Budget Basics: Unemployment Insurance Explained
Unemployment insurance (UI) is a joint state-federal program that was established in 1935 to provide temporary financial assistance to workers who become unemployed by no fault of their own. Each state administers its own UI program, but all states follow some basic federal guidelines. The program is a critical part of the country’s safety net, operating as an automatic stabilizer that kicks in when needed, and also to provide enhanced support to Americans during severe economic downturns.
What Is the Unemployment Rate?
The unemployment rate is a key indicator of the strength of the labor market, and as such can be a predictor for rising or falling unemployment insurance claims as well as overall economic health. As of September 2025, the civilian unemployment rate was 4.4 percent — the highest it has been since November 2021. The Federal Reserve has a mandate to promote maximum employment when they make policy decisions, which economists generally agree should be between 4 to 5 percent. The unemployment rate and unemployment insurance claims are related: as more people become unemployed, more people may qualify for unemployment compensation. The unemployment rate is not determined by how many people are on unemployment insurance; rather, it captures civilians who are actively looking for work but cannot find a job. Not everyone who is unemployed applies for UI benefits or qualifies. UI claims data do serve as inputs into the calculation for state and local unemployment estimates, but they are not related to the national unemployment rate.
Who Is Eligible for Unemployment Insurance?
To qualify for unemployment insurance benefits, a person must generally:
- have lost a job through no fault of their own — for example, because of layoffs, downsizing, or lack of available work;
- be “able to work, available to work, and actively seeking work”; and
- have earned a certain dollar amount (determined by each state) in at least one of the calendar quarters during a “base period” prior to becoming unemployed.
In the last 50 years, seasonally adjusted weekly initial claims (the number of new applications filed for unemployment insurance) have averaged approximately 354,000, excluding recessions. By comparison, initial claims spiked to the highest amount in history at 6.1 million claims during the pandemic. However, since then, claims have reverted to more typical numbers; the week ending November 15, 2025, saw 220,000 initial claims.
Continuing claims, which are not seasonally adjusted and measure the total number of workers collecting benefits, averaged 2.8 million over the last 50 years, excluding recessions. At the peak of the pandemic, there were 23.0 million continuing claims. Continuing claims have declined since the pandemic and were at 1.7 million claims during the week ending November 8, 2025.
Generally, payments are based on a percentage of an individual’s earnings over a 52-week period and last for a maximum of 26 weeks in most states. However, the duration of payments can vary because each state legislature has discretion over additional requirements for eligibility, benefit amounts, and duration of payments. For example, Massachusetts provides 26 weeks of UI except when the annual unemployment rate in any of its metropolitan areas exceeds 5.1 percent, which occurred in April 2025. Currently, Massachusetts provides benefits for the longest at a maximum of 30 weeks; other states such as Florida provide benefits for up to 12 weeks.
The Extended Benefits program — the funding of which is split evenly by the federal government and the states — may be triggered in a state with a period of high unemployment and provides an additional 13 to 20 weeks of compensation. Additional federal UI benefits can also be created through congressional action to further supplement payments during recessions. For example, lawmakers passed such legislation as a response to the COVID-19 pandemic.
Payment amounts vary greatly due to different formula calculations and costs of living in each state. The amounts dispersed are contingent on how much of an individual’s income each state chooses to replace. That parameter, called the replacement rate, ranges from 30 percent to 50 percent. In the second quarter of 2025, national average weekly payments were $451. The lowest average weekly payment was $221 in Mississippi, and the highest was $738 in Washington.
How Is the Unemployment Insurance Program Funded?
The Unemployment Trust Fund is held by the U.S. Treasury Department, but each state has its own account under the fund. The largest revenue stream comes from the State Unemployment Tax Act, which is a state tax levied on employers. In fiscal year 2024, those state revenues amounted to $40 billion and were enough to cover the cost of regular benefit payments. The secondary source of funding comes from the Federal Unemployment Tax Act (FUTA), which amounted to $8 billion in fiscal year 2024. The FUTA tax is paid by employers and it is 6 percent of the first $7,000 of each employee’s wages. However, employers who pay their state unemployment taxes on time receive an offset credit of up to 5.4 percentage points, meaning the maximum FUTA tax for an employee may be as little as $42. States can borrow funds from the federal government if they exhaust their account, but if they are overdue on repaying, then the federal taxes on employers automatically increase until the debt is paid.
In fiscal year 2023, spending on unemployment compensation totaled $31 billion, or about 0.1 percent of gross domestic product (GDP). That amount is consistent with non-recession periods and significantly less compared to expenditures from a few years ago. Because of the pandemic and legislative efforts to address its economic effects, total unemployment compensation (including regular benefits, extended benefits, and temporary programs) in fiscal year 2020 reached the highest level ever of $470 billion (2.2 percent of GDP). Comparatively, expanded unemployment benefits in response to the Great Recession lasted from 2008 and 2013, which resulted in a total of $458 billion in unemployment compensation over those five years.
