How Unemployment Works

Job seekers wait in line to enter a job fair in Califormia. What causes unemployment to increase or decrease? See more recession pictures.
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­With the recent economic downturn, unemployment is an unavoidable fact of life for many Americans. The September 2011 labor statistics showed that 14 million people, 9.1 percent of the workforce, were unemployed in the U.S. [source: Bureau of Labor Statistics]. Although unemployment is down slightly since the housing bubble burst in 2009, unemployment hasn't spiked like this since it reached almost 11 percent in the early 1980s [source: Economagic]. The numbers for long-term unemployment are also pretty depressing: 42.9 percent of the unemployed in the U.S. have been jobless for 27 weeks or more [source: Bureau of Labor Statistics]. If you're unemployed or facing job loss, life can be difficult.

The unemployment rate has remained near or above 9 percent since mid-2009, which is much longer than other spikes in unemployment associated with a recession [source: Tasci]. The recession caused the initial decline in unemployment, but there are economic forces at work that are keeping it high. One problem is that, while some employers are hiring and people are looking for work, the unemployed population's skills don't always match what many employers are looking for. This is especially true in newer industries, like information technology and green energy [source: Reuss].


There are job openings out there, but employers still aren't hiring at the rate they were pre-recession, and there are two major factors at play. Computer technology has make it easier to produce more with fewer workers, and instead of hiring, many companies are updating equipment to make their operations more efficient rather than hiring more people. On top of new technology, it's often cheaper to outsource jobs than to hire employees here in the U.S. [source: Lee]

The other force keeping those unemployment numbers up has to do with the definition of unemployment. Technically, an unemployed person isn't just jobless but also actively looking for a job. Now that employers are starting to hire again, unemployed workers who had given up on their job searches are pounding the pavement once again [source: Reuss].

The Obama administration recently predicted that we won't see unemployment rates of less than 6 percent until 2016 but that the economy is growing, albeit slowly [source: Bruce]. Job openings are on the rise, and we're expected to see around a .5 percent drop in unemployment each year as our economy slowly recovers [source: Philadelphia Fed].

In this article, we’ll look at getting fired or laid off, coping with job loss, and when and how to resign. We’ll also explore Unemployment Insurance and COBRA, two programs designed to help the unemployed.


Can This Job Be Saved?

To start, imagine that you just got fired. Is it actually possible to save your job? Let’s see what you can do.

If you have been fired for a clear cause, it may be difficult to save your job, but if the reasons are unclear, if you aren’t an at-will employee or if you are subject to a layoff or downsizing, it may be possible to hang on to your job, if only for a little while. First, consult your employee handbook or personnel manual. Find out if there is an official grievance process you can pursue and who can reinstate you. If filing a grievance, make sure you do it promptly within the required period of time. Union employees generally have a great advantage here as they have clearly defined appeal procedures, and union officials can offer help and representation.


Contact the person highest up the chain of command but within reason. Approaching the manager of your department may be a wise move, but e-mailing the CEO of the multinational corporation that just fired you is likely not. As in all matters related to losing your job, do your best to remain composed and respectful.

If you are desperate to stay employed to retain benefits, achieve a retirement or pension threshold or to have a source of income while looking for a new job, consider offering to do part-time, contract or temporary work. You could also offer to accept a smaller pay package. If your firing was based on poor performance, ask if you can resume work on a probationary basis. In the case of a downsizing or corporate restructuring, requesting to transfer to a different office or to fill a different position may allow you to stay employed.

However, most of the time you will not able to reverse a firing (or you may not want to). For what to do next, see the following page.


Getting Fired

Most American workers are "at-will" -- meaning they can quit whenever they wish or be fired without warning.
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The majority of American workers are “at-will” employees, meaning that their employers can fire them at any time without offering a reason, so long as the firing is not discriminatory or illegal. At-will employees can also quit at any time -- though offering two weeks' notice is considered standard decorum -- because they are not legally bound to work for their employer. If you have a contract, such as a union contract, then you are likely not an at-will employee and can only be terminated in circumstances that fall under the terms of the contract. Federal employees are not considered at-will but do have some protections from termination if it violates the U.S. Constitution or their state’s constitution.

