The Economic Follies of Extending Unemployment Insurance

December 13, 2013

By Casey Given

In an interesting twist to Congress’ ongoing budget negotiations for the 2014 fiscal year, President Obama called on Capitol Hill last Saturday to extend federal unemployment insurance (UI) benefits set to expire January 1st. House Minority Leader Nancy Pelosi went so far as to call for no budget deal without unemployment benefits at one point this past week. She later walked her statement back, saying that although she would like to see a UI extension in the budget deal, she would also accept it in separate, standalone legislation. This means that the forthcoming budget deal from the conference committee led by Congressional Budget chairs Paul Ryan and Patty Murray may be used as a vehicle to extend the UI benefits. The fiscal policy implications are concerning.

Here’s some important background on the program. As a jointly run state-federal program, unemployed Americans have historically been eligible for UI compensation for 26 weeks depending on which state they live in. However, after the economic downturn of 2008, Congress enacted two federal extensions that nearly quadrupled the maximum amount of weeks for UI eligibility to 99.

One of the two, the Extended Benefits program, has already expired, decreasing the maximum to 73 weeks, where it sits today. The second extension, the Emergency Unemployment Compensation program, is scheduled to expire in January 1, hence the President’s urgency to include its renewal in the continuing resolution currently under negotiation.

Unsurprisingly, the President and his allies in Congress are playing upon the holiday season to make his case, spewing syrupy rhetoric that would bring a tear to Tiny Tim’s eye: “The holiday season is a time for remembering the bonds we share, and our obligations to one another as human beings.” If his sentiments aren’t persuasive enough, the President and congressional progressives are also employing a number of economic arguments making the case the extending UI would be an economic stimulus: “When people have money to spend on basic necessities, that means more customers for our businesses and, ultimately, more jobs.” To bolster their case, the Congressional Budget Office and Council of Economic Advisors have both released studies this month claiming that failing to extend UI would result in the loss of thousands of jobs next year.

Unfortunately for the President and House Minority Leader Pelosi, basic economic contradicts their political push. A vast literature of analyses have shown that UI creates the same perverse incentives as any other welfare program, prolonging the time it takes employees to find work and discouraging employers to hire new help through increased taxation.

Ironically, the most damning studies come from President’s Obama’s own economic czar. Alan Krueger, the sitting Chairman of the Council of Economic Advisors, has published no less than three studies in the past ten years exposing UI’s unintended consequences. One 2002 article for the National Bureau of Economic Research concluded that “[t]he empirical work on unemployment insurance (UI) and workers’ compensation (WC) insurance finds that the programs tend to increase the length of time employees spend out of work.” Another 2008 report for the Institute for the Study of Labor concluded, “job search is inversely related to the generosity of unemployment benefits.” Finally, his latest study in 2011 for the Brooking Institution concluded that unemployed individuals search for jobs less, sleep more, and become more depressed the longer they are on UI.

Unsurprisingly, Kruger’s studies show UI recipients experience the same welfare incentives as many other government programs. With unemployed individuals currently eligible for up to a year and half of free checks from the government of approximately $300 a week, it’s no surprise that so many are in no rush to find a job. In fact, another famous study by Lawrence Katz and Bruce Meyer, respectively of Harvard and Northwestern University, found sharp increases in reemployment right before UI benefits run out.

However, unnecessary extensions of UI don’t only impact unemployed people. It causes employers to face higher taxes, too, which discourages them from hiring new employees. As The Wall Street Journal’s editorial board explains:

At least 24 states have been forced to raise this tax since 2010 and the Labor Department says it will rise again in 13 states to repay $20 billion in loans and interest they owe the feds for helping to finance state-funded benefits. This federal tax is applied to 0.6% of a worker’s first $7,000 of annual wages. The rate rises automatically by 0.3% for every year states fail to repay their unemployment insurance loans from Uncle Sam.

In some states like Minnesota, UI taxes can exceed $3,000 per worker according to the Tax Foundation. In short, extending UI hurts the very same unemployed workers it is supposed to help. Instead of providing employees temporary relief after being laid off to get their careers back on track, it only encourages them to remain unemployed. Instead of encouraging employees to hire more help during tough economic times, it only encourages them to lay off more workers to make ends meet. As such, Congress should reject the President’s faulty economics for the sake of the American economy and her struggling workers.

Like this post? Chip in $5 to AFP