Extend those unemployment benefits already

Yesterday 1.3 million jobless Americans lost their unemployment benefits, thanks to Congress’s unwillingness or inability to extend long-term unemployment insurance funding. The number could rise to 4.9 million within the next year.

Extending the unemployment benefits is a no-brainer at a time when long-term unemployment rates are still higher than in any previous postwar recession, when there are three unemployed people for every job vacancy, and the money paid out in unemployment benefits quickly gets spent, thereby boosting the still-weak economy. Support for the extension is strong among the public, liberal public policy groups, and even some prominent conservatives. But Congressional Republicans continue to block it.

I’ve heard four arguments against extending unemployment benefits beyond the current 26-week threshold.

1. It encourages idleness.

Econ 101 does indeed tell us that, other things equal, anything you do to make people’s unemployment experience more pleasant, like giving them cash, reduces their incentive to take a job. Which is which unemployment benefits normally expire after 26 weeks. But these are not normal times, not with the long-term unemployment rate at 2.6%, a higher level than in any previous recession or recovery since WW2. Yet in all of those other recessions, whenever long-term unemployment got anywhere near this high, unemployment benefits were extended. If you cut off long-term unemployment benefits, some of the long-term jobless would find jobs, but the vast majority would not, unless a million or so vacancies could somehow materialize too and employers suddenly developed a preference for long-time jobless applicants. (Currently employers have a strong preference for applicants who are not unemployed, followed by those who have only been out of work for a short spell.)

A recent empirical study published by the Brookings Institution estimates that in the absence of extended unemployment benefits the unemployment rate would be about 0.1 – 0.5% lower, which we will note that is a small fraction of the current 2.6% long-term jobless rate. And the author notes that about half of that improvement would come not from the long-term unemployed rejoining the work force but from currently employed people sticking with their jobs because of the worsening of the alternative. So the estimate becomes just 0.05% – 0.25% of the long-term jobless who would rejoin the work force if benefits were cut off. Do the math, and the estimated ratio of still-unemployed people without benefits to newly re-employed is in the range of 9-to-1 to 51-to-1. Rather high pain-to-gain ratios.

2. It hurts the long-term unemployed by lengthening their term of unemployment even further, making it even harder for them to find a job.

While it’s true that employers are reluctant to hire the long-term unemployed, this argument makes the same false assumption as in (1.), namely that the jobs are out there and the long-term unemployed just aren’t looking hard enough or aren’t willing to take them. A 3-to-1 unemployed-to-vacancies ratio should give the lie to that. And the ratio of long-term unemployed to vacancies that long-term unemployed people have a realistic shot at is surely much higher.

3. It’s no longer needed, what with the economy’s recent improvement. Real GDP grew 4.1% in the last quarter, and the unemployment rate is down to 7%. 

Those numbers have dominated the recent headlines, but they’re irrelevant here. Thanks to growing productivity, real GDP is now higher than it was before the recession, but with two million fewer workers. And as I seem to write in every post, the standard unemployment rate is largely irrelevant, when millions of jobless Americans have given up looking for work, millions more have left or avoided the labor force entirely, and other millions are involuntarily working part-time because they can’t find full-time work. More relevant numbers are the 13.2% comprehensive (U-6) unemployment rate; the 58.6% employment/population ratio, which has not improved since the depth of the recession; and, of course, the 2.6% rate of long-term (27+ weeks) unemployment as a percentage of the labor force. The economy’s recent good news has largely bypassed the long-term unemployed. The best that can be said about the long-term unemployment rate is that it’s been coming down, from about 4.3% four years ago, but even then it’s still as high as at any point since the 1940s.

4. It costs money.

This is the silliest objection of all, since the amount in question ($24 billion next year) is not only less than 0.7% of the budget, but a lot of the money would be returned to the federal, state, and local government in the form of tax revenues as the unemployed spend that income. Unemployed people can be counted on to spend nearly all of their benefits, especially seeing as the benefits are small compared to their previous income; the benefits level varies by state, with most states in the range of 25-45%. While unemployment benefits cost money, so do food, clothing, shelter, utilities, and all the other necessities and commitments that people have. They’re called benefits because they provide very tangible benefits to the people who receive them, far in excess of their cost to the taxpayers. (And it should be noted that the unemployed already paid into the system when they were working and will do so again if and when they return to work.)

