Extending Unemployment Benefits or Extending Unemployment?

As the unemployment rate has increased in tandem with the decline in the economy, extensions to government Unemployment Insurance (UI) benefits have been proposed both to support those out of work and to provide an economic stimulus. However, the value of this program to rejuvenating the drooping economy is highly questionable, and the incentives provided to unemployed workers in the program serve only to make a bad situation worse.

The Unemployment Compensation Extension Act (H.R. 6867) expands Emergency Unemployment Compensation to 20 weeks nationwide, with 13 additional weeks of benefits for individuals in states with high unemployment rates. So, with federal funds, unemployed workers now may receive UI benefits for up to 59 weeks, instead of most states’ standard 26 weeks.

While Emergency Unemployment Compensation is available in all states, including Oregon, Oregon also has an additional Extended Benefits program once the Emergency Unemployment Compensation becomes exhausted.

The theory behind extending UI benefits is that unemployed workers will spend all their additional income from UI compensation, increase consumption, and boost aggregate demand, providing significant economic stimulus. Economists in the 1960s thought UI could function as an important automatic stabilizer. However, research in the 1970s, both at the national and the state level, showed that at best, UI plays a very small role in stabilizing the economy. Despite these findings, a more recent study conducted by economist Mark Zandi in 2004 motivated Congress to extend UI benefits to 46 weeks. Zandi’s study claimed that each dollar in additional UI spending increases gross domestic product (GDP) by $1.73.

This claim is flawed due to two false assumptions. First, additional UI income does not necessarily lead to new consumption, as assumed by the theory. Microeconomic research demonstrates that unemployed households do not consume more. In fact, UI benefits indirectly fund some additional saving. As UI benefits replace only a portion of lost wages, unemployed workers tend to save more and to consume less.

Second, the assumption that unemployment insurance does not change workers’ behavior is faulty. A number of research studies, including one conducted by Larry Katz, the chief economist for the Department of Labor in the Clinton Administration, found that workers with extended UI benefits remain unemployed longer.

This brings us to a bigger problem: Extending benefits will lead to an increase in the unemployment rate. According to Professor Robert Hansen, senior associate dean of Dartmouth’s Tuck School of Business, higher UI benefits mean that some people will leave jobs they would not have been willing to leave otherwise, and that they will be willing to remain unemployed longer.

Analysts at The Heritage Foundation recently used a sophisticated macroeconomic model to estimate the full effects of extending UI benefits. The model predicts that the twenty-week extension will lead to a rise in the unemployment rate by an additional 0.06 percentage point, to a total of 0.22 percent increase in unemployment.

The point Congress has missed is that extended unemployment benefits provide little economic stimulus because paying workers not to work longer does not really do anything either for the economy or for workers who lose the incentive to look for work as soon as possible. Instead of helping the economy, extending UI benefits will stimulate higher unemployment, lower national production, and more government waste.


Sreya Sarkar is a policy analyst for the Asset Ownership Project at Cascade Policy Institute, Oregon’s free market public policy research center.

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  • Rupert in Springfield

    Frankly with Obama in the White House I would be surprised if UI benefits were extended. They are going to want an up tick in the economic numbers and extending UI does the exact opposite. That’s why UI benefits tend to be extended prior to elections with a I incumbent. Frankly any this talk of extending UI is simply left over chatter from the election.

    As a side note, I’ve recently been thinking more and more about welfare, as in going on it and getting more poor slobs out there working for me so I can relax a little. I’ve noticed that I pay UI compensation on myself even though I am self employed. Now, obviously if I lay myself off I’d get the UI, but my rates would also go up. I was wondering if anyone had actually run the numbers on this? If I lay myself off, does the increase in rates eat up what I would make from UI? I’ve never gotten UI so I really don’t know much about the process. Seems pretty easy, take a little break for a few months and start looking for work in earnest the last two weeks of benefits. At least that’s they way I’ve always seen it done.

    At any rate, I’m just trying to figure out more ways I can fit in with the welfare state leech off of others mentality. Others will soon be leaching off my health insurance when they increase taxes. Rather than resent them, maybe I should join them.

  • sagano

    These workers apid into it, they shoudl get it back. No flack.

