How the unemployment insurance program works

Since its inception in 1935, the unemployment insurance (UI) program in the United States has operated as the primary safety net for those who involuntarily lose their jobs. Although the UI program's broad guidelines are established by federal law, UI essentially operates as a state-level program. Policy decisions regarding the main components of unemployment insurance, such as eligibility, benefit generosity, and financing, are determined by each state, resulting in substantial variations in UI programs across the country.

Eligibility
Prior to receiving UI benefits, unemployed workers must qualify or be eligible under their state's rules. Nationally, in 2003, 41% of unemployed workers received UI benefits (see Table B). For a variety of reasons, many unemployed workers are ineligible to receive benefits. Of those workers who lost their jobs, 74% received UI benefits in 2003. The more common obstacles to eligibility are outlined below.

Initial eligibility
To receive benefits, unemployed workers must file an initial claim with their state's UI program to see if they meet state-determined eligibility criteria. In order to qualify for UI benefits, jobless workers must meet their state's initial monetary eligibility requirements (i.e., a worker must have earned a certain amount of money in a given time period) and nonmonetary requirements related to their separation from their prior employer (i.e., a worker's separation from prior employment must be for allowable reasons).

Monetary eligibility requirements. Most states determine whether an unemployed worker is eligible for UI benefits based on his or her earnings in the highest quarter or the two highest quarters of the "base period." The majority of states define the base period as the first four of the last five completed calendar quarters. Based on this definition, from three to six months of a jobless worker's most recent earnings history is excluded for the purpose of determining eligibility for UI benefits. Many states also require the unemployed worker to have earned a certain amount in the base period. These earnings requirements vary significantly by state. Table A provides some detail on each state's monetary eligibility requirements and whether the state has adopted an "alternative base period" that considers earnings from the worker's most recently completed calendar quarter.

Nonmonetary eligibility requirements. Any of the following circumstances could cause an unemployed worker to be denied UI benefits:

• job not covered by unemployment insurance (i.e., some states do not cover the self-employed, independent contractors, and some agricultural workers);
  
  
• left job without good cause (states vary as to exceptions to the good cause requirement and whether good cause must be related to employment or can also be for personal reasons); or
  
  
• fired for misconduct cause (some states require gross misconduct or just cause; usually the conduct must be intentional and an employee who made inadvertent mistakes or lacked the ability to perform the job would still be eligible).

Even if one or more of these circumstances applies, a worker should file a UI claim with the state agency and allow the state agency to determine whether or not the employee is eligible for UI benefits. Filing a UI claim regardless of circumstances is advisable because states vary significantly in their definitions of "good cause" and "misconduct," and an unemployed worker may not know whether he or she is eligible for UI without having the state make a formal determination. Similarly, in some cases employers classify individuals as independent contractors even when, in reality, they are employees and should therefore receive unemployment insurance.

Continuing eligibility
Once a worker is deemed eligible for benefits, a worker must also satisfy continuing eligibility requirements. If a worker fails to satisfy these conditions, that worker's benefits may be postponed temporarily, cancelled entirely, or reduced. Typically, unemployed workers must make a weekly "continuing claim" on the UI program verifying that they were "able and available" and "actively searching" for employment. Workers may fail to meet these criteria if they:

• limit their job search to part-time work in a state that requires workers to be "able and available" for full-time work;
• fail to search for work in a given week;
• find a job;
• turn down a "suitable" job offer; or
• exhaust UI benefits because they received the maximum amount of benefits for which they were qualified or because they received the maximum number of weeks of benefits for which they were qualified.

Hearings and appeals
Every state permits workers affected by unfavorable decisions to file appeals. All states also provide a hearing before an administrative law judge or hearing officer, as well as further appeals to court. In order to take advantage of these avenues, a worker must file an initial claim, and then appeal any unfavorable decisions within the time required by the state. That time period could range from a few days to 30 days, depending upon each state's rules. Legal aid offices, unions, and community groups offer advice or assistance with appeals in some areas, but a lawyer is not needed to appeal or get a hearing. Depending upon the state, court proceedings may be difficult or impossible for non-lawyers, but all agency appeals are open to unrepresented workers.