Whatever your opinion on this issue, there should be no doubting that long-term unemployment is one of the central problems of our time. The long-term unemployed are almost 40% of the total unemployed, which is roughly twice as high as in any previous postwar recession (see graph).

L-t-unempl-as-pct-of-total-unempl

While extended unemployment benefits do more good than harm, what we need even more are jobs. Government job creation is a non-starter in Congress and apparently with the public as well, so once again we are left with the Micawber-like hope that something will turn up in the private sector.

 

Special no-prize to the first person who can connect that last line to this video of Keith Richards:

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8 Responses to “Extend those unemployment benefits already”

  1. Chris Says:

    I respectfully disagree with a lot of the argument for extending the benefits. First, the previous extension of benefits has been considered by some experts to have actually prolonged the current recession/ depression, so using the argument raised in this blog entry, it does not make sense to extend it further. Giving cash does encourage idleness – let’s face it: humans are procrastinators by nature (those in education should be well aware of this when assignments come due), so delaying decisions to the end of the benefits likely delays – but does not alter – the options for a majority of them. People are actually far more resilient and adaptable than the article implies, and this is demonstrated in economies that were once very generous with their assistance but have made difficult modifications to long-term benefits such as Sweden and Denmark. Are there any known studies to see how long it takes for the unemployed in fields where the jobless outnumber the positions available to adjust their expectations (e.g., taking a lower-paying wage or return for retraining, which the previous extensions were supposed to provide, is necessary)? The 0.5% drop in unemployment through the Brookings Institution empirical study might seem unsubstantial to some, but to those approximately 1- in-14 affected unemployed families, it will mean a lot. The workforce participation rate in the US is now extremely low and nearly as low as the lowest point of the Great Depression as this article and many others point out. Extending the benefits won’t alter this at all. Moreover, an extension seems to put money into incentives that harm the participation rate instead of those that are more certain to help, such as retraining, job creation incentives, tax breaks for companies that hire the long-term employed, etc. The article discusses the 3-to-1 ratio of unemployed to vacancies, but oddly fails to address how this will be helped by extending the benefits. The argument for #4 (it costs money) is the most unusual of the four raised, mentioning that much of the money given in benefits comes back to local jurisdictions as a “plus”? I doubt many local jurisdictions will be counting on this windfall, so it’s effects are extremely minor, but spending 0.7% of the budget is not minor. Moreover, wouldn’t those local jurisdictions be better served by people earning more than these unemployment checks provide (but perhaps a bit less than their previous jobs did)? Extending the benefits does not address any real fixes needed, but may obscure them, making those that need retraining or who may benefit from other types of incentives worse off.

  2. Skeptic Says:

    Taking a step back, just consider the law of supply and demand for labor. Every year about a million new legal immigrants are added. In addition, there are already over 10 million illegal aliens in this country.

    If we had a functional government we would be like other countries and cut these numbers until employment rates went below a certain threshold.

    The two major US political parties don’t even address the topic, nor does the complicit news media, so don’t expect any improvements anytime soon – there are no incentives for anything to change.

  3. Ranjit Says:

    Of note: That projection 0.25% reduction in long-term unemployment if you cut off the benefits might not be from them finally finding jobs, but rather from them stopping looking:

    ‘There is no evidence in my study, and almost no evidence elsewhere, that cutting unemployment insurance would increase employment much at all. There is some evidence that it would lower the unemployment rate, but only because people would give up looking for work, and no longer count as unemployed.’
    – economist Rand Ghayad, author of at least two empirical studies of this issue
    http://www.theatlantic.com/business/archive/2013/12/no-rand-paul-theres-no-reason-to-cut-unemployment-benefits/282698/

  4. Peter Willmon Says:

    I have actually experienced unemployment and have a couple of comments. I’ve worked 30 years and never had employment issues until 2008. I’m a carpenter and lost 3 jobs between 2008 and 2011. The first time I did network and only lost 3 days of wages and never filed unemployment. The next two jobs eventually tanked. I was on state only unemployment the first time finding a job after 5 months. The second company had lay-offs and I needed 7 months to find my current job. So I did dip into a month of extensions from the federal government.

