Unemployment Insurance in a Free Society

Studies | Welfare

No. 274
Tuesday, March 29, 2005
by William B. Conerly, Ph.D.


Introduction

“Unemployment insurance has changed little since its inception.”

In 1935, the federal government set up the unemployment insurance (UI) system to pay benefits to laid-off workers. It is basically a monopoly insurance fund that has changed little since its inception. State governments administer the system, and state payroll taxes pay cash benefits to workers. The federal government collects an additional unemployment insurance tax (FUTA, after the Federal Unemployment Tax Act) from employers, and makes loans to states when their trust funds run low. Benefits are paid for a limited period of time, usually up to six months, while the worker seeks a new job. However, workers are often eligible for extended benefits that are paid from general federal tax revenues. Benefits for low-wage workers typically replace 50 percent to 70 percent of their pay. There is a ceiling on the maximum benefit, so middle- and higher-income workers receive a much smaller portion of their previous pay.


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