Amount of UI benefits
If workers make it over these eligibility hurdles, they can expect, in most states, to have about half their lost (pretax) wages replaced by UI benefits. There are limits on weekly benefits—each state has adopted a maximum weekly benefit amount that is paid to workers in the state. As a result, some workers—particularly higher-wage earners—receive less than 50% of their lost wages. Nationally, UI replaced just over 47% of a worker's lost wages in 2003. (This is referred to as the "replacement rate.") Because, on average, women earn less than men, women have a higher percentage of their earnings replaced by UI (49%) than men (46%). Similarly, Hispanics (50%) and African Americans (49%) have a higher percentage of their earnings replaced than do whites (47%). Although the percentage of lost income replaced by UI benefits has remained fairly stable from 1988 through the present, the real replacement rate has actually fallen due to the fact that, as of 1987, UI benefits are now treated as income and are taxed fully by the federal government.

The average UI weekly benefit check in 2003 was $262 ($1,135 per month). The average weekly benefit amount varies significantly by state, from a low of $173 in Arizona and Mississippi to a high of $357 in Massachusetts (see Table B). See EPI's Weekly Benefit Amount (WBA) Calculator to estimate the weekly benefit amount a typical worker might be expected to receive in a given state as of August 2004.

UI benefits rarely provide enough money for families to make ends meet. A 2004 study by the Congressional Budget Office found that "[w]hen UI receipients lost their job, their income—excluding UI benefits—dropped by almost 60 percent. With UI benefits included, the income loss was about 40 percent." The study also found that almost 25% of UI recipients who remained out of work for four months or more fell into poverty despite getting UI benefits.

Duration of UI benefits
Most state UI programs provide a maximum potential duration of 26 weeks during non-recessionary periods. However, the average duration of benefits collected is much lower than 26 weeks. In 2003, the average duration of regular state UI benefits was 16.4 weeks nationally, but varied by state from 12.4 weeks in North and South Dakota to 20.5 weeks in the District of Columbia (see Table B). This number is less than 26 weeks for a number of reasons, including cases in which the unemployed worker: (1) found a new job, (2) qualified for less than 26 weeks of benefits, or (3) was disqualified for a continuing eligibility violation (e.g., not actively seeking work, rejecting offer of "suitable" work). Because UI benefits are limited, some individuals run out of benefits, or "exhaust" benefits, before they find a new job. In 2003, 4.4 million workers, or 43.5% of UI recipients, exhausted their UI benefits. Individuals who exhaust the weeks to which they were entitled may only receive additional benefits if they later re-qualify for UI after additional work.

There are two programs that may extend the 26-week maximum benefit duration during economic hard times:

• First, there is a federal-state Extended Benefits program under which UI recipients in every state may be able to receive up to 13 additional weeks of benefits for a total of up to 39 weeks. The state and federal government each pay half of the costs of the Extended Benefits program and weekly benefits are identical to those in the regular UI program. The Extended Benefits program is activated automatically, or "triggers on," when a state's 13-week average insured unemployment rate reaches 5% and is a 120% increase from the same 13-week period in the last two years. A second, optional trigger (which has been adopted by most states) occurs when a state's 13-week average insured unemployment rate reaches 6% (the 120% factor does not need to be met). Unfortunately, these programs do not always work well, with only a handful of states helping their long-term unemployed in this way in the last recession.
• Second, Congress may decide to use existing federal UI trust fund monies to pay temporary extended UI benefits. During 2002 and 2003, UI recipients in most states were able to receive up to 13 additional weeks of benefits through the Temporary Extended Unemployment Compensation Act of 2002 (TEUC), with "high" unemployment states providing their workers another 13 weeks. Unfortunately, the TEUC program expired in December 2003 with benefits phased out by March 31, 2004. These extended benefits are therefore no longer available despite the high number of UI recipients who continue to exhaust benefits. Measures to extend TEUC past its December 2003 expiration in the Senate and House have been defeated by a relatively small number of votes each time.

