Unemployment Insurance and Workers’ Compensation

Background

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

Unemployment Insurance 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 and actively look for work, and they 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.

The current unemployment system is inadequate. Only around one-quarter of people who lack a job receive unemployment insurance, and benefit levels are generally low.

States have responsibility for setting the main parameters for unemployment insurance benefits, including eligibility rules, benefit amounts and durations, tax levels, and taxable wage bases. As a result, there is dramatic variety in unemployment insurance benefits among the states. For example, the percentage of unemployed individuals who receive these benefits varies from a low of 10.5 percent in North Carolina to a high of 52 percent in New Jersey. Maximum weekly benefit levels range from a low of $235 in Mississippi to a high of $823 in Massachusetts.

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

Another way to increase the proportion of the unemployed who receive support during their job search is to offer financial support 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 caused by caregiving responsibilities or discouraged workers who left the labor force but need to return.

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. However, in 2020, Congress temporarily allowed such workers to receive benefits. The challenge for policymakers is how to create a sustainable, ongoing funding source for these benefits.

Many states have ongoing problems with the solvency of state unemployment insurance trust funds. This is a result of their reluctance to increase unemployment insurance tax rates or the wage baseThe amount of earnings from work that is taxed to pay for a program.. In most states, employers pay a tax on less than $12,000 in earnings per employee, and it is not adjusted regularly to reflect increases in wages over time. Other options to finance the system would be through federal funding or by imposing a tax on workers rather than solely on employers.

States can use their unemployment programs to minimize layoffs during economic downturns. Work sharingA program that provides partial unemployment insurance benefits to workers whose hours have been reduced during an economic downturn. 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 compensationA program that provides partial unemployment insurance benefits to workers whose hours have been reduced during an economic downturn., partial unemployment benefits can compensate workers for their reduced work hours.

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 an employee 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, some states reduce or eliminate unemployment benefits for claimants receiving earned pension benefits. Similarly, many states reduce or terminate workers’ compensation benefits when recipients become eligible for Social Security 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.

UNEMPLOYMENT INSURANCE AND WORKERS’ COMPENSATION: Policy

UNEMPLOYMENT INSURANCE AND WORKERS’ COMPENSATION: Policy

Unemployment insurance

Policymakers should explore new and innovative approaches to address unemployment.

All 50 states and the federal government should adopt reforms to increase both the proportion of workers eligible for unemployment insurance benefits and the financial assistance provided to people who are unemployed.

  • Part-time workers and individuals seeking part-time work should be eligible to receive unemployment insurance (UI) benefits.
  • Waiting periods should be eliminated, UI should be available to job-training participants, and the compensation formula used in eligibility determinations should be based on a worker’s most recent earnings.
  • The federal emergency benefits program should be improved to respond to high unemployment rates without burdening state budgets.
  • Job-seekers who are new to the workforce or reentering it after time away should be eligible for a job-seekers allowance.
  • Funding for state UI trust funds should be increased.
  • There should be robust minimum standards for the number of weeks of benefits states must provide and the percentage of prior earnings that must be replaced.

During economic recessions and recoveries, Congress and the states should provide additional safety-net benefits. Training opportunities and access to job search assistance and training programs should be offered to those who have exhausted their unemployment benefits.

States should increase funding for their unemployment insurance (UI) programs rather than reduce the basic 26 weeks of unemployment benefits that they have traditionally provided. They should improve the financial situation of their UI trust funds.

States should facilitate short-term compensationA program that provides partial unemployment insurance benefits to workers whose hours have been reduced during an economic downturn. programs by amending their UI laws to permit the payment of prorated unemployment benefits to employees on reduced work hours.

State unemployment agencies should inform applicants of the importance of starting a job search early in their unemployment spell.

State unemployment agencies should have sufficient staffing and other resources to assess applicants and promptly refer them to workforce development centers.

Policymakers should provide dedicated funding to improve the technology infrastructure of the UI system to ensure the timely processing of benefit applications and payments.

Offsets

Workers should be eligible for full workers’ compensation or unemployment benefits regardless of age and other sources of income such as pension.

Offset or termination provisions should be repealed.