Unemployment insurance policy in the United States


The unemployment rate is a global challenge to most nations around the world with the United States included. Therefore, it is a topic that is worth discussing since it affects very many sectors within the nation. Job creation and unemployment are influenced by features such as economic status, global competition, demographics, education as well as computerization or automation (Vedder and Gallaway, 23). These features affect the duration of employment, number of employees and wage standards. This topic is important since it discusses the sources and measures of unemployment and plans for sinking it. In general, unemployment reduces during times of economic prosperity and increases during recessions, forming significant pressure on public fiscal as tax income reduces and social safety costs shoot. For instance, employment increased time after time during the early 1990s; however, it has been not consistent since due to depressions in 2001 and 2007-2009.

Due to the increased rate of unemployment, it is, therefore, important to have something that can help the unemployed persons generate income. In this case, unemployment insurance was created for that purpose. Unemployment insurance or unemployment benefit is a social welfare disbursement done by the government or authorized agencies to the unemployed persons. It has benefits which may be established on an obligatory para-governmental insurance scheme. First and foremost, the unemployment insurance policy enables people and their siblings through helping them during the unemployment period without going through theatrical alteration in lifestyle. Individual utilization of for those getting unemployment insurance benefits fall no more than a third as much as it would have in the non-existence of the program. In addition, this shows that employees losing their jobs can still afford to provide food for their families and not have to reduce or cut back considerably to deal with unemployment enchantment. In other words, this topic is important since it offers the solution and takes away the feeling of the pain of unemployment for the affected group of people within the United States.

Knowing or acquiring the policy comes with benefits that go beyond the family of an individual who is unswervingly affected to the larger economy. As per the Congressional Budget Department, every dollar of the unemployment insurance benefits raises cumulative economic bustle by 1.10 dollar, and every million dollars of the unemployment insurance benefits raises employment by almost six posts. Therefore, the unemployment insurance benefits policy has a positive impact on the economy per dollar used thus its importance to the public.

Background of the Policy

Unemployment insurance policies are premeditated to offer benefits to frequently employed members of the workforce who become unwillingly unemployed and who are capable and enthusiastic of accepting appropriate employment. Employees in all the fifty states within the United States of America are covered under unemployment insurance plans. The unemployment insurance plan or benefits were enacted after the Social Security Act of 1935 offered a tax offset incentive. This created a uniform national tax that was imposed on all payrolls of both industrial and commercial entrepreneurs who employed more than eight employees in a span of 20 weeks within a year. It ensured that the employers in most states with no unemployment insurance policy would not have an advantage conducting the same business in states with the same law since they would still be subject matter to the payroll tax of the federal government, and their workers would not be entitled to benefits.

Currently, the unemployment insurance policy offers temporary cash to individuals who are unemployed through no slip-up of their own. The primary idea is that the money is used immediately and consequently, provides a direct incentive to the local economies. It is given through state government through assistance from the federal government.

The policy was created in an effort to offer relief to employees who lost their jobs due to the repercussions of 1929 fiscal collapse. It spread across other states and later adopted by the federal government. The primary objective of its formation was to stabilize the economy and alleviate individual hardship stemming up due to lack of proper income and administered by the state workers or agencies under the state law. The benefits enable an individual to maintain the purchasing power on items such as food, household products, and fuel.

What the policy has achieved

Unemployment Insurance policy has helped American families for several decades since its inception. In 2009 and 2010, it helped 17 million people during the time the country was recovering from the recession since Great Depression. As per the estimates of the Census Department, unemployment insurance policy maintained 3.2 million citizens from going below the poverty level only in 2010 (Oaxaca, 17). The achievements have been both experienced by individuals and the states since it is a measure of managing the economy.

While every state handles its own program, the program of each state must adhere to specific federal laws and rules. For example, the amount of money and the period of the weekly unemployment insurance benefits are established on the employee’s previous wages and the duration of employment. The benefits are equal to almost 40-50 percent of the eligible employee’s earlier pay; however, it may be less. The program requires that the employee to have worked or be in service for a period of not less than a quarter of the earlier year before being retrenched or laid off to access the benefits. On the same note, an employee must be laid off through no fault of their own, in circumstances where the company is trying to reduce the cost of operation. Any employee who was dismissed for misbehavior or just voluntarily quit the job is not qualified for the benefits either through state or federal governments. However, it is also good to remember that the eligibility of the benefits is just on a temporary basis and only last for six months or in some cases twenty-six weeks, but can also be extended by the authority under particular situations like an economic recession.

Funding for Unemployment Benefits

Unemployment Insurance benefits are funded by the state and federal governments through payroll taxes, which are evaluated against the employers within the United States.  Employers remit funds to a special fund based unemployment and benefits payment experience on their own employees. The federal government also evaluates an unemployment insurance tax on its employers through the Federal Unemployment Tax Act, an act that enables the collection of the fund which is used for the administration of unemployment benefits.

Unemployment Insurance during the Time of High Unemployment and Financial Depressions

During the funding unemployment insurance, the state governments depend on the expansion of the surplus money to take them during and through the financial depressions at the time when the unemployment benefits payouts appear to be high. In the periods of depressions, nonetheless, the states may have a loan of funds from the federal government or increase tax rates if the funds set aside for unemployment benefit is depleted or run low. This is an important stipulation since one requirement of state-run unemployment insurance programs is that they must extend the duration of benefits when the unemployment rate increases and remains above an established level. The federal government may also authorize an expansion of the benefits payment duration when unemployment rises during a depression, paying for the extension out of wide-ranging federal incomes or levying a unique tax on employers

How the Policy Came into Effect

The policy falls under the Social Security Act of 1935 as mentioned in the above paragraph. This Act formed the Federal-State Unemployment Benefits plan. The program or plan has two major objectives;

  1. To offer temporary and incomplete wage replacement to workers who were previously employed.
  2. To assist in stabilizing the economy during depressions

This program is undertaken in each state by the state government but under control of the federal authority. FUTA imposes 6.2% gross tax rate on the first $7000 which is paid annually by the employers. This ensures a continuous flow of money through the system.

