UNEMPLOYMENT COMPENSATIOn AND UNEMPlOYMENT INSURANCE IN THE USA

THE UNEMPLOYMENT INSURANCE IN THE USA by Michael Rösch

The Unemployment Compensation Program is established to insure workers against loss of wages during times of temporary unemployment. It is neither a welfare nor a relief program, but rather an insurance program for the benefit of qualified unemployed workers.

(quoted from the homepage of the Maine Department of Labor—http://www.state.me.us/labor/ucd/homepag1.html )

It is time to break the bad habit of expecting something for nothing from the government or from each other. Let us all take more responsibility not only for ourselves and our families but for our communities and countries.

(quoted from Bill Clinton’s speech to assumption of office in1993)

These two quotations show the principle aim of the American Unemployment Insurance (further on quoted as UI) and the social policy in general. As many people estimate the differences in the UI as an important key to explain the great differences in fighting unemployment. The theme of this essay will, therefore, be to characterize briefly the specialities of the American UI system. The first part will explain the historical origins of the American UI which might be useful to understand it better. This will be followed by a description, on the one hand, of its organisation and, the conditions of receiving benefits.

The historical development

The American UI was formed in 1935 by Franklin D. Roosevelt. The Social Security Act was introduced to reduce the social problems of the great depression. Within two years each single state of the United States had passed its own unemployment compensation law. Until 1935 existed only voluntary agreements on unemployment compensation between trade unions and entrepreneurs. In this time only 235,000 workers had an insurance in case of unemployment.

In the 1970s the US-Congress passed some social security amendments as a part of the "Great Society" program. These additional rules enlarged the number of people who could receive money, increased the time in which money was paid in case of long-term unemployment it also encouraged further education.

However, big parts of the American working population did not have any insurance for many years. For example, railroad employees only got their own insurance through the federal railroad unemployment act in 1938. Even later on were many other occupational groups like domestic servants, agricultural and occasional workers and communal public employees. Most of them got insured 1976 when the last reform and enlargement of the UI system took place. At that time, more than 10 million people were admitted into the UI (Holtfrerich 1991).

From about 1939 up to 1980 the benefits and the number of people who can receive them was enlarged systematically. During the 1980s, probably as a result of the economic crisis many parts of the UI were changed and benefits were reduced. This concerned the height as well as the duration of insurance payment. In the 1990s, as the quotation above emphazises more reforms took place and were discussed in a dialogue, which was initialized by President Clinton to reduce the states tasks and to increase the personal responsibility. An important aim was to force the unemployed persons to search jobs sooner through reduced benefits and a shorter time of their payment.

The organisation and financing of the system

The American UI refers, as stated above, to the Social Security Act of 1935.

The UI is financed by a mixture of federal taxes and state taxes. These revenues are supervised by the Department of Labor which is also responsible for the legal basis. Whereas, the Department of Treasury obtains the task to administer the finances.

The Social Security Act of 1935 obliged any enterprise, consisting of more than eight employees (changed in 1954 to more than four employees), to pay a tax rate of 3.2% of the total sum of its gross wages to finance the UI. As it was possible to get back 90% of the paid taxes in case of the state having an own UI law and tax, the entrepreneurs forced their states to install their own laws. Therefore in 1937 each single state had its own UI.

To get back the 90% of the paid taxes and to get supports from the federal budget, the Federal Unemployment Act demands certain federal provisions to be realized in the states’ laws:

The performance principle - the UI depends on the income of the demander
The principle of collaboration - the worker must collaborate with the appropriate offices to get a new job
Regularly reports to the federal administration
The registration of refused workers by their social insurance number to prevent abuse
The principle of economizing to prevent the states from concurring by especially high expenditures which must be paid by the federal budget.

The federal taxes as well as the contributions from the states are paid directly to the Unemployment Trust Fund. This fund, which is administrated by the Department of Treasury, consists of different accounts. Beside these states accounts in the Unemployment Trust Fund there is another account in which the federal contribution is included. There is no actual financial balancing between the states. Until 1982 any state insurance in deficit could apply for an interest free loan from the federal account. Since then any federal loan contains 10% interest charge (see Holtfrerich 1991). Because of the separate states accounts and the federal account, the UI is not principally a matter of federal law but a matter of each states’ law.