    In Maryland the benefit is (was) 51% of previous wage up to something under $400 weekly. That is subject to federal and state income taxes. For me my income was less than half during that period. I did take lower paying jobs to get back to work. I never did try to apply for something like retail or food service. They probably wouldn’t hire me anyhow. At that time I went 3 months without even a response to a resume or application. In 2009 there were literally hundreds of applicants for any one job in my field. I had one guy ready to hire me said he would have but believed I would leave soon to return to my previous employment (likely true). The unemployment insurance helped prevent a long term economic disaster in my case

    Ranjit was spot on in many points. I’m not sure how the same job market is now. But the jobs simply were NOT there. I do know from others that currently, at least in Maryland, the benefits now have strings attached. I think that was a prudent change. I don’t think just cutting people off is prudent. Every single penny was spent on food, gas, bills, or went to income taxes. It helped me greatly and now I have been paying back into the system for a solid two years.

    As to networking… I tapped that out the first time. Cold calls and answering ads took a long time to yield employment. I really do discredit the networking notion. Perhaps it’s valid in better economic times. In fact that was how I got most of my jobs ever.

  5. Mark E. Says:

    Why not try it?…and when it fails miserably, the GOP will only have themselves to blame for losing more seats in Congress. (See pandering to the Tea Party). As Ranjit has stated, this is not a recession, but a depression, because the ship isn’t going to right itself on its own. Our government needs to intervene, but smarter, and on behalf of the people, not the job “creators”. The government is in large part responsible for prolonging this as they have mainly functioned to keep the already rich afloat atop their island paradises.

  6. Richard M. Says:

    The real question is “shouldn’t we focus our money and efforts to do something more beneficial for the long-term unemployed?” Democrats want to side-step this issue claiming Republicans would never go for any other form of change. Extending cash payments for those who are unemployed long-term seems to be a continuation of a government program that may be helpful in the short run, but is more costly than beneficial for those people who have gone through 99 weeks of unemployment and have still not found a new job. Something else needs to be tried rather than just continuing to do what doesn’t work. (Isn’t continuing to do the same thing but expecting a different result the definition of insanity?).

  7. Richard M. Says:

    When a person is on UI for two or three years or more it ceases to be unemployment insurance. At that point, s/he is simply on the dole. And, we have programs, such as SNAP and WIC, that speak to that problem. We do not need to pervert UI into yet another entitlement that lasts forever.
    Six months in this economy is probably too short for UI. But, several years is clearly too long. The extended UI was an emergency measure and the emergency, as measured by the (Obama) government’s own statistic has passed. This is the problem with so much of federal spending — once the trough is slopped, for whatever reason, there is an insistent demand to keep emptying buckets into it. It is the reason some of us are skeptical of our own government.
    It is difficult today finding a job if one has no skills or education. On the other hand, for college grads the unemployment rate is around 3%. In other words, working for a competitive advantage pays off.
    If we continue to just write checks to each other than we are well on our way to becoming similar to that ancient civilization, the economy of which was based on its citizens swapping dirty laundry to be washed.

  8. skeptic Says:

    Richard’s comments seem right on the mark to me.

    In terms of Mark’s comment on losing seats in congress it’s the Dems who are rightfully panicking, and have a realistic chance of losing the Senate. The Libertarian wing of the Tea Party has made enormous strides in influencing politics. Opposing and helping prevent the war in Syria, fighting against the NSA abuses, legalization of pot, protecting the 2nd amendment, and pushing for fiscal responsibility in the government.

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