The federal-state unemployment insurance system helps people who have lost their jobs by temporarily replacing part of their wages. Created in 1935, the system is a form of social insurance, with contributions being paid into the system on behalf of working people so that they have income support if they lose their jobs. The system also helps sustain consumer demand during economic downturns, by providing a continuing stream of dollars for families to spend.
The basic unemployment insurance program is run by the states, although it is overseen by the U.S. Department of Labor. States provide most of the funding, and pay for the actual benefits provided to workers; the federal government pays only for the administrative costs to the states of running the program. Although subject to a few federal requirements, states are generally able to set their own eligibility criteria and benefit levels
The unemployment insurance system is funded by taxes paid by employers on behalf of their employees. Most of these taxes are collected by state governments, but some are collected by the federal government. While both the federal and state taxes are technically paid by employers (although in a few states, the employee pays part of the state tax), economists generally regard the tax as falling on employees. The theory behind this is that the dollars employers use to pay the tax are part of overall compensation costs, and would otherwise have gone into employees’ paychecks.
The federal tax is set by the Federal Unemployment Tax Act (FUTA), and is equal to 0.8 percent of the first $7,000 paid annually to each employee. This tax is regressive; since most workers earn more than $7,000 per year, most workers are effectively paying the same flat tax of $56 per year regardless of income. The percentage of overall wages paid in FUTA taxes on behalf of high-wage workers is therefore much lower than for low-wage workers.
