Race and Ethnicity

Primer: How the unemployment insurance system operates


Unemployment insurance (UI) is a pillar of the social safety net. During normal economic times, UI helps families to protect against unexpected drops in income. In recessions, it takes on an added role as economic booster, helping to maintain spending against the downward spiral that is typical of most downturns. It was introduced as a national policy in the United States in the wake of the Great Depression, after several states had tried and largely failed to establish their own programs.

The core aspects of UI haven’t changed much since 1937. In essence, UI is a government program jointly funded by states and the federal government, and mostly administered by states. The federal government sets certain basic ground rules, while states can fill in most of the details. States also determine whether workers and their employers have complied with state and federal rules.

UI provides a partial replacement of wages for some recently unemployed workers. A worker who is fired, or is forced by certain compelling circumstances to leave, can claim benefits, while workers who quit voluntarily usually cannot. Eligible workers must submit a claim to a local unemployment office, and in most cases must show the office that they are available for and seeking a replacement job. Claimants also must meet “monetary eligibility” targets, meaning that they must show that they earned some minimum amount in the year or so before submitting their claim. This rule makes lower-earning part-time workers effectively ineligible for UI in many states. Self-employed individuals, such as those who work as contractors rather than employees, are also usually ineligible, although in 2020 a special program (Pandemic Unemployment Assistance, or “PUA”) enacted by Congress as part of the CARES Act in response to the COVID-19 pandemic temporarily granted benefits to these workers.

The fraction of separated workers (unemployed, for any reason) who receive benefits from the regular (i.e., nonemergency programs) is known as the “recipiency rate.” Because states vary so widely in their rules, so too do their recipiency rates. In 2019, although the national average was 28%, New Jersey topped the nation at 59%, while in many states fewer than one in six separated workers got any UI at all. Florida was lowest, at 11% (U.S. DOL-ETA 2021b). The recipiency rate in the United States is far below average for the rich countries of the Organisation for Economic Co-operation and Development (OECD 2018).

If a worker is found eligible, she is paid a fraction of her old wages, known as the “replacement rate,” up to a statutory dollar-value cap. Both this fraction and the cap are set by states. At the end of 2019, weekly benefits averaged $371 nationwide; before tax this represented a replacement of about 38% of the average wage (U.S. DOL-ETA 2021a). Again, the United States replaces a much smaller fraction of worker wages than many of its rich country peers in the OECD, and the U.S. replacement rate is below the OECD average (OECD 2021b).

Workers can only claim benefits for a limited period, 26 weeks in most states, although since 2010 at least 10 states have cut their benefit duration (some to as short as 12 weeks). Federal law requires states to also offer extended benefits (EB) for an additional period when certain adverse economic conditions are met. And Congress enacted additional, temporary, extensions in 2009 and 2020.

Both state and federal governments impose taxes to pay for the UI system. In both cases, UI taxes are nominally imposed on employers, but economists believe that in the long run employers pass some of the cost of these taxes on to workers in the form of lower salaries. The federal government collects state and federal taxes and holds each state’s proceeds in a trust fund account. Federal law encourages states to require that employers are “experience rated,” so that employers whose workers file more successful claims pay a higher rate of tax.1 Firms with very high experience-rated tax rates relative to their industry are less likely to be able to pass through these taxes to workers, which means that experience rating creates real incentives for firms to either reduce turnover or find ways to deny benefits to workers (see Section 2. Financing).

State revenues pay for benefits, while the federal revenues fund grants to cover most of the direct costs of UI administration. States also must pay 50% of the cost of extended benefits when those are active, but in recent recessions the federal government has covered 100% of those expenses, as well as the full cost of the emergency extensions.

Additional details on UI finances, eligibility, benefit levels, and benefit duration

We now offer additional detail for readers who may be interested in particulars, with the summary of federal rules drawn primarily from 26 U.S. Code Chapter 23—Federal Unemployment Tax Act (https://www.law.cornell.edu/uscode/text/26/subtitle-C/chapter-23) and state rules based largely on the U.S. Department of Labor’s “Significant Provisions of State Unemployment Insurance Laws” (U.S. DOL-ETA 2020b). In the current UI system, most rules are set individually by states. Although federal law imposes a handful of rules, the main influence of federal law on states is by way of the tax system and other financial incentives. We therefore begin with some added information about how UI is funded.