    • sybella

      As n employer, employees in Oregon DO NOT pay any of the unemployment insurance. That my dear is all paid by the employer for them.

  • Rupert in Springfield

    If you think they paid into it, and thus should get it back, then surely an increase in those benefits which an extension would be, would mean workers should be retroactively charged.

    At any rate, its probably not going to happen. Extending UI in an election year is a stunt to stagnate the economy to get an opposing party out of power. We saw it in Bush vs. Clinton. There is no way with Obama coming in that they want to do that now.

  • eagle eye

    After we get rid of unemployment insurance, let’s be sure to take care of social security and medicare — people will love this idea and will vote in conservatives for sure!

  • Rupert in Springfield

    Who ever talked about getting rid of unemployment insurance?

    What is it with liberals that they are so thin skinned they cant take any criticism of their pet programs without immediately lurching into absurd extensions no one ever argued?

    Makes me think they don’t have very good arguments for the programs in the first place when this sort of silliness is all they have to argue a position.

    • eagle eye

      Who is the thin-skinned one with the ad-hominem attacks?

      But if extending UI is such a bad idea, why not cut it back, or eliminate it altogether, for the same reasons given in the article?

      Or are we to believe that Cascade Policy Institute really supports UI, and just happens to think that right at this moment in time we have hit on the optimum UI program?

      • Sreya

        Cascade believes that there is a need to re-structure UI. Please visit our Asset Ownership program page to find out more about what we have to say. We are trying to promote a new idea to reform UI. Here is the link:
        http://www.cascadepolicy.org/asset-building-project/

        • eagle eye

          I will take a look at it when I have time. It sounds kind of like an IRA/health savings account type of idea? If so, kind of quixotic for Oregon. But, Oregon is for dreamers, as someone said. Maybe someday.

          I think all such plans are going to face a big headwind from the current financial fiasco. Though ironically, this might be a good time to invest in such a plan — if stocks are now cheap.

        • eagle eye

          It might not be a bad idea, but I doubt that this is the time to be promoting it, especially, going against extended benefits when people are fearful of massive layoffs.

          Also, I’m afraid that prospects for individual savings accounts for things like unemployment, social security, medical are really dim after the recent financial calamity and stock market meltdown. Bush couldn’t do it with the Republicans in office, I don’t see how it’s going to happen now.

          But, strange things sometimes happen, perhaps it will take the liberals to bring it off, if it ever happens in this country.

      • Rupert in Springfield

        >Who is the thin-skinned one with the ad-hominem attacks?

        Let us review.

        ad – Latin for to or towards

        hominum – the man, the person, also in Latin.

        “Liberals” refers to a group not a person.

        Therefore an ad hominum attack would attack you as a person directly, rather than remarking on a group, which you may be a member of, propensity for certain behaviour.

        Thus the statement:

        “Clearly eagle eye is not a Latin teacher”

        while possibly factual, may also be something of an ad hominum attack in this case.

        What I said previously was not, since it referred to group, not individual, behaviour.

        >But if extending UI is such a bad idea, why not cut it back, or eliminate it altogether, for the same reasons given in the article?

        Because of the simple fact that what you are arguing is not a logical conclusion of your statement. The argument that an idea, if when extended becomes ludicrous, makes it the idea itself ludicrous doesn’t hold water.

        Example – Giving unemployment benefits at 70% of wages may be rational. Giving unemployment benefits at 1000% of wages is clearly irrational. However that doesn’t undermine whatever rationality exists in the first instance.

        Example – Giving a child a $1 a week allowance may be rational. Giving a child a $10,000 a week allowance is clearly irrational. However the second doesn’t invalidate the first.

        Frankly I think you were doing better with the phantom public/private education studies.

        • Larry

          Nice job Rupert.

          Does eagle eye need glasses?

          (Is that ad hominum? Or only if not phrased as a question?)

          • Rupert in Springfield

            Thanks.

            Id say your statement is ad hominum because the question is meant more to deride than to sincerely inquire. Clearly it is directed at a person thus fulfilling the requirements of the language.

            Maybe we need to bring Latin back into the schools?

            Just to head em off at the pass, Advocacy of teaching Latin should not be taken to mean that I support the torture, vivisection and dismemberment of all but Latin teachers.

