the previous earned salary.

An unemployment check is a lifeline during a time of financial crisis, pandemic or not. In 1935, the U.S. established a federal-state partnership to protect American workers against losing their jobs through no fault of their own. Known as unemployment insurance, the system is funded by taxes paid by employers and administered by individual states.

Take a look at what is Unemployment Benefits, how it works, its rate, and other useful information that you need to know.

What is Unemployment Benefits?

Photo: iStock
Photo: iStock

Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed people. In the United States, benefits are funded by a compulsory governmental insurance system, not taxes on individual citizens. Depending on the jurisdiction and the status of the person, those sums may be small, covering only basic needs, or may compensate the lost time proportionally to the previous earned salary.

Unemployment benefits are generally given only to those registering as becoming unemployed through no fault of their own, and often on conditions ensuring that they seek work.

In British English unemployment benefits are also colloquially referred to as "the dole"; receiving benefits is informally called "being on the dole". "Dole" here is an archaic expression meaning "one's allotted portion", from the synonymous Old English word dāl.

Unemployment Benefits: History

Photo: Benefits.gov
Photo: Benefits.gov

The first modern unemployment benefit scheme was introduced in the United Kingdom with the National Insurance Act 1911, under the Liberal Party government of H. H. Asquith. The popular measures were to combat the increasing influence of the Labour Party among the country's working-class population. The Act gave the British working classes a contributory system of insurance against illness and unemployment. It only applied to wage earners, however, and their families and the unwaged had to rely on other sources of support, if any. Key figures in the implementation of the Act included Robert Laurie Morant, and William Braithwaite.

By the time of its implementation, the benefit was criticized by communists, who thought such insurance would prevent workers from starting a revolution, while employers and tories saw it as a "necessary evil".

The scheme was based on actuarial principles and it was funded by a fixed amount each from workers, employers, and taxpayers. It was restricted to particular industries, particularly more volatile ones like shipbuilding, and did not make provision for any dependants. After one week of unemployment, the worker was eligible for receiving 7 shillings/week for up to 15 weeks in a year. By 1913, 2.3 million were insured under the scheme for unemployment benefit.

Expansion and spread

The Unemployment Insurance Act 1920 created the dole system of payments for unemployed workers in the United Kingdom. The dole system provided 39 weeks of unemployment benefits to over 11 million workers—practically the entire civilian working population except domestic service, farmworkers, railroad men, and civil servants.

Unemployment benefits were introduced in Germany in 1927, and in most European countries in the period after the Second World War with the expansion of the welfare state. Unemployment insurance in the United States originated in Wisconsin in 1932. Through the Social Security Act of 1935, the federal government of the United States effectively encouraged the individual states to adopt unemployment insurance plans.

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Understanding Unemployment Insurance (UI)

The unemployment initiative is a joint program between individual state governments and the federal government. Unemployment insurance provides cash stipends to unemployed workers who actively seek employment. Compensation to eligible, unemployed workers is made through the Federal Unemployment Tax Act (FUTA) along with state employment agencies.

Each state has an unemployment insurance program, but all states must follow specific guidelines outlined by federal law. Federal law makes unemployment benefits relatively ubiquitous across state lines. The U.S. Department of Labor oversees the program and ensures compliance within each state.

Workers who meet specific eligibility requirements may receive up to 26 weeks of benefits a year. The weekly cash stipend is designed to replace a percentage of the employee's regular wage, on average. States fund unemployment insurance using taxes levied on employers. The majority of employers will pay both federal and state unemployment FUTA tax. Companies that have 501(c)3 status do not pay FUTA tax.

Three states also require minimal employee contributions to the state unemployment fund. Reportable income includes freelance work or jobs for which unemployment insurance recipients were paid in cash.

Out-of-work persons who do not find employment after a 26-week period may be eligible for an extended benefits program. Extended benefits give unemployed workers an additional number of weeks of unemployment benefits. The availability of extended benefits will depend on a state's overall unemployment situation. If you have become unemployed due to the coronavirus pandemic, see below for details of the various programs.

Who Pays for Unemployment Insurance?

