WHY UNEMPLOYMENT INSURANCE EXISTS

By January 15, 2016Blog

On August 17, 1936 the Employment Compensation Department of the Industrial Commission of Wisconsin cut a $15 check to Neils B. Ruud of Madison, Wisconsin. It was the first unemployment compensation check issued in the United States. Ruud had previously worked for the Brock Engraving Company, but like so many others during the Great Depression, he found himself out of work.

The enterprising Mr. Ruud reached a deal with Professor Paul Raushenbush of the University of Wisconsin, who would later head the state’s unemployment agency, to turn over what was correctly viewed as an important historical document in exchange for a $25 payment, netting an immediate $10 profit in the process. Today the check, never cashed, resides at the Wisconsin Historical Society where it is an artifact of a major societal transformation.

During the first year of the program, Wisconsin would pay 46,000 workers almost $1,000,000 in unemployment compensation benefits. Millions more were paid in the other states as the effects of the Great Depression continued to be felt. Though the unemployment insurance program did not take the place of having a job, it helped mitigate the financial hardship of unemployment and the resulting disruption to the economy.

Though the concept of an unemployment insurance program had been proposed decades earlier, it took the massive upheaval of the Depression to bring the idea to reality. The Social Security Act of 1935 included not only payments for those facing poverty in old age, but for those who had lost their jobs as well. Though the law was popular with many workers, it faced numerous legal challenges.

During their 1936 term, the Supreme Court heard arguments in Steward Machine Company v. Davis and Carmichael v. Southern Coal & Coke Co. and Gulf States Paperalong with the better known Helvering v. Davis case which challenged the old age insurance provisions of Social Security. On May 24, 1937 decisions in all three cases were announced and the programs were declared to be constitutional. By the end of 1937 all 48 states had established unemployment compensation programs.

The coming of the Second World War and the end of the Great Depression lessened the widespread need for unemployment insurance for a time, but continuing economic cycles and downturns meant that millions continued to receive benefits from the program. Through the years the program to “provide unemployment benefits to eligible workers who become unemployed through no fault of their own” has played an important role in helping smooth the ups and downs of the employment market for American workers and families.

Over the years many changes have been made to eligibility requirements for receiving unemployment compensation. In addition to limits on the length of time those who have lost jobs are eligible to receive benefits, there are also stipulations that require active participation in job search as a condition of continued payments. As a result, while the number of those receiving benefits has declined from the peak of the most recent economic crisis that began in 2008, that does not necessarily reflect an overall reduction in unemployment.

For example according to the Department of Labor, the month of April 2015 saw the lowest four week moving average of people receiving unemployment compensation since December 2000 at just under 2.3 million. However according to a study from the Economic Policy Institute, in December of 2014 only 23 of every 100 unemployed workers were receiving unemployment insurance benefits.

There is still considerable debate among economists and politicians alike over the proper level of program benefits, the length and requirements for eligibility and the overall impact of unemployment insurance. But over the seventy-nine year history of the program, it has become an established fixture of the economy. Until the business cycle is repealed and full employment becomes the rule (presumably about the same time lions and lambs begin living side by side in harmony and unicorns are discovered) unemployment compensation will remain a vital part of the safety net for the American worker.

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