CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Unemployment 

Insurance in the 

Wake of the 

Recent Recession

NOVEMBER 2012

© Shutterstock/ Robert F. Balazik
Pub. No. 4525
Contents

CBO

Summary 1

The Unemployment Insurance System 5

Benefits Under the Regular UI Program 5

Additional Benefits During the Past Five Years 6

Funding for Unemployment Insurance 7

Recipients of UI Benefits and the Budgetary Cost of Benefits 8

Economic Effects of Unemployment Insurance 9

Effects of UI Benefits on Income, Consumption, and Saving 9

Effects of UI Benefits on Incentives to Search for Work and Accept a Job Offer 11

Effects of UI Taxes on Decisions About Employment 12

Effects of the UI System as an Automatic Economic Stabilizer 13

Policy Options for the Short Term 14

Current Law 15

Option 1. Fully Extend the EUC Program and Temporary Provisions of the 

EB Program for One Year 16

Option 2. Partially Extend the EUC Program for One Year 17

Option 3. Allow UI Recipients to Finish Receiving the Tier of EUC Benefits for 

Which They Will Qualify at the End of December 2012, Up to 14 Additional Weeks 17

Option 4. Extend Temporary Provisions of the EB Program for One Year 17

Option 5. Delay States’ Schedules for Repaying the Unemployment 

Trust Fund for One Year 17

Policy Approaches for the Longer Term 17

Restructuring Benefits to Encourage Employment 17

Changing the Mix of Federal and State Roles 21

Changing the Distribution of Resources Within the UI System 22

List of Tables and Figures 25

About This Document 26

CBO

Summary

The unemployment insurance (UI) system is a 

partnership between the federal government and state 

governments that provides a temporary weekly benefit to 

qualified workers who lose their job and are seeking 

work. The amount of that benefit is based in part on a 

worker’s past earnings. The Congressional Budget Office 

(CBO) estimates that UI benefits totaled $94 billion 

in fiscal year 2012 (when the unemployment rate was 

8.3 percent, on average), a substantial increase over the 

$33 billion paid out in fiscal year 2007 (when the 

unemployment rate was 4.5 percent, on average).

The periods for which eligible workers can receive UI 

benefits have been repeatedly extended during the recent 

recession and its aftermath. Regular UI benefits generally 

last up to 26 weeks (see Summary Table 1). Additional 

weeks of benefits have been provided through the creation 

of the temporary Emergency Unemployment Compensation (EUC) program in 2008 and through modifications 

to the extended benefits (EB) program. The EUC program currently provides up to 47 weeks of additional benefits (depending on a state’s unemployment rate) after 

regular UI benefits have been exhausted. The EB program 

provides up to 20 weeks of benefits to certain eligible 

workers who have exhausted their EUC benefits (temporary changes in law have made it easier for states to 

qualify to provide extended benefits and have made the 

funding for the EB program entirely federal). The benefits the three programs provide—at a total cost over the 

past five years of roughly $520 billion—have allowed 

households to better maintain their consumption while 

household members are unemployed. Under current law, 

the temporary benefits that have been provided in recent 

years are set to expire at the end of December 2012.

CBO assessed four options that would extend some or all 

of the current benefits for up to one year and estimated 

their costs to the federal budget (shown in parentheses), 

as follows:

 Option 1: Fully extend the current EUC program and 

temporary provisions of the EB program for one year 

($30 billion); 

 Option 2: Partially extend the current EUC program 

by providing at most 14 extra weeks of benefits for 

one year ($14 billion); 

 Option 3: Allow UI recipients to finish receiving up 

to 14 weeks of EUC benefits, depending on the number of weeks of benefits for which they will qualify at 

the end of December 2012 ($4 billion); and 

 Option 4: Extend the current EB program for one 

year, maintaining full federal funding and allowing 

states to more easily qualify for the program 

($3 billion). 

Those options to extend UI benefits would have several 

effects on individuals and the U.S. economy in the short 

run. In particular, they would:

 Afford greater protection against income lost during 

unemployment;

 Provide incentives for UI recipients to remain 

unemployed longer than they otherwise would have 

because UI benefits stop when recipients find a job or 

stop looking for work; and 

 Lead to more consumer spending and increased 

demand for goods and services, which CBO expects 

would boost overall output and employment in the 

short term.

The four options would have similar short-term macroeconomic effects per dollar of budgetary cost. (Option 3 
2 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

CBO

Summary Table 1.

Unemployment Insurance Programs in Effect as of December 1, 2012

Source: Congressional Budget Office.

Note: UI = unemployment insurance.

would have slightly larger economic effects per dollar of 

budgetary cost in 2013 because spending would be 

concentrated earlier in the year; but that option would 

have the same cumulative effects over several years.) For 

the three options involving extensions for an entire 

year—Options 1, 2, and 4—economic output would be 

$1.10 higher per dollar of budgetary cost, on average, in 

2013, CBO estimates, and employment would be 

increased by six years of full-time equivalent employment 

per million dollars of budgetary cost (see Summary 

Figure 1). Under Option 1, for example, which extends 

the benefits provided under the current EUC and 

EB programs at a total budgetary cost of $30 billion, 

CBO estimates that gross domestic product adjusted for 

inflation would be 0.2 percent higher in the fourth 

quarter of 2013 and that full-time-equivalent employment would be 0.3 million higher at that time than it 

would be under current law. (The overall effects for the 

fourth quarter of 2013 are not equal to the corresponding 

effects per dollar multiplied by the budgetary cost 

reported above because of differences in the time periods 

analyzed.)

CBO also considered a fifth option that would provide 

temporary fiscal relief to states by delaying for one year 

the repayment of funds they have borrowed from the 

Unemployment Trust Fund, which is funded by a federal 

payroll tax on employers. Under Option 5, the federal 

government would forgo about $3 billion of revenue in 

Weekly Benefits

Program

Enabling

Legislation Funding Eligibility

Maximum Weeks 

Available Amount

Regular 

Unemployment 

Insurance

Social Security Act of 

1935

A state UI payroll tax on 

employers pays for 

benefits, and a federal 

UI payroll tax on 

employers pays for 

states’ administrative 

expenses. 

Workers must have lost 

their job through no 

fault of their own 

(typically, because they 

were laid off) and must 

have had a consistent 

record of earnings 

during a base period 

(typically, the previous 

four or five quarters).

26 weeks in most 

states; as few as 

19 weeks in others.

Amounts vary, but 

weekly benefits 

are typically about 

50 percent of prior 

weekly earnings up to 

a state-specific cap. In 

2009, the average 

weekly benefit was 

$300.

Emergency 

Unemployment 

Compensation

Enacted in the 

Supplemental 

Appropriations Act, 

2008; modified by 

subsequent acts, most 

recently by the Middle 

Class Tax Relief and Job 

Creation Act of 2012

Fully funded by the 

federal government 

from general revenues.

Workers’ eligibility is 

the same as for regular 

UI benefits. States 

qualify if their 

unemployment rate 

meets certain criteria.

14 to 47 weeks of 

benefits are currently 

offered, depending on 

the state’s unemployment rate, but the 

number of weeks 

offered since 2009 has 

been as high as 53.

Same as regular 

UI benefits.

Extended

Benefits

Federal-State Extended 

Unemployment 

Compensation Act of 

1970

Normally funded 50/50 

by states and the 

federal government but 

currently funded fully by 

the federal government.

Workers’ eligibility is 

typically the same as 

for regular UI benefits. 

States qualify if their 

unemployment rate is 

high and increasing.

0, 13, or 20 weeks of 

benefits, depending 

on the state’s 

unemployment rate.

Same as regular 

UI benefits.
SUMMARY UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 3

CBO

Summary Figure 1.

Estimated Economic Effects in 2013 of Extending Unemployment Benefits, 

Relative to the Budgetary Cost in 2013

Source: Congressional Budget Office.

Notes: The dots represent CBO’s central estimates, which correspond to the assumption that the values that describe key parameters of 

economic behavior (in particular, the extent to which lower federal taxes and higher federal spending boost aggregate demand in the 

short term) equal the midpoints of the ranges used by CBO. The ends of the lines represent estimates based on the full ranges that 

CBO uses for those parameters.

The estimated budgetary cost does not include debt service.

a. The results shown here apply to fully extending the Emergency Unemployment Compensation (EUC) program and temporary provisions 

of the extended benefits (EB) program for one year (Option 1), partially extending the EUC program for one year (Option 2), or extending 

temporary provisions of the EB program for one year (Option 4). The economic effects relative to the budgetary cost would be slightly 

larger if recipients of unemployment insurance were allowed to finish receiving up to 14 additional weeks of the EUC benefits for which 

they will qualify at the end of December 2012 (Option 3) because that spending would be concentrated earlier in the year.

2013 but would collect roughly that same amount in 

subsequent years.

In addition, CBO assessed more fundamental modifications of the UI system over the longer term. Some of 

those approaches would promote employment by increasing incentives for UI recipients to take a new job or by 

encouraging firms to reduce hours worked per employee 

rather than lay off some workers while retaining others 

full time. Other approaches would change the federal and 

state roles in administering UI, either by making the 

amount of funding more predictable and giving states 

more flexibility in implementing their UI programs or by 

making UI benefits and tax rates more uniform among 

states. Still other approaches would alter the distribution 

of resources within the UI system by expanding the wage 

base on which UI taxes are levied, by changing the weekly 

benefits the system provides, or by providing insurance 

against the earnings loss that many laid-off workers 

experience when they take a new job.

0 2 4 6 8 10 12

2 10

6 Extend Unemployment Insurance

Benefits for One Yeara

Gross Domestic Product

(Dollars of GDP in 2013 per dollar

of budgetary cost in 2013)

Full-Time-Equivalent Employment Years

(Average in 2013 per million dollars

of budgetary cost in 2013) 

0123

0.4 1.8

1.1

CBO

Unemployment Insurance in the

Wake of the Recent Recession

The Unemployment Insurance System

The unemployment insurance (UI) system is a partnership between the federal government and the states that 

provides payments to eligible workers who have been laid 

off. States vary considerably in their rules governing eligibility for benefits, benefit amounts, and payroll tax rates. 

Employers pay a state payroll tax to fund some of those 

benefits. Each state has its own account in the Unemployment Trust Fund (referred to in this report as the 

UI trust fund). When a state’s unemployment rate is high 

and its benefit payments exceed its payroll tax revenues, 

the state can draw from its account in the trust fund to 

cover the benefit payments. Employers also pay a federal 

payroll tax that is deposited into federal accounts in the 

trust fund. Those accounts are tapped for state and federal administrative costs, the federal share of certain 

benefits, and advances to states that cannot pay their 

regular benefits in a timely way.

UI benefits expanded considerably during and after the 

recent recession. The unemployment rate rose from 

about 5 percent in 2007 to nearly 10 percent in the latter 

months of 2009, and the share of unemployed people 

who had not worked for 26 weeks or more increased 

substantially. In response, policymakers changed the UI 

system in several ways: They increased the number of 

weeks for which workers can receive benefits, increased 

the amount of benefits, and shifted more of the responsibility for funding UI programs to the federal government. 

As a result, UI benefits peaked at more than $150 billion 

during 2010 (when the annual unemployment rate 

peaked at 9.6 percent). Unemployment and benefit 

payments have both declined since then.

