Unemployement_Compensation

Federal Unemployment Compensation The Social Security Act of 1935 created the Federal-State Unemployment Compensation (UC) Program. The program has two main objectives: (1) to provide temporary and partial wage replacement to involuntarily unemployed workers who were recently employed; and (2) to help stabilize the economy during recessions. The U.S. Department of Labor oversees the system, but each State administers its own program. Because Federal law defines the District of Columbia, Puerto Rico, and the Virgin Islands as States for the purposes of UC, there are 53 State programs. The Federal Unemployment Tax Act of 1939 and titles III, IX, and XII of the Social Security Act form the framework of the system. The Federal Unemployment Tax Act (FUTA) imposes a 6.2 percent gross tax rate on the first $7,000 paid annually by covered employers to each employee. Employers in States with programs approved by the Federal Government and with no delinquent Federal loans may credit 5.4 percentage points against the 6.2 percent tax rate, making the minimum net Federal unemployment tax rate 0.8 percent. Since all States have approved programs, 0.8 percent is the effective Federal tax rate. This Federal revenue finances administration of the system, half of the Federal-State Extended Benefits Program, and a Federal account for State loans. The individual States finance their own programs, as well as their half of the Federal-State Extended Benefits Program. In 1976, Congress passed a surtax of 0.2 percent of taxable wages to be added to the permanent FUTA tax rate. Thus, the current effective 0.8 percent FUTA tax rate has two components: a permanent tax rate of 0.6 percent, and a surtax rate of 0.2 percent. The surtax has been extended five times, most recently by the Taxpayer Relief Act of 1997 through December 31, 2007. FUTA generally determines covered employment. FUTA also imposes certain requirements on the State programs, but the States generally determine individual qualification requirements, disqualification provisions, eligibility, weekly benefit amounts, potential weeks of benefits, and the State tax structure used to finance all of the regular State benefits and half of the extended benefits. The Social Security Act provides for the administrative framework: title III authorizes Federal grants to the States for administration of the State UC laws; title IX authorizes the various components of the Federal Unemployment Trust Fund; title XII authorizes advances or loans to insolvent State UC Programs. In order to qualify for benefits, an unemployed person usually must have worked recently for a covered employer for a specified period of time and earned a certain amount of wages. About 125 million individuals were covered by all UC Programs in 2000, representing 97 percent of all wage and salary workers and 89 percent of the civilian labor force. FUTA covers certain employers that State laws also must cover for employers in the States to qualify for the 5.4 percent Federal credit. Since employers in the States would lose this credit and their employees would not be covered if the States did not have this coverage, all States cover the required groups: (1) except for nonprofit organizations, State-local governments, certain agricultural labor, and certain domestic service, FUTA covers employers who paid wages of at least $1,500 during any calendar quarter or who employed at least one worker in at least 1 day of each of 20 weeks in the current or prior year; (2) FUTA covers agricultural labor for employers who paid cash wages of at least $20,000 for agricultural labor in any calendar quarter or who employed 10 or more workers in at least 1 day in each of 20 different weeks in the current or prior year; and (3) FUTA covers domestic service employers who paid cash wages of $1,000 or more for domestic service during any calendar quarter in the current or prior year. FUTA requires coverage of nonprofit organization employers of at least four workers for 1 day in each of 20 different weeks in the current or prior year and State-local governments without regard to the number of employees. Nonprofit and State-local government organizations are not required to pay Federal unemployment taxes; they may choose instead to reimburse the system for benefits paid to their laid-off employees. States may cover certain employment not covered by FUTA, but most States have chosen not to expand FUTA coverage significantly. The following employment is therefore generally not covered: (1) self-employment; (2) certain agricultural labor and domestic service; (3) service for relatives; (4) service of patients in hospitals; (5) certain student interns; (6) certain alien farmworkers; (7) certain seasonal camp workers; and (8) railroad workers (who have their own unemployment program). Although the UC system covers 97 percent of all wage and salary workers, on average only 38 percent of unemployed persons were receiving UC benefits in 1999. This compares with a peak of 81 percent of the unemployed receiving UC benefits in April 1975 and a low point of 26 percent in June 1968 and in October 1987. Despite high unemployment during the early 