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Consequences on Employees

In situations where there is a problem with the economy, unemployment benefits offer people with certain revenue security as they search new jobs. Nevertheless, unemployment benefits also transform the advantages or incentives that the unemployed individuals are going through, expanding the job hunt. Through reducing the pressure of looking for employment, the scheme benefits the unemployed person at the expense of the general productivity as well as the long-term economic expansion or development. In addition, the program transforms the mentality of the employee thus becoming grieved since there is an increase of the dependence condition. Therefore, the unemployment insurance administrators must plan how the recompense and time for benefits about the employee’s previous revenue affect the incentive of an individual to hunt for employment.

The vicious incentives of unemployment benefits are properly written.  Sponsoring or subsidizing unemployment pulls out a job hunt. A liberal benefit that helps “provisional idleness” may lead to “chronic idleness.” As the state forms chronic idleness more appealing, more and more persons will decide on that option over a productive job. As individuals remain unemployed, their reduced expenditure will slow production during the economy, and the system will become less and less sustaining.

Apart from the comparatively short-term dangers, unemployment benefits may form a more serious long term effects which is commonly known as hysteresis or universal long-term unemployment. At the time employees are out of the employment and job market for longer durations, the skills and experience become obsolete and the possibility of remaining unemployed rises. While unemployment becomes a norm and accepted in the society, the normal level of employment and production decreases, creating a situation where there is a less-skilled labor (P.A, 2003). Recognizing hysteresis is a difficult task, but, it is possible to measure the consequences of transformations in unemployment benefits on employees. Therefore, as the unemployment benefits are always extended to assist employees, they have an impact of damaging economic growth and productivity.

The Effect on Employers and State Financial Policy

Federal government regulations propose that states should maintain, at lowest amount, unemployment trust fund reserves for one year’s anticipated payment requirements, based on the uppermost level of benefit payments experienced in the state over the last two decades. To establish the solvency of the unemployment trust funds, states apply the Average High-Cost Multiple. This is the ratio of the unaccounted balance in the unemployment trust fund to the average of the three highest duration of unemployment benefits disbursed. Any state that goes into a depression or recession below an AHCM ratio of 1.0 is at threat of insolvency ratio of less than 1.0 and 21 of those had solvency ratios lower than 0.5 (Congressional Committee, 69).

Therefore, after two years, at least 40 state unemployment insurance funds might be entirely depleted. To reload unemployment trust funds, states with low solvency rates will require either reducing or eliminating benefits or extend payroll taxes. The tax expansion will probably make worse the unemployment rate by making it more costly for companies to employ new workers.

Outcome of the Policy

Since this policy was created to relieve distress for unemployed persons and their siblings, the outcome expected is likely to be positive for the employee. They also offer extra benefits such as stimulating economic activity and employment creation. It is a major booster for the economy and jobs.

The setback with most of the companies in an economic droop is not lack of the capacity to meet the existing demand to entirely use their existing ability. In order to stop the annihilation of jobs and start to bring people together back to work, it is essential to stimulate the demand. One of the best ways to handle that targets the fiscal relief toward an unemployed worker who requires a surrogate for lost revenue. Individuals whose income is disrupted in a recession and who lack the savings to surge them over are the ones most probably to spend swiftly any extra income they get. Consequently, policies that put clientele in stores with money to spend will probably perform more to close the output gap and create employment than, for instance, business tax breaks. Given that the number of employment is gradually going down, the outcome of this policy will be negative since most states will operate in debts that have been used on the Unemployment Insurance benefits program.

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The updated or current recession indicates the insufficiency of the Unemployment Insurance program. This policy has both negative and positive impacts which comprise of the incentives. In addition to those negative incentives such as debts that public unemployment benefits form for productivity, employment hunt, and personal saving, unemployment benefits result to an economic danger for the states that restore trust funds in the time of economic depressions through increased payroll taxes on the company’s activities which later make recruiting become difficult. In this situation, establishing a better method such as Insurance Savings accounts to provide revenue for employees is recommended. Through this method, employees as well as the employers are expected to contribute towards the same account and can be used in future when there is unemployment. This will also act as motivation on the employees’ side, and cases of job loss will be limited. It will also reduce payroll taxes, and that indicates that wages will be increased as well increasing the number of employees through hiring. The contribution helps the workers to build a saving attitude not only for this reason but also for other important reasons such as individual financial situation. Finally, it ensures that workers get portions of the tax levied to offer benefits.

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  1. Vedder, Richard K, and Lowell E. Gallaway. Out of Work: Unemployment and Government in Twentieth-Century America. New York: Holmes & Meier, 1993. Print.
  2. Oaxaca, Ronald L. The Effects of Aggregate Unemployment Insurance Benefits in the U.s. on the Operation of a Local Economy. Washington, D.C: U.S. Dept. of Labor, Employment Training Administration, 1983. Print.
  3. Performance Audit: Review of the Missouri Unemployment Compensation Trust Fund. Jefferson City, Mo.: Missouri State Auditor, 2003. Print.
  4. Unemployment Insurance: Trust Fund Reserves Inadequate : Report to Congressional Committees. Washington, D.C: The Office, 1988. Print.
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