Eight Things We Know About Extending Unemployment Insurance

In the aftermath of the super committee’s collapse, Democrats are going to have to fight to get unemployment insurance benefits extended. This is one of many “orphan programs” left behind that are set to expire at the end of the year. Since it looks like there is going to be a debate over whether or not to extend the benefits, what can we say with certainty about the costs and benefits of extending unemployment benefits?

1. Even considering the cost, unemployment benefits are a deal. Extending unemployment benefits would cost around $44 billion for one year. (Source: CBO.) Specifically, “CBO estimates…$44.1 billion would stem from the one-year extension of EUC and EB provisions. That extension would allow people who exhaust their regular unemployment compensation during calendar year 2012 to receive up to 53 weeks of EUC, and would make it easier for states to provide up to an additional 20 weeks of benefits under EB (depending on the states’ laws and unemployment rates).” Given that interest rates are so low, and real interest rates are even negative, this is a great value.

2. Without an extension, GDP will decline. The loss of not having that $44 billion pumped into the economy would cause at least a 0.3 percent decline in GDP in 2012. (Source: JPMorgan Chase & Co. chief U.S. economist Michael Feroli.)

3. Given spending multipliers, this will have a ripple effect. Because of a government spending multipler, that 0.3 percent decline is more like 0.5 percent, with a subsequent, significant impact on jobs. (Source: EPI.)

Since we are in a liquidity trap, where monetary policy is made significantly more difficult by a zero lower bound, then there’s a multipler to government spending. Unemployment benefits in particular have a good bang-for-the-buck effect. Heidi Shierholz and Lawrence Mishel of EPI argued this with their chart:

4. This is about more than just GDP; it’s about keeping people afloat. The stakes go beyond economic aggregates. Unemployment insurance has kept 3.2 million people out of poverty in 2010.This includes nearly a million children. (Source: Census, h/t EPI.)

That’s a lot of jobs gained and a lot of misery avoided, with or without a multipler! But those jobs also increase demand. Won’t unemployment insurance decrease the supply of labor?

5. The potential increase in unemployment from extending benefits is small.Previous credible estimates of the effects of unemployment insurance in this recession have shown that they “increased the overall unemployment rate 0.4 to 0.8 percentage points,” a point where it is still a great tradeoff. (Source: Federal Reserve Bank of San Francisco.)

One way to estimate this is to take job losers, who are eligible for UI, and measure their duration against quits, who are not eligible for UI. The San Francisco Fed source above does this, and finds the following chart:

Even given these figures, I still think extending benefits is a fantastic idea. For more whether it is a great tradeoff, see this post from last year from WSJ’s Kelly Evans and my somewhat critical response.

6. And even those figures may be inflated. These results are found to be exaggerated by a better, more current study, which finds “UI benefit extensions raised the unemployment rate by only about 0.2–0.6 percentage points.” (Source: Jesse Rothstein.) This study uses the conceptual method above but goes an extra step to break UI down by state, over time, and with individual characteristics.

There are a handful of studies that find a 2%+ increase in unemployment don’t use any of the control techniques mentioned above. (Example: Barro’s WSJ editorial.) Indeed, what they all essentially do is look backwards, to data and studies from the 1980s and 1990s, and project those numbers into our current Great Recession. As Rothstein mentions, these studies all “involve extrapolations from pre-recession estimates of the effect of UI durations or from pre-recession unemployment exit rates.” As a financial engineer, I respect taking data from inappropriate time periods and blindly projecting them forward without any type of diligence or attention paid to the underlying conditions. But this is not appropriate here, as we haven’t had a major crisis like this in the past 30 years.

7. Everyone is having a hard time finding a job. The overall labor market is weak, not just for the long-term unemployed. (Source: This post, from BLS data.)

8. Other considerations make the case for extending benefits.

The biggest counterarguments against extending benefits are concerns about structural unemployment and decreased work effort. The worry about a permanent, “structural” increase from UI extensions is subject to the Lucas critique. As Scott Sumner noted, “the maximum length of unemployment insurance is itself an endogenous variable. If stimulus were to sharply boost aggregate demand it is quite likely that Congress would return the UI limit to 26 weeks, as it has during previous recoveries.”

