Unemployment Checks: Keep ‘Em Coming
The U.S. government should stimulate the economy by extending unemployment benefits past the traditional six months. Pro or con?
Pro: The Jobless Need Help
In April, employers shed jobs for the fourth consecutive month, bringing total losses this year as of the end of April to 260,000. With only one job opening for every two jobless workers, the ranks of the officially unemployed grew by almost 800,000 over the past year. New jobless benefits claims have reached levels that surpass the surge in claims when Hurricane Katrina washed ashore. With this steadily eroding economy, there is an urgent need to extend temporary federal unemployment benefits to jobless workers running out of state benefits without finding work.
Indeed, the situation is worse on almost every count than when the last two recessions began. Long-term unemployment is greater, now more than 17% of all unemployed workers. Twice as many workers are long-term unemployed, now up to 1.3 million workers, and workers are running out of the limited 26 weeks of state unemployment benefits at far higher rates—now up to 36% of all workers who collect an unemployment check, according to the Bureau of Labor Statistics.
If Congress does not extend jobless benefits, more than 3 million workers in the next year will use up their state assistance without any additional support.
With prices and unemployment rising and jobs and wages falling, workers feel the economy is already in recession. So do 7 of 10 economic forecasters recently surveyed by The Wall Street Journal. And many notable economists, including Martin Feldstein and Joseph Stiglitz warn of an especially severe downturn.
Extending unemployment benefits now makes good economic sense and is the right thing to do for jobless workers. The jobless spend their benefits quickly, and every dollar in benefits generates $2.15 in gross domestic product growth. Of special importance today, unemployment benefits reduce by roughly half the likelihood recipients will be forced to sell their homes, according to the Labor Dept. And unemployment benefits make it less likely that long-term jobless workers will fall into poverty.
Congress and the President should not wait until the recession deepens further to provide the support the economy and jobless workers need to navigate these troubling waters.
Con: Shooting Uncle Sam in the Foot
Extended unemployment benefits are targeted toward the long-term unemployed. The long-term unemployment rate, however, has been stable for the past two years and is below its peak following the 2001 recession, according to Labor Dept. statistics. Other Labor figures show the national unemployment rate in March was 5.1%, well below its long-term average of 5.5%. Weekly initial jobless claims have also been fairly stable since October, 2005, much lower than the levels immediately following the 2001 recession.
Current data suggest few unemployed workers stay unemployed for the 26 weeks necessary to begin collecting extended unemployment benefits. The average unemployment spell now lasts 16.2 weeks, according to the Labor Dept. Therefore, paying workers to stay unemployed longer will do little to jump-start the economy. Extending unemployment benefits in the current economic environment makes little sense.
Those in favor of extending benefits cite the multiplier effect they have on consumer spending and GDP growth. This reasoning is flawed. It fails to account for the fact that when the government has to borrow money to finance new unemployment benefits, the individuals it borrows from have less money to spend or invest elsewhere in the economy, which offsets the stimulus.
In fact, decades of economic research suggests that in the long term, unemployment insurance could lead to moral hazard issues. An increase in unemployment benefits could reduce labor supply and increase unemployment, therefore slowing down the economy. Workers with unemployment benefits have a reduced incentive to search for work, especially since benefits are set to pay about 50% of the wage earned by the worker in his or her most recent job. According to a Journal of Public Economics study, each additional week the government extends unemployment benefits prolongs the length of time the average worker stays unemployed by 0.16 to 0.20 weeks.
Hence extending the period beyond the 26 weeks already mandated would create undesirable incentives for individuals to delay returning to work. As noted by Harvard economist Martin Feldstein: “That would lower earnings and total spending.” This is hardly the stimulus the economy needs at this point.