The UI system currently comprises three programs that 

provide benefits to unemployed workers: 

 The regular UI program, which was enacted in the 

Social Security Act of 1935; 

 The Emergency Unemployment Compensation 

(EUC) program, which went into effect in July 2008 

and provides benefits to unemployed workers who 

have exhausted their regular UI benefits; and 

 The extended benefits (EB) program, which has been 

in effect since 1970 and, under certain circumstances, 

provides benefits once the regular and EUC benefits 

have been exhausted. In the absence of the EUC 

program, people who have exhausted their regular 

benefits receive additional assistance through the EB 

program if they reside in qualifying states. 

Benefits Under the Regular UI Program

The regular UI program is administered by the states. It 

provides payments to people who apply for benefits and 

are deemed eligible to receive them because they have 

been laid off or because they have left the military (at the 

end of their contract period or for health reasons). People 

who quit their job or are fired are generally not eligible 

for UI benefits, nor are people who are entering or 

reentering the labor market. To be eligible for benefits, 

workers must have earned at least a certain amount of 

income in the recent past, typically for four of the five 

most recent quarters; the amount of income varies by 

state. Thus, for example, new college graduates without 

a job do not typically receive UI benefits. To maintain 

eligibility for benefits while unemployed, UI recipients 

must search for a new job and, in some states, must 

accept a reasonable job offer.1

1. For more details, see Christopher J. O’Leary, “State UI Job Search 

Rules and Reemployment Services,” Monthly Labor Review, 

vol. 129, no. 6 (June 2006), pp. 27–37, www.bls.gov/opub/mlr/

2006/06/art3full.pdf.
6 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

CBO

Recipients can generally receive up to 26 weeks of 

benefits under the regular UI program, although as of 

October 1, 2012, seven states had shorter limits. The 

amount of weekly UI benefits depends on an individual’s 

prior earnings; higher earners receive higher benefits, up 

to a maximum benefit. Average weekly UI benefits vary 

from state to state because of differences in average earnings and benefit formulas. Nationwide average UI benefits, which change from year to year because of variability 

in recipients’ earnings history and state of residence, have 

been about $300 per week since 2009. The weekly 

amount a worker receives usually does not change 

during the period that he or she collects unemployment 

insurance benefits. 

The ratio of UI benefits to prior cash earnings—termed 

the UI replacement rate—varies from state to state and 

from person to person. In general, UI replacement rates 

range from 30 percent to 50 percent of prior earnings, 

and workers with higher earnings are at the lower end of 

that range because of the cap on weekly benefits.

Additional Benefits During the Past Five Years 

The number of people receiving UI benefits rose during 

and after the recent recession for several reasons. Far more 

workers were laid off in 2008 and 2009 than in 2006 

and 2007. Having so many more workers eligible for 

unemployment benefits would have substantially 

increased the number of recipients in the absence of any 

change in UI policies, but federal policies also were 

changed in ways that further expanded the number of UI 

recipients. The most important change increased the 

number of weeks for which laid-off workers could receive 

emergency and extended benefits; other changes also 

temporarily raised the amount of those weekly benefits. 

Together, those changes increased the share of unemployed workers who were eligible for benefits and, by 

making the benefits more attractive, increased the share 

who chose to receive them.2

 The changes in the UI system were made through several specific programs.

Emergency Unemployment Compensation. The EUC 

program, which is funded entirely by the federal government, has provided additional weeks of UI benefits to 

eligible unemployed workers since July 2008. Benefits in 

the EUC program are in four tiers. Workers in every state 

currently qualify for 14 weeks of emergency benefits (the 

first tier). Eligibility for three higher tiers—each providing between 9 and 14 additional weeks of benefits—has 

been limited to unemployed workers in states with higher 

unemployment rates and has changed over time.3

Extended Benefits. The EB program was established in 

1970 and currently provides either 13 or 20 weeks of 

additional benefits to unemployed workers in certain 

states who have exhausted their regular and emergency 

benefits. Benefits are normally available in states whose 

insured unemployment rate (the ratio of the number of 

UI benefit recipients to the number of workers covered 

by the system) is higher than 5 percent and is also at least 

20 percent higher than it had been in both of the previous two years. States have the option to choose a higher 

trigger—6 percent—without the requirement that the 

rate be rising. In addition, states have the option of 

basing their eligibility for extended benefits on their 

standard unemployment rate (the ratio of the number of 

people who are unemployed to the number in the workforce). Using that option, states can qualify for 13 weeks 

of extended benefits if their unemployment rate is both 

rising and exceeds a threshold, and they may qualify for 

20 weeks if their unemployment rate is rising and exceeds 

a higher threshold.

Provisions in the Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation Act of 2010 made it 

easier for states to reach the thresholds, or “triggers,” for 

eligibility for extended benefits. That law allows states to 

adopt a three-year “look-back” period with which current 

unemployment is compared in determining whether a 

state’s unemployment rate is rising; the previous lookback period was two years. In essence, the extended 

look-back provision allows states to compare their 

unemployment rate with the corresponding rates in 

earlier years (when unemployment rates were generally 

low) rather than with the rates in 2010 or 2011 (when 

unemployment rates were generally higher than they are 

2. For a discussion of the factors underlying a decision to accept UI 

benefits during earlier periods, see Rebecca M. Blank and David 

E. Card, “Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?” Quarterly Journal of Economics, 

vol. 106, no. 4 (November 1991), pp. 1157–1189, http://

qje.oxfordjournals.org/content/106/4/1157.abstract; and Patricia 

M. Anderson and Bruce D. Meyer, “Unemployment Insurance 

Takeup Rates and the After-Tax Value of Benefits,” Quarterly 

Journal of Economics, vol. 112, no. 3 (August 1997), pp. 913–937, 

http://qje.oxfordjournals.org/content/112/3/913.abstract.

3. For more information about the EUC program in 2012, see 

Department of Labor, Emergency Unemployment 

Compensation 2008 (EUC) Program (February 27, 2012), 

www.workforcesecurity.doleta.gov/unemploy/pdf/euc08.pdf.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 7

CBO

today). As a result, more states have been eligible to provide extended benefits over the past five years, although 

New York was the only eligible state as of November 

2012.

Maximum Duration of Benefits. The collective provision 

of regular benefits (up to 26 weeks), emergency benefits 

(at their height, up to 53 weeks), and extended benefits 

(up to 20 weeks) means that a person who was laid off 

during the past few years could have received benefits for 

up to 99 weeks, although in many states and at various 

times the maximum has been much lower.

Other Changes. In addition to extending the duration of 

benefits, the federal government temporarily increased 

the amount of the weekly benefit by $25 (referred to as 

federal additional compensation) between February 2009 

and early June 2010. It also changed the tax treatment of 

unemployment benefits. For tax year 2009 only, UI 

recipients could exclude from federal income taxation the 

first $2,400 of UI benefits they received. That exclusion 

was worth $360 in after-tax dollars for the typical recipient, who was in the 15 percent tax bracket.

Funding for Unemployment Insurance

Funding for unemployment insurance is ordinarily drawn 

from payroll taxes imposed on employers by state governments and the federal government. All funds collected 

through UI payroll taxes are deposited in the UI trust 

fund and appear as part of the federal budget. The trust 

fund allows states to save during good times, to draw 

down their account with the trust fund when their UI 

expenditures exceed tax receipts, and to borrow when 

they have insufficient balances to cover UI benefits. In 

recent years, funding for portions of the unemployment 

insurance program, such as emergency benefits, have 

been paid for out of general federal revenues rather than 

from dedicated payroll taxes.

State Payroll Taxes. The amount of state payroll taxes an 

employer pays for any particular employee is the product 

of the firm’s state UI tax rate and the amount of the 

worker’s earnings subject to the UI tax in that state. State 

UI tax rates vary among employers; higher rates are levied 

on employers with a history of costly UI claims. (The 

process by which states adjust employers’ UI tax rates 

in response to historical UI claims is called “experience 

rating.”) All states have minimum and maximum tax 

rates that apply to employers. In July 2012, minimum 

tax rates ranged from zero percent (in several states) to 

2.6 percent (in New Hampshire), and maximum rates 

ranged from 5.4 percent (in many states) to 13.5 percent 

(in Maryland). 

State UI taxes are levied as a percentage of each 

employee’s earnings, up to a maximum taxable wage base 

(that is, the amount of earnings subject to the UI tax). In 

2012, for example, those wage bases ranged from $7,000 

in Arizona and California to $38,800 in Hawaii. The 

limit on taxable wages for any worker means that UI taxes 

account for a higher percentage of earnings for workers 

with low earnings than for those with high earnings. In 

the Congressional Budget Office’s (CBO’s) view, the portion of UI taxes that does not vary among firms within a 

local labor market is generally passed through to workers 

in the form of reduced earnings; under that view, the 

reduced earnings resulting from the payroll tax accounts 

for a larger share of earnings for low earners than for high 

earners.4

 Low earners, however, also tend to receive larger 

benefits as a share of earnings than do high earners.5

Federal Payroll Taxes. The Federal Unemployment Tax 

Act (FUTA) imposes a payroll tax on employers to pay 

states’ UI administrative costs and the federal share of the 

EB program and to provide the trust fund from which 

states can draw advances (to be repaid with interest) if 

their UI accounts are fully depleted. The FUTA tax rate is 

6.0 percent on the first $7,000 paid to each employee, 

but almost all employers receive a credit of 5.4 percent 

for state taxes paid. The net effect is therefore a tax of 

0.6 percent, or a maximum of $42, on employees earning 

at least $7,000 annually. Beginning in 1976, a FUTA surtax of 0.2 percent brought the total FUTA tax, net of the 

state tax credits, to 0.8 percent (for a maximum of 

$56 per employee), but those surtax provisions expired 

on July 1, 2011. 

4. One study finds that individual firms can pass through only a 

small share of the differences between firms within a local labor 

market that are attributable to experience rating. See Patricia M. 

Anderson and Bruce D. Meyer, “The Effects of Firm Specific 

Taxes and Government Mandates with an Application to the 

U.S. Unemployment Insurance Program,” Journal of Public 

Economics, vol. 65, no. 2 (August 1997), pp. 119–145, 

www.sciencedirect.com/science/journal/00472727/65/2.

5. Patricia M. Anderson and Bruce D. Meyer, “Unemployment 

Insurance Tax Burdens and Benefits: Funding Family Leave and 

Reforming the Payroll Tax,” National Tax Journal, vol. 59, no. 1 

(March 2006), pp. 77–95, http://ntanet.org/tax-resources/

ntj-full-text-articles.html.
8 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

CBO

States can pay off advances from the trust fund if their UI 

tax receipts exceed the amount of UI benefits they pay 

out. That can occur if states raise their UI taxable wage 

bases or their UI tax rates, or if their economies improve, 

in which case UI tax receipts naturally rise and UI expenditures naturally fall. Alternatively, states can repay the 

trust fund with funds that they borrow by issuing bonds. 

If a state’s balance is not paid off within a certain period, 

then the credit for state taxes paid is automatically 

reduced, causing its FUTA tax rate to rise to help reduce 

the balance. Specifically, under current law, states that are 

in debt to the UI trust fund and that do not adequately 

increase their payments have their FUTA tax rates automatically increased by 0.3 percentage points per year (or 

more) when that debt remains outstanding for two or 

more consecutive years.6

Funding for UI During the Past Five Years. State UI payroll taxes are typically adequate to cover UI expenditures 

when unemployment is low, but expenditures in many 

cases exceed UI taxes when unemployment is high. In 

2007, before the recent recession began, the states collectively had a balance of roughly $40 billion in the trust 

fund. As of June 30, 2012, however, after several years of 

lower UI revenues and much higher UI expenditures, 

state loans from the trust fund (net of positive balances) 

totaled $13 billion.7

 To pay back that borrowing and to 

fund continuing high UI expenditures, some states have 

modified their UI tax systems to raise more revenue. 