The taxable wage base. States and the federal government both collect unemployment taxes from employers on the “taxable wage base.” Each employer pays a tax on each dollar of wages paid to employees, up to a cap. The portion of wages under the cap is the wage base. For example, the federal tax is imposed only on the first $7,000 of wages paid to each employee. The wage base on which the state tax is imposed cannot be lower than the federal wage base but can be higher, and state wage bases today range from $7,000 to about $53,000, with the majority under $15,000.

The federal tax rate. Federal taxes are usually 0.6%, but only if a state is in compliance with federal requirements. If the U.S. Department of Labor were to find a state out of compliance, the tax rate would increase by a factor of 10, to 6%. To our knowledge no state has ever triggered this penalty; the list of requirements is short and DOL has little discretion to reject state rules. Thus, the current federal tax is $42 per worker annually: 0.6% times the wage base of $7,000.

The state tax rate. An employer’s total state tax payment per worker depends not only on the wage base but also on the applicable tax rate, which can vary from employer to employer. Employers with more worker turnover pay higher rates, a practice known as “experience rating.” The total payment per employee is just the product of the employer’s rate times the wage base. In Missouri, a fairly low-tax state, the average employer would pay to the state a 1% tax on the state wage base of $11,500, for a state tax total of $115 per worker. Nationwide in 2020, the total average state UI tax was about $277 per worker, a decrease from an average of $350 over the 2013 to 2018 period (U.S. DOL-OUI 2021; BLS 2020).

State trust funds. Because UI expenditures usually exceed revenues during recessions, states are required to maintain a “trust fund” account with the federal government. State tax revenues are deposited in the trust fund and then state benefits are paid out of the fund. States that run out of money can borrow from the federal government, although these debts must usually be repaid fairly quickly and at relatively high rates. States that maintain a high enough balance in their accounts can qualify for a very short period of interest-free borrowing.

Federal grants for administration and operations. Federal revenues are used mostly to pay for state administration of the UI program. The U.S. Department of Labor makes annual grants to states out of the federal unemployment insurance trust fund to cover personnel and other expenses, and it has some limited discretion to impose conditions on these grants. States also receive money under other federal grant programs for operations related to UI, such as funding for job centers that may serve to connect individuals to UI.

Eligibility for benefits

States impose both initial and continuing requirements for receiving UI benefits. Initial requirements are usually subdivided into two categories, “monetary” and “nonmonetary” requirements. Each week after receiving initial benefits, workers must typically also establish that they are “able and available” for work.

Monetary requirements for initial benefits. Monetary requirements are intended to establish that the individual is already attached to the workforce—that is, that they are experiencing a temporary interruption in earnings, not permanent unemployment. Typically, applicants must show that they have earned some minimum amount of wages in the year to year and half prior to their application. This testing period is known as the “base period,” and in most states is the first four of the five most recent completed quarters prior to application; some states are more flexible for some applicants (U.S. DOL-ETA 2020b).

Determining the minimum total wage that has to be earned during the base period is complex and varies widely from state to state. For instance, in Connecticut all that is needed is the greater of $600 or 40 times the worker’s weekly benefit amount over the base period. Next door in New York, a worker must have earned at least $2,400 in one of the base period quarters, and $3,600 overall. As a practical matter, some part-time workers are effectively disqualified from UI in states with higher minimums, such as Arizona, Kansas, Michigan, and New York.

Nonmonetary requirements for initial benefits. In addition to needing to meet these dollar thresholds, separated workers also must show that they left work for the right reasons, usually known as the “nonmonetary” requirement. Like other insurance, UI programs attempt to limit an insured’s ability to control when they receive payment, and this is the primary function of nonmonetary rules. While states vary considerably, for the most part workers cannot claim benefits if they left a job voluntarily, unless they can establish a compelling and relatively involuntary reason for their departure. Many workers lose benefits on these grounds, with nonmonetary denials averaging more than 1.2 million per year nationally (U.S. DOL-ETA 2021c).

