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16.4 Unemployment Compensation

Learning Objectives

In this section we elaborate on the following features of unemployment compensation:

  • State unemployment laws
  • Coverage provided
  • Financing of unemployment compensation
  • Administration of unemployment compensation

While workers’ compensation is quasi-social private insurance of significant concern to its many stakeholders, unemployment compensation is a purely social insurance program. Because of the high risk associated with projecting future rates of unemployment and associated claims, private insurers are not willing to provide this type of insurance. Unemployment compensationGovernment programs that pay weekly cash benefits to workers who are involuntarily unemployed. programs pay weekly cash benefits to workers who are involuntarily unemployed. The following sections cover state laws, coverage, how benefits are financed, and administration of unemployment compensation.

State Laws

State unemployment compensation programs were established as a result of federal legislation. However, each state creates, finances, and administers its own law. Like workers’ compensation, the law transfers to the employer at least part of the financial element of a risk faced by the employee. Unlike most workers’ compensation programs, however, the firm’s risk manager has no choice with regard to how the risk is handled. Neither private insurance nor self-insurance is permitted. Management can reduce the cost, however, by stabilizing the firm’s employment and preventing payment of unjustified benefits.

Employers Subject to Tax

The federal tax applies to firms that have one or more employees in each of twenty weeks during a calendar year, or firms that pay $1,500 or more in wages during any calendar quarter. As of January 1987, coverage was extended to agricultural employers that have ten or more employees in each of twenty weeks during the year or that pay $20,000 or more in wages during any calendar quarter. New provisions to include domestic and municipal employees, as well as employees of nonprofit organizations, have also been added.


The federal law established minimum standards for coverage and benefits. Unless a state law meets the standards, no tax offset is permitted. Every state meets the standards, and in many cases they are exceeded. Today, all states cover state and local government employees, several cover farm workers, and a few cover domestic workers. About 97 percent of the civilian labor force is covered. In some cases, unemployment compensation is self-insured in a pool, as is the case with the unemployment compensation of employees of many Texas school districts that opted to use the pool administered by the Texas Association of School Boards.This is firsthand information by the author, who was employed by the Texas Association of School Boards in 1994–1995.

Unemployment compensation is designed to relieve workers in certain industries and occupations of part of the economic burden of temporary unemployment. Three aspects of benefit payments are important: (1) amount and duration, (2) qualifications for benefits, and (3) disqualifications.

Amount and Duration

The amount of the weekly benefit payment a worker may receive through unemployment compensation varies according to the benefit formulaCalculation used to determine the amount of the weekly benefit payment a worker may receive through unemployment compensation. in the law of each state. Usually, the amount is about one-half of the worker’s full-time weekly pay within specified limits. The maximum is low and is easily accessible on the Web site of your state unemployment compensation agency (usually a division of the employment commission). Some states provide an additional allowance for certain dependents of the unemployed worker. With the passage of the 1986 Tax Reform Act, all unemployment benefits became fully taxable to the recipient for federal income tax purposes.

Most state laws have a waiting period—typically one week—between the time an unemployed worker files a claim for benefits and the time benefit payments begin. This is designed to place the burden of short-term temporary unemployment on the worker as well as to decrease the cost of the plan, thereby making possible greater coverage of more significant unemployment losses.

In most states, the maximum number of weeks that benefits can be paid is twenty-six. A federal-state program of extended benefits may continue payments for another thirteen weeks during periods of high unemployment, such as occurred in the early 1990s. In an economic emergency, federal funding may continue payments for another twenty-six weeks.

Qualifications for Benefits

To qualify for benefits, unemployed workers must fulfill certain conditions. They must first be involuntarily unemployed. Once they are involuntarily unemployed, they are required to register for work at a public employment office and file a claim for benefits. They must have been employed in a job covered by the state unemployment compensation law.An unemployed federal civilian or ex-serviceperson may be entitled to benefits under the conditions of a state law for determining benefit eligibility. The amount he or she may receive will be the same as if federal pay had been covered under the state law. Costs of the benefits are paid by the federal government. They must have earned a specified amount of pay or worked for a specified length of time, or both. They must be able to work (this is important in order to differentiate unemployment benefits from disability benefits), available for work, and willing to take a suitable job if it is offered to them. In most states, an unemployed worker who is sick and therefore unable to work is not entitled to unemployment compensation benefits. Some states permit payments to disabled workers under a separate disability program.Several states have compulsory temporary disability insurance laws to provide income benefits for disabled workers who are not receiving unemployment benefits. Some of these plans pay partial benefits to workers receiving workers’ compensation benefits. Others exclude these workers.