(Some states have also reduced the number of weeks 

that benefits are available.) As a result, the nationwide 

ratio of state UI taxes collected to total earnings—the 

average state UI tax rate—has increased from about 

0.6 percent in 2008 to 0.9 percent in 2012.

Some states have been unable to pay off their debt to the 

UI trust fund despite their increased tax rates and 

reduced benefits, and in some cases those states’ FUTA 

tax rates have automatically increased. Indiana, for example, had a FUTA tax rate of 1.2 percent in 2011. As a 

result, Indiana employers paid a FUTA tax of $84 for 

each employee earning more than $7,000 per year (the 

$42 they normally would have paid plus an extra $42 

because of the state’s indebtedness to the trust fund).

Funding arrangements are different for the extended 

benefits program and the Emergency Unemployment 

Compensation program. The EB program is usually 

funded in equal shares by the federal government and 

state governments but has been funded completely by the 

federal government since February 2009—initially pursuant to the American Recovery and Reinvestment Act of 

2009 and most recently to the Middle Class Tax Relief 

and Job Creation Act of 2012. The EUC program has 

been funded entirely by the federal government and 

has been available since July 2008.8

 Although the federal 

government instituted programs similar to the EUC 

program during and after previous recessions, nothing 

in prior law required the provision of EUC benefits 

following the recent recession.

Recipients of UI Benefits and the 

Budgetary Cost of Benefits

Increased layoffs among workers and policy changes in 

the UI system have expanded the number of recipients 

and the amount spent to provide unemployment benefits. The unemployment rate increased during and after 

the recession, in part because so many workers were laid 

off but also because finding a new job took longer for 

unemployed workers (regardless of whether they had 

been laid off or were unemployed for some other reason). 

In addition, the proportion of unemployment accounted 

for by the long-term unemployed (that is, by people who 

have been unemployed for at least 26 weeks) steadily 

increased, reaching all-time highs in 2010 and 2011.9

Many of those laid-off workers were eligible for 

unemployment benefits, and so spending in the 

UI system also increased in those years. 

An average of roughly 8 million workers who lost their 

job started receiving UI benefits in each fiscal year from 

2004 to 2007. That number grew substantially and 

peaked at 14.4 million in 2009 (see Figure 1). In addition 

to the increase in the number of new recipients, the 

6. See Julie M. Whittaker, The Unemployment Trust Fund (UTF): 

State Insolvency and Federal Loans to States, CRS Report for 

Congress RS22954 (Congressional Research Service, 

September 20, 2012).

7. See Department of Labor, Unemployment Insurance Data Summary 

(2nd quarter 2012), p. 8, http://workforcesecurity.doleta.gov/

unemploy/content/data_stats/datasum12/DataSum_2012_2.pdf.

8. The Supplemental Appropriations Act of 2008 (Public Law 110-

252) established the EUC program. The most recent extension of 

EUC benefits was in the Middle Class Tax Relief and Job Creation 

Act of 2012.

9. Congressional Budget Office, Understanding and Responding to 

Persistently High Unemployment (February 2012), www.cbo.gov/

publication/42989.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 9

CBO

Figure 1.

Number of People Who Began Receiving Unemployment Benefits, by Fiscal Year

(Millions)

Source: Congressional Budget Office based on data from the Department of Labor, Employment and Training Administration.

total number of recipients each year also went up because 

unemployed workers received those benefits for longer 

periods. Eligible workers received benefits for longer periods both because finding work became more difficult and 

because they could receive UI benefits for an extended 

period. The share of UI recipients who exhausted their 

regular benefits, which in most states last for 26 weeks, 

increased from roughly 35 percent between 2004 and 

2007 to 44 percent in 2009 and 62 percent in 2010.

Greater numbers of people receiving UI benefits and 

higher benefits per person have increased UI spending 

(see Figure 2). (Although taxes and benefits are largely set 

by individual states, all UI taxes and expenditures are 

recorded in the federal budget.) The unemployment rate 

and benefits both peaked in 2010 and have since fallen 

off, but the proportionate drop has been greater for benefits. In particular, since 2010, two factors have decreased 

the share of unemployed workers who are eligible for 

those benefits. First, since peaking in 2008 and 2009, the 

number of workers laid off has decreased, which means 

that the unemployed are increasingly people seeking their 

first job and those reentering the workforce—groups who 

are typically not eligible for UI benefits. Second, workers 

who were laid off in 2008 and 2009 have now exhausted 

their benefits—even if they were in a state in which they 

were eligible for the maximum 99 weeks of benefits.

Economic Effects of 

Unemployment Insurance

The unemployment insurance system—as it existed 

before 2008 and in its current form—affects the 

economy through several channels:

 UI benefits insure workers against losses in income 

and provide them with cash to pay current expenses if 

they are laid off.

 UI benefits increase incentives for workers who lose 

their job to look for work (by requiring them to do so 

in order to receive benefits) but reduce the incentives 

to accept a job offer.

 UI taxes change employers’ and recipients’ decisions 

about employment. 

 The UI system serves as an automatic economic stabilizer by supporting consumer spending when income 

falls, which in turn boosts aggregate economic activity. 

Effects of UI Benefits on Income, 

Consumption, and Saving

Insurance protects people from the consequences of certain events; in the case of unemployment insurance, it 

protects against some of the losses in earnings and consumption that might otherwise follow a layoff. Between 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

2

4

6

8

10

12

14

16
10 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

CBO

Figure 2.

Spending on Unemployment Benefits, by Fiscal Year

(Billions of dollars)

Source: Congressional Budget Office based on data from the Department of Labor, Employment and Training Administration.

a. Emergency benefits may be temporarily authorized during periods of high unemployment, as they were from March 2002 through 

March 2004 and from July 2008 through December 2012. A weekly supplement of $25, termed federal additional compensation, 

was available to people receiving unemployment benefits between February 2009 and June 2010.

b. Regular benefits are provided according to state laws under broad federal parameters. Typically, regular benefits are available for up to 

26 weeks. Extended benefits may provide an additional 13 or 20 weeks of benefits, depending on a state’s laws and unemployment rate. 

fiscal years 2008 and 2012, the UI system provided 

$520 billion to unemployed people, using funds that 

were raised through UI payroll taxes and general 

revenues. 

That insurance keeps some families from entering poverty when a family member loses a job. About 70 percent 

of UI benefits paid out in 2009 went to families whose 

income exceeded 200 percent of the federal poverty 

threshold because another family member had labor 

income or the family had other sources of income. But a 

substantial portion of benefits went to families who were 

below or near that threshold. For many of those families, 

UI benefits were the difference between being in or out of 

poverty. The poverty rate was 14.3 percent in 2009, for 

example, whereas without UI benefits (and assuming that 

other income sources would not have changed), it would 

have been 15.4 percent.10

Unemployment insurance allows some unemployed people to avoid having to raise cash by selling assets, such as 

cars, to pay for more immediate needs, such as food and 

housing. For workers who have a job, the availability of 

unemployment insurance enables them to hold less of 

their savings in liquid forms, such as checking accounts, 

and to hold more of their savings in less readily accessible 

forms, such as retirement accounts and certificates of 

deposit. Specifically, without that insurance, workers 

might worry about the penalties associated with accessing 

their illiquid savings if they became unemployed. By providing cash when it is needed, unemployment insurance 

allows households to keep more of their savings in forms 

that are harder to access quickly but that may offer better 

returns.11

Similarly, the availability of unemployment insurance 

enables workers to take more risks in their career. In the 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

20

40

60

80

100

120

140

160

Emergency

Benefits and

Federal Additional

Compensationa

Regular and

Extended Benefitsb

10. Congressional Budget Office, Unemployment Insurance Benefits 

and Family Income of the Unemployed (November 2010), 

www.cbo.gov/publication/21922. 

11. See Raj Chetty, “Moral Hazard Versus Liquidity and Optimal 

Unemployment Insurance,” Journal of Political Economy, vol. 116, 

no. 2 (April 2008), pp. 173–234, www.jstor.org/stable/10.1086/

529035.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 11

CBO

absence of that insurance, workers might be overcautious 

and take a job that has less chance of a layoff but that also 

has less chance of a financial gain. For example, without 

UI, workers might be reluctant to take a job with a new, 

small firm that could either grow rapidly or fail. That 

insurance benefit for individuals may also help the overall 

economy. Some research suggests that the current UI system boosts productivity because it allows workers to take 

more risks that are socially efficient and that such an 

effect may more than compensate for the reduced efficiency that arises from the effects of UI on incentives to 

work.12

Effects of UI Benefits on Incentives to 

Search for Work and Accept a Job Offer

The structure of UI benefits increases the incentive for 

workers who lose their job to search for one, but it 

decreases their incentive to accept a job offer. Those 

changes in incentives differ during times of high 

unemployment. 

Searching for a Job. The UI program requires that 

benefit recipients actively look for work; as a result, some 

laid-off workers who might otherwise have left the workforce (that is, neither worked nor sought work) may 

instead eventually return to work. That effect may be 

weak, however, because the financial penalties that the UI 

system imposes on recipients who do not actively search 

for work are inconsistently applied. One recent study 

found that recipients with higher weekly UI benefits 

searched much less actively than those with lower benefits, suggesting that more generous UI benefits discourage 

looking for a job.13 Evidence of whether a more active job 

search leads to a better job is sparse, but a recent study of 

workers in Germany found that longer spells of receiving 

unemployment benefits slightly reduced workers’ longrun earnings.14

Accepting a Job Offer. The UI system reduces the incentive for benefit recipients to accept a job offer because 

the earnings from that job will be partially offset by the 

discontinuation of their UI benefits. For example, an 

unemployed worker who is currently receiving UI benefits and is considering accepting a job that would pay 

$600 per week (or about $30,000 per year) after taxes 

would lose those benefits if he or she took the job. If the 

worker received $300 per week after taxes from UI benefits, then taking the job would increase his or her income 

by only $300 per week after the loss of those benefits is 

taken into account. In this example, UI represents a 

50 percent effective marginal tax rate on earnings, which 

reduces the financial benefit of taking a job as long as UI 

benefits are available. (That tax rate is lower for workers 

whose benefit amounts are low relative to the earnings 

they could receive from a new job.) The net effect is that 

unemployment insurance would be expected to increase 

the amount of time that recipients remain unemployed.

Indeed, empirical studies have found that UI affects the 

rate at which recipients accept new jobs. For example, 

research has shown that many workers find jobs in the 

weeks immediately before and after their benefits run 

out. Studies of the duration of unemployment in periods 

during which states changed the structure of their UI systems—say, by increasing benefit amounts or by allowing 

more weeks of benefit receipt—reported similar conclusions.15 One widely cited study from 1990 found that 

eligibility for five extra weeks of benefits led, on average, 

to a one-week increase in the length of an unemployment 

spell.16 A more recent study suggested, however, that 

12. See Daron Acemoglu and Robert Shimer, “Productivity 

Gains from Unemployment Insurance,” European Economic 

Review, vol. 44, no. 7 (June 2000), pp. 1195–1224, 

www.sciencedirect.com/science/article/pii/S0014292100000350.