Whether you’re an at-will employee or a union employee, certain aspects of getting fired are the same, and there are some guidelines that you should follow. Most importantly, be careful what you do and say. Getting fired can be a very distressing time. Don’t use it as an excuse to tell off those coworkers who have annoyed you or to launch into a rant against the company. Although it may not seem like it, you may end up working with some of these people again one day or encountering them in a professional setting. Depending on the circumstances of your firing, you may also want to ask some of your coworkers or a former supervisor for a reference, a request that will be much more complicated if you make a tumultuous exit.


If you are fired, be careful about signing any documents, such as a release of claims that gives up your right to sue. Read them carefully, and feel free to consult outside sources or a lawyer. Most importantly, do not succumb to pressure.

You should also take this opportunity to look at any documents that you signed when you were hired that may affect future employment opportunities. These documents can include restrictive covenants, non-compete agreements or confidentiality agreements. If, for example, the non-compete agreement you signed bars you from working for a competitor for six months after leaving the company, read over the agreement carefully to see if there are any changes in its provisions if you are fired.

You may also receive a summary of your retirement plan and its status. These documents can be useful if you plan to roll your retirement account into a new plan with a future employer.

Whether your firing is dramatic and bitter or quiet and amicable, keep a record of events related to your job loss. You might need this information for collecting unemployment, filing a grievance or a lawsuit, or in settling a dispute about your severance package. Maintain a chronology of events so that you do not have to rely on your memory to support your version of events.

You should receive your final paycheck within 30 days of your final work day, though state laws on this vary [source: Nolo]. Your company may be bound to a different timeframe depending on whether you were fired or you resigned. If your employer does not give you your final pay within the legally required timeframe, contact a lawyer, your union or a government agency such as the Wage-Hour Division, part of the Department of Labor.



When an employee gets fired or laid off, he or she may be offered a severance or separation package. This package can be a combination of salary, a lump sum of cash, stock options or other benefits. It is designed to thank terminated employees for their work and to ease their transitions to new jobs. The amount of severance pay depends on the position you held, length of service with the company, your service record and the reason for termination. Some terminated employees manage to negotiate for more severance money based on these factors or by giving up the right to sue.

Some companies have written severance policies while others propose a different package for each individual. A severance package could equal a year’s worth of pay or much less, but almost all severance pay is taxable, though some severance benefits, like healthcare, are not [source: IRS].


You may continue to receive a salary or get a lump sum in your severance package. A lump sum payment is just what it sounds like -- you get all the money agreed upon in your severance package in one lump payment. This has some key advantages, including a clean break from your employer; there’s no need for continued correspondence because you’ll have your money. However, your other benefits, such as health insurance, will cease once you get that lump sum [source: New York Life]. The IRS also can tax lump sum payments at a higher rate than regular severance payments, so you might want to talk to a tax professional before accepting a lump sum payment [source: New York Life].

Salary continuation means that you stay on the payroll and get paid every pay period as if still an employee. According to the agreement, the salary continuation may last for a set period or until you find a new job. You also retain benefits when on salary continuation, again because you're still on the payroll and treated in many ways like an employee (albeit one who no longer shows up for work). A similar method to salary continuation, but one with clear disadvantages, is periodic payments, in which you receive several equal payments over time. You're not officially on the company’s payroll, meaning that there is less oversight, potentially no financial record and uncertainty about how to resolve and recover missed payments.

If you have the choice between a lump sum, salary continuation or periodic payments, keep in mind the amount of money offered and tax consequences compared to your needs and how long it might take you to get a new job. Generally, you also cannot collect unemployment benefits while receiving a severance, if it is equal or exceeds your previous weekly wages [source: New York Life].


Golden Parachutes and Reference Letters

Severance, golden parachutes and reference letters are all important to know about if you get fired.

Also called golden handshakes or change-in-control payments, a golden parachute is a large sum of money -- or a combination of cash, stock options, consulting contracts and other benefits -- that executives receive in the event of a takeover or change in ownership of a company. The practice became popular in the 1980s, but with the passage of the Dodd-Frank Act in April of 2011, company shareholders now get a vote about these types of payments [source: United States Committee on Banking, Housing, & Urban Affairs].

The initial idea behind golden parachutes was to guarantee compensation to an executive should he or she be fired after a merger or takeover, but some CEOs were receiving large pay packages in mergers and still remaining in control of the new company [source: Thornton]. An example is former Gillette CEO James Kilts, who received a $165 million pay package after orchestrating the sale of Gillette to Procter & Gamble in 2005. Critics claimed he benefited financially at the expense of shareholders and the 6,000 jobs cut in the sale.


