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Volume 17
Issue 2
Fall 2012

A n E c o n o m i c E d u c at i o n Ne w s l e t t e r f r o m t h e Fe d e r a l Re s e r v e B a n k o f S t. L o u i s

Unemployment Insurance
© iStock Photo| nigel carse

Payments, Overpayments, and Unclaimed Benefits

What’s Your
Question?
Unemployment
Benefits

Economic
Snapshot
Unemployment
Benefits

Resources
Econ Lowdown
lessons and
online courses

www.stlouisfed.org/education_resources

By David L. Fuller, B. Ravikumar, and Yuzhe Zhang

Overpayments in the U.S. unemployment insurance system have received
increasing attention of late. For example, CNN.com cited a recent study by
the Department of Labor in reporting that 11 percent of all unemployment
benefits were overpayments. Overpayments can be the result of errors on the
part of government administrators, employers, and employees or it can
be outright fraud.
First we examine the benefits the U.S.
unemployment insurance system has paid
out from 1989 to 2011. Next we look at the
overpayments for the same time period.
Finally, we discuss a fact that is less wellknown: Not everyone who is eligible for
unemployment benefits actually collects
them. Over the longer horizon, these
unclaimed benefits are much larger than
the overpayments that have received
recent attention.

Unemployment Insurance
Unemployment insurance programs insure
workers against the risk of lost income if
they lose their job through no fault of their
own. In the U.S., the program is run at the
state level. Each state sets its benefit level
and eligibility criteria and finances these
benefits through payroll taxes. There are
three primary criteria for eligibility: First, the
individual must have accumulated enough
earnings or worked a minimum number of
weeks during the previous year. Second,

only those who lost their job through no
fault of their own are eligible; thus, people
who quit their job or are fired because of
poor performance are not eligible. Third, the
duration of benefits is limited.
Typically, unemployment benefits last
for a maximum of 26 weeks. These regular
unemployment benefits paid by the states
increased sharply during the recent recession. Measured in 2005 dollars (all amounts
are reported in 2005 dollars), these benefits
more than doubled, from $31 billion in 2007
to almost $72 billion in 2009. Since 2009,
these regular benefits have decreased to levels below what they were after the previous
recession: In 2011, the unemployment insurance program spent less than $42 billion on
regular benefits, while the corresponding
figure in 2002 was more than $46 billion.1
In periods of high unemployment, benefits
may be continued beyond the typical cap of
26 weeks. Most states offer an additional 13
weeks of benefits when the unemployment
continued on Page 2

T h e f e d e r a l r e s e r v e b a n k o f s t. l o u i s : C e n t r a l t o A m e r i c a’ s e c o n o m y ®

Unemployment Insurance
continued from Page 1

rate in that state remains above a certain threshold.
The federal government may also finance more benefits. For example, the federal government recently
provided financing to some states to extend their
benefits to a maximum of 99 weeks. During the early
1990s, extended unemployment benefits added 60
percent on top of the regular 26 weeks of benefits.
During the past two years, the extended benefits
have added more than 125 percent.
Figure 1
14
12

PERCENT

10
8

Total overpayments as a percent
of unemployment benefits
Overpayments due to fraud as a percent
of unemployment benefits

6
4

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

Sources Benefit Accuracy Measurement (BAM) program, U.S. Department of Labor; authors’
calculations.
NOTES The fractions reported by the blue line are the total dollar amount of overpayments in a
calendar year divided by the total dollar amount of benefits paid in the same year. Both amounts
were obtained directly from the BAM sample and include only the payments by states for the standard 26 weeks. A similar calculation was used to compute the fraction reported by the red line.

80
70
60
50

“Concealed Earnings”

“Insufficient Job Search”

“Unable and Unavailable to Work”

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

10
1989

PERCENT OF OVERPAYMENTS DUE TO FRAUD

Figure 2

SourceS Benefit Accuracy Measurement (BAM) program, U.S. Department of Labor; authors’
calculations.
NOTES The calculations use dollar amounts, not number of cases. To calculate the numbers in
the figure, we first sum up the dollar amounts of overpayments due to all 28 types of fraud. Then,
for each of the three forms of fraud discussed in the article, we calculate the total dollar amount
of overpayments from the category. The numbers reported in the figure are the latter amounts
each divided by the former.