13. See Alan B. Krueger and Andreas Mueller, “Job Search and 

Unemployment Insurance: New Evidence from Time Use Data,” 

Journal of Public Economics, vol. 94, nos. 3–4 (April 2010), pp. 298–

307, www.sciencedirect.com/science/journal/00472727/94/3-4.

14. See Johannes F. Schmieder, Till von Wachter, and Stefan Bender, 

“The Effects of Unemployment Insurance on Labor Supply and 

Search Outcomes: Regression Discontinuity Estimates from 

Germany,” IAB Discussion Paper 2010,4 (Institut für Arbeitsmarkt-und Berufsforschung, 2010), http://hdl.handle.net/10419/

32764. 

15. Bruce D. Meyer, “Unemployment and Workers’ Compensation 

Programmes: Rationale, Design, Labour Supply and Income 

Support,” Fiscal Studies, vol. 23, no. 1 (March 2002), pp. 1–49, 

http://onlinelibrary.wiley.com/doi/10.1111/j.1475-5890.2002

.tb00053.x/abstract.

16. See Lawrence F. Katz and Bruce D. Meyer, “The Impact of the 

Potential Duration of Unemployment Benefits on the Duration 

of Unemployment,” Journal of Public Economics, vol. 41, no. 1 

(February 1990), pp. 45–72, www.sciencedirect.com/science/

journal/00472727/41/1. For more recent evidence, see David 

Card and Phillip B. Levine, “Extended Benefits and the Duration 

of UI Spells: Evidence from the New Jersey Extended Benefit 

Program,” Journal of Public Economics, vol. 78, nos. 1–2 (October 

2000), pp. 107–138, www.sciencedirect.com/science/journal/

00472727/78/1-2.
12 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

CBO

about 40 percent of that one-week increase was the result 

of a diminished incentive to take a job because of the 

“tax” induced by the reduction in benefits that result 

from increased earnings; the remaining 60 percent of that 

increase arose because unemployment insurance provides 

recipients with cash so that they feel less immediate 

pressure to take the first job they are offered.17

Differences When Unemployment Is High. The effects 

of UI benefits on the incentives that recipients have to 

search for and accept a job offer are different when 

unemployment is high. On the one hand, with fewer job 

openings, a job search is less likely to quickly result in 

employment, and so UI-induced reductions in the intensity of that search may matter less. On the other hand, UI 

benefits tend to replace a larger portion of prospective 

earnings when unemployment is high, because recipients’ 

benefits are based on pay at their former job and not on 

the lower-paying jobs available in a recession or the early 

part of a recovery.18 Thus, the UI-induced reduction in 

the net gain from returning to work may be bigger and of 

greater consequence in such periods.19 Empirical assessments suggest that the recent extensions of benefits have 

lengthened spells of unemployment among UI recipients 

but that the effect of such extensions has been smaller 

than had been observed when the unemployment rate 

was lower.20

Potentially offsetting the disincentive effect that unemployment insurance has on recipients’ reemployment is a 

resulting positive effect on the employment prospects of 

workers who are unemployed but are not eligible for 

UI benefits, such as people looking for their first job or 

reentering the labor force. In particular, to the extent 

that UI recipients are slower to accept available jobs, 

nonrecipients are more likely to receive a job offer. That 

positive effect tends to be larger when job openings are 

scarce, as they have been since the recent recession began. 21

Effects of UI Taxes on Decisions About Employment

UI payroll taxes—which provide all of the funding for UI 

benefits under normal circumstances and have been supplemented by resources from general revenues in recent 

years—also change firms’ and workers’ decisions about 

employment. 

Because firms’ payroll taxes do not cover the full cost of 

UI benefits to the workers they lay off, unemployment 

insurance subsidizes both the hiring and the laying off of 

workers. High-layoff firms pay higher UI taxes because of 

experience rating, but those taxes are not enough, on 

average, to cover the higher costs those firms impose on 

the UI system.22 As a result, firms with few layoffs provide implicit subsidies to firms with many layoffs. For 

example, older, established firms in service industries, 

which tend to have few layoffs, subsidize smaller, newer

17. See Raj Chetty, “Moral Hazard Versus Liquidity and Optimal 

Unemployment Insurance,” Journal of Political Economy, vol. 116, 

no. 2 (April 2008), pp. 173–234, www.jstor.org/stable/10.1086/

529035.

18. For a related discussion, see Steven J. Davis and Till Von Wachter, 

“Recessions and the Costs of Job Loss,” Brookings Papers on Economic Activity, no. 1 (Fall 2011), pp. 1–55, www.brookings.edu/~/

media/projects/bpea/fall%202011/2011b_bpea_davis.pdf.

19. Lars Ljunqvist and Thomas J. Sargent, “The European Unemployment Dilemma,” Journal of Political Economy, vol. 106, no. 3 

(June 1998), pp. 514–550, www.jstor.org/stable/10.1086/

250020. 

20. See, for example, Henry S. Farber and Robert Valletta, Extended 

Unemployment Insurance and Unemployment Duration in the Great 

Recession: The U.S. Experience (draft, June 24, 2011), 

www.frbsf.org/economics/economists/rvalletta/uiext.pdf (cited 

with permission from the authors); and Jesse Rothstein, “Unemployment Insurance and Job Search in the Great Recession,” 

Brookings Papers on Economic Activity, no. 1 (Fall 2011), pp. 143–

205, www.brookings.edu/about/projects/bpea/past-editions. 

Other economists have pointed to UI extensions, along with 

increased receipt of benefits from the Supplemental Nutrition 

Assistance Program (formerly known as the Food Stamp program) 

and other changes to means-tested programs, as a significant cause 

of sustained high unemployment during and following the recession. See, for example, Casey B. Mulligan, Do Welfare Policies 

Matter for Labor Market Aggregates? Quantifying Safety Net Work 

Incentives Since 2007, Working Paper 18088 (National Bureau of 

Economic Research, May 2012), www.nber.org/papers/w18088.

21. See Kory Kroft and Matthew J. Notowidigdo, “Should 

Unemployment Insurance Vary with the Unemployment 

Rate? Theory and Evidence” (draft, December 2011), 

http://faculty.chicagobooth.edu/matthew.notowidigdo; 

and Camille Landais, Pascal Michaillat, and Emmanuel Saez, 

Optimal Unemployment Insurance Over the Business Cycle, 

Working Paper 16526 (National Bureau of Economic Research, 

November 2010), www.nber.org/papers/w16526.

22. See Patricia M. Anderson and Bruce D. Meyer, “Unemployment 

Insurance in the United States: Layoff Incentives and Cross Subsidies,” Journal of Labor Economics, vol. 11, no. 1, pt. 2 (January 

1993), pp. S70–S95, www.jstor.org/stable/2535168.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 13

CBO

firms in industries like construction, which tend to lay 

workers off more frequently.23 Although levied as a payroll tax on employers, the portion of the cost of UI taxes 

that does not vary among firms within a local labor market is ultimately paid by workers in the form of reduced 

wages. Employment and workers’ earnings therefore are 

probably higher in high-layoff industries, and lower in 

low-layoff industries, than they would be in the absence 

of unemployment insurance. 

However, because experience rating means that highlayoff firms pay higher taxes to cover the costs they 

impose on the UI system—thereby mitigating some of 

the problems just discussed—the system provides slightly 

less insurance to firms and workers than it would if the 

funding for unemployment insurance came from sources 

other than payroll taxes. That insurance is provided 

against unexpected deterioration in business conditions, 

such as weak economywide demand for goods or 

increased prices of key inputs to production. Rather than 

spreading such risks more broadly by raising funds for 

unemployment insurance from general revenues, firms 

effectively repay the UI system for a portion of the benefits paid to workers whom they lay off. Those repayments 

take the form of higher subsequent UI taxes that, when 

passed through to the employees who remain with the 

firm, reduce wages—which slightly reduces the total 

amount of insurance provided by the UI system.

Some analysts also have expressed concern that because 

payroll taxes are linked to a firm’s record of layoffs, 

businesses might seek to avoid paying higher taxes by 

misrepresenting layoffs in one of two ways: Firms might 

claim to have fired employees for cause or might assert 

that employees had left voluntarily.24 In part because of 

such concerns, most European countries do not have 

experience rating as a feature of their UI tax system.25

However, the UI-based incentive to misrepresent layoffs 

as firings may be counteracted by an incentive created 

by the legal system to misrepresent firings as layoffs. 

Specifically, some research suggests that firms, in an 

effort to avoid being sued by employees upset about 

being fired, wait until periods of slack demand to lay off 

low-performing workers whom they would otherwise 

have fired earlier.26

Effects of the UI System as an 

Automatic Economic Stabilizer

Automatic economic stabilizers decrease government 

revenues and increase government expenditures in periods of weak economic activity without requiring new 

government action. They also reduce spending and boost 

revenues when economic activity is strong. The structure 

of taxes and benefits under the unemployment insurance 

system makes that system a prototypical automatic 

stabilizer.

Weak demand for goods and services during the recent 

recession and slow recovery has reduced output and 

employment, in CBO’s view. Under those conditions, 

automatic stabilizers increase demand for goods and services by households, businesses, and governments and 

thereby increase overall output and employment.27 UI 

benefits are particularly effective in that stabilizing role 

because they are directed toward families who, because of 

their changed employment circumstances, probably 

spend a large fraction of the benefits they receive.28

23. See Robert H. Topel, “On Layoffs and Unemployment Insurance,” American Economic Review, vol. 73, no. 4 (September 

1983), pp. 541–559, www.jstor.org/stable/10.2307/i331506; and 

Patricia M. Anderson and Bruce D. Meyer, “Unemployment 

Insurance in the United States: Layoff Incentives and Cross Subsidies,” Journal of Labor Economics, vol. 11, no.1, pt. 2 (January 

1993), pp. S70–S95, www.jstor.org/stable/2535168.

24. See Jerry L. Mashaw, Unemployment Compensation: Continuity, 

Change, and the Prospects for Reform, Faculty Scholarship Series, 

Paper 1187 (1996), http://digitalcommons.law.yale.edu/

fss_papers/1187. 

25. Julia Fath and Clemens Fuest, “Temporary Layoffs and 

Unemployment Insurance: Is Experience Rating Desirable?” 

German Economic Review, vol. 6, no. 4 (November 2005), 

pp. 471–483, http://onlinelibrary.wiley.com/doi/10.1111/

j.1468-0475.2005.00142.x/abstract.

26. See, for example, Paul Oyer and Scott Schaefer, “Layoffs and Litigation,” Rand Journal of Economics, vol. 31, no. 2 (Summer 2000), 

pp. 345–358, www.rje.org/archive.html.

27. For estimates of the magnitude of automatic stabilizers in the 

federal budget, see Congressional Budget Office, The Budget and 

Economic Outlook: Fiscal Years 2012 to 2022 (January 2012), 

Appendix C, www.cbo.gov/publication/42905. For an analysis of 

the slow recovery, see Congressional Budget Office, What Accounts 

for the Slow Growth of the Economy After the Recession? (November 

2012), www.cbo.gov/publication/43707. 

