Unemployment Insurance: Myths and Facts

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There’s a lot of confusion when it comes to unemployment insurance (UI). What is it? Or more importantly, what isn’t it? These points should help clear up any confusion when it comes to facts vs. the fiction of unemployment insurance:

Myth: Unemployment insurance is paid for by workers.

Fact: Unemployment Insurance is paid for by employers.

It’s a common misconception that you should receive unemployment benefits because you’ve “paid into the system.” Unemployment insurance isn’t listed as a line item on a paycheck, like you would find with programs such as Medicare and Social Security. That’s because the employer, not the employee, pays the unemployment insurance tax (except in Alaska, New Jersey, and Pennsylvania).

Myth: Unemployment insurance will give you time to find your dream job.

Fact: Unemployment insurance is there to help you get back on your feet.

Unemployment insurance is a temporary benefit meant to get people back into the workforce as quickly as possible. A dream job might not be available right away, but a suitable job that will keep the lights on and put food on the table likely will. From there, the dream job search can continue. Turning down work so you can continue to receive benefits is fraud.

Look to South Dakota for a prime example of UI helping get people back on their feet. In May, South Dakota Gov. Noem and the South Dakota Department of Labor cracked down on work refusals, clarifying that refusing to work when offered your job back means you do not qualify for unemployment. Because of this effort, nearly 80 percent of the lost jobs had been recovered, and the state forwent extra money from the federal government—the state didn’t’ need it.

Myth: Unemployment insurance will cover all of your bills.

Fact: Unemployment insurance only covers part of your bills.

As was mentioned above, unemployment insurance is temporary assistance while you are between jobs so that you can cover some of your basic expenses. It’s called “partial wage replacement” because it’s not meant to be a full paycheck. “Full wage replacement” does not encourage people to go back to work, like we saw with COVID-19 and unemployment boosts. And it would hurt the economy by unfairly saddling businesses with higher unemployment taxes.

Myth: After the $600 boost to unemployment insurance expired, the U.S. economy slumped.

Fact: When Congress let the $600 boost to unemployment insurance expire as scheduled, the economic recovery kicked into overdrive.

FGA research makes it clear: Since the unemployment bonus expired in July, millions of Americans have returned to work, and unemployment has plummeted. Since the boost expired, entrepreneurs have been creating new startups at a record pace.

Myth: All states had well-prepared UI systems ahead of COVID-19.

Fact: States with UI indexing in place were prepared while states not indexing were not.

From January 1 to August 18, the average state drew down 96.4 percent of its UI trust fund from payouts and borrowing. Well-prepared states, such as Florida and North Carolina had UI indexing in place, where the duration of benefits was linked to economic conditions. Looking at the same time period, Florida and North Carolina only drew 58.7 percent and 23.4 percent respectively. UI indexing helps prepare states for downturns and protects the integrity of their trust funds. Here’s a one-pager with more information on UI indexing.

Myth: Unemployment insurance is a well-funded program, prepared for a crisis like a recession.

Fact: Unemployment insurance is often not funded well and typically not prepared for recessions.

When there are more people using unemployment insurance, UI expenditures naturally go up. Typically, more people are using unemployment insurance during recessions and during other economic hardships. But during economic hardships, businesses shutter, have less revenue, and therefore fund UI programs at a lower level. And, the taxes on those businesses go up if they lay off workers. So even the businesses that struggle to remain open suffer with higher taxes. This can have a snowball effect on state economies and state budgets.