What is Unemployment Insurance?

Unemployment Insurance (UI) was established in 1935 and has been a fixture in the U.S. economy since the Great Depression. It is a fundamental part of the nation’s social insurance infrastructure for those who lose their jobs through no fault of their own. UI provides a partial replacement of earnings for unemployed workers. By putting money into the hands of people who will spend it and help speed economic recovery, it also has an important positive impact on the national economy during downturns and recessions.

Indeed, the money granted in UI benefits circulates quickly through the economy. Of the many UI “automatic stabilization” studies, the latest, a 2010 study by the Urban Institute’s Wayne Vroman, indicated that during recessions every dollar paid out in benefits helps expand the nation’s output by $2.15 worth of goods and services.

Who Administers Unemployment Insurance?

Each of the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, administers its own version of the UI program within the general rules of federal law. While the Federal government is responsible for oversight and enforcement of Federal statutes, each jurisdiction determines eligibility, benefit levels, and tax amounts, which, as a result, vary substantially across states. For example, while Federal law prescribes that eligibility must be based on prior work attachment and be applied uniformly to all claimants, the level of past wages a worker must have earned to be eligible and the amount of benefits paid are state decisions.

The program is financed by two taxes, a federal and a state tax on wages, primarily on employers. The federal tax is currently levied on the first $7,000 earned each year by workers, and is used to pay for the administrative costs of running the program and for federal extensions of the benefits, such as the Emergency Unemployment Compensation program, (see section on benefits below.) The money collected from the state tax is used solely to fund the benefit checks provided to eligible unemployed claimants.

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Size of the UI Program: