International Encyclopedia of Public Policy and Administration - Vol. 4

By Jay M. Shafritz | Go to book overview


UNEMPLOYMENT INSURANCE. A program that pays benefits to partially offset the loss of wages due to unemployment.


At the height of the Great Depression, President Franklin D. Roosevelt's Committee on Economic Security recommended the establishment of two national social insurance systems. The first program would provide old-age benefits to retired workers and the second program would provide compensation for the unemployed. In 1935, the Social Security Act created both of these programs -- the social security and unemployment insurance (UI) programs.

From its inception, the intent was to entice states to participate in UI so it would be a federal-state relationship. By 1937, all states had adopted unemployment insurance laws patterned after model legislation prepared by the Social Security Board. The board, whose formation had been recommended by the President's Committee on Economic Security, had the responsibility of assisting states in setting up their UI systems and monitoring changes in state UI systems.

Original Structure of the UI System

The Social Security Act of 1935 contained two titles that dealt with unemployment insurance-Title III, which provided for administrative grants, and Title IX, which provided for the financing of the system. The federal administrative grants, under Title III. were to assist in the proper administration of the federal UI law among the states and were at the discretion of the Social Security Board.

Under Title IX, employers were required to pay a federal unemployment insurance excise tax if they employed eight or more people for 20 or more weeks a year. The tax rate initially was set at 1 percent of total payroll in 1936, increasing to 2 percent in 1937 and 3 percent in 1938. Some kinds of employment were excluded from the tax, such as agricultural labor, domestic employees; individuals providing service for nonprofit organizations of a religious, charitable, scientific, literary, or educational nature; and individuals working for the federal, state, and local levels of government.

As an incentive to get states to levy their own UI excise taxes, employers making contributions to state unemployment compensation programs were eligible for credit up to 90 percent of the federal tax. The credit was contingent on the state UI law conforming to federal guidelines established by the Social Security Board.

A trust fund was created by the 1935 act (see trustfund). The Unemployment Trust Fund was to receive the UI excise taxes collected by the federal and state governments and to invest the funds in federal securities.

Objectives of Unemployment Insurance

The UI system was created with a number of objectives in mind. First and foremost, unemployment insurance was intended to alleviate the hardships that result from the loss of income during periods of unemployment. Unemployment insurance would provide cash to enable workers basically to maintain their living standard. Secondary objectives included allowing an unemployed worker time to locate new employment or regain old employment, providing the unemployed time to retrain for a new job and providing a degree of stabilization during difficult economic times.

Conceptual Issues

The UI system is structured to systematically accumulate funds during good economic times in order to provide benefits during periods of high unemployment. Therefore, the concepts of solvency and reserves are of utmost importance to the successful operation of a UI system.


State unemployment insurance systems seek to balance benefit payments to recipients with contributions to the system. The traditional principle holds that the pool of reserves should be structured so it is able to finance unemployment benefits during a succession of economic cycles without going into the red. A system is considered insolvent when it lacks sufficient resources-accumulated reserves from prior periods plus employer contributions during the current period-to pay benefits earned during the period. Insolvency does not mean benefits go unpaid because the federal-state UI structure allows states to borrow from the federal unemployment trust fund to cover payments when insolvency occurs.

There are three primary approaches that can be used to maintain solvency in a state unemployment insurance system: countercyclical, replenishment, and balancing reserves. The three approaches differ in the requirements they place on reserve fund levels held in the state system and the effect they have on UI tax rate changes over time.

Countercyclical Finance. One of the stated objectives of the UI system is to provide a measure of countercyclical stabilization to counter swings in the business cycle. The system operates as an automatic stabilizer; as unemployment increases, tax contributions decline and benefit payments increase, providing a dampening effect on the decline of economic activity. In an expansion, the reverse occurs, constraining potential inflationary pressures.

In order to maximize the countercyclical potential of an unemployment insurance system, the tax rate schedule would rise when benefit payment requirements are low


Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this page

Cited page

Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited page

Bookmark this page
International Encyclopedia of Public Policy and Administration - Vol. 4
Table of contents

Table of contents

  • Editorial Board *
  • Title Page *
  • R 1901
  • S 2019
  • T 2205
  • U 2297
  • V 2325
  • W 2377
  • Z 2429
  • Index 2437


Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen
/ 2504

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    New feature

    It is estimated that 1 in 10 people have dyslexia, and in an effort to make Questia easier to use for those people, we have added a new choice of font to the Reader. That font is called OpenDyslexic, and has been designed to help with some of the symptoms of dyslexia. For more information on this font, please visit

    To use OpenDyslexic, choose it from the Typeface list in Font settings.

    OK, got it!

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search


    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.