Continuing requirements. Lastly, even after satisfying these initial hurdles workers must also establish, on a weekly or biweekly basis, that they are searching for work and available to accept a job. In most states an individual who is only able to accept part-time work is not considered “available for work” unless that worker qualified for UI benefits with part-time hours (U.S. DOL-ETA 2020a).

Together, these rules create several notable gaps in who is able to depend on UI. Self-employed individuals, including workers who in reality are employees but have been misclassified by their employer as contractors, cannot claim UI because they lack qualifying wages. Part-time workers, as we’ve noted, often fail monetary eligibility and may also be unable to establish that they are available for work. Most noncitizens without work authorization are denied benefits by federal law, although the exact boundaries of that prohibition are contested. Those who are just entering the workforce or rejoining after an extended interruption, such as mothers or recently incarcerated individuals, also cannot meet monetary eligibility standards (U.S. DOL-ETA 2020a).

Benefit levels

For the most part, states are free to decide what benefits to provide to eligible UI claimants. Key factors that determine a worker’s benefits are the share of pretax wages paid, also known as the “replacement rate,” as well as minimum and maximum weekly benefit amounts. Net benefit amounts are also affected by state and federal government policies on whether UI benefits are taxed.

State formulas for determining weekly benefits are complex and vary considerably from state to state. A plurality approach is to compute the worker’s highest quarterly wage during the base period (again, the base period is usually the four quarters preceding the most recent completed quarter). Among these states, many of them award workers one-half of their average weekly wage during that highest-wage quarter. Beneficiaries always get at least a minimum weekly benefit, with the median state offering around $50 (U.S. DOL-ETA 2020b).

Weekly benefits are capped, usually at some multiple of the average weekly wage for all workers in the state. In 2020, there were six states (Alabama, Arizona, Florida, Louisiana, Mississippi, and Tennessee) where the maximum weekly benefit was less than $300; in Mississippi it was just $235. A few states additionally grant a small allowance for each dependent, which also can increase the maximum benefit amount. For example, in 2020 the maximum benefit for any household, including the dependent allowance, was the $1,234 allotted in Massachusetts.

In general, a worker who is receiving benefits loses them when returning to work. To encourage part-time work among benefit recipients, most states allow a small amount of part-time earnings in addition to UI. Any earnings above this amount then reduce benefits dollar for dollar: effectively, a 100% marginal tax rate. A typical earnings disregard is 20% to 25% of the weekly benefit amount (U.S. DOL-ETA 2020b). So, for instance, with a disregard of 20%, a worker receiving $200 per week in benefits could earn up to $40 in added wages without reducing their benefits, but then a worker who earned $50 would get only $190 in benefits.

Unemployment insurance benefits are included in federal taxable income for income tax purposes, but are not subject to the Social Security payroll tax (Congress also exempted the first $10,200 of 2020 UI benefits from tax for lower-earning households). Most states follow federal law with respect to taxation of UI benefits, although California and Pennsylvania both expressly exempt UI benefits from state taxable income (Galle, Pancotti, and Stettner 2021; Pennsylvania Office of Unemployment Compensation 2021).

Taxation affects the net replacement rate. Suppose a worker is in the 10% federal tax bracket. If their pretax wages are $10,000, they take home $9,000. Suppose the state intends to provide workers with a net replacement rate of 50%. If UI benefits are not federally taxed, the state can offer a UI benefit of $4,500: that is the amount that leaves workers with 50% of their working (net) wages. In contrast, if UI benefits are subject to federal tax, the state must pay a benefit of $5,000, resulting in the same $4,500 in benefits received after tax. For any given replacement rate target, the state must pay more (and impose higher UI tax rates) when UI benefits are subject to federal tax.