1980s, there was a downward trend in the proportion of unemployed persons receiving regular State benefits until the mid-1980s. The proportion receiving UC rose sharply in December 1991 due to the temporary Emergency Unemployment Compensation (EUC) Program. In May 1988, Mathematica Policy Research, Inc., under contract to the U.S. Department of Labor, released a study on the decline in the proportion of the unemployed receiving benefits during the 1980s. This analysis did not find a single predominant cause for the decline but instead found statistical evidence that several factors contributed to the decline, the figures in parentheses show the share of the decline attributed to each factor: 1. The decline in the proportion of the unemployed from manufacturing industries (4-18 percent); 2. Geographic shifts in composition of the unemployed among regions of the country (16 percent); 3. Changes in State program characteristics (22-39 percent):Increase in the base period earnings requirements (8-15 percent); Increase in income denials for UC receipt (10 percent); and tightening up other nonmonetary eligibility requirements (3-11 percent); 4. Changes in Federal policy such as partial taxation of UC benefits (11-16 percent); 5. Changes in unemployment as measured by the Current Population Survey (CPS) (1-12 percent). The groups of unemployed most likely to be insured are job losers. The number of unemployment compensation claimants measured as a percentage of the number of job losers remained fairly stable from 1968 through 1979. Over that 12-year span, there were from 90 to 110 recipients of regular State UC for every 100 job losers. This ratio fluctuated somewhat over the business cycle, but it was otherwise quite stable. Beginning in 1980, the ratio of UC recipients to job losers fell sharply, reaching an all-time low in 1983 when there were fewer than 60 regular UC recipients for every 100 job losers. After 1983, the coverage ratio increased somewhat, so that there were about 75 regular UC claimants for every 100 job losers in 1990. However, the ratio declined again with the 1990-91 recession. It has since returned to the prerecession level. States have developed diverse and complex methods for determining UC eligibility. In general there are three major factors used by States: (1) the amount of recent employment and earnings; (2) demonstrated ability and willingness to seek and accept suitable employment; and (3) certain disqualifications related to a claimant's most recent job separation or job offer refusal. The State monetary qualification requirements in the base year for the minimum and maximum weekly benefit amounts, and for the maximum total potential benefits. The base year is a recent 1-year period that most States (48) define as the first 4 of the last 5 completed calendar quarters before the unemployed person claims benefits. On average, workers must have worked in two quarters and earned $1,734 to qualify for a minimum monthly benefit. Qualifying annual wages for the minimum weekly benefit amount vary from $130 in Hawaii to $3,400 in Florida. For the maximum weekly benefit amount, the range is $5,450 in Nebraska to $29,432 in Colorado. The range of qualifying wages for the maximum total potential benefit, which is the product of the maximum weekly benefit amount and the maximum potential weeks of benefits, is from $6,080 in Puerto Rico to $32,850 in Washington. In February 1996, a Federal court in Pennington v. Doherty overturned the base year definition in use by most States. The court agreed with the plaintiff's contention that Illinois could have used an alternative base period and that this alternative would better carry out Federal law, which requires States to use administrative methods that ensure full payment of UC when due. This alternative method would impose greater costs on the States affected. The Balanced Budget Act of 1997 revised the Federal law that was central to the court's decision so that States have full authority to set base periods for determining eligibility. All State laws provide that a claimant must be both able to work and available for work. A claimant must meet these conditions continually to receive benefits. Only minor variations exist in State laws setting forth the requirements concerning “ability to work.” A few States specify that a claimant must be mentally and physically able to work. “Available for work” is translated to mean being ready, willing, and able to work. In addition to registration for work at a local employment office, most State laws require that a claimant seek work actively or make a reasonable effort to obtain work. Generally, a person may not refuse an offer of, or referral to, suitable work without good cause. Most State laws list certain criteria by which the suitability of a work offer is to be tested. The usual criteria include the degree of risk to a claimant's health, safety, and morals; the physical fitness and prior training, experience, and earnings of the person; the length of unemployment and prospects for securing local work in a customary occupation; and the distance of the available work from the claimant's residence. Generally, as the length of