Financing of UI benefits
Adequate financing for the UI program is crucial because it determines, at least in part, each state's policies on eligibility and benefit generosity. Most states adjust their employer tax rates based on their trust fund solvency. In some states, the financial solvency of the UI program directly determines benefit levels. For example, some state legislatures have voted to cut UI benefits or restrict eligibility when their trust fund balances are low. Louisiana 's law is a particularly unique example of the interdependence between benefits and trust fund solvency—the state's trust fund balance directly determines the formula that is used to compute weekly benefits and the maximum weekly benefit amount.

The unemployment insurance program is financed primarily by taxes levied on employers. There are two components of these taxes: (1) a federal tax that is used to pay for the federal and state administration of the program; and (2) a state tax that is used to pay state UI benefits.

Federal UI taxes pay administrative costs
Federal UI taxes pay for federal and state administrative costs, the federal portion of the Extended Benefits program, and loans to states with insolvent trust funds. Technically, the federal UI payroll tax is 6.2% of the first $7,000 of a covered employee's wages. However, employers in states with UI programs that meet the federal guidelines (a $7,000 taxable wage base, a maximum employer tax rate of at least 5.4%, state administrative performance standards) receive a 5.4% credit toward their federal tax payment, reducing their tax rate to 0.8%. Since all states have federally approved programs, 0.8% is the effective federal tax rate. The 0.8% rate includes a surtax of 0.2% that Congress passed in 1976 and has extended multiple times; this surtax is set to expire on December 31, 2007.

In March 2002, Congress approved an unprecedented $8 billion "Reed Act" distribution to the states and encouraged states to use it to expand their UI programs. A General Accounting Office report found that most states used this money to avoid raising their state unemployment taxes on employers. The Department of Labor has been considering proposals that would change the manner in which administrative costs are funded.

State UI taxes pay benefits
Each state determines the amount of an employee's wages that is subject to the state UI tax and the tax rates it charges employers. These state taxes pay for state UI benefits and one-half of the federal-state Extended Benefits program. The first component of an employer's state UI taxes is the state's taxable wage base. Federal law requires states to tax at least the first $7,000 of a covered employee's wages. While 10 states (20%) set their 2004 taxable wage base at $7,000, the remaining states have adopted a higher taxable wage base (see Table C). In a state with a taxable wage base of $9,000, an employer would pay the same state UI taxes on an employee who earns $9,000 a year as it would for an employee who earns $100,000 a year. Because a portion of the cost of a payroll tax is likely to be passed on to workers in the form of lower wages, low-wage workers and part-time workers (and their employers) "pay" more than higher-wage and full-time workers. Finally, some states' taxable wage base increases automatically every year because they index their taxable wage base to their individual state's average annual wage or annual weekly wage.

The second component of an employer's state UI taxes is the tax rate an individual employer is charged. The UI program is experience-rated, meaning that, within a given state, firms that lay off a higher percentage of workers and whose employees collect a higher amount of UI benefits pay higher tax rates than firms that lay off fewer workers. The goal of experience rating is to discourage employers from laying off workers, particularly during temporary downturns. The United States' experience rating system is unique—no other country taxes its employers based on their past "experience" laying off workers. The national average state tax rate in 2003 was 2.1%, from a low of 0.6% in Georgia and Utah to a high of 4.1% in New York. Depending on the employer and the state, an employer's maximum UI state payroll tax rate in 2004 could range from a low of 5.4% (Missouri) to almost 11% (Arkansas, Massachusetts) (see Table C ). In addition, a state's tax schedule typically changes so that the same employer would pay a higher tax rate when the state UI trust fund balance is low, and a lower tax rate when the state UI trust fund balance is healthier. In addition, three states (Alaska, New Jersey, and Pennsylvania) also require employees to make a contribution.

