UNEMPLOYMENT INSURANCE : Benefits, Problems and Issues

Benefits
The majority of states pay regular unemployment insurance benefits for a maximum of 26 weeks; the remaining states pay benefits for slightly longer periods. In most states, the amount of the weekly benefit is equal to a specified fraction of a worker's average wages for the calendar quarter of the base period during which the highest wages were earned. The typical fraction is 1/26, which yields a benefit equal to 50 percent of average weekly earnings for that quarter. Other states determine benefits as a percentage of average weekly wages or annual wages during the base period. Some states also modify their benefit formulas to provide relatively higher benefits (as a percentage of past earnings) to lower-paid workers. Benefits in all states are subject to minimum and maximum amounts. Minimum weekly benefits typically fall within the range of $20 to $75, maximum benefits in the range of $200 to $375, and the average benefit in the range of $150 to $225. In addition, a few states currently provide additional benefits if there are dependents who receive regular support from the worker.

States also provide reduced benefits for partial unemployment. Such a condition occurs if a worker is employed less than full-time and has a weekly income less than his or her weekly benefit amount for total unemployment.

Since 1970, there has been a permanent federal-state program of extended unemployment benefits for workers whose regular benefits are exhausted during periods of high unemployment. The availability of these benefits is automatically triggered by a state's unemployment rate exceeding a specifed level. The benefits are financed equally by the federal government and the states involved, and they can be paid for up to 13 weeks, as long as the total of regular and extended benefits does not exceed 39 weeks. This program is operable when the insured unemployment rate in a state exceeds a specified level. The insured unemployment rate is the percentage of workers covered by unemployment insurance who are receiving regular benefits. Benefits can also be triggered if a state's total unemployment rate exceeds specified criteria. In this case, an additional 20 weeks of benefits can be paid.

In periods of severe unemployment, the federal government often enacts legislation to provide additional benefits that are financed with federal revenue. The last such program expired in 1994.

Problems and Issues
The current system of unemployment insurance has become increasingly subject to criticism, especially regarding the level of benefits. At current levels, the majority of employees would receive benefits that are less than half of their former wages. Because of maximum limits on the amounts of benefits, higher-income employees would receive proportionately smaller benefits than lower-paid employees.

In addition to the level of benefits, the percentage of persons receiving benefits at any point in time has dropped over the last two decades. Typically, fewer than 40 percent of the unemployed are receiving benefits. Some persons have benefits denied because of more stringent rules, particularly those dealing with initial benefit disqualification. Other persons exhaust the benefits that are available. Of course, there are those who argue that without disqualifications and limits on benefits, there would be little incentive for many of the unemployed to seek work.

Few employers provide any type of supplemental unemployment benefits. The plans that do exist are in highly unionized industries and result from collective bargaining.

There seems to be a feeling among economists that unemployment insurance programs today are less effective in dealing with unemployment issues than they were in the past. In theory, unemployment compensation insurance should be a counterbalance against recessions. In practice this is often not the case, perhaps because of the low percentage of persons receiving benefits. In addition, the degree of experience rating has declined over time, reducing the incentive for employers to retain employees in bad times rather than laying them off. It also has shifted an increasing burden for financing the program to employers in industries with stable employment.

UNEMPLOYMENT INSURANCE : Eligibility for Benefits

Eligibility for Benefits
In order to receive unemployment benefits, a worker must meet the following eligibility requirements:

- Have a prior attachment to the labor force

- Be able to work and be available for work

- Be actively seeking work

- Have satisfied any prescribed waiting period

- Be free of disqualification

Prior Attachment to the Labor Force
The right to benefits depends on the worker's attachment to the labor force within a prior base period. In most states, this base period is the 52 weeks or four quarters prior to the time of unemployment. During this base period, the worker must have earned a minimum amount of wages or worked a minimum period of time or both.

Able to Work and Available for Work
The right to benefits is also contingent on an unemployed worker's being both physically and mentally capable of working. The worker must also be available for work. Benefits may be denied if suitable work is refused or if substantial restrictions are placed on the type of work that will be accepted.

Actively Seeking Work
In addition to registering with a local unemployment office, most states require that a worker make a reasonable effort to seek work.

Waiting Period
Most unemployment programs have a one-week waiting period before benefits commence. Benefits are not paid retroactively for that time of unemployment.

