Wednesday, April 21, 2010

Does Extended UI Benefits Increase Unemployment?

Despite the common idea that extending unemployment benefits will result in the unemployed lasting for longer periods of time, recent data analysis indicates that extending unemployment insurance benefits has only a modest effect on the rate of unemployment. While there are always a few who will seek to take advantage of government programs, there can be a good case made that extended benefits are needed during the severe labor market downturn. See the following article from Economist's View.

Republicans have been worried that extensions to Unemployment Insurance are causing higher levels of unemployment, but Rob Valletta and Katherine Kuang of the San Francisco Fed say those worries are unfounded.

Extended Unemployment and UI Benefits, by Rob Valletta and Katherine Kuang, Economic Letter, FRB SF: Unemployment duration, or the amount of time that an individual remains unemployed, reached new historical highs in 2009. The spike in unemployment duration is among the most compelling indicators of the severe economic dislocation caused by the recent recession. At the same time, however, following congressional legislation that temporarily extended eligibility for unemployment insurance (UI) benefits, the maximum period for UI claims also reached new historical highs. As of late 2009, individuals in most states were eligible for up to 99 weeks, or nearly two years, of UI benefits, well above the normal limit of six months. The question arises whether this extended availability of UI benefits has contributed to a lengthening of unemployment spells because jobless workers are staying in the labor force longer in order to continue collecting benefits. Such a dynamic could raise the unemployment rate. However, analysis of data on unemployed individuals decomposed by their reason for unemployment, which affects their eligibility for UI, suggests that extended UI benefits have had a relatively modest effect. We calculate that, in the absence of extended benefits, the unemployment rate would have been about 0.4 percentage point lower at the end of 2009, or about 9.6% rather than 10.0%. ... It is not surprising that the disincentive effects of UI would loom small in the midst of the most severe labor market downturn since the Great Depression. ...
When I was a kid in school, I can remember how mad I'd get when the misbehavior of one one or two people would cause the whole class to lose privileges. I hated that.

No matter how hard we try to stop it, people are going to find ways to take advantage of government programs. There will always be one or two people in every "class" who will misbehave, and people opposed to programs will turn them into very public examples of how these programs fail. But these few examples shouldn't stop us from doing the right thing and helping all the people who use these programs as intended, people who rely upon them when, say, they lose jobs due to a poor economy.

The problem isn't lazy workers taking advantage of government programs as some would have you believe. Job openings are few and far between, and until that changes workers will continue to have difficulty finding employment.

This article has been republished from Mark Thoma's blog, Economist's View.

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