Unemployment Compensation

AuthorJeffrey Lehman, Shirelle Phelps

Page 145

Insurance benefits paid by the state or federal government to individuals who are involuntarily out of work in order to provide them with necessities, such as food, clothing, and shelter.

Unemployment compensation for U.S. workers was established by the federal SOCIAL SECURITY ACT OF 1935 (42 U.S.C.A. §§ 301 et seq.). Unemployment insurance provides work-ers who have lost their job through no fault of their own with monetary payments for a given period of time or until they find a new job. This compensation is designed to give an unemployed worker time to find a new job equivalent to the one lost without major financial distress. Unemployment compensation is also justified as a way to provide the U.S. economy with consumer spending during an economic downturn.

The mass unemployment during the Great Depression of the 1930s led to the enactment of the federal unemployment compensation law. States had resisted establishing their own unemployment compensation plans because the first states to tax employers to fund such a plan would lose business and jobs to other states. Therefore, a federal program was needed. Much of the federal plan was implemented under the Federal Unemployment Tax Act of 1935 (26 U.S.C.A. §§ 3301 et seq.). In 1938, Congress enacted the Railroad Unemployment Insurance Act (42 U.S.C.A. §§ 351 et seq.), which provides unemployment compensation for railroad workers who lose their jobs.

A combination of federal and state taxes is levied on employers to fund state-administered programs that meet minimum federal standards. Federal funds are also used for administrative costs and to set up employment offices that attempt to match workers with new jobs. In 2000, approximately 125 million individuals, or 97 percent of all wage earners, were covered by unemployment compensation programs. During that same year, an average of 38 percent of unemployed individuals were receiving some sort of unemployment benefits.

In general, a tax on employers provides the funds to pay unemployment compensation. An employer who has more than a specified minimum number of employees is ordinarily required to file regular reports that disclose the number of employees and the amount of their wages, including tips. A standard or basic rate is charged against the employer based on the amount of wages paid. If the employer does not lay off employees, the employer will be entitled to a credit. An...

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