An Introduction to Unemployment Insurance in the U.S.

A Look at American Federal-State Unemployment Benefits Programs

Unemployment claim hearing
Unemployment claim hearing. Getty Images/Kirby Hamilton/E+

In the United States, unemployment insurance, which is also known as unemployment benefits or employment insurance, is a form of social welfare provided to unemployed workers by the state. Unemployment insurance was established as part of the Social Security Act of 1935, but unlike Social Security, unemployment insurance is organized as a federal-state system and provides basic income support for unemployed workers, not retirees.

Under unemployment insurance, wage-earners who are laid off or otherwise involuntarily become unemployed (for reasons other than misconduct) receive a partial replacement of their pay for specified periods. Whether to extend jobless-pay benefits frequently becomes a political issue since any extension boosts federal spending and may lead to tax increases. Let's take a deeper look at these programs.


The Basics of Unemployment Insurance Eligibility

While each state operates its own unemployment insurance program, each state's program must follow certain federal rules. For instance, the amount and duration of the weekly unemployment benefits are based on a worker's prior wages and length of employment. Typically those benefits are equivalent to 40-50% of the eligible worker's previous pay, but may be less. Most programs also require that a worker to have worked for at least one-quarter of the previous year before being laid off to be eligible for benefits.

It is also important to note that the programs also require that the unemployed worker be laid off through no fault of their own, such as employer downsizing. A worker who was fired for misconduct or voluntarily quit his or her job is not eligible for unemployment benefits through the state. In the United States, eligibility for employment benefits is temporary.

 The standard eligibility for unemployment insurance lasts a duration of 6 months or up to 26 weeks, but can be extended by the state under specific circumstances like an economic downturn.


Funding for Unemployment Insurance

Unemployment benefits are paid by state governments but are funded in large part by both state and federal payroll taxes, which are assessed against American employers. Simply put, employers pay taxes into a special fund based on the unemployment and benefits payment experience of their own workforce. The federal government also assesses an unemployment insurance tax of its own on employers through the Federal Unemployment Tax Act (FUTA). The federal tax money collected under the provisions of FUTA is used to fund the administration of unemployment benefits and job service programs in the states, which provide services and resources for unemployed job seekers and employers seeking workers. 


Unemployment During Periods of High Unemployment and Economic Downturns

When it comes to funding unemployment insurance, American state governments generally rely on the build up of surplus funds to carry them through economic downturns when unemployment benefit payouts tend to be high.

During these downturns, however, states can borrow from the federal government or boost tax rates if their dedicated funds run low. This is a particularly important provision given that one requirement of state-run unemployment insurance programs is that they must lengthen the duration of benefits when the unemployment rate rises and remains above a set "trigger" level. The federal government may also permit an extension of the benefits payment period when unemployment climbs during a recession, paying for the extension out of general federal revenues or levying a special tax on employers. In fact, a portion of the money collected by the federal government under FUTA is intended to pay half of the costs associated with extended unemployment benefit periods due to high state unemployment. FUTA loans beyond the provided federal assistance to state unemployment benefits programs, on the other hand, must be paid back by the states with interest.