        • eagle eye

          Rupert, I may not be a Latin teacher, but at least I know how to spell “ad hominem”.

          Be that as it may, “thin skinned … cant take any criticism … lurching into absurd”

          sounds pretty ad hominem to me. Whether personal or directed at a group (liberals) — to which I supposedly belong.

          Here’s a wikipedia definition:

          An ad hominem argument, also known as argumentum ad hominem (Latin: “argument to the man”, “argument against the man”) consists of replying to an argument or factual claim by attacking or appealing to a characteristic or belief of the source making the argument or claim,

          Actually, the Cascade guy, in a way, is proposing a form of the logical extension I suggested — “cut back or eliminate unemployment insurance”.

          • Rupert in Springfield

            >Rupert, I may not be a Latin teacher, but at least I know how to spell “ad hominem”.

            You are quite correct, it is spelled hominem. My spelling is atrocious, and am forced to admit to that on a fairly regular basis. Noted and logged!

            Unfortunately your definition fails you here – I was clearly not attacking you “the source” I was noting an annoying characteristic of the group “liberals” – their tendency to make this form of argument and why I thought it was absurd.

            Again if I attack a person, based on being in a group ( of course you’d think that, you’re a conservative ) that’s ad hominem. If I attack a group, that a person is a member of, that’s not ad hominem.

            Although now that does make me wonder if there is some form of “ad genus” ( towards the class ) out there?

            >Actually, the Cascade guy, in a way, is proposing a form of the logical extension I suggested — “cut back or eliminate unemployment insurance”.

            I’m not sure I can find “the cascade guy” ( who does that refer to? ) who said what you claim, but be that as I may lets take is as it lays.

            You think from that statement your statement – “After we get rid of unemployment insurance, let’s be sure to take care of social security and medicare ” then immediatly follows?

            Fine, that is a ridiculous conclusion. You want to stick with that? Be my guest. However don’t get all cranky when someone then remarks the propensity to make ridiculous logical extensions.

  • H. Craig Bradley

    Academic studies often poorly reflect the real world. In this instance, Professor Robert Hansen’s UI study at Tuck School of Business. People leave jobs primarily for two reasons: They quit or they get fired. Quitting a job usually disqualifies one from collecting Oregon unemployment insurance. Getting fired may also disqualify one from collecting any unemployment insurance, depending on the exact circumstances.

    Oregon has a computerized IMatch system for unemployment recipients which results in more job referrals from Oregon Worksource. If you were making $10.50/hour as an armed/unarmed security officer and lost your job, you might be elgible to collect UI. However, the state of Oregon Employment Dept. requires UI claimants to register with I-Match.

    The state will refer you to jobs, including similar positions which pay substantially less than you were once earning. If you are referred to an $8.50/hour contract security officer job (no benefits), you must apply within 48 hours to preserve your benefits. If offered the job, you must accept. Not too many claimants want to do this, and may just forego UI Benefits until they find suitable employment. That is exactly what I did.

    All too often many jobs advertised on Oregon’s Unemployment Dept. Website (Oregon Worksource)are low paying, high turnover jobs which use the state for referrals to keep a constant supply of captive applicants flowing in to local employers .

    Some jobs advertised on the OED site are the opposite extreme: So specialized that few applicants can possibly qualify, such as “Java Programmer”. This is a terrible way to find suitable work and barely works in normal economic times, certainly not in recessions.

    Barack Obama says he intends to give states extra funding for UI and hopes various states will loosen up their elgibility criteria (requirements) to allow more applicants to be elgible to receive UI benefits. Unfortunately, this is not how the UI program is administered in most states. The program is run for the benefit of employers, NOT applicants or claimants. Generally, employers do not want to pay claims, as it causes their UI insurance premiums to increase, especially in high turnover jobs.

    President-elect Obama is facing a learning curve on this and many other foreign and domestic issues during the next couple of years.

  • rosia gregg

    let them get welefare why should they get more than a family on welefare and not meet the critiria?? unemployment is not free, its tax money. force them off and put them on welefare..my daughter works 3 days a wk at a motel and gets less than someone not even looking for work?? stop extended unemployement !!

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