Unemployment compensation is meant to help keep struggling individuals and families out of poverty while they search for employment. It also is set up to help keep the economy afloat at times when consumer spending would otherwise dip, by giving compensation to individuals so that they can continue to pay their rent or mortgage and do things like buy groceries and have basic transportation.
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Unemployment compensation is federally regulated and is administered at both the state and federal level. States choose how much compensation an unemployed individual is eligible to receive and at what rate those unemployment benefits are taxed. States also decide who is eligible to receive those benefits as well as what disqualifies individuals from receiving these benefits.
From the unemployment rate to unemployment insurance, let’s take a look at the various ways unemployment affects employers.
How Does Unemployment Affect Employers?
Here are some of the most prominent ways unemployment affects employers.
The unemployment rate will directly affect the number of applicants for a given role (with some exceptions). Generally speaking, the higher the unemployment rate, the more applicants there will be for a given job opening. High unemployment may increase the applicant pool, but it can also increase the number of applicants who are not qualified—all of which the employer then has to review to find the right applicant to hire. This can actually increase the costs of hiring in some cases. On the other hand, lower unemployment rates may mean fewer applicants in general. However, lower unemployment rates also mean existing employees will have less trouble finding new work—which can lead to higher turnover rates. It’s prudent for employers to pay attention to prevailing unemployment rates to help understand what the labor market is doing.
Employers must pay for unemployment insurance to the government to cover the costs of paying unemployment compensation to those eligible for it. This comes from the Federal Unemployment Tax Act (FUTA). It comes in the form of an unemployment tax, and the amounts collected from employers go into the Unemployment Compensation Trust Fund, which is then used for the payments. Employers are taxed based on the number of employees they have, and their unemployment tax rate—which is directly impacted by the number of individuals who have claimed unemployment benefits after working at that employer. (This is yet another reason to work to keep turnover rates low and to not terminate employees without justification.)
This tax comes at both the state and federal level. Generally speaking, the state taxes collected end up funding the regular unemployment compensation payouts (amounts of which vary based on state regulations and are typically a specific percentage of previous pay). These payments usually last for 6 months after an involuntary job loss for a qualified employee. The federal tax covers the cost of administering the unemployment systems and can also be used to cover shortfalls in times when states cannot meet their own unemployment pay obligations, as happened during the recovery from the Great Recession. When we were in the Great Recession, unemployment benefits were extended beyond the usual 6-month period by using a combination of state and federal funds to pay unemployment compensation for longer periods of time.
*This article does not constitute legal advice. Always consult legal counsel with specific questions.
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.