What is 'Unemployment Compensation'

Unemployment compensation is 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. It's 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 American unemployment compensation system is jointly managed by the federal and state governments and financed through payroll taxes on employers in most states. In the United States, policies vary by state, but unemployment benefits will usually pay eligible workers up to $450 per week. Benefits are generally paid by state governments, funded in large part by state and federal payroll taxes levied against employers. In Canada, the system is called Employment Insurance and is funded by premiums paid by both employers and employees.

History of Unemployment Compensation

The first unemployment compensation system was introduced in the United Kingdom with the National Insurance Act 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.

When unemployment compensation was implemented in the UK, communists criticized the benefit, who thought such insurance would prevent workers from starting a revolution. Meanwhile, 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 for receiving 7 shillings per week for up to 15 weeks in a year. By 1913, 2.3 million were insured under the British scheme for unemployment benefits.

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