Are Unemployment Benefits a Good Idea?

By John Stang

The House is currently debating whether to extend the payroll tax cut, a senate compromise was passed yesterday.  The bill also includes extending unemployment benefits for another 99 week period, the typical timeline for benefits of this nature. As this debate happens, some new research has come to light about whether unemployment insurance (UI) is a good idea.  Typically seen as a compassionate thing to do, economists ponder its economic benefits.  On the one hand, unemployment insurance is a quick stimulus to the economy, the income families receive will be spent quickly on necessary items.  On the other hand, longterm unemployment benefits can discourage workers from looking for a job.  Here are three different perspectives on the matter.  First, Suzy Khimm at the Washington Post notes a new study on the matter:

Rothstein, a public-policy professor at the University of California-Berkeley, looks at the impact of extending unemployment benefits from 26 weeks to 99 weeks—an extension Congress has taken up in fits and starts since July 2008. He explains that extending benefits can reduce some motivation to search for work: as their benefits expire, people tend to look even more intensively for work, so extending benefits would decrease that pressure. But the overall impact on the unemployment rate is small. On the other hand, UI benefits can also encourage the jobless to continue searching for work when they otherwise may have stopped looking and dropped out of the labor force altogether.

Overall, Rothstein estimates that unemployment benefits contributed about a 0.2 percentage point increase in the overall unemployment rate between 2007 and 2009. And he estimates that the UI benefit extension that Congress is currently considering would increase the unemployment rate by 0.1 to 0.5 percent in 2012, assuming they are extended by a full year. Rothstein’s figures are lower than other recent estimates: a number of economists concluded that the UI extension raised the unemployment rate by 1 percent in 2010 and 2011, with some saying the effect is many times higher.

Josh Barro at National Review, who quotes the same study, says that the impact on overall unemployment is probably minimal, especially if you consider the employers side:

The effect on unemployment is nonzero because workers are not interchangeable cogs. A modestly tighter (but still loose) labor supply means that it will take employers somewhat longer to find suitable candidates, and the job market in some regions and professions is tight even while the overall market is loose. A 2010 study from the San Francisco Federal Reserve compared cohorts of workers that are eligible and ineligible for UI benefits, and suggested that extended UI benefits might be raising the unemployment rate by 0.4 percentage points.

Catherine Rampell at the New York Times also wants people to consider the benefits by each state:

Benefits generally don’t cover more than half of a worker’s lost wages, and they’re capped at a maximum amount. In many states, the cap is quite low relative to the cost of living and local wages, so there is probably still a strong incentive for most unemployed workers to start earning higher wages again instead of receiving benefit checks.


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