e21 Asks: Should Federal Unemployment Insurance be Extended?

In this week’s poll, we asked e21 readers, “Should federal unemployment insurance be extended?” Over half (52 percent) believed it should not be extended since doing so “discourages people from working.” However, a sizeable portion (27 percent) thought

unemployment insurance should be extended because “26 weeks is not long enough.” Another 17 percent of voters thought it should be extended, but for the reason that “unemployment benefits stimulate economic growth.” Only 4 percent thought benefits should not be extended because “the economy is doing fine now.”

When the total votes in favor of extending federal unemployment insurance (56 percent) are compared to the total votes against (44 percent), the results were close. This is probably because of the strong support for extended federal unemployment benefits coming from many in the media and in Washington. 

In the aftermath of the financial crisis and ensuing recession, the federal government funded the expansion of unemployment insurance benefits to 99 weeks (almost two years). This duration then fell to 73 weeks (a year and a half), where it stayed until the end of December. The duration varied among states, with an average of 55 weeks in 2013.

Now, barring Congressional action, the unemployed will usually receive 26 weeks of state benefits, funded by taxes from employed workers and their employers.

Extending unemployment benefits beyond 26 weeks has significant costs. The Congressional Budget Office estimates that extending the benefits through 2014 would cost $26 billion. 

This amount does not capture the full cost of unemployment benefits which last almost a year and a half. The real damage can be seen in rising rates of long-term unemployed (those out of work for 27 weeks or more). Now, more than four years after the recession’s end, the rate of long term unemployment (37 percent) is higher than the peaks or recoveries of prior recessions.

While the unemployed receive unemployment benefits, they are more likely to turn down lower-paying jobs—even though they are losing job skills by remaining out of the labor force. The longer the unemployed are out of work, the more their skills atrophy. It is a cycle leading to more long-term unemployment, which hurts the unemployed and economic growth.

Cutting unemployment benefits will not lead to the doomsday outcomes predicted by those who support extension. In June, North Carolina cut the duration of its benefits from 63 weeks to 19 weeks. The state’s subsequent employment growth of 22,000 thousand jobs between June and November 2013 outperformed not only its neighbors but also the rest of the United States. Its unemployment rate fell from 8.8 to 7.4 percent from June to November.

While North Carolina’s labor force declined by 1 percent between June and November, more than the United States as a whole, this is similar to the average decline in its border states. The labor force shrank more in Georgia and South Carolina than it did in North Carolina. What is significant is that employment grew in North Carolina while the duration of unemployment benefits declined.

If extending the duration of unemployment benefits were so beneficial to the economy, why not extend them even further to hasten the recovery? The answer is because extending unemployment benefits reduces incentives to find work, and the benefits have to be paid for through cutting other spending, raising taxes, or additional borrowing. 

Two former Obama economic advisers, Princeton University professor Alan Krueger and Harvard University professor Larry Summers, are among many academic economists who have concluded than extending benefits increases unemployment. The Congressional Budget Office collaborated their findings and stated, “The UI system reduces the incentive for benefit recipients to accept a job offer because the earnings from that job will be partially offset by the discontinuation of their UI benefits.”

Extending unemployment benefits beyond 26 weeks is often purported to be an economic cure-all. However, the cost of disincentives to work should be included in the calculus. Especially now that the unemployment rate is declining, unemployment insurance should be left to the states.