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Overpayments and Fraud
Some unemployment benefit payments have indeed
been overpayments, as recent newspaper reports suggest. Figure 1 illustrates the amounts overpaid. The
average overpayment as a fraction of benefits during
2007-2011 was 11 percent. For example, during the
middle of the recent recession in 2008, total unemployment benefits were $40 billion and total overpayments were $4 billion.
The overpayments could stem from simple typographical errors on one extreme to outright fraud on
the other extreme. For example, an individual’s benefit
may be inadvertently set too high because the wrong
formula was applied. This represents a simple error.
Fraud, on the other hand, is a deliberate act. During
2007–11, overpayments due to fraud accounted for
25 percent of all overpayments and 3 percent of all
payments on average (see Figure 1). Put differently,
overpayments due to fraud were roughly a fourth of
the total overpayments.

Types of Fraud
The Benefit Accuracy Measurement (BAM) program
run by the U.S. Department of Labor classifies fraud in
28 categories. The dominant form of unemployment
insurance fraud in recent years is what’s classified
as “Concealed Earnings” fraud: collection of unemployment benefits by individuals who are gainfully
employed. As Figure 2 illustrates, overpayments from
Concealed Earnings fraud have been steadily rising
over the past 22 years and were almost 70 percent of
the overpayments due to fraud in recent years.
Recent headlines on prisoners collecting unemployment benefits fall under “Unable and Unavailable to
Work” fraud. This category includes cases where an
unemployed person is not healthy enough to work
or is in school, for example. Overpayments due to
the entire Unable and Unavailable to Work category
amounted to barely 5 percent of fraud in 2011.
Meanwhile, overpayments due to “Insufficient Job
Search” (cases where the unemployed individual did
not, but claimed to meet the mandatory work search
requirement, such as the minimum number of job
applications to be filed each week) have been declining
and are down to less than 5 percent of fraud.

Unclaimed Benefits
Some unemployed persons never seek benefits.
Although overpayments have grabbed recent headlines, only 35 percent of the unemployed have been
collecting benefits over the past 22 years on average.
Not all of these people are eligible to collect benefits,

Figure 3
120

Additional persons if all eligible
unemployed collect benefits (left axis)

100

Additional expenses if all eligible
unemployed collect benefits (right axis)

Overpayments (right axis)

2011

2009

2007

2005

2003

2001

1999

20
1997

1
1995

1993

1991

1989

$ BILLIONS (IN 2005 DOLLARS)

6
MILLIONS OF PEOPLE

however. For instance, the typical duration of unemployment benefits is 26 weeks, and a person who continues to be unemployed past 26 weeks is not eligible.
During the recent recession (2007-09), roughly 50
percent of those eligible were collecting benefits. The
fraction increased to 95 percent in 2011. In Figure 3, we
illustrate the number of people who could have collected unemployment benefits but chose not to do so.
Figure 3 also illustrates a back-of-the-envelope
calculation. If all of those who are eligible to collect
unemployment benefits were to indeed collect the
benefits, what would be the additional expenditures
for the unemployment insurance program? The
additional expenditures in 2009, toward the end of
the recent recession, would have been a whopping
$108 billion. As Figure 3 illustrates, the overpayments
in 2009 were $11 billion. On average, more unclaimed
benefits are left on the table than improper benefits
taken off the table.
Looking at the unemployment insurance program
over the longer horizon, overpayments are less than
one-tenth of the benefits paid, overpayments due to
fraud are less than 3 percent of the benefits paid, and
unclaimed benefits are nearly seven times the
overpayments. Although reducing the overpayments
would clearly help reduce the expenditures for the
unemployment insurance program, a higher fraction
of eligible people choosing to collect unemployment
benefits would significantly increase the expenditures
for the program.

