Exclusive Commentary

Emergency Unemployment Benefits: Too Much of a Good Thing? By Jeffrey M. Jones, Assistant Director and Research Fellow, Hoover Institution

- Posted September 29, 2010


The U.S. Senate spent the better part of its summer fighting a protracted battle over extending a program that provides up to 99 weeks of unemployment insurance benefits to millions of out-of-work Americans. Democrats finally succeeded in passing the $34 billion measure seven weeks after the previous extension had expired.

 

By all accounts, this has bought only a temporary reprieve. The additional funding for Emergency Unemployment Compensation (EUC) runs out at the end of November. But with the economic recovery stalling and unemployment sticking at 9.6 percent, the White House has already signaled that it intends to push for a ninth extension. Taken at face value, this seems like the right response.

 

Indeed, the most recent employment report is downright depressing—14.9 million unemployed persons, 8.9 million involuntary part-time workers, and 2.4 million persons marginally attached to the labor force (including 1.1 million who have given up looking for work).

 

The situation is more severe for individuals from impoverished circumstances. According to the Center for Labor Market Studies, data from 2009 demonstrate that unemployment disproportionately affects those with lower incomes—the bottom 10 percent faced an unemployment rate of 30.8 percent, whereas the top 10 percent had a rate of only 3.2 percent.

 

Given these circumstances, shouldn’t Congress avoid a repeat of its summer stalemate over extending benefits?

 

Perhaps, but a more fundamental question needs to be answered first: is emergency unemployment insurance effectively doing what it was created to do—namely, providing additional weeks of assistance during periods of high unemployment so that workers can find a job?

 

The unfortunate reality is no. An increasingly large number of unemployed Americans have been out of work for more than 99 weeks—1.4 million as of June according to the Bureau of Labor Statistics. The term "99ers" has entered our national lexicon to describe individuals who have exhausted their unemployment benefits without finding work.

 

The system we have in place to temporarily support the jobless is falling short. In fact, it may be part of the problem.

 

Conservatives point to numerous economic studies documenting how the incentive effect of paying laid-off workers delays their efforts to find a new job. Liberals counter that the reason people are without work for an average – and record high – of 35.2 weeks, is that there are six applicants for every job opening.

 

Whether you blame the individual or the economy, both miss the crucial element of analysis—long-term unemployment harms an individual’s future job prospects. The longer you go without working, the harder it is to find a job. This is the 99er’s dilemma.

 

Reasons for this predicament range from the personal to the structural. According to Nobel Prize-winning economist Gary Becker, “[T]he long-term unemployed tend to lose confidence in their abilities, their resources to pay for their consumption run out, and their skills begin to depreciate.” Making matters worse, many of the jobs and industries workers were laid off from – construction, real estate, financial services, and manufacturing – will be slow to recover, if at all. This results in a mismatch between the supply and demand of skilled labor in a recovering economy.

 

Extended unemployment benefits in this scenario serve to delay a worker’s decision to get more education, retrain, or relocate. And that delay can be disastrous. Ample evidence confirms that employers are less likely to hire someone who has been out of work for a long time. When they do finally get a job, workers are typically less productive than before and less likely to regain their former earning power. Impoverished skills can turn a temporary situation into a long-term loss of income and opportunity.

 

Emerging political divisions pose another threat to the long-term unemployed. Earlier this summer, the Senate came dangerously close to cutting off emergency benefits entirely. That didn’t happen, but what’s to come in November is anyone’s guess. While acknowledging the harmful effects of lengthy extended benefits, a gradual phase-out of EUC is preferable to the shock of an immediate withdrawal.

 

A great deal of energy has been directed toward bolstering unemployment insurance. But the only real solution to this crisis lies in job creation. According to Robert Hall, the head of the National Bureau of Economic Research, we are coming up short—“[T]he way we judge the performance of the economy should be its success in growing employment. By this standard, the recovery is weak and faltering.”

 

The place to start is by asking what our current national policy strategy is for strengthening the economy. Treasury Secretary Timothy Geithner is adamant that it does not include extending the Bush era tax cuts for the top 2 percent. But a number of Congressional Democrats are breaking ranks over concerns that a tax increase could hurt small business owners and hinder the economic recovery.

 

The American Recovery and Reinvestment Act, designed to “spur economic activity and invest in long-term growth,” has been in place for 17 months. Yet its ability to save jobs and create new ones fell well below the forecasts of Christina Romer, former Chair of the President’s Council of Economic Advisers.

 

Apart from a broad push to improve education, the current recovery strategy is most notable for its lack of coherence. The Administration pushes stimulus measures, like the long-term job creation package introduced in early September, while at the same time floating proposals to temporarily halt payroll taxes as a means to encourage hiring.

 

What’s missing from this agenda is a principled commitment to creating a business climate where the private sector can thrive. That formula is easy to understand but difficult for governments to implement:  reduce public spending, remove regulations that hurt growth, lower taxes, and focus on stability.

 

We stand at a crossroads over what direction to pursue in tackling the issue of unemployment. It’s time to change the focus of employment policy in Washington from one of subsistence to one of real solutions that benefit both the individual and society.

 

Jeffrey M. Jones is an assistant director and a research fellow at the Hoover Institution.