Unemployment Insurance and Workers’ Compensation

In addition to Social Security and Medicare, employers are required to participate in two forms of employment insurance to protect their workers. One is the joint federal-state unemployment insurance (UI) system. The other is the state-based workers’ compensation programs. Both programs are funded through employment taxes.

UI provides a basic, time-limited benefit to qualifying unemployed workers who have lost a job through no fault of their own. To be eligible, workers must have demonstrated a sufficient recent work history. They must be available to work, actively look for work, and cannot refuse suitable work.

This benefit is particularly important to older workers. Workers age 50 and older are slightly less likely to be unemployed than workers age 25–49. But once unemployed, older workers tend to remain so longer than their younger counterparts.

States have responsibility for setting the main parameters of UI benefits, including eligibility rules, benefit amounts and durations, tax levels, and taxable wage bases. As a result, there is great variety in UI programs among the states. For example, maximum weekly benefit levels range from a low of $235 in Mississippi to a high of $1,079 in Washington.

States could increase eligibility for unemployment insurance in a number of ways. They could pay benefits to unemployed part-time workers searching for new part-time work and workers who leave jobs for compelling personal reasons. In addition, they could pay an allowance for children and provide benefits for people engaged in training. They also could change the way they define whether an applicant has a sufficient recent work history to qualify for unemployment insurance benefits. Under the current definition, earners with lower wages are less likely to qualify than earners with higher wages.

Financial support could be offered to people who do not qualify for unemployment insurance but need assistance during a job search. This could include people returning to the labor force after an absence due to caregiving responsibilities or discouraged workers who left the labor force but need to return.

States also could use their unemployment programs to minimize layoffs during economic downturns. Work sharing is an alternative to layoffs. It enables employers to reduce work hours and spread the remaining work among employees who might otherwise be terminated. Often called short-term compensation, partial unemployment benefits can compensate workers for their reduced work hours.

One challenge for the system is how to support self-employed workers, independent contractors, and gig economy workers who lose work. Because the tax is paid by employers, self-employed workers and independent contractors are typically not eligible for unemployment insurance benefits. At the start of the COVID-19 pandemic, eligibility for UI benefits was expanded to such workers as part of the Pandemic Unemployment Assistance program. However, this program ended in September 2021 after only one and a half years.

Another challenge for states is chronic underfunding of their state unemployment insurance trust funds. As of January 1, 2024, only 19 states had UI trust funds that met the U.S. Department of Labor's recommended minimum solvency standard. This is in part due to policymakers setting the taxable wage base—the portion of an employee’s annual wages that are subject to UI taxes—too low. For instance, in over half the states, the taxable wage base is $15,000 or less. States could increase the taxable wage base. They also could index it to the state's average wage, so that it automatically adjusts every year.

Workers’ compensation programs offer wage replacement and medical benefits to employees who are injured on the job or become ill as a result of work. To be eligible for benefits, workers must be employees of an organization that carries workers’ compensation insurance.

Some states have instituted unemployment insurance and workers’ compensation policies that undercut economic security. These policies are sometimes referred to as offsets. For example, unemployment benefits are reduced or eliminated for claimants receiving earned pension benefits. Similarly, many states reduce or terminate workers’ compensation benefits when recipients become eligible for Social Security Disability Insurance or retirement benefits. This has adverse effects on retirement security. Workers whose occupational injury or illness prevents them from working for an extended period leading up to retirement are significantly affected.