unemployment increases, the claimant is required to accept a wider range of jobs. In addition, Federal law requires States to deny benefits provided under the Extended Benefits Program to any individual who fails to accept work that is offered in writing or is listed with the State Employment Service, or who fails to apply for any work to which he is referred by the State agency, if the work: (1) is within the person's capabilities; (2) pays wages equal to the highest of the Federal or any State or local minimum wage; (3) pays a gross weekly wage that exceeds the person's average weekly unemployment compensation benefits plus any supplemental unemployment compensation payable to the individual; and (4) is consistent with the State definition of suitable'' work in other respects. States must refer extended benefits claimants to any job meeting these requirements. If the State, based on information provided by the individual, determines that the individual's prospects for obtaining work in her customary occupation within a reasonably short period are good, the determination of whether any work is suitable work is made in accordance with State law rather than the criteria outlined above. There are certain circumstances under which Federal law provides that State and extended benefits may not be denied. A State may not deny benefits to an otherwise eligible individual for refusing to accept new work under any of the following conditions: (1) if the position offered is vacant directly due to a strike, lockout, or other labor dispute; (2) if the wages, hours, or other conditions of the work offered are substantially less favorable to the individual than those prevailing for similar work in the locality; or (3) if, as a condition of being employed, the individual would be required to join a union or to resign from or refrain from joining any bona fide labor organization. Benefits may not be denied solely on the grounds of pregnancy. The State is prohibited from canceling wage credits or totally denying benefits except in cases of misconduct, fraud, or receipt of disqualifying income. There are also certain conditions under which Federal law requires that benefits be denied. For example, benefits must be denied to professional and administrative employees of educational institutions during summer if they have a reasonable assurance of reemployment; to professional athletes between sport seasons; and to aliens not permitted to work in the United States. The major causes for disqualification from benefits are not being able to work or available for work, voluntary separation from work without good cause, discharge for misconduct connected with the work, refusal of suitable work without good cause, and unemployment resulting from a labor dispute. Disqualification for one of these reasons may result in a postponement of benefits for some prescribed period, a cancellation of benefit rights, or a reduction of benefits otherwise payable. Of the 14.8 million monetarily eligible initial UC claims in 1999, 27.4 percent were disqualified. This figure subdivides into 4.9 percent not being able to work or available for work, 7.3 percent voluntarily leaving a job without good cause, 4.9 percent being fired for misconduct on the job, 0.3 percent refusing suitable work, and 10.1 percent committing other disqualifying acts. The total disqualification rate ranged from a low of 11.0 percent in Kentucky to a high of 94.9 percent in Nebraska, with Colorado the next highest at 86.8 percent. Federal law requires that benefits provided under the Extended Benefits Program be denied to an individual for the entire spell of his unemployment if he was disqualified from receiving State benefits because of voluntarily leaving employment, discharge for misconduct, or refusal of suitable work. These benefits will be denied even if the disqualification were subsequently lifted with respect to the State benefits prior to reemployment. The person could receive extended benefits, however, if the disqualification were lifted because he became reemployed and met the work or wage requirement of State law. On December 3, 1999, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking to create, by regulation, a voluntary experimental program that would give States the option of extending UC eligibility to parents who take time off from employment after the birth or placement for adoption of a child under the Family Medical Leave Act of 1993. The program is referred to as the birth and adoption UC experiment, also known colloquially as “baby UI.” The proposal immediately drew criticism from opponents who argued that the proposal creates a benefit that the Congress did not intend when it created the Family and Medical Leave Act and such benefits would be contrary to the purpose of UC benefits as stated in the law. Some opponents argued that the proposal could not be implemented without a new law being enacted by the Congress. DOL disagreed with this assessment and cited the fact that much of the basic structure of the UC system, including the requirement that individuals be able and available for work, was established by regulatory guidance, rather than statute. DOL also suggested the