28. For additional discussion, see the testimony of Douglas W. 

Elmendorf, Director, Congressional Budget Office, before the 

Senate Committee on the Budget, Policies for Increasing Economic 

Growth and Employment in 2012 and 2013 (November 15, 2011), 

www.cbo.gov/publication/42717.
14 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

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In CBO’s assessment, the increase in the amount of UI 

benefits during the past several years—including the 

automatic increase in total benefits that would have 

occurred under previous law and the additional increase 

in benefits that was caused by changes in law—has raised 

consumer spending, output, and employment relative to 

what they otherwise would have been. Specifically, CBO 

concludes that, given the economic conditions that have 

prevailed, the positive impact of the additional UI benefits on the demand for goods and services—and thus on 

economic activity—has been significantly larger than the 

net impact on economic activity of the various other ways 

in which the increase in UI benefits has affected the economy (including greater incentives to search for a job and 

reduced incentives to accept a job offer). 

As the economy improves, total UI benefits will automatically fall, and total UI taxes will automatically rise. That 

evolution will help stabilize economic activity in the 

future.

Policy Options for the Short Term

Unemployment has been at historically high levels since 

the recession began in late 2007 and has been slow to fall 

even though the recession officially ended in 2009. The 

creation of the EUC program and the other modifications to UI policy since 2008 reflect policymakers’ concerns about the economic circumstances of people who 

have lost their job and have not taken a new one. Under 

current law, at the end of December 2012 the UI system 

will revert to the policies that were in place before the 

recession. As a result, eligibility for UI benefits will contract sharply, and federal spending for those benefits will 

decline sharply as well. 

Policymakers could choose to continue offering additional weeks of UI benefits—for example, to keep some 

or all of the current policies that have been adopted in 

recent years in place for up to one additional year. Doing 

so would impose a budgetary cost on the federal government. CBO expects that such an extension also would 

increase output (gross domestic product, or GDP) and 

employment in the short term relative to what would 

otherwise occur. Using evidence from empirical studies 

and econometric models, CBO has estimated the impact 

of offering additional weeks of benefits on output and 

employment. In CBO’s view, the various effects of 

extending additional unemployment benefits apart from

the effects on the overall demand for goods and services 

would, on balance, make little difference to overall 

output or the number of people employed under the 

weak economic conditions that the agency projects for 

the next few years. Accordingly, CBO’s estimates of the 

impact of additional weeks of unemployment insurance 

on output and employment include only the effects of 

boosting demand for goods and services—using low and 

high estimates to encompass, in CBO’s judgment, most 

economists’ views about those effects. 

Extending unemployment benefits for one year in either 

the EUC or the EB program would boost GDP in 2013 

by $1.10 for every dollar of budgetary cost in that year, 

CBO estimates. That figure represents CBO’s central 

estimate, which corresponds to the assumption that the 

values that describe key parameters of economic behavior 

(in particular, the extent to which lower federal taxes and 

higher federal spending boost aggregate demand in the 

short term) equal the midpoints of the ranges used by 

CBO.29 The full ranges that CBO uses for those parameters suggest that if unemployment benefits were 

extended, then GDP could be between $0.40 and $1.80 

higher per dollar of budgetary cost. 

Regarding employment, CBO estimates that extending 

UI benefits for one year would add about 6 years of 

full-time-equivalent employment (FTE-years—that is, 

40 hours of employment per week for one year) in 2013 

29. For a discussion of CBO’s approach to analyzing the short-term 

effects of fiscal policy, see Felix Reichling and Charles Whalen, 

Assessing the Short-Term Effects on Output of Changes in Federal Fiscal Policies, Congressional Budget Office Working Paper 2012-08 

(May 2012), www.cbo.gov/publication/43278. CBO has previously analyzed the effects of increasing aid to the unemployed; see, 

for example, the testimony of Douglas W. Elmendorf, Director, 

Congressional Budget Office, before the Senate Committee on the 

Budget, Policies for Increasing Economic Growth and Employment in 

2012 and 2013 (November 15, 2011), pp. 26–27, www.cbo.gov/

publication/42717. In the current report, CBO has refined some 

aspects of its analytic approach and its presentation of results. For 

example, CBO now estimates that changes in GDP affect employment more gradually than the agency estimated previously. That 

change implies that generating a given increase in employment in 

the first year of a policy requires a larger increase in GDP. In addition, CBO now presents the effects of policies on nominal GDP 

per dollar of budgetary cost, whereas the previous analysis presented the effects on real (inflation-adjusted) GDP measured with 

2008 prices; that change in presentation (which better matches 

the effect on GDP to the budgetary cost of a policy, measured in 

nominal dollars) has slightly increased the effects on output per 

dollar of budgetary cost presented in this report but leaves the 

effects on employment unchanged.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 15

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Table 1.

Policy Options for Changing the Unemployment Insurance System in the 

Short Term and Their Costs

Source: Congressional Budget Office.

Notes: Unemployment insurance benefits are taxable under the federal income tax. According to standard Congressional scorekeeping 

practices, however, cost estimates of proposed legislation that would increase or decrease unemployment insurance benefits (or 

other taxable federal spending) do not take into account any resulting increases or decreases in federal tax revenues.

Tier I benefits are available in all states, regardless of the state’s unemployment rate, and provide up to 14 additional weeks of 

benefits.

per million dollars of budgetary cost. Under alternative 

assumptions about economic behavior, that amount 

ranges from 2 to 10 FTE-years. 

In contrast, CBO’s estimates of the effect of providing 

additional UI benefits on the unemployment rate include 

both negative and positive values. On the one hand, the 

increase in employment would reduce the number of 

people without a job. On the other hand, to remain eligible for unemployment benefits, more people without a 

job would stay in the labor force and be counted as 

unemployed after their receipt of regular benefits ended. 

According to CBO’s central estimate, extending UI benefits would cause an average of three additional people to 

be counted as unemployed during 2013 per million dollars of budgetary cost. According to CBO’s estimate that 

incorporates a smaller effect on demand for goods and 

services (corresponding to 2 FTE-years) and a larger 

effect on people staying in the labor force, extending UI 

benefits would result in eight more people being counted 

as unemployed per million dollars of budgetary cost. 

Conversely, according to the agency’s estimate that 

incorporates a larger effect on demand (corresponding to 

10 FTE-years) and a smaller effect on people staying in 

the labor force, extending UI benefits would result in two 

fewer people being counted as unemployed per million 

dollars of budgetary cost.

In this study, CBO examines five policy options and 

assesses their effects on the federal budget (see Table 1). 

Four options would extend some or all of the temporary 

UI provisions through the end of December 2013. In 

general, options that extend more of the temporary provisions would provide more benefits to laid-off workers and 

produce a larger increase in total output and employment, but they would also have a greater budgetary cost. 

The fifth option would change the schedule on which 

states repay amounts borrowed from the UI trust fund.

Current Law

Under current law, following the provisions of the 

Middle Class Tax Relief and Job Creation Act of 2012, 

four tiers of Emergency Unemployment Compensation 

benefits are available to unemployed workers from 

September 2, 2012, through the end of December 2012. 

Each successive tier of benefits adds to the benefits 

provided for the lower tiers, up to a maximum of 

Option Budgetary Cost

Option 1: Fully Extend the Emergency Employment Compensation (EUC) Program and Temporary 

Provisions of the Extended Benefits (EB) Program for One Year 

$30 billion

Option 2: Partially Extend the EUC Program for One Year (Allow unemployment insurance 

recipients to continue to claim Tier I benefits but allow all other expiring provisions to lapse.)

$14 billion

Option 3: Allow Unemployment Insurance Recipients to Finish Receiving the Tier of EUC Benefits 

for Which They Will Qualify at the End of December 2012, Up to 14 Additional Weeks (Allow all 

other expiring provisions to lapse.)

$4 billion

Option 4: Extend Temporary Provisions of the EB Program for One Year $3 billion

Option 5: Delay States’ Schedules for Repaying the Unemployment Trust Fund for One Year $3 billion in 2013, roughly offset by 

higher revenues in subsequent years
16 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

CBO

47 additional weeks (that is, 47 weeks of benefits beyond 

those provided by a state’s regular UI program).30

 Tier I benefits are available in all states, regardless of 

the state’s unemployment rate (up to 14 additional 

weeks).

 Tier II benefits are available in states whose unemployment rate is 6 percent or higher (up to 14 additional 

weeks).

 Tier III benefits are available in states whose 

unemployment rate is 7 percent or higher (up to 

9 additional weeks).

 Tier IV benefits are available in states whose 

unemployment rate is 9 percent or higher (up to 

10 additional weeks).

In September 2012, the number of states paying at least 

50 new claims in those tiers was 50, 36, 28, and 12, 

respectively.31

Under current law, the extended benefits program will 

change in two ways in January 2013. First, the share of 

costs for that program paid by the federal government 

will revert from 100 percent to 50 percent (the share in 

effect before February 2009). Second, the temporary provisions allowing states to use a longer period to measure 

changes in their unemployment rate (that is, to use an 

extended look-back period) to determine eligibility for 

the program are also scheduled to end. Although workers 

in 41 of the 50 states have received extended benefits 

within the past five years, only one state (New York) was 

paying such benefits as of November 2012.

According to CBO’s baseline projections, which generally 

follow current law, the unemployment rate will increase 

from 8.1 percent in the third quarter of 2012 to 9.1 percent in the fourth quarter of 2013. The reason for that 

jump is that significant tax hikes and spending cuts 

scheduled to occur under current law in 2013 will reduce 

economic activity and increase unemployment for the 

next few years. As a result of that higher unemployment, 

CBO projects that the number of new UI recipients will 

be higher in 2013 than in 2012.32 In addition, some 

states that are currently not eligible to participate in the 

EB program (because their unemployment rate is not sufficiently high) will probably become eligible—in some 

cases, regaining eligibility that had previously lapsed—as 

unemployment in those states goes up. In CBO’s baseline 

projections, spending for regular and extended benefits 

totals about $49 billion in fiscal year 2013.

Option 1. Fully Extend the EUC Program and 

Temporary Provisions of the EB Program for 

One Year

Option 1 would extend all four tiers of the current EUC 

program through December 2013. In addition, the federal government would continue to pay the full cost of 

the EB program, and the provisions used to determine 

states’ eligibility for that program (specifically, the threeyear look-back period used to determine any increase in 

the unemployment rate) would continue through the end 

of 2013. CBO estimates that this option would cost the 

federal government roughly $30 billion.

CBO projects that extending benefits in this way would 

increase inflation-adjusted GDP by 0.2 percent (by 

0.1 percent to 0.5 percent under CBO’s full range of 

assumptions) and increase full-time-equivalent employment by 0.3 million (with a range from 0.1 million to 

0.5 million) in the fourth quarter of 2013.33 (The overall 

effects for the fourth quarter of 2013 are not equal to the 

30. Benefits for some of those tiers are available for fewer weeks under 

current law than was the case in 2010 or 2011, when benefits were 

available for up to 53 additional weeks, and the state criteria for 

eligibility for different tiers of benefits have become more difficult 

to meet.

31. State counts are CBO estimates based on data from Department 

of Labor, “Emergency Unemployment Compensation 2008 

(EUC2008) and Federal-State Extended Benefit (EB) Summary 

Data for State Programs,” http://workforcesecurity.doleta.gov/

unemploy/euc.asp. See “EUC Aggregate Program Activity,” Data 

from July 2008 – Present.

32. Congressional Budget Office, An Update to the Budget and 

Economic Outlook: Fiscal Years 2012 to 2022 (August 2012), 

www.cbo.gov/publication/43539.

33. This option is one component of the policy to “extend the 

reduction in employees’ portion of the payroll tax and extend 

emergency unemployment benefits” that CBO previously analyzed. See Congressional Budget Office, Economic Effects of Policies 

Contributing to Fiscal Tightening in 2013 (November 2012), p. 11, 

www.cbo.gov/publication/43694. The effect per dollar of budgetary cost of the UI extension alone is greater than the effect when 

such an extension is combined with a payroll tax reduction. 