Photo: Shutterstock
Photo: Shutterstock

If you get an unemployment check in the mail, the return address will be your state's Department of Labor, but that doesn't mean that the government is funding your unemployment benefits. It's all paid for by your employer. In fact, employers pay two types of unemployment insurance taxes for each of their workers: federal and state.

The federal unemployment tax, known as the FUTA (Federal Unemployment Tax Act) tax, isn't too bad. It's listed as 6 percent of the first $7,000 in earnings for each employee, but most employers pay far less. If the employer also pays unemployment taxes to an approved state program, then the feds will refund 5.4 percent of that 6 percent tax, leaving employers on the hook for only the remaining 0.6 percent. The maximum amount of FUTA tax per worker per paycheck is $42. FUTA tax is used to make loans to states for unemployment funds, to cover half of extended benefits during long periods of high unemployment and to cover administrative costs.

Requirements for Unemployment Insurance (UI)

An unemployed person must meet two primary requirements to qualify for unemployment insurance benefits. An unemployed individual must meet state-mandated thresholds for either earned wages or time worked in a stated base period. The state must also determine that the eligible person is unemployed through no fault of their own. A person may file an unemployment insurance claim when fulfilling these two requirements.

Individuals file claims in the state where they worked. A participant may file claims by phone or on the state unemployment insurance agency's website. After the first application, it generally takes two to three weeks for the processing and approval of a claim.

After approval of a claim, the participant must either file weekly or biweekly reports that test or confirm their employment situation. Reports must be submitted to remain eligible for benefit payments. An unemployed worker cannot refuse work during a week, and on each weekly or biweekly claim, they must report any income that they earned from freelance or consulting gigs.

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.”

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” 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”; and

states cannot impose excessively burdensome “methods of administration” that block access for otherwise eligible individuals.

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.

Different Rates in Different States

Photo: Getty Images
Photo: Getty Images

State unemployment taxes are generally much higher and provide the money that funds typical unemployment benefits. But each state has its own tax rates, which are all over the place – some probably kept low to entice businesses to move or stay in their state. "Tax rates range from almost zero percent to 10 percent of wages, and some states only tax the first $7,000 of wages, while others tax up to the first $49,000 of pay," says Michele Evermore, senior policy analyst with the National Employment Law Project.

Since unemployment benefits programs are funded almost entirely by employer taxes, the lower the unemployment tax rates, the lower the jobless benefits for workers. Florida, for example, has one of the nation's lowest unemployment tax rates, as low as 0.1 percent of the first $7,000 of wages. As a result, Florida offers relatively stingy relief to laid-off workers.

"Florida has some of the lowest average benefits and is tied with North Carolina for the lowest duration of benefits," says Evermore. "Florida workers are only entitled to 12 weeks of unemployment benefits, while in most states it's 26 weeks."

Interestingly, the unemployment tax rate is not the same for all businesses in the same state. Since unemployment is a type of insurance, employers that use the system more are charged at a higher rate. This "experience rating" system raises rates on companies that have frequent layoffs and therefore pull more benefits from the state kitty.

Who Is Eligible for Unemployment Benefits?

During the COVID-19 crisis, unemployment benefits have been extended to almost all workers currently out of a job, including self-employed freelancers and gig workers. But during normal economic times, a relatively narrow slice of workers qualify for benefits.

Again, each state writes its own rules, but in general you can only collect unemployment if you were a full-time or part-time employee, you lost the job through no fault of your own and you earned enough at that job to qualify for benefits.

What that means is that you can generally only collect unemployment if:

  • you were laid off from a job because your position was downsized
  • you were part of a larger round of layoffs at your company
  • your company went out of business
  • it's seasonal work and the season is over (with no guarantee that you'll be rehired next season)

On the flip side, you generally cannot collect unemployment if:

  • you were fired for misconduct
  • you quit without good cause

There are, however, certain situations in which you may be able to collect unemployment even if you quit. Those "good cause quits," says Evermore, include relocating with a spouse who got a job in another state, or quitting because job conditions violated health and safety codes. The state agency will be the one to decide if the circumstances qualify or not.

There are also monetary eligibility requirements for collecting unemployment. You need to have earned a minimum amount of money at the job over a set period of time known as the "base period." A typical base period is four quarters (one year), and each state sets its minimum amount, but can go as low as $3,000 in total earnings.