SOURCES Overpayments: Benefit Accuracy Measurement (BAM) program,
U.S. Department of Labor; authors’ calculations.
NOTES We calculate the numbers for the green line by multiplying the overpayment rate in Figure 1 by
the amount of total unemployment benefits paid (that is, including extended benefits) reported by the
Department of Labor.
To obtain how many additional people could collect benefits, we use the calculations in this paper: Auray,
Stephane; Fuller, David L.; and Lkhagvasuren, Damba. “Unemployment Insurance Take-up Rates in an Equilibrium Search Model.” Working Paper, Concordia University, 2012. They compute the fraction of eligible
unemployed who are collecting benefits by using Current Population Survey data and details on eligibility
requirements for all U.S. states. We increase their fraction to 100 percent (as if all eligible unemployed collect benefits) and calculate the additional number of unemployed who could legitimately collect benefits.
Additional expenses are calculated as follows: We divide the total unemployment benefit expenditures
each year by the number of unemployed people collecting benefits in that year to obtain a benefit amount
per person. Both of these numbers are tabulated by the U.S. Department of Labor; see www.doleta.gov/
unemploy/chartbook.cfm. We then multiply the additional number of people by the benefit/person to
obtain “Additional expenses if all eligible unemployed collect benefits.”

We obtain the nominal actual outlays from the Department of
Labor, www.doleta.gov/unemploy/chartbook.cfm, and convert
them to 2005 dollars using the GDP deflator in the FRED
database, http://research.stlouisfed.org/fred2/.

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Glossary
Back-of-the-envelope calculation — Informal computation
using estimates and/or rounded numbers to reach a general
answer.
Benefit Accuracy Measurement (BAM) program — BAM is a
quality control statistical survey that investigates and reviews
the records of a sample group of claimants selected each
week at random to test the accuracy of decisions to issue
or deny benefits for that week. The program, administered
by each of the 50 states for the U.S. Department of Labor,
identifies errors and abuse in unemployment programs from
approximately 24,000 cases annually. Causes of erroneous
payments or denials may include administrative oversight and
misrepresentation or errors by claimants and/or employers.
Concealed earnings fraud — Deliberately not revealing earnings in order to receive unemployment benefits; deception
by gainfully employed individuals to collect unemployment
benefits for which they are not eligible.
Employed — People 16 years and older who have jobs.
Employer — A person or business that provides work to others
and a monetary payment in exchange for that work.

Fraud — Deliberate misrepresentation of facts for profit or gain
in violation of laws and regulations.
Job Search Fraud — Deliberate misrepresentation by unemployed persons to collect unemployment benefits by claiming
to meet mandatory work search requirements, such as the
minimum number of job applications to be filed each week.
Recession — A period of declining real income and rising
unemployment; significant decline in general economic activity extending over a period of time.
Unemployed — People 16 years of age and older who are without jobs and actively seeking work.
Unemployment — A condition where people at least 16 years
old are without jobs and actively seeking work.
Unemployment benefits — Unemployment insurance payments given to provide temporary financial assistance to
eligible unemployed workers who are unemployed through
no fault of their own and who meet their state’s eligibility
requirements.

Employee — A person who works for an employer in exchange
for a monetary payment.

Unemployment insurance — Federal-state insurance that
provides unemployment benefits to eligible workers who
are unemployed through no fault of their own and meet the
eligibility requirements of their state’s law.

Extended unemployment benefits — Additional weeks of
benefits available to workers who have exhausted regular
unemployment insurance benefits during periods of high
unemployment.

Unable and unavailable for work fraud — Deliberate misrepresentation of not being healthy enough to work or being
available for work by an unemployed person filing for unemployment benefits.

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economic s n a p s h o t

Unemployment Benefits
Current Economic Data

1. Why does the cost of unemployment benefits vary
among the states?
The cost of unemployment insurance claims in individual states varies due to several factors: the total population, the number of persons who are unemployed,
the unemployment rate of the state, and the specific
guidelines of the state.

