The first step when we converse about unemployment is facing the fact of existence of such. We’ll analyze the history of unemployment insurance in US and its present aspects in order to be able to see its contribution into increasing of the nonaccelerating inflation rate of unemployment (NAIRU). So what are the relationships between unemployment insurance coverage and actual unemployment? The U.S. unemployment insurance (UI) program was enacted as part of the Social Security Act in 1935. It was intended to be a self-financing social insurance program that levied payroll taxes on covered employers and paid benefits to eligible unemployed workers. Currently, workers laid off by their employers are potentially eligible to collect benefits for a limited time, usually 26 weeks, until they are recalled, find another job exhaust their benefits, or leave the labor force. Most unemployed workers now receive a maximum of between 50 and 60 percent of their previous wages, depending on which state they live in. The federal-state nature of the system was dictated by circumstances in 1935. Not enough was known then about the impact of the many ingredients of unemployment insurance to warrant imposing untried provisions on an entire nation. Moreover, there was doubt that such a system could even be enacted by a state-oriented Congress. Finally, President Roosevelt favored a cooperative federal-state undertaking. The real issue in 1935 was not whether there would or would not be a sharing of responsibilities but rather the best possible division of responsibilities. The system could have been structured so as to render states little more than the federal government’s administrative agents, at one extreme, or so as to give the states near total autonomy, at the other.
The decision, expressed by President Roosevelt’s Committee on Economic Security and later by Congress in enacting the Social Security Act, was to give states as much autonomy as possible, consistent with prescribed national objectives. Accordingly, under the U.S. UI system, states alone determine what minimum wage or employment requirements must be satisfied by any individual to qualify for benefits. The states decide the formulas used to determine individual weekly benefit amounts, minimum and maximum benefit levels, the payment of partial benefits, and the availability and amount of dependents’ allowances. The states have almost complete authority in establishing the availability-for-work, ability-to-work, and work search requirements individuals must meet to maintain their eligibility for benefits. In addition, the states are basically free to establish the causes for disqualification from benefits and the particular disqualification penalty, and they have wide discretion over how liability for taxes will be allocated among employers, and total authority to determine the amount of taxes to be collected. What about the federal government?
The Committee on Economic Security identified four key federal responsibilities: (1) providing an incentive for states to act; (2) safeguarding unemployment reserves; (3) ensuring efficient administration; and (4) providing program standards where uniformity was essential. The immediate federal responsibility in 1935 was to provide an incentive for states to enact and maintain unemployment insurance laws. Thus, the Social Security Act provided businesses with a competitive disadvantage if their state did not become part of the UI program. It established a federal unemployment tax (originally 3 percent, currently 6.2 percent) and allowed credit against the tax to employers who pay taxes under a state law that meets federal requirements. Thus, the federal law allows states to void most of the 6.2 percent federal tax. The states are then free to construct sets of schedules that vary the tax rate charged to individual plants so long as overall financial solvency is maintained. The tax credit provision embodies a compelling incentive for a state to adopt not only an unemployment insurance program but also minimum coverage and taxable wage base standards. For all potentially eligible employers to actually receive credit against the 6.2 percent federal tax, the same employers, employment, and wages that are subject to the federal tax must also be subject to state law. A state that excluded the construction trades or banking industry, for example, would deprive those employers of the opportunity to receive credit against the federal tax. The tax credit approach also embodies the principal penalty for failure of a state to enact an unemployment insurance law or to conform with a multitude of federal requirements. The denial of tax credit is so formidable a penalty that no state is willing to risk the hazard. The national interest in making coverage almost universal was accomplished by gradually eliminating exclusions from the federal tax. In 1935, the tax applied to employers with eight or more workers. The tax was extended to employers with four or more in 1950, and the present one or more in 1970. Large farm employers and some domestic service employers were covered by 1976 legislation limiting the previous exclusions. In 1970 and 1976, coverage was extended to nonprofit organizations employing four or more and to most state and local government workers. The Social Security Act provides for the establishment of an Unemployment Trust Fund in the U.S. Treasury.
It authorizes the secretary of the treasury to invest amounts in the fund not needed to meet current withdrawals. A separate bookkeeping account is maintained for each state UI agency, and the secretary is required to pay out of the fund to any state agency whatever amount it requisitions from its account. Both the Social Security Act and the Federal Unemployment Tax Act require that each state immediately deposit all contributions collected under the state UI law into the Unemployment Trust Fund–and that moneys withdrawn from that fund be used only for unemployment compensation. Eight-tenths of 1 percent of the state unemployment tax that is paid to the federal government is kept by the federal government. The federal government uses this money for two things. First, the revenues are used to finance the administrative costs of the states’ UI claims operations and their employment service functions. Second, the revenues are used to establish a pool of funds from which advances can be given to states that have depleted their funds for benefits.