Unemployed workers may be disqualified from benefits even if they meet the qualifications described above. As noted above, most state laws disqualify those who quit voluntarily without good cause or who were discharged for just cause. Those who refuse to apply for or accept suitable work, or are unemployed because of a work stoppage caused by a labor dispute, may be disqualified. Other causes for disqualification are receiving pay from a former employer, receiving workers’ compensation benefits, receiving Social Security benefits, or being deemed an independent contractor and therefore not an employee.

The effect of disqualification varies from state to state. In some cases, it means that the unemployed worker receives no benefits until he or she has again qualified by being employed for a specified length of time in covered work. In other cases, disqualification results in an increase in the waiting period. Some state laws not only increase the waiting period but also decrease the benefits.

How Benefits Are Financed


Most unemployment compensation insurance is noncontributory: employers pay all the cost in most states.Employees contribute in Alabama, Alaska, and New Jersey. The Federal Unemployment Tax Act (FUTA)Law that places a tax on employers at the rate of 6.2 percent of workers’ pay in covered jobs, excluding anything over $7,000 paid to a worker in a year for the purpose of financing unemployment compensation. places a tax on employers at the rate of 6.2 percent of workers’ pay in covered jobs, excluding anything over $7,000 paid to a worker in a year for the purpose of financing unemployment compensation. Up to 5.4 percent can be offset by employers who pay a state tax or have been excused through experience rating. So, in effect, the federal tax may be only (6.2 − 5.4 =) 0.8 percent. Revenue from this tax is deposited in the Federal Unemployment Trust Fund and credited to the state for the payment of benefits under its plan. Each state has its own trust fund. The remaining part of the federal tax goes into general federal revenues. Congress appropriates money for grants to the states for their administration of the program. If appropriations for this purpose are less than the federal share of the payroll tax, then the remainder of such revenue is put into a reserve fund for aid to the states in payment of benefits when state reserves are low.

Experience Rating

All states have experience rating; that is, they reduce the contribution of employers whose workers have little unemployment. The theory of this rating system is that it encourages employers to reduce unemployment and stabilize employment to the extent that they can. One other effect, however, is to make employers interested in disqualifying workers who apply for benefits because the benefits paid out of their account reflect their experience under the plan.This does not necessarily mean that employers try to cheat employees out of benefits. There are many borderline cases in which there is room for argument about whether or not the unemployed worker is really involuntarily unemployed. Experience rating emphasizes the fact that employers pay the cost of benefits and motivates them to be interested in disqualifications. As in other human relations situations, one can find examples of bad behavior by both employers and employees. This has led to considerable discussion of disqualification standards and administration and to many hearings and disputes.


The federal portion of the unemployment compensation insurance program is administered by the Employment and Training Administration in the Department of Labor. Every state has its own employment security agency. Some are independent; others are in the State Department of Labor or some other state agency. Typically, the agency is also responsible for the administration of state employment search offices. There are more than 2,500 such offices in the United States where claims for benefits may be filed. Claimants apply for benefits and register for employment at the same time. The function of the office is to find employment for claimants or provide benefits.

Key Takeaways

In this section you studied the following features of unemployment compensation, a pure social insurance program:

  • State unemployment programs pay weekly cash benefits to workers who are involuntarily unemployed.
  • Unemployment compensation is established by federal legislation, but it is administered by each state.
  • Applies to employers with one or more employees in each of twenty weeks of a year or paying at least $1,500 in wages per year.
  • Usually pays qualified, involuntarily unemployed workers half their weekly pay, subject to a waiting period and a maximum duration.
  • Financed through taxes on employers between 0.8 to 6.2 percent and subject to experience rating.
  • The federal portion of the program is administered by the Employment and Training Administration of the Department of Labor.

Discussion Questions

  1. Who is qualified to receive unemployment compensation? Who is not qualified?
  2. Ann and Dick both have excellent jobs in Boston. She is transferred to Los Angeles. Dick quits his job so he can go with her. Should he receive unemployment compensation benefits? Why or why not?
  3. Do unemployment compensation benefits help stabilize our economy? Explain your answer.