2011 State Unemployment Benefits
by State (millions of dollars)
WA
ID

WY
UT

CA
AZ

Q2-’12

Q3-’12

Growth Rate
Real GDP

4.1%

2.0%

1.3%

2.7%*

Inflation Rate
Consumer Price Index

1.3%

2.5%

0.8%

2.3%

Civilian Unemployment Rate

8.7%

8.3%

8.2%

8.1%

*Second estimate
SOURCE: GDP, Bureau of Economic Analysis; www.bea.gov.
Unemployment and consumer price index, Bureau of Labor Statistics; www.bls.gov.

AR
LA

IL
KS

NE
NV

Q1-’12

Q4-’11

MS AL

NH
MA
CT
RI

≤ 56 to 349

≤350 to 679

≤680 to 1,597

≤1,598 to 3,223
≤3,224 to 17,355

2. How does the number of initial claims for unemployment insurance compare with the number of
continued claims? What conclusion can be drawn
from this analysis?

7 mil

CCSA

6 mil

Number

The number of initial claims has remained relatively stable over the past ten years and the greatest fluctuation
is seen in the tan bar, which shows the recent recession.
The number of continued claims has consistenly been
much higher than initial claims and has shown more
volatility, especially during the past recession (as shown
in the graph at right). This indicates a recent trend for
unemployed persons to receive continued benefits.

Initial Claims (ICSA)
Continued Claims (Insured Unemployment) (CCSA)

ICSA

5 mil
4 mil
3 mil
2 mil
1 mil
0

2002

2004

2006

2008

2010

2012

2014

Shaded area indicates U.S. recession.
research.stlouisfed.org.

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w h a t ’ s y ou r ques t i o n ?

Unemployment Benefits
1. What government agency collects data on unemployment insurance benefits?
United States Department of Labor
2.When was the unemployment insurance program
created, and how is the program managed?
The current federal-state system of unemployment
insurance (UI) traces its origins to the Social Security
Act and related laws of 1935. Each state administers
a separate unemployment insurance program within
guidelines established by federal law.
3. How are unemployment insurance benefits
funded?
In most states, benefit funding is based solely on a tax
imposed on employers. Unemployment taxes are paid
by employers to the federal government and to states
to fund unemployment compensation benefits for outof-work employees. (Three states—currently, Alaska,
New Jersey, and Pennsylvania—also impose unemployment insurance taxes on employees.)
The Federal Unemployment Tax Act (FUTA) authorizes the Internal Revenue Service (IRS) to collect a
federal employer tax used to fund state workforce
agencies. Currently, the federal tax is 6.2 percent on
the first $7,000 in annual wages to each employee.
FUTA covers the costs of administering the program
in all states, pays one-half of the cost of extended
unemployment benefits during periods of high unemployment, and provides a fund from which states may
borrow to pay benefits.
State law determines individual state unemployment
insurance tax rates. The state unemployment tax,
paid to state workforce agencies, is used solely for the
payment of benefits to eligible unemployed workers.
State tax rates vary from state to state, as does the
amount of each worker’s income that’s subject to the
tax—which ranges from $7,000 to $34,000.
4. Is the national unemployment rate released
each month by the Bureau of Labor and Statistics the same as the number of persons receiving
unemployment insurance benefits?
No. The unemployment rate released each month by
the BLS estimates unemployment based on a monthly
sample survey of more than 60,000 households. A
person’s unemployment status is established by
responses to a series of questions about whether they
have a job, whether they want a job and are available
to work, and what they have done to look for work
in the preceding 4 weeks. The unemployment rate is
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the number of unemployed persons as a percent of
the labor force (employed and unemployed persons).
There is no requirement or question relating to unemployment insurance benefits in the monthly survey.
The unemployment data derived from the household
survey in no way depend upon the eligibility for or
receipt of unemployment insurance benefits. Some
people are still unemployed even when their benefits
run out, and many more are not eligible at all or delay
or never apply for benefits.
Statistics on persons receiving unemployment insurance benefits (sometimes called insured unemployment) are collected as a byproduct of unemployment
insurance programs.
5. How long can a person receive unemployment
benefits?
Unemployment insurance payments (benefits) are
intended to provide temporary financial assistance
to unemployed workers who meet the requirements
of state law and typically run for 26 weeks. However,
since 1970, federal law requires provisions for extended
unemployment benefits in times of high and rising
unemployment and some unemployed persons may
qualify for these benefits. When a state’s unemployment rate reaches a certain level, the time for receiving benefits must be extended. The basic Extended
Benefits program provides up to 13 additional weeks of
benefits and some states have also enacted a voluntary
program to pay up to 7 additional weeks (20 weeks
maximum) of Extended Benefits during periods of
extremely high unemployment.
6. Is unemployment insurance taxable, and how
often are the payments received?
Unemployment insurance payments are deemed taxable income by the Internal Revenue Service. Most
states measure unemployment in calendar weeks and
make payments weekly.

