DEFINITION of 'Unemployment Compensation'

Funds paid by the state to unemployed workers who have lost their jobs due to layoffs or retrenchment. Unemployment compensation is meant to provide a source of income for jobless workers until they can find employment. In order to be eligible for it, certain criteria must be satisfied by an unemployed worker, such as having worked for a minimum stipulated period and actively looking for employment. Unemployment compensation provides partial income replacement only for a defined length of time or until the worker finds employment, whichever comes first.


Also known as unemployment insurance or unemployment benefits.

BREAKING DOWN 'Unemployment Compensation'

Unemployment compensation is paid by many developed nations and some developing economies. In the United States, unemployment compensation was ushered in by the Social Security Act of 1935, when the economy was struggling through the Depression. The U.S. unemployment compensation system is jointly managed by the federal and state governments and financed through payroll taxes on employers in most states. In Canada, the system is called Employment Insurance and is funded by premiums paid by both employers and employees.

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