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Unemployment benefit

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Unemployment benefits are sums of money given to the unemployed by the government or a compulsory para-governmental insurance system. Depending on the jurisdiction and the status of the person, those sums may be meager, covering only basic needs (thus a form of basic welfare), or may compensate the lost pay somewhat proportionally to the previous earned salary. They often are part of a larger social security scheme.

Unemployment benefits are generally given only to those registering as unemployed, and often only conditions ensuring that they seek work and do not have a job.



In Canada the system is known as Employment Insurance, but until 1996 it was called Unemployment Insurance. Canadian workers pay into a central fund that contributors can draw on if later unemployed. The amount a person receives and how long they can stay on EI varies with their previous salary, how long they were working, and the unemployment rate in their area. The EI system is managed by Human Resources and Skills Development Canada (formerly Human Resources Development Canada), a federal government department.

EI is especially important in the Atlantic provinces, which have higher rates of unemployment. Many Atlantic workers are also employed in seasonal work such as fishing and go on EI over the winter when there is no work.

An unemployment insurance program was first attempted during the Great Depression by the government of R.B. Bennett. It was, however, ruled unconstitutional by the Supreme Court of Canada as it was a provincial responsibility. After a constitutional amendment was passed the first Canadian system was established in 1940. The EI system was dramatically cut by the Liberals in the mid-1990s. This led to a sharp fall in Liberal support in the Atlantic in the 1997 election.

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In Sweden unemployment benefits are divided into a voluntary scheme with income related compensation up to a certain level and a comprehensive scheme that provides a lower level of basic support. The voluntary scheme requires a minimum of 12 months membership and a certain degree of employment during that time before any claims can be made. Employers pay a fee on top of the pre-tax income of its employees, which together with membership fees, fund the scheme. Private insurance is also available, mainly through professional organizations, to provide income related compensation that otherwise exceeds the ceiling of the scheme. The comprehensive scheme is funded by tax.

United Kingdom

Main article: Job Seeker's Allowance

In the United Kingdom there are two forms of unemployment benefit: Job Seekers Allowance (income-based) and Job Seekers Allowance (contribution-based). If a claimant has paid enough National Insurance contributions of the correct class in the two complete tax years previous to the claim year in which the claim is being made, and can prove that they are available for work and are actively seeking employment then they are entitled to contribution-based benefit. If not, and they have a low or no income they receive income-based benefit, but they still have to prove that they are available for and actively seeking work. Benefit levels are lower for those under 25 and to remain receiving benefit a claimant has to visit the Job Centre every two weeks, give details of how they have been looking for work (a "job seeker's diary" is provided), and sign a declaration that they are following their Job Seeker's Agreement (so called signing on).

United States

In the United States there is Unemployment Insurance, a federal program, established by the Social Security Act of 1935, and administered by individual states and territories. The reason for leaving your last job must be "lack of work" or a determination of your benefits will be ordered. Payments to an eligible person are based on a percentage of the last 52 weeks' earnings, not to exceed a state maximum. It generally takes two weeks for checks to begin, the first being a "waiting week", which is not reimbursed, and the second being the time lag between eligibility for the program and the first check actually being paid. Federal rules are governed by the United States Department of Labor. In general, the maximum period for receiving benefits is 26 weeks, though the federal government may choose to extend the benefit period in difficult economic times.

Because it is a federal program run by the states taxing business for the benefit of labor, the politics of unemployment insurance are very complex. Generally speaking, Democrats are more likely to favor benefit increases than are Republicans, while Republicans are more likely to favor tax cuts than are Democrats.

The federal government loans money to the states for unemployment insurance when the states run short of funds. The combination of all the above circumstances led to the situation in many states where taxes were cut, benefits were increased, and the federal government was stuck with large debts.

Congressional actions to massively increase penalties for states incurring large debts for unemployment benefits led to state fiscal crises in the 1980's.

To calculate the unemployment insurance benefits you might receive in the United States, see the useful page at the Economic Policy Institute.

Technical analysis of unemployment benefits

  • Starting without unemployment benefits, the budget line is FE and indifference curve U0, the person could consume 110 hours of leisure and not earn anything. However the person would choose optimum consumption point P, where the budget line and indifference curve intersect, and have 70 hours leisure and 40 hours work per week.

  • If an unemployment benefits program is now introduced it shifts the endowment point vertically from E to G, as they now consume the same amount of leisure time but have an income as well. Potentially the person could consume 110 hours of leisure time, but still earn $500 from the unemployment benefits. Because the wages now earned will have a lower net value as unemployment benefits are reduced with income earned the slope of the budget line rotates to GH.
  • The income effect moves the chosen work/leisure ratio to point Q and the substitution effect then moves the chosen work leisure ratio from Q to point R where the person is working for 10 hours and having 100 hours leisure. This is because the price of leisure has been reduced by the unemployment benefits system. The substitution effect dictates that the person will always switch to the relatively cheaper option. Thus it is clear that, in theory, unemployment benefits encourage people to choose to have more leisure time and work less.
  • In theory, having an unemployment benefits system increases the reservation wage , implying that it will also increase unemployment.

See also

Last updated: 05-07-2005 10:12:43
Last updated: 05-13-2005 07:56:04