Some executives also receive golden handshake-type severance packages when they resign. In 2011, Hewlett-Packard CEO Leo Apotheker was ousted after just 11 months and received a severance package of $13.2 million in cash and stock, not to mention a sign-on package worth $10 million [source: Financial Times]. However, other executives have declined opportunities to receive large payouts, claiming that their regular compensation is sufficient and that executives should match company performance and align with shareholders’ interests [source: Howard] .


Though letters of reference may be one of the last things on your mind when you’re fired, this is actually the best time to consider them. Of course, obtaining a letter of reference can depend on the circumstances of your termination, but prospective employers can take it as a bad sign if you don't put down a past employer as a reference. If you are unhappy with a reference letter, you can try to discuss it with the writer.

You can also request a service letter explaining the reasons for your termination. A service letter is required by law upon request in California, Delaware, Indiana, Kansas, Maine, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New York, Tennessee, Texas and Washington. If unable to obtain a service letter, ask your supervisor for the reason behind your termination and write it down. Include the date, time, place and any witnesses. Read the letter to your supervisor and ask him to confirm its content.


Quitting a Job

Worried that you're going to get fired? It can be better to resign than to get fired, but if you're facing layoffs, it's usually a good idea to hang in there so that you can collect unemployment insurance or maybe even severance pay while you're looking for a new job.

If you do resign to keep from getting fired, your record with the company will say that you quit, and you can tell prospective employers that you left your last job voluntarily. Additionally, if you hope to return to your company one day, perhaps in a different position or department, you may be barred from being rehired if the company’s records shows you were fired.


It’s a good idea to talk to an employment lawyer before resigning and to read all applicable company documents. If your employer wants you to quit but has no legal reason to fire you, perhaps he or she is trying to force you to quit. You could pursue legal action instead, try to obtain a favorable separation package or file a grievance with the company or your union. If you're suffering from discrimination, try to stay at your job and file a complaint with the Equal Employment Opportunity Commission (EEOC). If possible, report the discriminatory behavior to a supervisor. You are legally protected from retaliation for filing with the EEOC.

If you’re just dealing with general unhappiness or restlessness with your job, it’s better to hold on to the job and look for a new one while you’re still employed, especially during these tough economic times.

If you do decide to resign, do so in writing, and give at least two weeks' notice. Continue fulfilling your responsibilities until your very last day of work, and don’t take anything that doesn’t belong to you or that could be considered cause to withhold your final pay. Leave your files and other materials in order to facilitate your successor’s transition. Look at the employee handbook to see if you’re entitled to any benefits or compensation for unused vacation or sick time.

Some companies ask employees who are leaving to do exit interviews. Be careful during this interview -- using it as a forum to list all of your grievances or to complain about specific employees or supervisors could backfire later in your career. You may be working with some of these people in the future, asking them or their colleagues for references or encountering them in another situation.


Dealing with Job Loss

If your former company offers outplacement assistance, be sure to take advantage of it.

Losing a job can be one of the most stressful experiences a person goes through, especially if you're concerned about supporting a family. Try to maintain your perspective through this process, and use your available support system -- friends, family and mentors. Don’t close yourself off to them; now is a time to ask for help. You should also start looking for a new job immediately, consulting professional contacts, friends and former employers. Online job networking sites like LinkedIn can help you network with possible future employers and find leads, so make sure that your resume is up to date. Your old employer may also provide access to outplacement services to aid you in your job search.

When not looking for a job, stay active, and maintain hobbies and social activities. An active routine is good for maintaining mental health. Try using your job skills in a volunteer setting. You’ll be doing good for others, keeping your skills sharp, staying busy and feeling good in the process. You can also learn new skills and meet new people, which may lead to a job.


Be particularly careful with your finances during this time. Create a budget with your family, and stick to it. If you have debt, figure out how you’re going to afford your payments, and if you think you may run into trouble, consult a consumer credit counseling agency.

Finally, take care of your mental and physical health. Eat well and exercise to stay fit and lower stress. Get proper sleep, and stay away from drugs and alcohol. You can also join a support group, keep a journal or seek counseling. Most of all, take time to enjoy yourself (while keeping your budget in mind), and stay determined in your job search, following up on every possible lead.