change was needed to allow the UC system to keep pace with the changing nature of the work force, particularly the dramatic increase in the number of working mothers. The final rule was published in the Federal Register on June 13, 2000. The Emergency Unemployment Compensation Act of 1991 provided that ex-members of the military be treated the same as other unemployed workers with respect to the waiting period for benefits and benefit duration. Before this 1991 action, Congress had placed restrictions on benefits for ex-service members, so that the maximum number of weeks of benefits an ex-service member could receive based on employment in the military was 13. In addition to a number of restrictive eligibility requirements, ex-service members had to wait 4 weeks from the date of their separation from the service before they could receive benefits. The Unemployment Compensation Amendments of 1976 required all States to reduce an individual's UC by the amount of any government or private pension or retirement pay received by the individual. Under the modified provision, States are required to make the offset only in those cases in which the work-related pension was maintained or contributed to by a base period or chargeable employer. Entitlement to and the amount and duration of unemployment benefits are based on work performed during this State-specified base period. A chargeable employer is one whose account will be charged for UC received by the individual. However, the offset must be applied for Social Security benefits without regard to whether base period employment contributed to the Social Security entitlement. States are allowed to reduce the amount of these offsets by amounts consistent with any contributions the employee made toward the pension. This policy allows States to limit the offset to one-half of the amount of a Social Security benefit received by an individual who qualifies for unemployment benefits. The Tax Reform Act of 1986 made all UC taxable after December 31, 1986. The Revenue Act of 1978 first made a portion of UC benefits taxable beginning January 1, 1979. In general, the States set weekly benefit amounts as a fraction of the individual's average weekly wage up to some State-determined maximum. The total maximum duration available nationwide under permanent law is 39 weeks. The regular State programs usually provide up to 26 weeks. The permanent Federal-State Extended Benefits Program provides up to 13 additional weeks in States where unemployment rates are relatively high. An additional 7 weeks is available under a new optional trigger enacted in 1992, but only 7 States have adopted this trigger as of July 31, 1997. The temporary Emergency Unemployment Compensation (EUC) Program, which operated from November 1991 through April 1994, provided either 7 or 13 additional weeks of benefits during its final months of operation. A State offering this temporary program could not have offered the extended benefits simultaneously, however. The State-determined weekly benefit amounts generally replace between 50 and 70 percent of the individual's average weekly pretax wage up to some State-determined maximum. The average weekly wage is often calculated only from the calendar quarter in the base year in which the claimant's wages were highest. Individual wage replacement rates tend to vary inversely with the claimant's average weekly pretax wage, with high wage earners receiving lower wage replacement rates. Thus, the national average weekly benefit amount as a percent of the average weekly covered wage was only 35 percent in the quarter ending December 31, 1999. In 1999, the national average weekly benefit amount was $215 and the average duration was 14.5 weeks, making the average total benefits $3,118. The minimum weekly benefit amounts for 2000 vary from $0 in New Jersey to $102 in Rhode Island. The maximum weekly benefit amounts range from $133 in Puerto Rico to $646 in Massachusetts. Most States vary the duration of benefits with the amount of earnings the claimant has in the base year. Twelve States provide the same duration for all claimants. The minimum durations range from 4 weeks in Oregon to 26 weeks in 12 States. The maximum duration is 26 weeks in 51 States. Two States have longer maximum durations. Massachusetts and Washington both provide up to 30 weeks. From 1999 to 2000, 16 States increased and 3 decreased their minimum weekly benefit amounts. Thirty-six States raised their maximum weekly benefit amounts, while no State decreased them. Five States lowered their minimum potential durations, and 13 States raised their minimum duration. The Federal-State Extended Benefits Program is available in every State and provides one-half of a claimant's total State benefits up to 13 weeks in States with an activated program, for a combined maximum of 39 weeks of regular and extended benefits. Weekly benefit amounts are identical to the regular State UC benefits for each claimant, and Federal funds pay half the cost. The program activates in a State under one of two conditions: (1) if the State's 13-week average insured unemployment rate (IUR) in the most recent 13 weeks is at least 5.0 percent and at least 120 