Six years into the Great Depression, and after decades of mostly fruitless efforts by states to create their own, Congress created the nation’s unemployment insurance program in 1935.
Through several recessions, as early as the one in 1913-14, many states had seen a need for some kind of safety net for workers, but they didn’t act for fear the higher taxes needed would disadvantage them against economic rivals. Political interest would peak immediately after recessions and fade as economic growth returned.
Emulating similar programs in Europe, some American businesses and labor unions had offered some kind of unemployment compensation since the 19th century. But most out-of-work people had to rely on charities, which were available only to the most desperate. Neither the charities nor private unemployment programs survived the upheaval of the Great Depression.
In 1931, as more and more workers lost their jobs, lawmakers in 17 states introduced 52 bills to provide unemployment benefits and, in 1933, lawmakers in 25 states introduced 68 bills. But passage was difficult because unemployment was so severe—one in four workers was unemployed in 1933—and no insurance plan seemed adequate.
Only Wisconsin succeeded in 1932, starting its own unemployment insurance program.
Taking Wisconsin’s lead, the Franklin D. Roosevelt Administration took up the cause as part of a broader New Deal effort to promote Americans’ economic security. The resulting Social Security Act included unemployment insurance and its much better-known sibling, what was known then as old-age benefits.
Wisconsin had a big influence on the Social Security Act, in part, because proponents could point to an existing program there and, in part, because the Roosevelt administration hired several Wisconsinites to work on the proposal.
The idea that employers that laid off more workers should pay more unemployment taxes emerged from Wisconsin policymakers. This notion was later known as experience rating, meaning rating an employer’s experience with layoffs. The state had used the same model when it earlier started funding benefits for injured workers. To encourage employers to improve safety, those with more injured workers had to pay more. It worked.
Unemployment was seen in the same light—that is, something to be prevented—and proponents of unemployment taxes hoped employers would maintain more stable employment in exchange for lower taxes. When Congress debated unemployment benefits in 1935, it included the Wisconsin idea of an experience rating.
This way of thinking was different from unemployment benefits then in existence. Great Britain and Germany, which had the largest benefits programs, taxed businesses and workers equally.
Unlike the Social Security retirement benefits created by the same legislation, unemployment insurance was not a federal program. Rather, it was a partnership between the federal government and states. Congress, fearing constitutional challenges, didn’t require states to provide insurance. Instead, the federal government imposed heavy taxes on employers in states without insurance programs that met certain standards. This partnership has led to a wide variety among state unemployment insurance programs, some more effective than others. (See “Snapshot: A state-by-state look at solvency.”)