The U.S. unemployment insurance (UI) system operates as a federal-state partner- ship, where states have considerable autonomy to decide on specific rules. While it could allow states to efficiently tailor their UI generosity level to local economic condi- tions, it could also generate racial inequality as states with a larger Black population appear to set stricter rules. Do the differences in state UI rules create racial inequal- ity, and are they are efficient? From random audits on UI claims, we build a unique representative dataset of UI claimants in all states, including information on race and on the individual work history variables used by the administration to determine UI rights (e.g., the earnings before job loss and the reason for separation from prior employer). We document a large gap in the UI entitlements of Black and white un- employed workers filing a new claim. Compared to white claimants, Black claimants receive an 18.3% lower replacement rate (i.e., benefits relative to prior wage, includ- ing zero benefits for denied claimants). In principle, the replacement rate of each claimant entirely depends on her state and her work history—which we can observe. We are hence in a unique position to identify the contribution of each factor to the racial gap: after accounting for Black-white differences in work history, we find that differences in state rules create an 8.4% Black-white gap in replacement rate (i.e., close to half of the overall gap). Finally, using a standard welfare calculation, we show that states with the largest Black population would gain the most from having marginally more generous UI rules. Altogether, our results highlight that disparate UI state rules both create racial inequality and inefficiency.