Rothstein shows that at least half of this “increase” is the result of people staying in the labor force, which is a good thing, or at least a not bad and definitely not related to the major problems. As Heidi Shierholz notes, ”less than 0.2 percentage points of the 4.4 percentage point increase in the unemployment rate over the Great Recession was due to an extension-induced reduction in the rate at which workers get a new job, which is the disincentive effect policy makers are actually concerned about. Moreover, even that may be a good thing — a small UI-induced increase in the time it takes for an unemployed worker to get a new job is an asset of the UI program to the extent that it affords unemployed workers the needed space to find a new job that matches their skills and experience.”

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14 Responses to Eight Things We Know About Extending Unemployment Insurance

  1. Milton Recht says:

    Unemployment is not a means tested program. As such, some of unemployment payments substitute for spending from savings (including IRA’s 401k’s, etc.), asset sales (stocks, bonds, extra car, jewelry, vacation home, collectibles, etc.) of the unemployed person, his/her household members, relatives or friends.

    The marginal impact on spending of an extra $44 million of unemployment payments due to the above substitution effect will be less than the full amount of benefits.

    Additionally, there are other government programs for the needy unemployed, such as food stamps, Medicaid, and accelerated Social Security for those over 62 years of age, etc.

    Extended unemployment payments can easily have close to a zero marginal impact on the economy if they mostly substitute for other available funds and other government benefits.

    • Patrick Earnest says:

      Of course, that only holds true if there are other available funds and other government benefits. Food stamps and Medicaid are means tested, and social security is only available to those over 62. Most of the long-term unemployed have already tapped into savings and other assets. Additionally, the current lack of demand (our liquidity trap) has meant a drop in asset prices, and lower wealth overall for many individuals.

      All of that is to say that the scenario you mentioned is not reflective of reality.

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  4. Warren Mosler (moslereconomics.com) has a standing recommendation that the Federal government offer a minimum-wage job to anyone who wants one, as a way for the long-term unemployed to get back on their working feet.

  5. tom says:

    Might be advantageous at this point in time to drop the minimum wage to $5.00 so that more jobs can be provided that are profitable enough to the employer they hire someone.

    In the first Great Depression they tried enforcing minimum wage and the effect was obvious. A lot of people lost their jobs. When minimum wage was increased 10% in 2008 a lot of people lost their jobs.

    You can argue that minimum wage isn’t enough but there are two considerations: it’s better than a handout for those who are stuck with the bill and while they are working they are more exposed to opportunity to develop and promote the skills that are in demand. We haven’t much demand for builders right now – perhaps they can start working in another industry and develop their skills accordingly. It’s cheaper than shoving everyone into a college degree that’s over priced and short on demand.

    And here’s something for the politicians. Working people provide tax revenue. Welfare people do not. Get people working at any price.

  6. Ted K says:

    Mike, your grammar in point 6 is shit man:
    “There are a handful of studies that find a 2%+ increase in unemployment don’t use any of the control techniques mentioned above.”

    I tried to tell you in an e-mail dude. Don’t “go Yves Smith” on us man. Dead links and 5 grammar errors per piece is a real bummer. The ability to correct (instead of argue with the easiest thread contra-opinions like Yves does) really does beat the old white paper days man—do it.

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  8. Rosemary K says:

    Milton, if I misunderstand your comment regarding the needy, I apologize, but you seem to be saying that the unemployed needy … can get assistance in other areas such as food stamps, etc. I wonder if you have ever tried, hypothetically, to qualify for assistance? Do you know what the “poverty level” is for a 2 person household (1 adult, 1 minor child) in Washington DC? (poverty level=amount of gross income that comes into the home) It’s $14,000 (rounding down). $14,000 … poverty level. I call that destitute, not poverty. Those persons living in poverty pay the same price for bath soap as those not living in poverty. Why is it to hard for people to try to visualize what would happen to them and their family if all of a sudden the maximum income into the family was $46,000? It is a sobering experience.

