What Is Unemployment Compensation?

Unemployment compensation is paid by the state to unemployed workers who have lost their jobs due to layoffs or retrenchment. It 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, such as having worked for a minimum stipulated period and actively looking for employment. Unemployment compensation, generally provided by an unemployment check or a direct deposit, provides partial income replacement for a defined length of time or until the worker finds employment, whichever comes first. It is also known as “unemployment benefits” or “unemployment insurance.”

Key Takeaways

  • Unemployment compensation is a benefit paid to people who have recently lost their job via no fault of their own (laid off, the business closed, etc.)
  • Unemployment benefits are often calculated as a percentage of the average of the claimant’s pay over a recent 52-week period.
  • Compensation is usually paid by an unemployment check or via direct deposit.

Understanding Unemployment Compensation

Unemployment compensation is paid by many developed nations and some developing economies. In the United States the unemployment compensation system is jointly managed by the federal government and each individual state government. Benefits are based on a percentage of a worker’s average pay over a recent 52-week period, and their calculation can vary by state.

Benefits are generally paid by state governments, funded in large part by state and federal payroll taxes paid by employers. Most states provide benefits for 26 weeks, though this varies by state and can go as low as 12 and as high as 30. Extensions are possible during periods of high unemployment.

Unemployment Compensation Requirements

As noted, both the federal government and the individual states manage unemployment insurance in the U.S.

Requirements vary by state in terms of how benefits are determined. To be eligible in New York, for example, in 2020 you must have worked and been paid wages in two calendar quarters, been paid at least $2,600 in one calendar quarter, and the total wages paid to you must be at least 1.5 times the amount paid to you in your high quarter. The minimum benefit is $104 per week, and the maximum benefit is $504 per week. New York and many other states are waiving the seven-day waiting period for benefits for people who are out of work due to coronavirus (COVID-19) closures or quarantines.

26

The maximum number of weeks for which most states will pay unemployment compensation.

Three New Unemployment Programs Under the CARES Act

On March 27, 2020, President Trump signed into law a $2 trillion coronavirus emergency stimulus package called the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It temporarily expands unemployment insurance benefits through three initiatives: the Pandemic Unemployment Assistance program, the Federal Pandemic Unemployment Compensation program and the Pandemic Emergency Unemployment Compensation program. Here is a quick summary of how they compare:

PROGRAM WHAT IT DOES
Pandemic Unemployment Assistance (PUA) Extends benefits to the self-employed, freelancers, and independent contractors. 
Federal Pandemic Unemployment Compensation (FPUC) Provides a federal benefit of $600 a week.  
Pandemic Emergency Unemployment Compensation (PEUC) Extends benefits for an extra 13 weeks after regular unemployment compensation benefits are exhausted.

History of Unemployment Compensation

The first unemployment compensation system was introduced in the United Kingdom with the National Insurance Act of 1911 under the Liberal Party government of H.H. Asquith. The measures were intended to counteract the increasing footprint of the Labour Party among the country’s working-class population. The National Insurance Act gave the British working classes a contributory system of insurance against illness and unemployment. However, it only applied to wage earners. The families of wage earners and those earning non-wage income had to rely on other sources of support. Communists—who thought such insurance would prevent workers from starting a revolution—criticized the benefit, but employers and Tories saw it as a “necessary evil.”

The British unemployment compensation scheme was based on actuarial principles, and it was funded by a fixed amount contributed by workers, employers, and taxpayers. However, the benefits were restricted to particular industries that tended to have more-volatile employment requirements, such as shipbuilding, and it did not make provision for any dependents. After one week of unemployment, the worker was eligible to receive seven shillings per week for up to 15 weeks in a year. By 1913 about 2.5 million people were insured under the British scheme for unemployment benefits.

In the United States, unemployment compensation began at the state level when Wisconsin enacted it in 1932 to assuage the effect of the Great Depression. In 1935 President Franklin D. Roosevelt signed the Social Security Act and established it nationwide. Initially, employers of fewer than eight employees were exempt from having the coverage. That number dropped to four in 1954, and was reduced to one in 1970.

In Canada the system is called “Employment Insurance (EI)” and is funded by premiums paid by both employers and employees. Canada’s first national system of unemployment was established in 1940 by the Unemployment Insurance Act, also prompted by the effects of the Great Depression. The law was expanded and liberalized in 1971 and finally replaced in 1996 by the Employment Insurance Act, which changed the program’s name to emphasize that its intention is to promote employment rather than just support unemployment.