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Evan Horowitz | Analysis

Nine things you need to know about unemployment insurance

Unemployment insurance helps workers who have lost jobs through no fault of their own. It’s particularly vital in difficult economic times, when even well-qualified, highly-motivated job-seekers have trouble finding work. To be effective, though, unemployment insurance has to be properly funded, and while Massachusetts has a sensible funding system, it is regularly disregarded.

In recent months, unemployment insurance has once again been the subject of heated debates, both here in Massachusetts and down in Washington. Who should be eligible? How long should people get benefits? And where will the money come from? Here are nine things you need to know.

1. What’s unemployment insurance?

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Imagine you work at a thriving company that makes widgets. You get a regular paycheck that you use to buy groceries, repay your student loans, cover rent, and generally keep your finances together. Everything is routine until one day the economy sours. Suddenly, sales at your widget company collapse and your boss has to let you go. Now what?

If you’ve been putting money away then you’ll have some savings, and you might be able to rely more on your credit card. But you may need additional help to stay afloat, and that’s what unemployment insurance provides: money you can use to offset your lost wages.

2. Who is eligible?

Those who: have recently lost work through no fault of their own; are able to work; are actively seeking work

3. How long do the benefits last?

It varies among states. Unemployment insurance is a joint federal-state program. So long as the economy is healthy, the federal government plays a relatively limited role, managing administrative costs while allowing states to set their own eligibility rules and benefit levels.

Most states offer benefits for a maximum of 26 weeks. Massachusetts is one of only two states with a higher maximum (30 weeks here, 28 in Montana). But even here the majority of recipients receive less than 30 weeks of benefits.

4. How much money do people receive?

Unemployment benefits are not meant to replace all of a person’s lost wages. The actual numbers vary quite a bit, because the rules are different in different states and also because benefits depend on job history, but the standard baseline is about half of former wages. Generally, there’s also a cap, which means higher-wage workers get less than half.

In Massachusetts, the cap affects workers earning more than about $70,000, and the average benefit is 36 percent of their former wages. That average benefit is lower than 26 other states.

5. Are there any other benefits?

Let’s say the economy begins to falter. Struggling businesses need customers, but some of their potential customers can’t afford to buy anything because they’ve lost their jobs. This further hurts the already struggling businesses, which then have to lay off more people, who can’t afford to become customers, and so on and so on.

By putting money into the hands of people who’ve just lost their jobs, unemployment insurance helps to prevent this vicious circle.

6. What about the costs?

There are two different kinds of costs to consider.

First, there is the direct cost of paying out benefits to laid off workers. In most states, that money comes from a tax on employers. Businesses pay a certain amount of money into an unemployment insurance trust fund, based on the number of employees they have, their history of laying people off, and the current tax rate. That trust fund then provides the money needed for benefits.

The second cost has to do with the risk that unemployment benefits could actually increase unemployment. Here’s how it might work: Remember that job with the widget company? Losing that job gave you a very strong incentive to look for new work, because you had no paycheck. Once you started receiving unemployment benefits, however, your incentives changed. You didn’t need that new job quite as badly because you had some money to pay for food, and rent, and other needs. Among economists there is a good deal of debate about whether this disincentive actually matters in the real world and, if it does, how strong it is.

7. So what is being debated in the State House?

Until recently, it looked as if state lawmakers might make some substantial changes to eligibility and benefits, but at this point both the Senate and the House have passed reform bills which incorporate a narrower set of changes to the unemployment insurance system. These changes include:

- Increasing the taxable wage base. Employers don’t pay taxes on every dollar their employees earn, just the first $14,000. After that, wages are untaxed. This means that if you’re an employer in a high-wage industry, a lot of the money you pay your employees is exempt. By contrast, in low-wage industries, a much higher portion of wages is subject to the tax. This creates a fairness problem for businesses and their employees. The Senate has proposed raising the taxable wage base to $21,000; the House recommends $15,000. Neither has followed the Labor Department recommendation to use a formula that would adjust the rate automatically to keep up with changes in actual wages.

- Increasing the cost to employers who lay off more workers. The current system is designed so that employers who lay off more employees pay a higher tax rate. Both the House and Senate bills would increase this penalty.

- Freezing the tax rates. Massachusetts’s funding system is actually well designed, but it’s almost never followed. The trust fund for unemployment insurance is supposed to be forward funded. That means you put extra money in when times are good so that the money is available when times are bad. If the balance gets too low, tax rates are supposed to increase automatically, and when the fund reaches healthy levels they automatically decrease. Yet, for 15 of the last 16 years our state Legislature has blocked these automatic adjustments.

8. If the states run the system, what are they debating in Washington?

When the economy is healthy the federal government plays a limited role in the unemployment insurance program. When the economy is bad, however, the federal government sometimes authorize extended, federally funded benefits for people whose state benefits have run out. The US restarted that program just after the great recession began and then discontinued it a few months ago. The current debate in Washington is about whether it should be reinstated. Legislators need to decide if the labor market really is strong enough to end the extensions, or if it is still unusually challenging for people who have been out of work for months, or even years, to find jobs?

9. Summing it up

Unemployment insurance helps workers who have lost their jobs through no fault of their own. It plays a particularly important role when the economy is bad and jobs are hard to come by. One of the reasons it has once again become a contentious issue (here and in Washington) is that our economy seems to be at a turning point. Unemployment is down, business profits are strong, and it’s becoming easier for people who need jobs to find them. Yet, the state economy and the US economy still have a long way to go. In Massachusetts, 220,000 people are currently out of work and looking for jobs. That’s far above where we were when the recession began.

If unemployment insurance is to remain a lifeline for workers still caught in this recession, much less those who will lose their future jobs when the next recession comes, the trust fund needs to be funded in a sensible and forward-looking manner.

Further reading

- Introduction to Unemployment Benefits from the Center on Budget and Policy Priorities

- 7 reasons why Congress’s failure to extend unemployment insurance matters

- The logistical hurdles of reinstating the federal extension

- Politifact assesses some recent studies on the disincentive effects of unemployment insurance

- FiveThirtyEight looks at whether the end of the federal extension has reduced long-term unemployment

More by Evan Horowitz:

-- Who pays more in taxes?

-- If Massachusetts were a country, how rich would it be?

-- Do Americans really overpay taxes by $1 billion?

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the US. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz
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