The reason is that recipients would spend a larger portion of the 

additional UI benefits than of the tax savings, CBO estimates. 

However, the budgetary cost of the UI extension would be about 

one-quarter of the budgetary cost of a reduction of 2 percentage 

points in the payroll tax, so the UI extension is a relatively smaller 

part of the overall policy that CBO estimated previously.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 17

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corresponding effects per dollar multiplied by the budgetary cost reported above because of differences in the time 

periods analyzed.) The other options analyzed in this 

report would have smaller overall macroeconomic effects; 

because of their small size, CBO could not reliably quantify those effects.

Option 2. Partially Extend the EUC Program for 

One Year 

This option would continue only the Tier I benefits of 

the EUC program through 2013 (Tier I provides up to 

14 weeks of benefits once a UI recipient has exhausted 

benefits from the state’s regular UI program). As under 

current law, the other three tiers would lapse at the end 

of 2012, and so would the EB program’s temporary provisions of full federal funding and longer look-back 

period. Tier I accounts for a disproportionate share of the 

EUC program’s total cost because states are eligible for 

benefits regardless of their unemployment rate. CBO 

estimates that this option would cost about $14 billion.

Option 3. Allow UI Recipients to Finish Receiving 

the Tier of EUC Benefits for Which They Will 

Qualify at the End of December 2012, Up to 

14 Additional Weeks

Under current law, EUC benefits are scheduled to come 

to a “hard stop” in the first week of January, and no further payments will be made after that. Option 3 would 

allow UI recipients to finish the tier of EUC benefits that 

they are receiving at the end of December 2012, but it 

would not allow unemployed workers to initiate EUC 

benefits or to start a new tier of benefits. Some UI recipients would continue receiving benefits into April 2013 

under this option, but EUC expenditures would quickly 

phase out as recipients completed their benefit tiers. This 

option would cost approximately $4 billion.

Option 4. Extend Temporary Provisions of the 

EB Program for One Year 

Option 4 would maintain full federal funding and the 

current three-year look-back provisions of the EB program through December 2013 but would allow the EUC 

program to lapse at the end of 2012 as currently scheduled. Very few states will be eligible to provide extended 

benefits in 2013, CBO projects, because they will no longer meet the requirement that their unemployment rate 

be increasing relative to what it was three years ago, even 

though the number of unemployed people in the states 

may continue to be high. This option would cost 

approximately $3 billion.

Option 5. Delay States’ Schedules for Repaying the 

Unemployment Trust Fund for One Year 

Under current law, states that owe money to the UI trust 

fund must begin repaying that debt or have their FUTA 

taxes increased. That policy caused few problems in the 

past because when such balances were incurred during 

previous recessions, fairly rapid recoveries generated 

increases in UI revenues and decreases in UI benefits that 

allowed states to quickly pay off those balances. But states 

are currently required to raise UI payroll taxes while their 

labor markets are still weak, which may further impede 

growth in employment. Providing a one-year “holiday” 

from higher FUTA taxes would allow states to make 

repayments in 2014 and beyond, when labor markets will 

probably be stronger and higher taxes will have a smaller 

effect on employment. CBO estimates that this option 

would reduce federal revenues by $3 billion in 2013 but 

that the revenue loss would be roughly offset by increases 

in federal and state UI taxes in future years.

Policy Approaches for the Longer Term

CBO also considered a wide range of approaches for 

changing the structure of the UI system for the longer 

term (see Table 2). In its current form, the UI system 

raises funds via state and federal payroll taxes and allows 

states considerable leeway in deciding how to structure 

benefits so long as the benefits are paid to eligible 

unemployed workers in a timely fashion. The three sets 

of approaches assessed here would: 

 Restructure benefits to encourage employment, 

 Change the mix of federal and state roles, and 

 Change the distribution of resources within the UI 

system.

Because the budgetary effects of those approaches would 

depend on their specific design, CBO did not estimate 

their impact on the federal budget. Indeed, depending on 

how the approaches were implemented, they could 

increase or decrease the budgetary cost of the UI system 

for federal and state governments. Many of the 

approaches could be combined with one another, and 

they do not encompass all potential changes to the UI 

system. Many other changes are also possible.

Restructuring Benefits to Encourage Employment

Policymakers seeking to encourage employment could 

modify the form of benefits that laid-off workers receive. 
18 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

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Table 2.

Policy Approaches for Changing the Unemployment Insurance System 

Over the Longer Term

Source: Congressional Budget Office.

For example, the UI system could be modified to provide 

reemployment bonuses, establish personal reemployment 

accounts, establish unemployment insurance savings 

accounts, or encourage the use of short-time 

compensation.

Providing Reemployment Bonuses. To provide incentives 

for UI recipients to quickly return to work, the federal 

government could establish a system of reemployment 

bonuses—one-time payments to UI recipients who 

find work within a specified period after losing their job. 

The potential advantages of such a policy are that, by 

paying UI recipients to return to work, bonuses could 

reduce joblessness and potentially reduce UI spending. 

Reemployment bonuses might be particularly effective at 

reducing the number of long spells of unemployment 

because unemployed workers would receive less money if 

they were still unemployed after the period of eligibility 

for the bonus ended. That effect may be more important 

now than in the past, given that long-term unemployApproach Description

Restructuring Benefits to Encourage Employment

Providing Reemployment Bonuses Make laid-off workers eligible to receive a lump-sum payment if they are 

reemployed within a specified period. 

Establishing Personal Reemployment Accounts Make laid-off workers who are at risk of remaining unemployed for more than 

26 weeks eligible to receive funds in a dedicated account that they can use to pay 

for career training or reemployment bonuses.

Establishing Unemployment Insurance Savings 

Accounts

Require workers to save a fixed percentage of their before-tax income in an 

account and allow eligible unemployed workers to withdraw amounts equal to 

current UI benefits. (At retirement, convert any positive account balances to an 

individual retirement account and forgive any negative balances.) 

Expanding the Use of Short-Time Compensation Encourage states to provide unemployment benefits to workers who have their 

hours reduced by their employer instead of being laid off.

Changing the Mix of Federal and State Roles

Giving States More Predictability in Funding and 

More Flexibility in Implementing Their UI Program

Tie federal funding to formulas based on economic conditions or other factors 

and give states more latitude to determine how to use the funds. 

Making State Programs More Uniform Require states to set benefits and taxes within a narrower range than is currently 

allowed.

Changing the Distribution of Resources Within the Unemployment Insurance System

Changing the Limit on Taxable Earnings Increase the amount of an employee’s annual earnings that is subject to the state 

and federal taxes that fund unemployment insurance. (That approach could be 

coupled with lower tax rates to keep unchanged the amount of tax revenue that 

is collected.)

Changing the Amount of Weekly Unemployment 

Insurance Benefits

Increase the share of income that is replaced by unemployment insurance 

benefits or increase the cap on income that can be replaced by such insurance. 

Providing Earnings Insurance Give eligible laid-off workers who are reemployed at a job paying less than their 

prior job a portion of the difference between their original earnings and new 

earnings.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 19

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ment has become more common in the past decade, 

particularly since the recent recession began.

Whether this approach would reduce or increase UI 

spending is unclear, however. Offering reemployment 

bonuses to all UI recipients, regardless of how long they 

have been unemployed, might induce more eligible 

people to apply for benefits and would therefore substantially add to the program’s cost, all else being equal. In 

addition, if bonuses were available to all UI recipients, 

bonuses might end up being provided to many people 

who would have taken a job quickly even without the 

bonus. If, instead, bonuses were offered only to people 

who have been unemployed for a long time—say, 15 or 

20 weeks—then such bonuses might induce the newly 

jobless to stay unemployed until they qualified for bonus 

payments. Experiments in the 1980s and 1990s yielded 

mixed results about whether such bonuses reduced the 

number of weeks that laid-off workers received UI 

benefits.34

A closely related policy—the use of employment retention bonuses—has been used with success in the United 

Kingdom. Under the U.K. Employment Retention and 

Advancement program, the long-term unemployed who 

found a job received a retention bonus of £400 (approximately $600) every four months (for up to two years) if 

they continued working for at least 30 hours a week 

and for 13 weeks out of every 17.35 Participants also 

received employment counseling, tuition assistance, and 

additional bonuses if they underwent training. The participants had significantly higher employment rates and 

earnings over the five-year study period than did longterm unemployed workers who did not participate. 

Furthermore, the cost to the government of providing 

such bonuses was less than the cost of providing standard 

employment assistance and services.

Establishing Personal Reemployment Accounts. The 

federal government could provide incentives for states to 

set up personal reemployment accounts (PRAs) that UI 

recipients would use to fund career training or reemployment bonuses. Some states currently have PRAs, which 

are self-managed accounts that are typically offered to 

people projected to be at risk of remaining unemployed 

for more than 26 weeks. Like the reemployment bonuses 

discussed above, PRAs encourage UI recipients to quickly 

return to work and thus receive the bonus. Also, PRAs 

eliminate any incentive for UI recipients to prolong 

unemployment because, unlike regular UI benefits, the 

cumulative value of the PRA benefits does not rise with 

weeks of joblessness. PRAs share some of the disadvantages of reemployment bonuses, however; by making 

unemployment insurance more appealing, the policy may 

increase the number of people receiving UI benefits and 

the cost of the program. In addition, states would incur 

additional administrative costs to teach recipients how to 

use the accounts.

In a demonstration project conducted in 2004, eight 

states provided $3,000 to selected UI recipients to use 

as a reemployment bonus or to purchase reemployment 

services.36 In a related initiative in 2006, eight states provided $3,000 per year for two years to fund PRAs for UI 

recipients to pursue training.37 The effects of those experiments on recipients were not evaluated directly, but the 

accounts established in the experiments were similar to 

individual training accounts that had been available earlier and were found to have little impact either on the 

amount of training received or on other outcomes when 

compared with the counseling services that states typically provided in One-Stop Career Centers.38 The labor 

market was stronger during that demonstration than it is 

today, however, and such accounts might be more effec34. Bruce D. Meyer, “Lessons from the U.S. Unemployment Insurance Experiments,” Journal of Economic Literature, vol. 33, no. 1 

(March 1995), pp. 91–131, www.jstor.org/stable/2728911?seq=4.

35. See Richard Hendra and others, Breaking the Low-Pay, No-Pay 

Cycle: Final Evidence from the U.K. Employment Retention and 

Advancement (ERA) Demonstration, Research Report 765 (United 

Kingdom Department for Work and Pensions, August 2011), 

http://research.dwp.gov.uk/asd/asd5/report_abstracts/

rr_abstracts/rra_765.asp.

36. See Gretchen Kirby and others, Responses to Personal Reemployment 

Accounts (PRAs): Findings from the Demonstration States (report 

submitted by Mathematica Policy Research, Inc., to the 

Department of Labor, June 2008), www.mathematica-mpr.com/

labor/pra.asp. 

37. See Jeffrey Salzman and others, Evaluation of the Career 

Advancement Accounts Demonstration Project: An Implementation 

Study (interim report submitted by Social Policy Research 

Associates to the Department of Labor, November 2010), 

http://wdr.doleta.gov/research/FullText_Documents/

ETAOP_2011-17.pdf. 

