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Ever since the U.S. federal-state system of unemployment insurance was founded in the 1930s, it has provided partial, temporary replacement of wages to eligible workers who lose jobs -- through no fault of their own -- (as determined by state-level regulations). Unemployment insurance is one of the largest social insurance programs in the United States, with benefits paid totaling about $34 billion in 2004. Economic theory can help us understand the challenges this complex program is likely to face over the next few years. We begin by summarizing the salient characteristics of the unemployment insurance program and then examine the theoretical and econometric research. Much of this research revolves around the main goals of the program, which include: 1) sustaining consumption for workers and their families; 2) helping recipients to make efficient job choices during a period of financial stress; and 3) minimizing the adverse incentives that may accompany partial wage replacement. Of course, these goals can come into conflict -- for example, if replacing wages for an unemployed worker also discourages that worker from aggressively searching for or accepting a new job -- and our discussion will focus on these conflicts. In conclusion, we address the key policy issues that the unemployment insurance system is likely to face in upcoming years and ways policymakers may be able to use economic analysis to adjust the program so that it remains effective in addressing the needs of unemployed workers.

The extreme labor market weakness during and after the Great Recession led to the passage of extensive federal legislation related to unemployment compensation. In this paper, we summarize that legislation and some of the research related to it. Although our particular focus is on the very long potential durations of benefits (up to 99 weeks) initially implemented in 2008-2009, we also look at a variety of other initiatives. Most of the research we review comes from the United States. But we also provide a brief look at the vast European literature that addresses many of the same policy issues.

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