Worldly Philosopher: The Political Economy of Unemployment Insurance
This week's Worldly Philosopher, Ismael Cid-Martinez, discusses the politics and economics of unemployment insurance.
The debate surrounding unemployment insurance (UI) returns to Capitol Hill. This is not entirely surprising. Amid the good news, today's report confirmed that a large shadow continues to loom over our labor market. Examining monthly changes in each category of unemployment by duration, we observe that long-term unemployment remains stubbornly high when compared to previous recoveries (see graph).
The long-term unemployed have been in search of work for more than 6 months (+27 weeks). There are 3.1 million Americans living this reality today. They make up nearly a third of those we count as unemployed. We know most of them, and their children, will experience reduced earnings for decades to come. We also know their quality of life is deteriorating by the day. Prolonged joblessness is detrimental to health, family unity and even the sense of purpose we attach to our lives. If nothing is done and the skills of these workers begin to atrophy, ours is likely to become a story of wasted capacity.
So why is Congress even debating an extension of UI? It has to do with how some lawmakers view these benefits. Their thinking is best captured in the words of Representative Paul Ryan, "I do support unemployment benefits for the 26 weeks they're paid for. If extended it beyond that, you do a disservice to these workers." That is, extending UI is not worth pursing even if the cost is offset by reduced spending or increased revenue. The notion is that these benefits serve as a disincentive to work for our long-term unemployed.
All evidence contradicts this belief. Recent work by Berkeley economist Jesse Rothstein and the Federal Reserve Bank of San Francisco reveals that the majority of long-term unemployed who see their UI come to an end just stop searching for work. North Carolina confirmed this by gutting UI in July of last year. By December, politicians were celebrating the drop in the unemployment rate that followed and ignoring the drop in the labor force that caused it.
This is simply because one must be actively seeking employment in order to qualify as unemployed and to continue receiving UI. We also know UI helps because it provides some cash on hand to make affordable the cost of job hunting. When these benefits end, the cost of job searching rises. A 2011 study by the Joint Economic Committee (JEC) confirmed that previous extensions helped the long-term unemployed more than double the time they spent searching for work.
This extra time aids a group with unfavorable odds. Research suggests that the long-term unemployed have approximately a one in ten chance of moving into employment any given month. When they succeed, their jobs are often temporary.
The real problem is we still need more jobs. A new report by the Economic Policy Institute (EPI) finds that our economy continues to operate far below potential. UI would help in this area too. Congressional Budget Office (CBO) estimates show that extending UI to the end of 2014 would boost demand and increase employment by as much as 300,000.
Extending UI will not only help our long-term unemployed continue searching for work, but also help our economy grow and create jobs. It is our continued inaction that is a disservice to these workers.