Commentary | Budget Taxes and Public Investment

Extending unemployment insurance is the fiscally responsible thing to do

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Unemployment insurance (UI) not only provides a vital safety net to workers who lose their jobs, it also serves as a valuable stimulus, which puts money back into the economy and helps create jobs during recessions.  Yet at a time of the worst job crisis in a generation, with unemployment at 9.9%, more than five unemployed workers for every job opening, and record levels of long-term unemployment, millions of workers are at risk of losing their UI benefits.

On May 26, EPI hosted Long-Term Unemployment: Causes, Consequences, and Solutions, a panel featuring several leading labor market economists discussing the unprecedented rates of long-term unemployment and showing why extending UI benefits to those workers would help them maintain some consumption during a time of economic distress and help create more jobs. The economists provided an array of evidence disputing the contention that extending unemployment insurance raises the unemployment rate in any meaningful way.

“We are in a situation where unemployment benefits could have a lot of value,” said Jesse Rothstein, chief economist at the U.S. Department of Labor, who described the current 9.9% rate of unemployment as “absurdly high.” Rothstein cited a study from the Congressional Budget Office that ranked unemployment insurance as the most effective form of economic stimulus and explained, “If you give money to someone who is unemployed, they are going to spend it the next day.” Rothstein pointed out that the rise of long-term unemployment is due to a severe shortfall in consumer demand and an economy producing far less than its potential.

While some critics maintain that unemployment insurance provides incentives for people not to look for work, data suggest that the money provided goes to cover basic expenses such as food. Raj Chetty, professor of economics at Harvard University who also spoke on the panel, said that the median unemployed person has less than $250 in liquid savings at the time of job loss. He also presented a chart showing a sharp drop in food consumption when a person loses his job. This not only supports other research showing that prolonged unemployment impacts health and even mortality rates, particularly when there is not an adequate safety net in place, but it also helps explain why unemployment insurance dollars are quickly put back into local communities.

Congress has responded to the severe jobs crisis with multiple extensions to the standard 26 weeks of unemployment insurance. In states with the highest rates of unemployment, unemployed workers can collect up to 99 weeks of unemployment insurance. However, without another extension, many of those workers could begin to exhaust those benefits in June. EPI Economist Heidi Shierholz, speaking on the panel, offered some sobering numbers. She said 8.2 million workers could lose benefits this year without a further extension, such as that contained in The American Jobs and Closing Tax Loopholes Act of 2010. If the extension is preserved, she said, the number of unemployed likely to lose benefits this year would fall to 3.3 million.

The fact that this debate over extending unemployment benefits comes at a time when the economy is once again creating jobs is a reflection of the large number of jobs that have been lost and the length of time it will take – even under a best-case scenario – to return to full employment. “We’ve lost jobs, sometimes at a breathless pace,” said Shierholz, who writes EPI’s analysis of the monthly jobs data.

Some numbers: About 7.8 million jobs have been lost since the recession began in December 2007. Over that same time, the country should have been adding about 100,000 jobs per month or about 2.9 million in total, just to keep up with population growth. As a result, today the United States is short 10.7 million jobs. Shierholz said the April jobs report showing 290,000 new jobs was very good news, but that much more was needed. “Even if we add 290,000 more jobs every month, it will take five years to return to the pre-recession rate of unemployment.”

The Labor Department’s Rothstein argued that the current size of the jobs shortage made a much stronger case for extended unemployment insurance, to support both the jobless and the overall economy. “I don’t think there’s anybody advocating allowing the unemployed to receive 99 weeks of benefits in normal times,” he said. “But if there really are no jobs, that cost (of providing unemployment insurance) goes away.”

The so-called cost Rothstein referred to was not the actual cost of unemployment benefits but what critics have often argued is a disincentive cost, which effectively discourages unemployed workers from looking for jobs. Contrary to that argument, he stressed that even in more normal economic times, research has found only a slim disincentive effect. In times of severe jobs crisis, there is good reason to think that extending unemployment insurance actually increases job search efforts, since in order to qualify for benefits, a person must be actively looking for a job. “The shortage of job searching is not the problem,” he said. “The problem is a shortage of jobs.”

Chetty explained how recent evidence in the economic literature shows that the work disincentive effects of unemployment insurance are much smaller than what has sometimes been implied by previous estimates. He said that most of the increase in unemployment duration due to unemployment insurance is not a negative effect generated by distorted work incentives, but the benefit that having cash-in-hand provides in the form of reduced chaos in the lives of cash-strapped families. He argued that even in normal times, the benefits of UI are now understood to be large relative to the work disincentive costs. Furthermore, the benefits of UI are likely to be larger in this deep, long downturn, and work disincentive effects are likely to be smaller, so weighing costs against benefits, extending benefits further in the current economy would significantly increase economic welfare.

Till von Wachter, associate professor of economics at Columbia University, offered more evidence that providing unemployment insurance helps keep jobless workers in the labor force and improving the likelihood of them returning to work once the job market improves. “A high fraction of the unemployed who lose their benefits will end up out of the labor force,” he said noting that many of these discouraged workers apply for permanent Social Security disability. Once on disability, very few workers re-enter the labor force. Therefore, providing UI can be fiscally responsible, argued von Wachter.

And, when measuring the total cost of unemployment, the costs of these people who drop out of the labor force altogether must be considered, von Wachter said. They may no longer be collecting unemployment insurance, but they will likely be receiving disability – and possibly Medicare benefits as well – for a lifetime, with little or no prospect of working, or paying taxes, again. Considering those outcomes, providing unemployment insurance is t
he fiscally responsible thing to do, said von Wachter.