Benefit duration

As with the weekly benefit amount, states have almost complete control over the duration of ordinary UI benefits. Traditionally, states offered a maximum of 26 weeks, a figure that is among the lowest in the developed world. Again the United States lags far behind its OECD peers, many of which offer up to two years or more (OECD 2021a). Further, since 2009, many states have reduced maximum benefit durations further, in a couple of cases to as few as 12 weeks of benefits.2 Massachusetts currently has the longest potential benefit duration, topping out at 30 weeks for some beneficiaries.

As described briefly above, the federal Extended Benefits program, or EB, mandates additional weeks of benefits, and these benefits are triggered automatically by economic conditions. The EB program provides two tiers of extended potential benefit durations: tier 1 adds 13 weeks and tier 2 adds an additional 7 weeks. The triggers for tier 1 are based on the level and/or the change in the insured unemployment rate (IUR)—a measure of how many in the labor force are currently receiving UI benefits.3 This measure can obviously vary by labor market conditions, but also can vary based on state-level eligibility criteria. That is, in states where it is hard to qualify for UI benefits, the state is less likely to hit the IUR trigger. States can opt to use another trigger that is a much more focused measure of labor market distress: the total unemployment rate (TUR), which is simply the official unemployment rate, a measure that includes workers who are unemployed but not receiving UI benefits.4

The EB program is also designed to automatically trigger off benefits when economic conditions improve or do not worsen. Once the trigger on criteria are no longer met, EB is turned off. In addition, an EB “look-back” provision triggers benefits off whenever there has been no significant increase in unemployment over the past two years. Persistently high unemployment does not prevent the EB benefits from triggering off.


1. 26 U.S. Code § 3303

2. In some cases states do not directly determine how long benefits will last, but instead first calculate a total benefit amount and weekly benefit amount, both based on wages during the base period. For example, if the total benefit were $10,000 and the weekly amount were $500, the household would have 20 weeks of benefits.

3. The IUR trigger is 5% plus 20% above the average level in the same quarters of the two previous years, or optionally a flat 6% IUR. Most states and the District of Columbia using the IUR trigger use the optional 6% trigger.

4. At press, 19 states used the TUR trigger, which is 6.5% and a 10% increase over the same quarter of either of the previous two years.


Bureau of Labor Statistics (BLS). 2020. “The Cost of Layoffs in Unemployment Insurance Taxes.” Monthly Labor Review. April 2020.

Galle, Brian, Elizabeth Pancotti, and Andrew Stettner. 2021. “Expert Q&A About the Unemployment Provisions of the American Rescue Plan.” The Century Foundation, March 10, 2021.

Organisation for Economic Co-Operation and Development (OECD). 2018. “Pseudo-coverage Rates of Unemployment Benefits.” Social Benefit Recipients (SOCR) Annual Data by Country. Pooled 2007–2018 data, accessed June 8, 2021.

Organisation for Economic Co-operation and Development (OECD). 2021a. “Comparative Policy Tables 2020” (online database), OECD Tax-Benefit Data Portal, accessed 2021.

Organisation for Economic Co-Operation and Development (OECD). 2021b. “Net Replacement Rate in Unemployment” (online table). In OECD.Stat (database), accessed 2021.

Pennsylvania Office of Unemployment Compensation. 2021. “Taxes on Benefits.” Accessed May 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2020a. “Monetary Entitlement” and “Nonmonetary Eligibility.” In Comparison of State UI Laws. Accessed June 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2020b. “Significant Provisions of State Unemployment Insurance Laws.” July 2020.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021a. UI Replacement Rates Report (online database), fourth quarter 2019 data accessed June 8, 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021b. Unemployment Insurance Chartbook (online database), “Category 13: Recipiency Rates by State.” Accessed June 8, 2021.

U.S. Department of Labor Employment and Training Administration (U.S. DOL-ETA). 2021c. Unemployment Insurance (UI) Nonmonetary Determinations [downloadable data sets]; summing 2019 quarterly figures from the “UI Nonmonetary Determinations” and column in spreadsheet for separation denials. Updated April 1, 2021.

U.S. Department of Labor Office of Unemployment Insurance (U.S. DOL-OUI). 2021. State Unemployment Insurance: Tax Measures Report 2020. April 2021.