The Fundamentals of Unemployment Compensation

The Fundamentals of Unemployment Compensation

Updated April 18, 2023
The Fundamentals of Unemployment Compensation
A Joint Federal-State Program
Authorization
The joint federal-state Unemployment Compensation (UC)
The underlying framework of the UC system is contained in
program provides income support through UC benefit
the Social Security Act. Title III of the act authorizes state
payments. Although there are broad requirements under
grants for administering state UC laws; Title IX authorizes
federal law regarding UC benefits and financing, the
the various components of the federal Unemployment Trust
specifics are set out under each state’s laws. States
Fund (UTF); and Title XII authorizes advances or loans to
administer UC benefits with U.S. Department of Labor
insolvent state programs. UC is financed by federal taxes
(DOL) oversight, resulting in 53 different UC programs
under the Federal Unemployment Tax Act (FUTA) and by
operated in the states, the District of Columbia, Puerto
state payroll taxes under the State Unemployment Tax Acts
Rico, and the Virgin Islands.
(SUTA).
Total UC expenditures include benefits and administrative
costs. During economic expansions, states fund
UC in a Snapshot, FY2022
approximately 85%-90% of all UC expenditures—as almost
all of the benefits are state-financed by state unemployment
4.4M
$401
14.2 weeks
4.4 M
taxes. In comparison, federal expenditures are relatively
Average Weekly
Average
Average
New
small during these expansions (approximately 10%-15%) in
Claims
Weekly
Duration
UC
which federal expenditures are primarily administrative
Benefit
of Claim
Beneficiaries
grants to the states financed by federal unemployment

taxes.
In FY2022, there was still a significant share of federal

Revenues: $66.2B
expenditures in the UC system as a result of the COVID-19
Federal Unemployment Tax (FUTA): $6.9B
response. Out of $28.7 billion in total expenditures on
State Unemployment Tax (SUTA): $59.3B
permanent-law unemployment benefits and administrative

costs, 22.8% ($6.54 billion) was federally financed.
Additionally, DOL reported $8.1 billion in federal

