Unemployment Insurance – Purpose and Summary

Unemployment Insurance (UI) is a form of insurance that American society carries with itself. Their purpose is to create a savings fund from which qualified workers can draw if they are out of work under certain circumstances. By receiving an income during periods of unemployment, beneficiaries can cover basic needs until they can return to productive employment. Given how dependent the US economy is on consumer spending, the inability of individuals to commit financially to one another can have drastic and eventually far-reaching consequences.

UI’s social safety net differs somewhat from other welfare-type programs in that it is not based on financial need, but rather on prior employment history and the circumstances surrounding the worker’s separation from their previous employment. People who have been in the workforce for longer periods of time can generally receive benefits for more weeks. Since UI is a form of replacement income, the dollar value of benefits a person can receive is tied to the wages they received while working.

Seen from one perspective, UI functions as a type of government-mandated savings plan for workers, by requiring responsible companies to “hold” income that could otherwise be distributed among them. Seen from another perspective, unemployment insurance is a kind of tax on the economic prosperity that workers generate. Either way, the cost of unemployment insurance to businesses is largely determined by the amount of potential future benefits workers may receive and the tax policies adopted by state unemployment insurance program managers.

Funds for unemployment insurance come from two sources: separate federal and state UI taxes. Obliged companies pay a UI tax to their state government, creating a trust fund for the payment of future benefits. These same companies pay a federal unemployment tax to the IRS each year. Every year, each state receives a grant from these federal taxes to fund UI employees and services provided by its UI agency.

This dual funding mechanism reflects the dual approach of the administration that operates UI programs across the country. Since federal taxes pay for UI employees and services, the federal government sets broad program requirements within which states must operate, as well as the operational goals and objectives they must meet. For example, states must operate in such a way that a certain percentage of UI claims filed are adjudicated and paid within 21 days. Since state UI taxes pay for benefits, state agencies decide the tax provisions that fund benefits, as well as the rules that allow or deny individual UI claims.

This structure, both for funding and operating the UI program, allows for a healthy tension to exist between the large and diverse populations of stakeholders who may be affected by the UI program.