38. Sheena McConnell and others, Managing Customers’ Training 

Choices: Findings from the Individual Training Account 

Experiment (final report submitted by Mathematica Policy 

Research, Inc., to the Department of Labor, December 2006), 

www.mathematica-mpr.com/labor/ita.asp.
20 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

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tive under the weak labor market conditions projected for 

the next few years.

The federal government could provide additional waivers 

from the Social Security Act of 1935—the original 

enabling legislation for unemployment insurance—for 

states to experiment further with PRAs. Policymakers 

could also provide financial incentives to states to adopt 

and fund PRA programs, either through block grants or 

through matching grants. Those financial incentives 

could encourage states to use PRAs more widely than 

they otherwise would.

Establishing Unemployment Insurance Savings Accounts. 

An alternative to unemployment insurance is for workers 

to save money during periods of steady work to build a 

“rainy-day fund” in preparation for potential layoffs—

a strategy commonly referred to as self-insurance—and 

to make cash available by facilitating borrowing after 

workers are laid off.

Unemployment insurance savings accounts provide some 

of the insurance and liquidity benefits of unemployment 

insurance but retain some of the incentives to work that 

self-insurance would provide. Under such a policy, workers would be required to deposit a fixed percentage of 

their before-tax earnings into their account. Those funds 

would earn interest and be available for weekly withdrawals by workers eligible for unemployment benefits. Eligible workers could borrow from their account, up to a 

limit, if their prior savings did not cover their withdrawals, and workers would pay off those debts through 

deposits they make once reemployed. An account that 

had a positive balance when the worker retired would be 

converted to an individual retirement account, and negative balances would be forgiven. Simulations suggest that 

if the contribution rate was 4 percent, a small fraction of 

workers would end their career with a negative account 

balance.39 Similar accounts have been used to replace or 

supplement traditional UI systems in many Latin American countries.40 To implement such accounts on a trial 

basis, the federal government could provide states with 

waivers from the Social Security Act.

The accounts would eliminate most of the adverse effects 

that UI has on incentives to find a job, because workers 

who take a job do not lose UI benefits; instead, they are 

able to keep more funds in their account or do not have 

to pay back borrowing from their account later. Such 

accounts would also supply much of the financial liquidity that UI provides, thereby allowing UI recipients to 

avoid having to sell assets or take out a high-interest loan. 

A disadvantage of the accounts is that they do not provide 

as much protection against loss of earnings as do regular 

UI benefits. Workers themselves, not the government, 

provide that protection through their own saving and 

borrowing, which eliminates some of UI’s positive effect 

on workers’ willingness to take a high-risk/high-reward 

job, such as working for a new, small business. That disadvantage may be less important, however, if lawmakers 

view UI’s primary function as providing financial liquidity rather than insurance.

Expanding the Use of Short-Time Compensation. Shorttime compensation (STC) provides UI benefits to 

workers whose employers reduced their hours of work in 

lieu of laying them off. Because the traditional UI system 

provides benefits only for workers whose hours have been 

cut to zero, it creates an incentive for firms to reduce 

labor costs by laying off workers rather than by reducing 

the number of hours each employee works.41 By providing UI benefits to people whose hours are cut, STC 

motivates firms to retain more workers at fewer hours 

per week, potentially reducing the number of layoffs and 

mitigating the effect of a recession on the unemployment 

rate. Some evidence indicates that European countries 

avoided some of the rise in unemployment that occurred 

39. See Martin Feldstein and Daniel Altman, “Unemployment 

Insurance Savings Accounts,” in James M. Poterba, ed., Tax Policy 

and the Economy, vol. 21 (MIT Press, 2007), pp. 35–64, 

www.nber.org/chapters/c0046.

40. See Ana M. Ferrer and W. Craig Riddell, Unemployment Insurance 

Savings Accounts in Latin America: Overview and Assessment, 

SP Discussion Paper 0910, Social Protection & Labor (World 

Bank, June 2009), http://siteresources.worldbank.org/

SOCIALPROTECTION/Resources/SP-Discussion-papers/Labor

-Market-DP/0910.pdf.

41. Those incentives are easiest to see in firms that have frequent 

short-term fluctuations in the amount of work needed, such as 

construction firms. For example, a firm that always needs 50 percent fewer labor hours in winter can cut each worker’s hours by 

half each winter and, collectively, the workers would not receive 

UI benefits in the absence of short-time compensation. Alternatively, the firm can fully lay off half its workers in winter and keep 

the other half working full-time. As a group, the firm’s workers 

share the same amount of work and earnings but now also receive 

UI benefits.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 21

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in the United States during and after the recent recession 

because they made greater use of STC policies.42

Some potential advantages of STC programs—particularly in a recession, when firms are uncertain about 

demand for their services or products—are that firms and 

workers gain time to make adjustments while maintaining valuable knowledge and skills. For example, if a firm 

is not able to return to its previous level of full-time 

employment, natural attrition may make it possible to 

increase the hours of remaining employees over time, 

even if the total hours of work needed by the firm are permanently lower. For workers, the loss of wages resulting 

from working fewer hours is spread across a larger group 

of people rather than being concentrated on those who 

have been laid off. Furthermore, workers may use the 

time when they are not working to find a new job, avoiding some or all of the potential permanent wage losses 

associated with layoffs.

Although 20 states operated STC programs as part of 

their unemployment insurance in 2011, those programs 

are not widely used and represent only about 1 percent of 

overall disbursements in the UI system.43 Several factors 

may account for that infrequent use. Employers that 

might participate in an STC program may be unaware it 

exists if it is not widely publicized by a state. Also, shorttime work may be uneconomical for workers who have 

lengthy commutes or other fixed costs associated with 

employment. Finally, STC is currently designed as an 

alternative to temporary or seasonal layoffs—situations in 

which firms know they will be able to recall laid-off 

workers after a certain period. But short-term layoffs are 

increasingly uncommon, in part because of the relative 

decline in employment in unionized and manufacturing 

firms, which have made greatest use of them in the past.

The Middle Class Tax Relief and Job Creation Act of 

2012 provided temporary subsidies to qualified STC programs and allocated roughly $100 million to expand 

states’ use of STC programs. Under that legislation, the 

benefit costs of qualified STC programs will be paid from 

federal sources for up to three years. In addition, each 

state has a designated allotment from which it can draw 

to implement new programs or improve existing ones. 

States are directed to use one-third of the allotted grant 

money to implement or improve a short-time compensation program and two-thirds to promote and enroll 

employers in the program. That grant money may help 

invigorate STC programs, but federal policymakers may 

want to take further steps to encourage states to make 

greater use of such programs. For example, policymakers 

could provide federal matching funds for STC benefits 

paid out beyond the three years provided for under 

current law.

Changing the Mix of Federal and State Roles

Policymakers could alter the mix of responsibilities of the 

federal government and state governments in the UI system either to provide more autonomy to states to tailor 

unemployment benefits to their own circumstances or to 

provide a more uniform national program. The UI system currently involves a complex combination of federal 

and state roles with regard to determining eligibility for 

UI benefits, the amounts of benefits, and the taxation to 

fund the benefits. On one hand, states would probably 

engage in more policy innovation if they had more predictable funding and more flexibility in implementing 

their UI program. For example, states could use such latitude to fund a broader set of UI benefits, to provide 

training to laid-off workers, or to provide more intensive 

assistance to people seeking work. On the other hand, 

greater uniformity of state UI programs would probably 

reduce the incentives that firms and individuals have to 

seek states that offer relatively low costs for doing business or relatively generous benefits, respectively. The 

impact of either sort of change on federal and state 

budgets would depend on how taxes and benefits were 

modified.

Giving States More Predictability in Funding and More 

Flexibility in Implementing Their UI Program. Policymakers could make federal funding for unemployment 

42. See, for example, Pierre Cahuc and Stéphane Carcillo, Is ShortTime Work a Good Method to Keep Unemployment Down? IZA 

Discussion Paper 5430 (Institute for the Study of Labor, January 

2011), www.iza.org/en/webcontent/publications/papers/

viewAbstract?dp_id=5430; Michael C. Burda and Jennifer Hunt, 

“What Explains the German Labor Market Miracle in the Great 

Recession?” Brookings Papers on Economic Activity (Spring 2011), 

pp. 273–333, www.brookings.edu/about/projects/bpea/past

-editions; and Tito Boeri and Herbert Bruecker, “Short-Time 

Work Benefits Revisited: Some Lessons from the Great 

Recession,” Economic Policy, vol. 26, no. 68 (October 2011), 

pp. 697–765, http://onlinelibrary.wiley.com/doi/10.1111/

j.1468-0327.2011.271.x/abstract.

43. Alison Shelton, Compensated Work Sharing Arrangements 

(Short-Time Compensation) as an Alternative to Layoffs, 

CRS Report for Congress R40689 (Congressional Research 

Service, February 15, 2011).
22 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

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insurance more predictable. Although the federal 

government accounts for a small share of overall state and 

federal spending on unemployment insurance when 

unemployment is low, federal spending has typically 

soared during recent recessions. Some of that increased 

spending occurs automatically through the permanent 

cost-sharing features of the extended benefits program. In 

the recent recession, however, most of the increase in federal spending on unemployment insurance occurred 

through new policies such as emergency benefits, additional compensation, and the modifications to the 

extended benefits program. 

Increases in federal funding during and after recessions 

could be made more formulaic by automatically tying 

more funding to state and national unemployment rates, 

for example, instead of relying on new policies. Tying 

funding to such formulas would make federal assistance 

to states more predictable when state governments’ fiscal 

situations are typically under stress. However, policymakers may wish to tailor federal responses to particular 

circumstances rather than rely on formulas. 

Policymakers also could give states wider autonomy in 

determining how states spend their unemployment insurance funds. States already have considerable freedom to 

set their own tax rates and benefit levels, but under this 

approach they could allocate some funds to job training 

or other activities designed to increase employment, such 

as those discussed above. If such experimentation was 

effective, other states could learn from the results and 

perhaps adopt similar approaches. The wider autonomy 

could be allowed on spending funded by state unemployment taxes, by federal disbursements, or by spending 

funded from either source.

Giving states more flexibility has some potential disadvantages, however. For example, the UI system might 

become a less effective automatic economic stabilizer in a 

recession if the funds states gave to unemployed workers 

were in a form less likely to be immediately spent—such 

as a reemployment bonus or a personal reemployment 

account.

Making State Programs More Uniform. Policymakers 

could make state UI programs more uniform than they 

are currently. For example, they could require that states’ 

tax and benefit policies be within a narrower range than 

under current policy, or they could federalize the UI system by collecting taxes and administering benefits at 

the federal rather than at the state level. (In virtually all 

countries in Western Europe, UI policies are 

administered at the national level).44

The structure of unemployment insurance benefits and 

taxes differs considerably among states.45 Those differences may influence employers’ decisions about when and 

where to invest. Economic efficiency can be reduced 

when firms make fewer or less productive investments to 

avoid UI taxation. As a result, greater uniformity among 

states’ UI systems would reduce the distortions of business decisions caused by differences in states’ UI policies.

Greater uniformity would have disadvantages, however. 