UI taxes are comparatively small, representing just over half of one percent (0.6%) of all earnings for those workers covered by the program in 2003. On average, the combined annual state and federal UI tax on employers was just $253 per employee in 2003 ($201 in average state taxes and $52 in federal taxes).

UI trust fund solvency
Many state UI programs have had problems because they have failed to collect enough tax revenue from employers during economic expansions, setting tax rates too low and subjecting too small a share of wages to taxation. Since more workers file UI claims in bad economic times—when tax revenues are low because employment is lower—it is vital for states to build adequate trust funds in good economic times.

The "average high cost multiple" (AHCM) is one measure that is used to analyze state UI trust fund solvency. A state's AHCM is the average of the three most recent high-cost calendar years that include either three recessions or at least 20 years of UI payment history. An AHCM of 1 indicates that a state has one year's worth of reserves to pay benefits, based on the average of the three most recent high-cost years. In 1995, the Advisory Council on Unemployment Compensation recommended that states maintain an AHCM of 1. Unfortunately, after the most recent recession and slow jobless recovery, the nationwide AHCM was at 0.42 for the 49 states reporting an AHCM for the first quarter of calendar year 2004.

The health of the UI trust funds varies from state to state, but many states' trust funds are considered inadequate to meet their state's needs (see Table C). For example, 14 reporting states (31%) had an AHCM of 0 to 0.5 and 32 states had an AHCM below 1.0. A state's AHCM could be low for a variety of reasons, including a low taxable wage base, low employer tax rates, high unemployment, or state eligibility and benefit rules. In the event that a state runs out of money and becomes "insolvent," the state may borrow from specially established federal funds.

Differences across states
Because each state is free to establish the components of its state UI program, the benefits an unemployed worker receives and the taxes an employer pays both vary significantly across the country. Some state-level characteristics are presented in Tables A, B, and C.

Washington is an example of a state offering a more generous UI program. In determining eligibility, Washington considers hours instead of earnings, and it considers earnings in the most recent quarter. Washington offers a higher than average weekly benefit amount and indexes the amount with average weekly wages in the state. Workers in Washington are more likely than the average U.S. worker to receive UI benefits. Its financing mechanism is also sound: Washington has one of the highest taxable wage bases ($30,200), and that wage base is indexed.

Recommendations
Many aspects of the state UI programs are in need of reform. Since states determine their own policies, the degree of reform needed varies dramatically. However, the UI program would be better if the states adopted the following broad general guidelines:

• Simplify eligibility rules and benefit calculations. This would counter the false perception many workers have that they are ineligible for UI benefits, and it would allow workers to gain a sense of how much of their income they can expect to be replaced by the UI program.
• Modernize eligibility rules to reflect the needs of the current workforce. To do this, states should adopt three important recommendations of the Advisory Council on Unemployment Compensation. First, states should stop discarding up to six months of a worker's most recent earnings by adopting an "alternative base period." Eighteen states and the District of Columbia have already adopted an alternative base period. Second, states should extend eligibility to workers seeking part-time jobs. Third, states should base their eligibility requirements on the number of hours worked, not earnings. Almost all states' monetary eligibility rules (with the exception of Washington and Oregon) currently discriminate against low-wage workers because low-wage workers with a part-year or part-time work schedule may be ineligible to receive UI benefits whereas higher-wage workers with an identical work schedule would qualify. Adopting an hour-based eligibility approach, instead of the current earnings-based approach, would eliminate this bias and help workers at the lowest end of the pay scale.
• Offer more generous UI benefits to keep workers and their families out of poverty.
• Adopt a higher taxable wage base and index it to increases in their states' wages to help ensure the solvency of their UI trust funds.

Taken from : www.epinet.org