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How Unemployment Benefits Work

Author: Ethan Davis

Much like how to use a fire extinguisher, or how to perform the Heimlich maneuver, here's something we hope you will never have to do, but that you should know just in case. If you ever lose your job, knowing how to apply for unemployment insurance, also called unemployment benefits or compensation, may save you from having to move back in with your parents, or worse, live out of your car.

Contrary to the belief of some uninformed folks, unemployment benefits are not free, nor are they unearned money. Although unemployment benefits are facilitated by the government, the money itself originates with employers and eventually ends up in the hands of employees. (Read more in, "What are the key points when getting ready to file for unemployment aid?")

Unemployment Benefits are Not the Same as Welfare

The standard requirement for collecting unemployment is that you have to lose your job through no fault of your own. But regardless of how you lost your job, you should still apply for unemployment benefits: the upside is enormous, the downside is negligible. Keep in mind, however, you aren't guaranteed benefits just by virtue of ever having held a job at some point.

Do not confuse unemployment benefits with welfare. The government vouchsafes the disabled, children, students, or the indigent through benefits like cash, food, tax breaks, housing assistance and education. Unemployment benefits do not derive from the largesse of the taxpayers. When a laid-off worker receives unemployment benefits, they're paid out from a fund established by the relevant jurisdiction and funded by employers themselves--all employers, not just the one that laid off the worker in question. If you're skeptical about this arrangement, take a look at your most recent pay stub. Under deductions you'll see something like [state abbreviation] UI-E. Your employer withholds a small amount of money from your check--money that you earned in the first place, but your employer's not going to go out of their way to tell you that--to fund its share of the program.

Not without Strings

Perhaps to hammer home the point that unemployment benefits aren't just given by the state to whomever asks for them, the federal government has determined that benefits are federally taxable. Your state's division of employment and labor might profess sympathy for you and your plight, but the Internal Revenue Service offers no quarter.

By the way, that I in UI-E is noteworthy. The payments are officially classified as unemployment insurance. Which is to say, good old risk transfer. You (indirectly, through your employer) make minuscule payments while employed, in order to avoid any long stretches of zero income in the future should you be one of the relatively small number of people to lose your job in a particular period.

Does half a year sound like a reasonable length of time in which to find another job? It's a rhetorical question – in most cases that's how long unemployment benefits last. If your state's unemployment rate is unusually high, you're in luck, in a manner of speaking, and benefits can stretch out for a few weeks longer. (Read more in, "Help! My Unemployment Benefits Are Running Out.")

Better To Work in New Jersey or Be Unemployed in Hawaii?

Unemployment benefits differ from state to state, and they're intended as neither a reward nor a consolation prize for suffering the misfortune of being out of work while your employed cohorts are happily enduring traffic jams, sexual harassment workshops and performance reviews. In fact, unemployment benefits come with performance reviews of their own, sort of. In most states, you're supposed to record what jobs you applied for. Fail to be diligent in applying for jobs and providing proof, and you could lose your benefits. And no, the lost money isn't returned to your employer, nor to anyone else.

The trifling and seemingly arbitrary requirements for eligibility differ from state to state. For instance, Indiana requires that you earn at least $4200 during the base period, which is…the 2nd, 3rd, 4th, and 5th most recent quarters. In Oklahoma, the comparable figure is just $1500.

Once you meet the compensation criteria, there are more requirements. In Massachusetts, for instance, your earnings in the base period have to be at least 30 times the amount you'll receive weekly in benefits. That's the way the state's executive office of labor and workforce development words it, but it's really a roundabout way of saying that your weekly benefits are capped at 1/30 of the amount you earned during the relevant period.

Sometimes, your eligibility for unemployment benefits can be beyond your control. For example, in West Virginia you can't collect benefits if you're part of a labor dispute. If your union boss decides you're not going to receive any income from your employer, then you're not going to receive any income from your employer. Nor from your employer-funded lifeline. You're also out of luck if you're receiving other benefits from your employer, "other" meaning beyond your wage or salary. That includes annuities, pensions, retirement pay, etc. However, if you'd otherwise be due unemployment benefits greater than the non-wage income you're receiving from your employer, you can still collect said benefits. They'll just be decreased by the amount of the non-wage income the employer is paying you.

The Bottom Line

You won't get rich off unemployment benefits, but presumably you knew that anyway. The authorities understand that unemployment benefits have to fall in a very narrow range, in that they have to be set high enough that their recipients won't starve nor end up homeless, but low enough that collecting unemployment doesn't provide a disincentive to work. If you've never once gone without a paycheck, consider yourself blessed. For the rest of us, unemployment benefits have provided a small if welcome boon during a distressing time. As long as it remains a societal imperative that employers ought to provide now for their employees' eventual ouster, unemployment benefits will offer a temporary respite from poverty for the people who need it most.

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