Unemployment insurance: Extension deficit disorder
The pros and cons of longer-lasting unemployment benefits
Jun 10th 2010 | WASHINGTON, DC
One of a few small mercies was that Congress had allowed them to collect unemployment insurance (UI) payments for much longer than usual. But on June 2nd even that concession expired. A mini-stimulus bill now before Congress would keep the extension in place until November. When the package passed the House on May 28th, worries about the deficit had whittled back the stimulus provisions from a proposed $79 billion to $40 billion. As The Economist went to press the Senate was debating its own version with $64 billion in stimulus, including the UI extension and additional assistance for the states’ Medicaid health programmes for the poor. To help pay for various other tax breaks in the bill, the “carried interest” of investment managers would be taxed at ordinary income rates instead of lower capital-gains rates.
America’s UI payments are usually stingier and more short-lived than their equivalents in Europe and Canada. That is not necessarily a bad thing: it is one reason why America’s unemployment rate is also usually lower. There is concern now, though, that repeated extensions of UI may have made unemployment both higher and longer-lasting. Benefits are routinely extended during recessions, but the current 99 weeks in most states, almost four times the normal 26 weeks, is another record. Some 10m people are now claiming unemployment benefits, half of them through these extensions (see chart).
In theory, more generous payments discourage some of the unemployed from taking jobs right away, while encouraging some who might have given up the search to keep looking—and thus be counted as unemployed. JPMorgan Chase estimates that this may have raised the unemployment rate by 1.5 percentage points.
But estimates of UI’s impact on unemployment may depend too much on the experience of the 1970s and 1980s. Since then, the share of the unemployed on temporary lay-offs, who were more likely to return to work when their benefits ran out, has shrunk, while the share who have lost their jobs permanently has grown. Two researchers at the Federal Reserve Bank of San Francisco found that jobless workers who qualify for benefits have been unemployed, on average, only 1.6 weeks longer than those who don’t. They reckon that the more generous payments have raised the unemployment rate by only a mere 0.4 percentage points.
Some argue that keeping people on unemployment benefits may have long-run advantages. Till von Wachter, an economist at Columbia University, notes that applications for disability insurance usually rise in recessions, and he has found that a growing share of applicants are young and potentially able to work. Keeping them on UI may improve the chances that they return to work instead of taking up disability insurance. He cautions that there is no empirical proof of that. But if true, it may mean that, for all today’s worries about the deficit, extending UI may ultimately reduce it—though not by as much as if disability insurance were reformed.
The original article is linked here.