    • Milton Recht says:

      Rosemary K,
      I may have been too brief in my original comment. There is nothing wrong with government having safety nets for people who need them, whether it is due to poverty, unemployment, disasters, etc.

      My comment was only meant to say that justifying helping those in need because it will promote economic growth is misleading. Many people in dire circumstances, and I agree not all, will borrow from friends or relatives, will have some savings to spend or things to sell, will have friends or relatives pick up some of their expenses, etc., so that the dollar impact of additional funds allocated to the safety net program on the economy will be much less than the money spent by the program. Some of the program funds, and maybe a very large portion of it, will substitute for non-government, private funds.

      On the margin, the additional funds added to the economy and GDP will be less than the total in the program because the government funded spending will replace some private spending.

  9. Rosemary K says:

    Good morning Milton and thank you for your elaboration. I appreciate it. With all due respect, and I am being quite sincere when I say respect, I disagree with you. The availability of the options you mention (friends, relatives, etc) are for the most part not available. The official charities are tapped out. Getting in the government assistance line is cumbersome to say the least. If one is honest about what income s/he does have, they will most likely not qualify for assistance … even though s/he does not have sufficient funds to feed the family and pay bills on time. Friends and relatives? Many have lost their jobs and there ability to live without that salary is just not there. They have financed their childrens education, had weddings, and perhaps helped their children establish credit in some small way. What do they do? Sell their home? Not likely to get the price necessary to move on etc. They will not get anything but coffee money for their household items. They’ve already tapped into their 401k. They are terrified. These are educated and sophisticated people who have lived decent lives, never living extravagantly or even imagining that they are rich. They have gotten by … because the cash-in, and a good credit standing, made it possible for them to sustain the cash-out of raising a family. Because of job loss, the major salary that sustained the family is gone. I will even share a personal experience with you. I am embarrassed, even though I know that I shouldn’t be … but taking unemployment insurance payments is contrary to my work ethic and other values. My life has been the perfect storm for too long now and I can honestly say that if I did not have unemployment insurance income, I could not afford to pay any of the following fairly standard family monthly needs and pay them in full and on time: feed my son appropriately, pay for his medications (as he has some special needs that require medication, and p.s. I have very good Rx medical insurance), keep him in clothes that fit, pay for doctor office visits, pay the utilities (Pepco, water, other electrical), the car payment, insurance and upkeep and rent. I haven’t even mentioned a small amount of debt over-hang, other house-hold expenses. I am not a single mother by choice as most unfortunately my husband passed away from skin cancer that metastasized to his brain. I only share that because it is an important part of the picture. Relatives, friends, others? They are either tapped out themselves, or scared of their own future. So, here I am a well-educated (MBA) woman with 25 years of excellent work experience and no job. Even though I am an emotionally well-balanced person, I am terrified that the unemployment insurance benefits will not be extended by congress. These examples I share are real life. Thanks for the discussion.

  10. John Alexander Thacker says:

    My complaint would be that Unemployment Insurance payments are based on what someone made in his or her previous job; the concept is that it is Insurance based on premiums paid in.

    However, if the duration keeps getting extended, it ceases to be insurance paid for by premiums, and starts becoming something closer to welfare. At some point I cease seeing the logic in paying A significantly more money than B for being unemployed, simply because A used to have a better job.

    It seems regressive. At some point it becomes an argument for a better safety net for all, not helping the upper middle class maintain their lifestyle in the way to which they’ve been accustomed and giving them more than the always poor.

  11. My complaint would be that Unemployment Insurance payments are based on what someone made in his or her previous job; the concept is that it is Insurance based on premiums paid in.

    However, if the duration keeps getting extended, it ceases to be insurance paid for by premiums, and starts becoming something closer to welfare. At some point I cease seeing the logic in paying A significantly more money than B for being unemployed, simply because A used to have a better job.

    It seems regressive. At some point it becomes an argument for a better safety net for all, not helping the upper middle class maintain their lifestyle in the way to which they’ve been accustomed and giving them more than the always poor.

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