percent of the average of its 13-week IURs in the last 2 years for the same 13-week calendar period; or (2) at State option, if its current 13-week average IUR is at least 6.0 percent. All but 12 State programs have adopted the second, optional condition. The 13-week average IUR is calculated from the ratio of the average number of insured unemployed persons under the regular State programs in the last 13 weeks to the average covered employment in the first four of the last five completed calendar quarters. In addition to the two automatic triggers, States have the option of electing an alternative trigger authorized by the Unemployment Compensation Amendments of 1992. This trigger is based on a 3-month average total unemployment rate (TUR) using seasonally adjusted data. If this TUR average exceeds 6.5 percent and is at least 110 percent of the same measure in either of the prior 2 years, a State can offer 13 weeks of EB. If the average TUR exceeds 8 percent and meets the same 110-percent test, 20 weeks of EB can be offered. Analysis of historical data shows that this TUR trigger would have made EB more widely available in the past than did the IUR trigger. As of July 31, 1997, the TUR trigger had been authorized by seven States (Alaska, Connecticut, Kansas, Oregon, Rhode Island, Vermont, and Washington). As of May 2000, EB is not active in any State. Due to the limited duration of UC benefits, some individuals exhaust their benefits. For the regular State programs, 2.3 million individuals exhausted their benefits in fiscal year 1999, or 32 percent of claimants who began receiving UC during the 12 months ending March 1999. A study of exhaustees was completed in September 1990 by Corson and Dynarski, under contract to the U.S. Department of Labor. The purpose of this study was to examine the characteristics and behavior of exhaustees and nonexhaustees and to explore the implications of this information. The samples were chosen from individuals who began collecting benefits during the period October 1987 through September 1988. Overall, 1,920 exhaustees and 1,009 nonexhaustees were interviewed. The Extended Benefits (EB) Program was enacted to provide unemployment compensation benefits to workers who had exhausted their regular benefits during periods of high unemployment. Before enactment of a permanent EB Program, Congress authorized two temporary programs, during 1958 and 1959 and again in 1961 and 1962. The Federal-State Extended Unemployment Compensation Act of 1970 authorized a permanent mechanism for providing extended benefits. Extended benefits rules were amended by the Omnibus Budget Reconciliation Act of 1981 and the Unemployment Compensation Amendments of 1992. During the 1970s and 1980s, temporary programs provided supplemental benefits to UC recipients who had exhausted both their regular and extended benefits during three periods of high unemployment: (1) the Emergency Unemployment Compensation Act of 1971, which provided benefits until March 31, 1973; (2) the Federal Supplemental Benefits Program, first authorized by the Emergency Unemployment Compensation Act of 1974, and subsequently extended in 1975 (twice) and in 1977; and (3) the Federal Supplemental Compensation Program, created by the Tax Equity and Fiscal Responsibility Act of 1982, which was subsequently extended and modified six times and finally expired on June 30, 1985. More recently, Congress passed the Emergency Unemployment Compensation Act of 1991 authorizing a temporary Emergency Unemployment Compensation (EUC) Program. The EUC Program, which was extended four times, effectively superseded the EB Program and entitled individuals whose regular unemployment compensation benefits had run out to additional weeks of assistance. At its peak in 1992, the EUC Program provided benefits for 26 or 33 weeks, depending on the level of unemployment in the respective States. The EUC Program ended on April 30, 1994. Benefits under the EUC Program were originally financed from spending authority in the Extended Unemployment Compensation Account (EUCA) of the Unemployment Trust Fund. However, depletion of EUCA led Congress to fund EUC from general revenues from July 1992 to October 1993. States that qualified for extended benefits while EUC was in effect could elect to trigger off extended benefits. This reduced the State funding burden because 50 percent of extended benefit costs are financed from State UC accounts while EUC was entirely federally funded. At the end of fiscal year 1999, the Employment Security Administration Account (ESAA) exceeded its fiscal year 1999 ceiling of $1.4 billion. The 1997 budget bill provided for the distribution of up to $100 million of excess funds at the end of each of the fiscal years 1999-2001. The funds will be made available to each State in the same proportion as the State's share of funds appropriated for administration for that fiscal year. This action effectively limits transfers to State accounts that will occur if trust fund surpluses continue to mount in future years. The Extended Unemployment Compensation Account (EUCA) balance was below its ceiling of $15.9 billion by $0.3 billion at the end of fiscal year 1999; the FUA