Free of Disqualification
All states have provisions in their laws under which a worker may be disqualified from receiving benefits. This disqualification may take the form of (1) a total cancellation of benefit rights, (2) the postponement of benefits, or (3) a reduction in benefits. Common reasons for disqualification include the following:

- Voluntarily leaving a job without good cause.

- Discharge for misconduct.

- Refusal to accept suitable work.

- Involvement in a labor dispute.

- Receipt of disqualifying income. This includes dismissal wages, workers' compensation benefits, benefits from an employer's pension plan, or primary insurance benefits under the Social Security program.

UNEMPLOYMENT INSURANCE : Financing of Benefits

Prior to the passage of the Social Security Act in 1935, relatively few employees had any type of protection for income lost during periods of unemployment. The act stipulated that a payroll tax was to be levied on covered employers for the purpose of financing unemployment insurance programs that were to be established by the states under guidelines issued by the federal government. Essentially, the federal law levied a federal tax on certain employers in all states. If a state established an acceptable program of unemployment insurance, the state taxes used to finance its program could be offset against up to 90 percent of the federal tax. If a state failed to establish a program, the federal tax would still be levied, but no monies collected from the employers in that state would be returned for purposes of providing benefits to the unemployed there. Needless to say, all states quickly established unemployment insurance programs. These programs (along with a federal program for railroad workers) now cover more than 95 percent of all working persons, but major gaps in coverage exist for domestic workers, agricultural workers, and the self-employed.

There are several objectives of the current unemployment insurance program. The primary objective is to provide periodic cash income to workers during periods of involuntary unemployment. Benefits are generally paid as a matter of right, with no demonstration of need required. While federal legislation has extended benefits during times of high unemployment, the unemployment insurance program is basically designed for workers whose periods of unemployment are short-term; the long-term and hard-core unemployed must rely on other measures, such as public assistance and job-retraining programs, when unemployment insurance benefits are exhausted.

A second major objective of unemployment insurance is to help the unemployed find jobs. Workers must register at local unemployment offices, and unemployment benefits are received through these offices. Another important objective is to encourage employers to stabilize employment. As will be described later, this is accomplished through the use of experience rating in determining an employer's tax rate. Finally, unemployment insurance contributes to a stable labor supply by providing benefits so that skilled and experienced workers are not forced to seek other jobs during short-term layoffs and thereby remain available to return to work when called back.

Financing of Benefits
Unemployment insurance programs are financed primarily by unemployment taxes levied by both the federal and state governments. The federal tax is equal to 6.2 percent of the first $7,000 of wages for each worker, but this tax is reduced by up to 5.4 percentage points for taxes paid to state programs. The practical effect of this offset is that the federal tax is actually equal to .8 percent of covered payroll. A few states levy an unemployment payroll tax equal to only the maximum offset (5.4 percent on the first $7,000 of wages), but most states have a higher tax rate and/or levy their tax on a higher amount of earnings.

No state levies the same tax on all employers. Rather, states use a method of experience rating whereby all employers, except those in business for a short time or those with a small number of employees, pay a tax rate that reflects their actual experience, within limits. Thus, an employer who has laid off a large percentage of employees will have a higher tax rate than an employer whose employment record has been stable.

An employer with "good experience" will often pay a state tax of less than 1 percent of payroll and possibly as little as .1 percent. Other employers may pay a state tax as high as 9 percent or 10 percent. Regardless of the actual state tax paid, the employer will still pay the .8 percent federal tax.

The major argument for experience rating is that it provides a financial incentive for employers to stabilize employment. Those opposed to its use contend that many employers have little control over economic trends that affect employment. In addition, they argue that tax rates tend to rise in bad economic times and, in so doing, may actually thwart economic recovery.

The entire unemployment insurance tax is collected by individual states and deposited in the Federal Unemployment Insurance Trust Fund, which is administered by the secretary of the treasury. Each state has a separate account that is credited with its taxes and its share of investment earnings on assets in the fund. Unemployment benefits in the state are paid from this account. The federal share of the taxes received by the fund is deposited into separate accounts and is used for administering the federal portion of the program and for giving grants to the states to administer their individual programs. In addition, the federal funds are available for loans to states whose accounts have been depleted during times of high unemployment.