Criticisms of the Unemployment Insurance Program
Critics of the UI program raise concerns that individuals may be discouraged from reentering the workforce if benefits are too generous. A 2015 analysis from the St. Louis Fed found that larger benefits were inversely related to the intensity of job searches. The analysis showed that if benefits increase by 10 percent, the time spent on job searches decreases by about 16 percent, although the intensity of searches increased as the end date of benefit payments drew closer. However, during the COVID-19 pandemic, other studies showed that there was not a significant effect on overall employment from expanded benefits.
Another concern with the UI program is the argument that it is not available to significant parts of the workforce, and does not necessarily help those in the most need. Self-employed workers and unincorporated independent contractors who work in the gig economy are not covered by traditional UI, despite the fact that they make up about 10 percent of the nation’s total workforce. Furthermore, most states have a minimum requirement for time worked and amount of earnings in order to be eligible for benefits. A consequence of those work history requirements is that low-wage workers, who are more likely to be unemployed, are among the least likely to receive UI benefits; steady earnings are needed to qualify for benefits, and low-wage workers tend to work more intermittently. During the Great Recession, only one quarter of low-wage workers were granted unemployment insurance, whereas workers who earned more than the 30th percentile wage were twice as likely to be granted UI benefits.
There are also antiquated state systems that make administration and maintenance of the program inefficient. Because each state has different guidelines for its program, navigating the eligibility requirements and understanding the payment structure can be complex. Even in February 2021, nearly a year into the pandemic, just six states reported meeting the federal standard of providing benefits to 87 percent of applicants within three weeks. In addition, nearly 80 percent of state workforce agencies characterized their IT systems as “barely functional” or “needs improvement” in 2017, even before the pandemic.
Expansions of the UI program also led to a considerable amount of fraud. The Government Accountability Office estimates that 11 to 15 percent of the total unemployment insurance benefits paid during the pandemic were fraudulent, or approximately $100 to $135 billion from April 2020 to May 2023. Claimants can commit fraud by failing to report income, making false statements about eligibility, or continuing to collect benefits when ineligible.
Reform Options for Unemployment Insurance
Because of challenges resulting from different approaches to the UI program, and the lessons learned – especially from pandemic-related expansions — researchers and lawmakers have proposed ways in which to improve the system.
To incentivize people to return to work:
- Short-term compensation programs. Short-term compensation is a form of UI in which employees whose hours have been reduced, but remain employed, can receive a prorated portion of unemployment benefits. Given fears about traditional UI discouraging work, research from Japan and across Europe finds that short-term compensation programs can provide an incentive for workers to remain in the workforce during an economic recession.
- Individual unemployment insurance accounts. When looking at UI programs from other developed countries, some economists found that the best way to redesign a UI program is to implement decreasing payments the longer one’s unemployment persists, and after re-employment, individuals would be taxed at rates depending on their length of unemployment. Individuals who use their benefits for longer periods of time would have to contribute more after reentering the workforce in order to balance their unemployment account.
To make UI more accessible to those with the most need:
- Expand support for more types of workers. After benefits were extended to part-time workers, freelance workers, independent contractors, and those who were self-employed during the COVID-19 pandemic, there has been a push for that to be a permanent expansion of UI. Allowing non-traditional workers to be eligible for UI would make the program more accessible and easier for those with greater need to receive benefits. In addition, some proposals would allow UI benefits to accrue during job training and other education tied to employment.
- Increase support for the Reemployment Services and Eligibility Assessment (RESEA) program. The budget for fiscal year 2025 allocates $388 million in funding for the RESEA program to provide greater access to reemployment services and help claimants assess if they are eligible for continuing benefits.
To improve antiquated systems and processes:
- Make UI expansions during recessions an automatic stabilizer. Making UI expansions automatic during strenuous economic times would eliminate delays that can incur from trying to enact emergency legislation. It would shorten the process and get benefit payments to people quicker.
- Modernize infrastructure. The Department of Labor is working with states to improve UI systems by enabling system development and reusing software across the UI system; additionally, there is a new initiative exploring ways to streamline administrative work by using artificial intelligence.
- Provide Additional Program Oversight. Overall program integrity could be enhanced by bolstering the ability of the Department of Labor Inspector General to root out waste, fraud, and abuse across the UI system.
Conclusion
The Unemployment Insurance program is a critical part of the safety net and a vital support system for people during difficult times, especially during recessions. It is also a key counter-cyclical tool to help stabilize the economy and speed recovery during downturns or crises. Given its importance to our economy and to millions of Americans, and its cost within the budget, it is important for lawmakers to continue to examine ways to make it more efficient, effective, and targeted for the future.
Photo: Joe Raedle/Getty Images
Further Reading
Can We Raise the Retirement Age and Protect Vulnerable Workers?
Raising the retirement age could harm workers who would be unable to delay retirement due to physically demanding occupations, disability, or job loss.
What Is SNAP? An Overview of the Largest Federal Anti-Hunger Program
SNAP has a positive effect on poverty and food insecurity, with a relatively small effect on the federal budget.
Should We Eliminate the Social Security Tax Cap?
There have been a number of proposals to increase, eliminate, or otherwise adjust the payroll tax cap as a way to shore up Social Security’s finances.