balance was slightly below its $8.0 billion ceiling. Under the administration's fiscal year 2000 budget assumptions, the EUCA balance will fall short of its ceiling in fiscal year 2000, and then begin to have end-of-year balances which slightly exceed its ceiling. The 1997 legislation raised the ceiling on FUA assets from 0.25 to 0.5 percent of wages in covered employment for fiscal year 2002 and subsequent years. Like the capping of annual distributions at $100 million as described above, that change is designed to limit Reed Act transfers to State accounts in coming years. The reason Congress has taken these actions to increase ceilings and limit outflows from the Federal funds is that excess funds in the Unemployment Trust Fund are included in the unified Federal budget and offset deficits or increase surpluses. The State accounts had recovered substantially from the financial problems that began in the 1970s and continued through the early 1980s, but the 1990-91 recession reversed that trend. The State accounts at the beginning of 2000 held $50.3 billion, which represents a marked improvement over the balances of $28.8 billion in 1992 and $38.6 billion in 1997. The balances in the State accounts are well below the balances in the early 1970s before serious financial problems began for most States. State reserve ratios show that a number of State accounts are at risk of financial problems in major recessions. These State ratios are only 48 percent of their levels in 1970. However, no State presently has outstanding Federal loans to its account. Twenty States had average high-cost multiples below 1.0; 13 had average high-cost multiples below 0.8; and 5 had average high-cost multiples at or below 0.5. Based on this stringent measure, States with the highest risk factor were Illinois, New York, North Dakota, Texas, and West Virginia. At the start of fiscal year 2000, the 4 Federal accounts and the 53 State benefit accounts had a total balance of $72.0 billion. In real terms this represents a level 28 percent higher than that of 1971. Whether the State trust fund balances are adequate is ultimately a matter about which each State must decide. States have a great deal of autonomy in how they establish and run their unemployment system. However, the framework established by the Federal Government requires States to actually pay the level of benefits they determine to be appropriate; in budget terms, unemployment benefits are an entitlement. Thus, if a recession hits a given State and results in a depletion of that State's trust account, the State is legally required to continue paying benefits. To do so, the State will be forced to borrow money from the Federal Unemployment Account. As a result, not only will the State be required to continue paying benefits, it will also be required to repay the funds plus interest it has borrowed from the Federal loan account. Such States will probably be forced to raise taxes on their employers, an action that dampens economic growth and job creation. In short, States have strong incentives to keep adequate funds in their trust fund accounts. FUTA imposes a minimum, net Federal payroll tax on employers of 0.8 percent on the first $7,000 paid annually to each employee. The current gross FUTA tax rate is 6.2 percent, but employers in States meeting certain Federal requirements and having no delinquent Federal loans are eligible for a 5.4 percent credit, making the current minimum, net Federal tax rate 0.8 percent. Since most employees earn more than the $7,000 taxable wage ceiling, the FUTA tax typically is $56 per worker or 3 cents per hour for a full-time worker. The 1997 budget bill extended the 0.2 percent surtax through 2007. The wage base for the Federal tax was held constant at $3,000 until 1971, and then was increased on three occasions, most recently in 1983. The effective Federal unemployment tax rate equals FUTA revenue as a percent of total covered wages. Although the statutory tax rate doubled from 0.4 percent in the late 1960s to 0.8 percent in the late 1980s, the effective tax rate has fluctuated between 0.2 and 0.3 percent in most of those years. REFERENCES Corson, W. & Dynarski, M. (1990, September). A study of unemployment insurance recipients and exhaustees: Findings from a national survey. (Occasional Paper 90-3). Washington, DC: U.S. Department of Labor.Office of the President. (1997, February). Economic Report of the President. Washington, DC: U.S. Government Printing Office. Pennington v. Doherty. Unemployment Insurance Reporter (para.22,184). Chicago, IL: Commerce Clearing House.U.S. Department of Labor. (2000, February). UI Outlook: Fiscal Year 2001 President's Budget. Washington, DC: Author.U.S. Department of Labor, Employment and Training Administration. (2000, March). UI Data Summary (Fourth quarter, calendar year 1999). Washington, DC: Author. http://www.washingtonpost.com/wp-srv/special/business/us-unemployment-rate-history/ http://www.yourpbc.org/articles/detail.dot'id=81247 http://en.wikipedia.org/wiki/Unemployment_benefits http://legal-dictionary.thefredictionary.com/Federal+Unemployment+Compensation+Act http://workforcesecurity.doleta.gov/unemploy/pdf/partnership.pdf