expenditures related to the expired COVID-19 UI benefits
Regular Outlays: $28.7B
(discussed below) as states continued to process and
Administration (FUTA financed): $5.1B
adjudicate benefit claims for weeks of unemployment that
Regular UC Benefit (SUTA financed): $22.2B
occurred while those programs were authorized. In
1st Week of Regular UC (temporarily General Fund): $710M
FY2022, federal expenditures amounted to almost 40% of
UCFE (Agency pays) and UCX (Service pays): $300M
the $36.8 billion in total UC system expenditures, which
EB (temporarily 100% FUTA financed): $440M
includes both permanent-law and COVID-19 program
Temporary COVID-19 UI Benefit Outlays
outlays.
(General Fund financed): $8.1B
Objectives
PUA: $2.8B
PEUC: $110M
The UC program’s two main objectives are to provide
FPUC ($300/week): $5.2B
temporary partial wage replacement to involuntarily
MEUC ($100/week): $0
unemployed workers and to stabilize the economy during
recessions. These objectives are reflected in the current UC
Source: U.S. Department of Labor (DOL), Employment and
program’s funding and benefit structure.
Training Administration, Office of Unemployment Insurance.
During economic expansions, UC program revenue rises
Notes: “UCFE” is UC for federal employees; “UCX” is UC for
through increased tax revenue whereas UC program
former servicemembers. EB was temporarily 100% federally
spending falls as fewer workers are unemployed and
financed during FY2020 and FY2021. Most EB payments in FY2022
receive benefits. The effect of collecting more taxes than
were delayed payments based upon weeks of unemployment that
are spent on benefits dampens demand for goods and
occurred before FY2022. Alaska was the only state in an EB payable
services in the economy. This also creates a surplus of
period in FY2022 (ended December 11, 2021).
funds, or a cushion of available funds, for the UC program
to draw upon during a recession. In a recession, UC tax
revenue falls and UC program spending rises as more
Benefits
workers lose their jobs and receive UC benefits. The
The UC program pays benefits to workers who become
increased amount of UC payments to unemployed workers
involuntarily unemployed for economic reasons and meet
dampens the economic effect of lost earnings by injecting
state-established eligibility rules. The permanent-law UC
additional funds into the economy.
program generally does not provide UC benefits to the self-
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The Fundamentals of Unemployment Compensation
employed, those who are unable to work, or those who do
primarily based upon delayed payments subject to the 100%
not have a recent earnings history.
federal financing provisions in the CARES Act. For more
details on the EB program, see CRS Report R46687,
States usually disqualify claimants who lost their jobs
Unemployment Insurance (UI) Benefits: Permanent-Law
because of inability to work, voluntarily quit without good
Programs and the COVID-19 Pandemic Response.
cause, were discharged for job-related misconduct, or
refused suitable work without good cause. To receive UC
Temporary Programs
benefits, claimants must (1) have enough recent earnings
Congress has acted nine times—1958, 1961, 1971, 1974,
(distributed over a specified period) to meet their state’s
1982, 1991, 2002, 2008, and 2020—to create temporary,
earnings requirements; and (2) be able, available, and
additional UI benefits in response to recessions. Most
actively searching for work.
recently, in response to the COVID-19 recession, Congress
created Pandemic Unemployment Assistance (PUA),
Most states provide up to a maximum of 26 weeks of UC
Pandemic Emergency Unemployment Compensation
benefits. Under current state laws, the maximum duration of
(PEUC), and Federal Pandemic Unemployment
UC benefits ranges from up to 12 weeks (under certain
Compensation (FPUC) under the CARES Act; and Mixed
economic conditions in Florida, Kentucky, and North
Earner Unemployment Compensation (MEUC) under P.L.
Carolina) to up to 30 weeks (Massachusetts). For more
116-260, the Consolidated Appropriations Act, 2021. All of
information on UC eligibility and benefit duration in states,
these temporary COVID-19 unemployment benefits expired
see CRS Report R46687, Unemployment Insurance (UI)
in September 2021—although states continued to adjudicate
Benefits: Permanent-Law Programs and the COVID-19
claims and pay benefits owed for weeks of unemployment.
Pandemic Response.
For FY2022, these benefits totaled $8.1 billion and were
Former federal workers may be eligible for unemployment
financed by General Fund transfers from the U.S. Treasury.
benefits through the Unemployment Compensation for
For information on PUA, PEUC, MEUC, FPUC, and
Federal Employees (UCFE) program. Former U.S. military
MEUC, see CRS Report R46687, Unemployment Insurance
servicemembers may be eligible for unemployment benefits
(UI) Benefits: Permanent-Law Programs and the COVID-
through the Unemployment Compensation for Ex-
19 Pandemic Response. For more details on earlier
Servicemembers (UCX) program. For more information on
temporary UI programs, see CRS Report RL34340,
the UCX program, see CRS Report RS22440,
Extending Unemployment Compensation Benefits During
Unemployment Compensation (Insurance) and Military
Recessions.
Service. In FY2022, states paid $22.2 billion in regular UC
benefits and federal agencies paid $0.3 billion in
Financing
UCFE/UCX benefits, which are considered on-budget,
The UC program is financed by federal payroll taxes under
mandatory expenditures. The UC program’s administrative
the FUTA and by state payroll taxes under SUTA. The
costs, which go through the federal appropriations process,
0.6% effective net FUTA tax paid by employers on the first
were estimated to total $5.1 billion. Additionally, based
$7,000 of each employee’s earnings (no more than $42 per
upon Section 2105 of the Coronavirus Aid, Relief, and
worker per year) funds federal and state administrative
Economic Security (CARES) Act (P.L. 116-136), an
costs, loans to insolvent state UC accounts, the federal
additional $0.71 billion for the first week of regular, state
share (50%) of EB payments under permanent law, and
UC benefits were paid by the General Fund of the U.S.
state employment services. For FY2022, an estimated $6.9
Treasury.
billion was collected in federal FUTA taxes, whereas an
estimated $59.3 billion was collected in SUTA taxes to
Unemployment Benefits for the Long-
finance UC benefits. For more details on UC financing, see
Term Unemployed
CRS Report RS22077, Unemployment Compensation (UC)
Federal law augments the regular UC benefit with the
and the Unemployment Trust Fund (UTF): Funding UC
Extended Benefit (EB) program if certain state economic
Benefits.
conditions are met. In response to economic recessions,
Congress has often created additional weeks of temporary
Program Integrity
unemployment benefits (including the now-expired
Program integrity issues have long been of concern for the
unemployment benefits enacted in response to the COVID-
UC program. The improper payment estimate for UC has
19 pandemic).
been above 10% for 15 of the past 19 years. The temporary
COVID-19 UI benefits created in response to the pandemic
Extended Benefits
exacerbated program integrity concerns related to improper
The EB program was established by the Federal-State
payments and fraud. For an overview, see CRS In Focus
Extended Unemployment Compensation Act of 1970
IF12243, Unemployment Insurance Program Integrity:
(EUCA; P.L. 91-373) (26 U.S.C. §3304, note) to provide
Recent Developments. For information on the procedures
additional weeks of unemployment benefits if high
states may use to recover UC overpayments through various
unemployment exists within the state. After UC benefits are
means, see CRS Insight IN12127, Unemployment Insurance
exhausted, the EB program may provide up to an additional
Overpayment and Fraud Recovery.
13 or 20 weeks of benefits, depending on worker eligibility,
state law, and economic conditions in the state. The EB
program is funded 50% by the federal government and 50%
Julie M. Whittaker, Specialist in Income Security
by the states. However, immediately prior to FY2022, the
Katelin P. Isaacs, Specialist in Income Security
EB program was temporarily 100% federally funded. EB
IF10336
benefits paid in FY2022 totaled $0.44 billion and were
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The Fundamentals of Unemployment Compensation

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