Wrongful Termination

Experts estimate that 150,000 people face wrongful termination each year in the United States [source: ACLU]. Wrongful termination is an allegation that an employee was fired without proper cause or on discriminatory grounds. Many such allegations result in wrongful termination or wrongful discharge lawsuits, in which plaintiffs often sue for lost wages, compensatory damages, attorney’s fees, punitive damages, reinstatement or required reasonable accommodations.

There are many potential reasons for a wrongful termination suit. If you believe you were fired for any of the following circumstances, you may have a right to sue [source: FindLaw]:


  • Before the end of a contract
  • Reporting a supervisor or “whistle-blowing”
  • Refusing to do something illegal or to work in illegal conditions
  • For reasons that appear to violate federal or state anti-discrimination laws (for example, race or gender)
  • For becoming pregnant or having a medical condition related to pregnancy
  • Taking time off to vote or perform military service
  • Without receiving sufficient warning prior to termination, as specified in the employee’s contract or personnel handbook
  • Refusing to submit to a lie detector test

The Immigration Reform and Control Act bars most employers from firing an employee based on alien status, as long as that person is legally allowed to work in the U.S. [source: FindLaw].

Whether considering a wrongful termination suit for one of the above reasons or any other, it’s best to consult an employment lawyer.


Unemployment Insurance

Each state has its own system of Unemployment Insurance (UI) that provides benefits to those who qualify. The main rule with collecting UI benefits is that you must be ready, able and willing to work. Most states allow you to apply online or by phone as well as in person. If you’re in a union, they may be able to help you or assign you a representative dealing with Unemployment Insurance. Generally, you should apply for UI benefits immediately after losing your job. Usually you won’t be able to collect benefits retroactively -- despite your unemployment status and UI eligibility -- so it’s best to apply as early as possible [source: Workplace Fairness].

The UI application will require you to fill out a variety of personal information, including contact numbers, home address, social security number and contact information for employers during the previous 18 months.


In the application, be honest about why you are unemployed. If the unemployment commission determines you lied, you can be face penalties or even criminal charges [source: Workplace Fairness]. Truthfully state why you lost your job, and if possible, mention how you tried to correct the situation or to maintain your job. If you disagree with the reason why you were fired or with some accusation your employer made, specify that in your initial application. Someone from the Unemployment Insurance system may ask you more detailed questions after they receive your initial application.

Unemployment Insurance is primarily designed for those who were laid off or lost a job through no fault of their own. Your company should present you with a severance letter that states the reason for termination and any severance payment you have been given. Bring this letter with you to your unemployment office. If it states the reason for termination as "lack of work" (i.e. laid off), this will help you start collecting benefits sooner, since the office won't have to go back to your former company for verification. However, if you worked for a nonprofit and got laid off, there is a chance that you won't be able to collect unemployment, but you may be able to get “direct reimbursement” from your former employer [source: Russell].

If you quit your job, you are not usually eligible for UI benefits, unless you quit for “good cause.” Unsafe working conditions, an employer refusing to pay wages, abuse or harassment, or a request by an employer to do something illegal may all constitute good cause, but you must give the employer a chance to remedy the situation before quitting. If covered by a collective bargaining agreement (CBA), you should ask your union whether refusing to work under those conditions is allowed under the agreement and if they can help with the situation [source: Workplace Fairness].

If you quit for certain personal reasons, such as taking care of a baby or sick relative or moving to a new city to be with a spouse, you may be eligible for UI benefits, but you still must be ready, willing and able to work. If medical problems caused you to quit, you may still be able to collect UI benefits if you are able to do light work or to work in a related field.

Once you are receiving UI benefits, continue filing the necessary paperwork and claims weekly or bi-weekly, depending on what your state's unemployment commission requires [source: Workplace Fairness]. You will have to show that you’re actively seeking work, usually by checking in with a UI representative or online system. Keep copies of your resume, job applications and interview schedule as proof that you’re actively job-hunting. If you have any questions about your UI benefits or the application process, contact your state’s unemployment commission.

For more information about unemployment and related topics, check out the links on the next page.


Lots More Information

Related Articles

More Great Links

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  • Bruce, Mary. “White House Estimates 9 Percent Unemployment Through Next Year's Election.” ABC News. September 1, 2011. (September 15, 2011)
  • COBRA Insurance. "Cobra Insurance FAQ's." (September 15, 2011)
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