The aims of the American Unemployment Insurance

"Unemployment Insurance is a program—established under Federal and State law—for income maintenance during periods of involuntary unemployment due to lack of work, which provides partial compensation for wage loss as a matter of right, with dignity and dispatch, to eligible individuals. It helps to maintain purchasing power and to stabilize the economy. It helps to prevent the dispersal of he employers’ trained work force, the sacrifice of skills and the breakdown of labour standards during temporary unemployment."

(quoted from a description of the Unemployment Insurance by the Department of Labour in 1955—see: http://www.doleta.gov/dialogue/tec-sec2.html)

As this quotation states, the American UI system does not claim to last for a long period of time. It is only to get over a short period of unemployment and crisis. The performance principle, the relation between the former wage and the paid support fulfils the demand of the quotation to the maintenance of purchasing power as well as to keep the dignity and the life standard of the jobless person. It is due to this person to search for a new job and to accept one if it is offered to him or her. In case of long-term unemployment it is not in the responsibility of the UI anymore. In such a situation the social welfare has to take charge. That means, in the USA does not exist any kind of unemployment benefit, it is only temporary short-term earnings-related benefit. According to the Social Security Act it is possible to extend the period of payment in case of a very high number of jobless people or an economic crisis. A principle which was reduced and finally given up in the last 20 years is that the UI should not be used to force workers to accept substandard working condition. The function of macro-economic stabilization in case of economic crises, which means that money is spent in crises to keep up economic power of the society, is very important as well.

Conditions to receive earnings-related benefits

As not the federal Department of Labor but every state is responsible for the division of the benefits it is not possible to give general guidelines about the eligibility and demands. However, it is possible to show some principles which are valid in most states. Generally, should any worker receive benefits who had previous working experience and did not become jobless on his own fault or interest.

"To be eligible to receive unemployment benefits in most states:

1. You must meet the state requirements for wages earned or time worked during a one year period prior to the claim.

2. You must have become unemployed ( or only partially employed ) through no fault of your own.

3. You must be able to work: This means that you are physically and mentally capable of working every day of the week for which you are claiming benefits.

4. You must be available for work: This means that you are ready to start a job immediately. It also means you have transportation and do not have to remain at home to care for children or other dependents. You must be available for work every day of the week for which you are claiming benefits.

5. You must actively seek work: This means that for each week of benefits you claim, you must make an active search for work and do all that is reasonable to secure reemployment."

(http://www.doleta.gov/programs/claims.htm--from an official consideration of the Department of Labor)

Unemployment benefits are paid for a seven day period in the most states. Common conditions (that means most states meet similar conditions) for an extension of this period are, that the unemployed person has to report to the local UI office, the unemployed person is not allowed to refuse offered jobs without loosing its claims.

Before receiving any benefits a waiting period of one week exists in the most countries. The maximum extension of receiving benefits is 26 weeks. This period can, as stated above, be lengthened in case of a great number of unemployed persons.

The principle height of the benefits should be, referring to the performance principle 50 % of the former earned wage or salary. In the last years this amount has been reduced in order to enlarge the incentive of finding a new job soon.

For further legal information see the Federal Unemployment Tax Act: http://www.law.cornell.edu/uscode/26.html and http://www.doleta.gov/dialogue/technicl.htm or http://www.doleta.gov.programs/uimap.htm to see the exact regulations of the different states.

Conclusion

The American Unemployment Insurance system is not aimed for a long termed support of unemployed persons. It acts as a bridge for a short time to help the jobless until they are able to find a new job. An important point is that it is supposed to be a macro-economic stabilizator. This refers to the old fordistic and keynesianistic assumption, that economy can only grow when there are consumers who can buy goods and that it is reasonable for the state to spend more money in times of crises.

Finally, one could resume that the American UI program offers the possibility to receive benefits under certain, at least nowadays, very strict conditions for a short period of time. The number of covered persons still is relatively low, because for example self employed or part-time workers (approximately 18 million workers in 1997) are excluded from the UI (see Table 1). Twelve percent of all unemployed persons do not even file for unemployment compensation. his is often explained as result of the reduced union membership and the reduced knowledge of the workers about their rights. Concerning the low level of coverage and eligibility in connection with the shifting of the problem of long-termed unemployment from the UI to the social welfare systems might give reasons for the hypothesis the current American job miracle and the often stated advantages of the American UI program are not as big as they seem, when regarding the social costs and problems resulting from it. This might be substantiated by the extremely low percentage of insured unemployment from total unemployment (Table 1). The huge differences between the minimum and maximum benefits of the single states (Table 2) can be regarded as another indicator for social injustice and inequality and for the problems related with the American Unemployment Insurance.