To the extent that states’ residents differ in their earnings, 

their likelihood of being laid off, or their household 

wealth, for example, they may prefer UI programs that 

differ from one another. To the extent that people choose 

to live in a state because of its policies (including UI policy), permitting differences between states allows people 

to “vote with their feet” and live in states that have the 

combination of policies that best suits their circumstances 

and preferences.46

Changing the Distribution of Resources 

Within the UI System

Policymakers could alter the way that income is redistributed within the UI system. For example, they could 

change the limit on taxable earnings, change the amount 

of weekly UI benefits, or establish wage insurance for 

workers. Depending on the precise nature of the changes 

made, those policies would either increase or decrease the 

share of unemployment insurance benefits provided to 

workers who have low earnings or, independently, the 

share of benefits provided to workers who have longerterm reductions in earnings.

44. Katherine Baicker, Claudia Goldin, and Lawrence F. Katz, “A 

Distinctive System: Origins and Impact of U.S. Unemployment 

Compensation,” in Michael D. Bordo, Claudia Goldin, and 

Eugene N. White, eds., The Defining Moment: The Great 

Depression and the American Economy in the Twentieth Century

(University of Chicago Press, 1998), pp. 227–264, www.nber.org/

chapters/c6895.

45. See Department of Labor, “State Law Information” (August 16, 

2012), http://workforcesecurity.doleta.gov/unemploy/

statelaws.asp.

46. Charles M. Tiebout, “A Pure Theory of Local Expenditures,” 

Journal of Political Economy, vol. 64, no. 5 (October 1956), 

pp. 416–424, www.jstor.org/stable/1826343.
NOVEMBER 2012 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 23

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Changing the Limit on Taxable Earnings. One approach 

to changing the amount of redistribution within the UI 

system would be to alter the limit on earnings that are 

subject to the federal unemployment tax. For instance, 

that limit could be increased, and the new amount could 

be indexed so that it would grow with changes in wages 

in the future (as the earnings limit for Social Security currently does). Such an increase would impose a larger tax 

burden on workers who earn relatively more and, if combined with a reduction in the tax rate so that the total 

amount of tax revenue was unchanged, would also reduce 

taxes for workers who earn relatively less. Because states 

are required to set their own limit on taxable earnings at 

least as high as that of the federal government, an increase 

in the federal limit also would increase the limit of many 

state UI payroll taxes—amplifying the distributional 

effects of the policy. 

The limit on each individual’s earnings at a firm that are 

taxable under FUTA has remained constant at $7,000 

since 1983—a period over which median weekly earnings 

have more than doubled. An increase in the limit on 

taxable earnings would raise average tax rates on higher 

earners. For example, a worker who earns $7,000 pays an 

average FUTA tax rate of 0.6 percent ($42/$7,000), but a 

worker who earns $14,000 pays an average FUTA tax rate 

of 0.3 percent ($42/$14,000). If tax rates remained the 

same, raising the taxable wage base to $14,000 would 

equalize the average FUTA tax rates of those two workers 

at 0.6 percent. 

Increasing the limit on earnings that are subject to the 

FUTA tax would reduce the disincentive for employers to 

hire part-time workers. The current limit tends to discourage firms from hiring part-time workers because the 

employer would pay a larger amount of FUTA tax for 

two people earning $7,000 than for one person earning 

$14,000. Because there is no tax on earnings above the 

limit, the tax has a larger effect on the number of workers 

than it does on the number of hours that people work 

once they have a job. Even so, the FUTA tax is a small 

portion of the total cost of employing most workers—a 

maximum tax of $42 per worker—so the effects of this 

disincentive are probably small.

Changing the Amount of Weekly UI Benefits. The federal 

government could increase the benefits available to workers in two ways: by requiring states to adopt a higher 

replacement rate for earnings or by increasing the cap 

on the amount of earnings that could be replaced by 

unemployment insurance. The average UI replacement 

rate—the ratio of benefits to a worker’s earnings before 

being laid off—ranged from 44 percent to 47 percent 

between 1988 and 2007.47 For UI recipients whose benefits are less than the maximum amount, the basic weekly 

benefit is equal to or slightly greater than 50 percent of 

prior earnings in most states. States then cap that benefit 

at a maximum weekly amount. Currently, UI benefit 

amounts and formulas vary significantly from state to 

state.

Raising only the base replacement rate would not alter 

the benefits of high earners, but it would increase the 

UI benefits of lower-earning workers who were laid off. 

Alternatively, leaving the base replacement rate as is but 

raising the cap on benefits would have no effect on the UI 

benefits of workers whose earnings were below the prior 

cap, but it would increase benefits for high earners who 

were previously receiving the maximum benefit amount. 

Either approach would increase the average UI replacement rate and would increase the economic effects of 

unemployment insurance. In particular, higher replacement rates would provide workers with more insurance 

against the loss of earnings from a layoff, but they would 

also provide additional incentives for laid-off workers to 

remain on unemployment insurance as long as they are 

eligible.

Providing Earnings Insurance. Policymakers could 

choose to adopt earnings insurance (also referred to as 

wage insurance) to temporarily make up some of the 

earnings gap for laid-off workers reemployed at reduced 

pay rates. Proposals to do that vary in such crucial 

specifics as the percentage of the drop in earnings that 

insurance would replace, the length of time over which 

payments could be received, and whether the insurance 

was based on annual earnings or hourly wages. Nonetheless, a simple example illustrates the program. If a worker 

earning $50,000 per year was laid off and then took a 

new job paying $40,000 per year, a program that insured 

50 percent of earnings would pay the worker an additional $5,000 per year—half the difference between the 

worker’s former and current earnings. Those payments 

47. Government Accountability Office, Unemployment Insurance Trust 

Funds: Long-Standing State Financing Policies Have Increased Risk 

of Insolvency, GAO-10-440 (April 2010), p. 22, www.gao.gov/

products/GAO-10-440.
24 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

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might continue, for example, for five years and also might 

be structured to diminish over the course of the payout. 

An earnings insurance program already exists for workers 

age 50 or older under the Reemployment Trade Adjustment Assistance program, most recently authorized by 

the Trade Adjustment Assistance Extension Act of 2011 

and set to expire at the end of 2013. Eligibility for the 

program is restricted to laid-off workers deemed to have 

lost their job for reasons related to international trade. 

With some exceptions, that program has replaced 

50 percent of participants’ lost earnings, up to a maximum payment of $10,000 over two years, and only for 

workers’ whose new job pays less than $50,000 per year.48

Earnings insurance, either as a substitute for or as a complement to the current UI system, would have several 

effects. The primary effect would be to provide insurance 

payments tied more directly to the larger, longer-term 

financial consequences of losing a job that the current UI 

system does not address. Research indicates that the average earnings of laid-off workers are significantly lower for 

many years after a layoff, which implies that the UI system protects workers only to a limited extent from the 

adverse financial consequences of losing a job.49 For 

example, one recent study found that average earnings 

six years after a layoff were about 15 percent lower than 

they were before the layoff.50 Earnings insurance would 

protect workers against some of that loss and would be 

targeted toward workers with the largest long-term 

reductions in earnings.

In principle, earnings insurance also could provide an 

incentive for some laid-off workers to go back to work 

sooner than they otherwise would, because their earnings 

while reemployed would be higher than they would be 

without the earnings insurance—an effect similar to that 

of reemployment bonuses. A study of earnings insurance 

in Canada, however, found little effect on the length of 

time before laid-off workers found another job.51 Such 

insurance might also induce some laid-off workers to take 

a job that was less demanding and lower paying because 

the insurance would make up some of the earnings shortfall relative to their earnings at their prior job. However, 

other research finds that neither hours worked nor 

earnings are very responsive to changes in tax rates or 

reductions in benefit rates for workers earning between 

$10,000 and $50,000—the earnings range of many 

potential recipients of earnings insurance.52 In sum, such 

potential recipients are more likely to be reemployed (so 

as to receive insurance payments) but also are more likely 

to earn less than they might otherwise (because insurance 

payments increase the financial benefit of returning to 

work); however, the effects of both incentives would 

probably be small.

48. See Benjamin Collins, Trade Adjustment Assistance for Workers, 

CRS Report for Congress R42012 (Congressional Research 

Service, July 11, 2012).

49. For a discussion of the consequences of being laid off, see 

Congressional Budget Office, Losing a Job During a Recession

(April 2010), http://www.cbo.gov/publication/21396.

50. Kenneth A. Couch and Dana W. Placzek, “Earnings Losses of 

Displaced Workers Revisited,” American Economic Review, 

vol. 100, no. 1 (March 2010), pp. 572–589, www.aeaweb.org/

articles.php?doi=10.1257/aer.100.1. See also Till von Wachter, 

Jae Song, and Joyce Manchester, “Long-Term Earnings Losses 

Due to Mass Layoffs During the1982 Recession: An Analysis 

Using U.S. Administrative Data from 1974 to 2004” (draft, 

Columbia University, April 2009; cited with permission from 

the author), www.columbia.edu/~vw2112/papers/

mass_layoffs_1982.pdf. 

51. Howard S. Bloom and others, “Testing a Financial Incentive to 

Promote Re-Employment Among Displaced Workers: The 

Canadian Earnings Supplement Project (ESP),” Journal of Policy 

Analysis and Management, vol. 20, no. 3 (Summer 2001), 

pp. 505–523, http://onlinelibrary.wiley.com/doi/10.1002/

pam.1005/abstract.

52. See Jon Gruber and Emmanuel Saez, “The Elasticity of Taxable 

Income: Evidence and Implications,” Journal of Public Economics, 

vol. 84, no. 1 (April 2002), pp. 1–32, www.sciencedirect.com/

science/journal/00472727/84/1; and Nada Eissa and Hilary W. 

Hoynes, “Behavioral Responses to Taxes: Lessons from the EITC 

and Labor Supply,” in James M. Poterba, ed., Tax Policy and the 

Economy, vol. 20 (2006), pp. 73–110, www.nber.org/chapters/

c0063.
UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION 25

CBO

List of Tables and Figures

Tables

S-1. Unemployment Insurance Programs in Effect as of December 1, 2012 2

1. Policy Options for Changing the Unemployment Insurance System in the 

Short Term and Their Costs 15

2. Policy Approaches for Changing the Unemployment Insurance System 

Over the Longer Term 18

Figures

S-1. Estimated Economic Effects in 2013 of Extending Unemployment Benefits, 

Relative to the Budgetary Cost in 2013 3

1. Number of People Who Began Receiving Unemployment Benefits, by Fiscal Year 9

2. Spending on Unemployment Benefits, by Fiscal Year 10
26 UNEMPLOYMENT INSURANCE IN THE WAKE OF THE RECENT RECESSION NOVEMBER 2012

CBO

About This Document

This report was prepared at the request of the Chairman of the Senate Committee on Finance. 

In keeping with the Congressional Budget Office’s (CBO’s) mandate to provide objective, impartial 

analysis, the report makes no recommendations.

William Carrington of CBO’s Microeconomic Studies Division wrote the report—in close 

collaboration with Christi Hawley Anthony—under the general supervision of Joseph Kile and 

Chad Shirley. Benjamin Page and Felix Reichling also contributed to the analysis. Linda Bilheimer, 

David Brauer, Molly Dahl, Wendy Edelberg, Heidi Golding, Ed Harris, Holly Harvey, Sam Papenfuss, 

and Jonathan Schwabish of CBO provided useful comments.

Philip Levine of Wellesley College, Robert Shimer of the University of Chicago, and Wayne Vroman 

of the Urban Institute also provided helpful comments. The assistance of external reviewers implies no 

responsibility for the final product, which rests solely with CBO. 

Sherry Snyder edited the report. Maureen Costantino and Jeanine Rees prepared the report for 

publication. An electronic version is available on CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf 

Director

November 2012