fea t ured r esou r ces

Bank Contacts

Grades 3-5
Meet Kit: An American Girl
This lesson with SMART™ Board application complements the book, Meet Kit: An
American Girl. Students listen to the story about a young girl’s life in America during
the Great Depression. They learn through discussion and role-playing about the
impact that unemployment and reduced consumer and business spending can have
on people’s lives. (Book written by Valerie Tripp / ISBN: 1-58485-016-7)

Grades 6-12
Are you looking for a lesson that features an active demonstration, primary sources,
data, and current events. Look no further. What Is Unemployment, How Is It Measured,
and Why Does the Fed Care? features all of these. Students participate in an activity to determine who makes up the labor force and who the unemployed are. They
then use the data generated to learn how the unemployment rate is calculated. Next,
they read and interpret maps that contain actual unemployment data. They compare
verbal descriptions for the labor market from the Federal Reserve’s Beige Book with the
mapped data. They look at mapped data from other years and write descriptions to
represent the data like those they read in the Beige Book.

Grades 9-12
The Story of Unemployment online course teaches students the answer to
these questions: How is unemployment calculated? Why might people
become unemployed? What can be done to get people back to work?
Students also explore how education will help them avoid unemployment
in the future. Enroll your students in the two-hour course today
at www.stlouisfed.org/education_resources/The_Story_of_Unemployment.cfm.

Little Rock
Kris Bertelsen
501-324-8368
Kris.A.Bertelsen@stls.frb.org
Louisville
Erin Yetter
502-568-9257
Erin.A.Yetter@stls.frb.org
Memphis
Jeannette Bennett
901-579-4104
Jeannette.N.Bennett@stls.frb.org
St. Louis
Mary Suiter
314-444-4662
Mary.C.Suiter@stls.frb.org
Barb Flowers
314-444-8421
Barbara.Flowers@stls.frb.org
Scott Wolla
314-444-8624
Scott.A.Wolla@stls.frb.or
Jennifer Bradford
314-444-4608
Jennifer.L.Bradford@stls.frb.org

Two St. Louis Fed Economic Lowdown podcasts complement this edition of Inside the Vault. Go to www.
stlouisfed.org/education_resources/podcasts.cfm to access Episode 5: Unemployment and Episode 10:
The Labor Market. Use this extra review to reinforce concepts already learned.

That’s a Winner!
For the second year in a row, the
St. Louis Fed’s Education Resources
website has won an Award of Excellence
from Tech & Learning Magazine.

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Inside the Vault is written
by economic education staff
at the Federal Reserve Bank
of St. Louis, P.O. Box 442,
St. Louis, Mo., 63166.
The views expressed are
those of the authors and are
not necessarily those of the
Federal Reserve Bank of
St. Louis or the Federal
Reserve System.

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Full text of Inside the Vault : Fall 2012

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