Report | Budget, Taxes, and Public Investment

Two for the Price of One

Issue Brief #281

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The expiration of the special unemployment compensation provisions enacted earlier in the recession has brought the problems of long-term unemployment and the role of unemployment compensation to the fore.

The June unemployment rate was 9.5%, and 45.5% of the unemployed have been seeking work for more than six months. Roughly a quarter of the unemployed have been jobless for more than a year. In this context, more than 2 million unemployed workers have already lost their unemployment insurance benefits because of the failure to renew the program that provides extended benefits to the long-term unemployed. This is unfortunate because providing unemployment benefits during a recession fulfills two important national needs: assisting those most hurt by the recession and generating jobs in the midst of a deep downturn.

First, unemployment benefits help cushion the blow of unemployment for millions of unemployed workers. This recession has caused the most job loss by far of any recession in the last seven decades. During the first half of 2010, unemployment averaged nearly 15 million workers, and that will likely remain the case for the rest of the year. However, the number of people experiencing unemployment will be far greater since some unemployed will gain employment and some of those employed now will become unemployed. For instance, in 2008 (the year for which we have the latest data) there were 8.9 million people unemployed on average.

However, over the course of the year, 21.2 million people experienced unemployment, a number 2.38 times the level of unemployment in the average month. This means that in 2010 we might have 35.0 million people experience unemployment at some point during the year. Given that there have been at least five unemployed workers for every job opening in recent months, many of those who are unemployed have and will continue to need assistance to weather this economic calamity. For the week ending May 29, 10.2 million people were receiving unemployment insurance benefits, over 50% of whom had exhausted regular state benefits and were receiving benefits under provisions that were included in the Recovery Act. This is a crucial lifeline to those families most hurt by the downturn.

Second, providing assistance to the unemployed is a very effective mechanism for injecting spending into the economy and generating jobs. The reasoning is simple. Those who are unemployed are experiencing a major challenge to maintain anything close to their regular standard of living, so any assistance they receive will be spent on necessities, not saved. The spending that results as the unemployed pay their rent, buy groceries, and so on saves and creates jobs throughout the economy.

This paper provides estimates of the impact of the unemployment compensation system on jobs. We consider the impact of both the special provisions included in the Recovery Act (in particular, the extension of benefits beyond the normal 26 weeks, the expansion of weekly benefits by $25, and subsidies to help unemployed workers cover the cost of health insurance under COBRA) and the natural expansion of regular unemployment benefits as the number of unemployed workers grew in the recession.