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What is “Unemployment Insurance?”

Unemployment insurance is one of the most misunderstood government programs.

Whether it’s who pays into the program or how long people stay on it or how much money people should receive, no one seems able to agree, even on the fundamentals. And with misconceptions abound, it can be difficult to separate myths from facts. We’ll get more into that later, but for now let’s start with the basics—what is unemployment insurance?

Simply stated, unemployment insurance, or UI, is insurance against job loss. UI is meant to be personal protection against hard times, just like other types of insurance for individuals, such as car insurance, health insurance, or home insurance.

How does UI work?

When an individual loses their job through no fault of their own, like getting laid off during a pandemic, he or she can apply through his or her state for unemployment benefits. They receive payments calculated based on their previous wages, and in return they have to verify that they are attempting to find work. How that looks and how effective the process is dramatically varies by state.

Why not a full paycheck?

Unemployment benefits are not intended to be a replacement paycheck for recipients. UI is meant to provide workers some cushion to help get their back on their feet for a limited duration, and make sure the lights stay on while they find another suitable job. It isn’t meant to provide unending payments while waiting on a dream job.

When workers are given large sums of money through unemployment, tragedy follows. At the height of the COVID-19 pandemic, Congress-passed legislation increased weekly benefits to include an additional $600 federal bonus, which meant that the average UI participant was receiving the equivalent of more than $50,000 per year in payments. The result was predictable: People were making more on this government program and refused to return to work. Without a bonus, they have incentive to re-enter the workforce. Properly ordered, UI is meant to bring people back into the workforce as quickly as possible.

Okay, but haven’t I been paying into this program?

Well, not exactly. UI is unique in many ways. For starters, an individual does not “pay into” unemployment, even though individuals are the beneficiaries. Instead, an employer buys into a policy by paying their UI taxes. Unemployment is a tax on businesses, not individuals.

Between the paying employer and the receiving employee there is a middleman: the state. After a policy is purchased by an employer (by the employer’s taxes), the state administers the system and provides the policy to the individual who has just been laid off or lost their job. After this, a now-former employee is officially a beneficiary of the state UI system.

Why does knowing all of this matter?

Programs can’t help the truly needy if valuable resources are allotted to people who can and should be working, or to people who are abusing the system for personal gain. Unemployment is wrought with fraud. COVID-19 made that clear. Understanding UI properly means the waste, fraud, and abuse can begin to be properly addressed.

If state governments and citizens continue to stick our heads in the sand when it comes to unemployment insurance, we can’t possibly hope to chart a better path forward for the American workforce. State governments have misunderstood or ignored the unemployment insurance problem for far too long, and citizens have never been told about it.

To learn more about unemployment insurance and reforms from the Foundation for Government Accountability (FGA), check out the FGA research page, where you will find a bevy of resources and reforms at your disposal.

At FGA, we don’t just talk about changing policy—we make it happen.

By partnering with FGA through a gift, you can create more policy change that returns America to a country where entrepreneurship thrives, personal responsibility is rewarded, and paychecks replace welfare checks.