Unemployment Insurance: Definition and Significance

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  • 0:02 Unemployment…
  • 1:17 Funding the Program
  • 2:17 Eligibility
  • 3:43 Significance
  • 4:38 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

While no one wants to think about it, it is likely that most people will face some period of unemployment during their working lives. In this lesson, you'll learn about unemployment compensation and its significance to employers, employees and the economy.

Unemployment Compensation System

Nathan worked as a project manager for a construction company that built residential homes in middle class neighborhoods. He recently lost his job due to company downsizing. Like millions of Americans before him, Nathan will be applying for unemployment compensation to help him make ends meet until he finds a new job.

Unemployment compensation is a type of social insurance benefit paid by a state or federal government to eligible unemployed workers to help provide for the necessities of life. Unemployment payments will help Nathan pay for groceries, gas, utilities and help him keep up with his mortgage payments until he finds new employment.

The unemployment insurance in the United States was provided for under the Social Security Act of 1935. Each state administers its own program, subject to federal standards. Nathan will apply for benefits through his state's unemployment office. Unemployment benefits are not indefinite. The typical period of eligibility is 26 weeks. However, in times of severe economic hardship, such as a recession, the federal government may extend benefits for a longer period of time.

Funding the Program

The Federal Unemployment Tax Act (FUTA) establishes part of the funding for unemployment compensation. It is a form of payroll tax that is paid by employers. The tax is based upon wages paid to employees. Unlike other payroll taxes, Nathan and other employees don't have any taxes withheld for unemployment. You can really think of the tax as being an insurance premium that employers are paying for unemployment insurance coverage. The taxes are paid to the U.S. Treasury's Federal Unemployment Trust where each state has its own account.

States also levy a tax on employers for unemployment coverage. This tax is often referred to as the State Unemployment Tax Authority (SUTA). State tax rates are based upon the amount of benefits people received in the past years from the unemployment fund. The state taxes are also a form of a payroll tax that are not deducted from employee wages.


Not everyone is eligible to receive unemployment benefits. While state eligibility requirements vary, all states generally require that an individual have worked for a minimum amount of time and earned a certain amount of wages. Additionally, an unemployed person must not have left employment on a voluntary basis without good cause. For example, if Nathan just quit his job because he did not like it, he probably will not qualify for unemployment benefits.

On the other hand, if he quit his job because he had to choose between quitting or transferring across the country, he probably qualifies for unemployment insurance, especially if relocation expenses were not paid. Moreover, even if Nathan was terminated, he will be ineligible for unemployment benefits if he was terminated for misconduct, such as stealing.

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