Do All The Unemployed Get UI?

Photo: CNBC
Photo: CNBC

No. In ordinary times, most unemployed workers don’t receive UI benefits. UI does not cover people who leave their jobs voluntarily, people looking for their first jobs, and people reentering the labor force after leaving voluntarily. Self-employed workers, gig workers, undocumented workers, and students traditionally aren’t eligible for UI benefits.

In addition, most states require unemployed workers to have worked a minimum amount of time or received a minimum amount of earnings from their previous employer to be eligible. The minimum amount of earnings required to qualify for UI benefits ranged from $1,000 to $5,000 in 2019. Due to differences in eligibility criteria, the UI recipiency rate—the portion of unemployed people who receive UI benefits—varies significantly across states. In the fourth quarter of 2019, Mississippi’s 9 percent recipiency rate was the lowest; Massachusetts’s 55 percent rate was the highest.

Another consequence of earnings and work history requirements is that low wage workers—who are most likely to become unemployed—are among the least likely to get UI benefits. During the Great Recession, only one quarter of low-wage workers—defined as those who earned less than their state’s 30th percentile wage—received UI benefits when they became unemployed. Workers who earned more than the 30th percentile wage before becoming unemployed were twice as likely to receive UI benefits. The main reason low-wage workers do not qualify for unemployment benefits is not low hourly wages per se. Rather, low-wage workers also tend to work intermittently, and most states require laid off workers to have minimally steady earnings over the previous year to qualify for the maximum number of weeks of benefit payments.

How Big Is the Unemployment Check?

The size of your unemployment check depends on how much you earned on the job and where you live. As we said, states with low unemployment tax rates are less generous with their unemployment benefits. Weekly unemployment checks can range from $100 or less a week to nearly $1,000. In 2019, the national average was $347 a week, which was the equivalent of 32 percent of the average weekly wage.

States use complicated formulas to determine the exact amount of the unemployment benefit. In general, it's based on how much you earned over the first four of the last five consecutive quarters. Some states use the highest-earning quarter while others take an average of all four. The more you earned, the more you will receive each week, but states also cap the benefit at a maximum amount.

The state with the most generous unemployment benefits, according to 24/7 Wallstreet is Massachusetts, where the average weekly payout is $515 (max is $823). Forty-eight percent of unemployed people in the state were receiving UI benefits in 2019, which run on average 26-30 weeks. Coming in second was Hawaii with a $503 average weekly benefit check, which is 53 percent of the average weekly wage in the state (maximum benefit is $648).

On the other end of the scale are states like Florida, Tennessee and North Carolina. Florida caps its benefits at $275 a week and cuts them off after just 12 weeks. In Tennessee, the average weekly benefit in 2019 was just $144 – the lowest in the nation – which covered only 15.2 percent of the average working wage in the state. Benefits also max out at $275. In North Carolina, only 10 percent of unemployed workers received benefits, a sign that the system is failing.

Of course, cost of living can play a role in how long benefits last, so a generous benefit in a state with a high cost of living may not be any better than a lower benefit in a state with a low cost of living.

Can Unemployment Funds Run Out?

Yes, they can and they do. In a perfect world, states should save up enough unemployment taxes in good times to cover unemployment benefits in bad times, but it doesn't always work that way. And when the state unemployment coffers run dry, as several did during the Great Recession, states have to take loans from the federal government – that's what the FUTA tax covers.

California borrowed $10 billion from the feds to bail out its unemployment fund after the Great Recession and didn't fully pay it back until 2018. The real losers in those situations are the employers, says Evermore, who have to pay higher FUTA tax rates to pay back the loan right when they're trying to recover from a recession. In all, 36 states had to borrow from the federal government to cover UI costs during the Great Recession, according to Tax Policy Center.

What Are the Four Types of Unemployment?

The four types of unemployment include cyclical, frictional, institutional, and structural unemployment.

How Is Unemployment Calculated?

Unemployment is calculated by dividing the number of unemployed people by the number of people in the labor force.

Who Is Counted as Unemployed?

The unemployed include anyone that doesn't have a job, is available for work, and has been actively looking for work in the previous four years. Actively looking for work includes having job interviews or contacting employers.

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