George Gibbs Center for Economic Prosperity

Orlando Sen⁠t⁠⁠i⁠nel: Benef⁠i⁠⁠t⁠s hur⁠t⁠ ⁠t⁠hose ⁠i⁠⁠t⁠’s ⁠i⁠n⁠t⁠ended ⁠t⁠o help

By: The James Madison Institute / 2014

Extended unemployment compensation expired at the end of December, and some members of Congress are now pushing to reinstate it. That would be a mistake. It would slow the economic recovery and hurt many of the very people the program is intended to help.In fact, extended unemployment compensation is largely responsible for the substantial increase we’re now seeing in the average duration of unemployment.
Granted, unemployment always tends to last longer during recessions. During normal times, those who are unemployed for more than six months would comprise about 15 percent of total unemployment, and during past recessions the long-term unemployed only briefly edged past 20 percent of the total. During the most recent recession, however, long-term unemployment peaked at 45 percent of total unemployment, and as of last June, more than 36 percent of the unemployed had been out of work for more than six months. Long-term unemployment has never been even close to as high as it is now.If you pay people to remain unemployed longer, they will remain unemployed longer. During the recent recession, a comparison with past recessions suggests that 17 percent of total unemployment is attributable to extended unemployment payments. If these people were working, today’s unemployment rate would be 5.8 percent instead of 7 percent, and the economic recovery would be much further along.This lingering increase in unemployment has slowed the recovery, imposing an obvious cost on everyone. Aggregate output and income are lower, meaning lower tax collections and higher transfer payments, thereby increasing the budget deficit.Everyone’s economic opportunities are reduced in a sluggish economy. Some of the biggest costs are imposed on those whom extended unemployment compensation is supposed to help.Most obviously, a slow recovery makes it more difficult for those who are out of work to find jobs. Unemployment compensation allows people to wait out a bad job market to find a better job — it was designed to do this. However, giving people the option of remaining unemployed rather than taking the best job available at the moment has slowed the recovery, and jobs are not being created as rapidly as they otherwise would be.We don’t want an economy where lots of people are underemployed, but being underemployed is preferable to being unemployed. The longer a person is unemployed, the harder it will be for that person to find another job. Extended unemployment compensation does a disservice to people by giving them the incentive to remain unemployed longer. Taking a job — even an entry-level job — can be a steppingstone to getting a better job as the economy recovers.Finding a job is often not easy, especially in a sluggish economy, so we should be sympathetic to people who are having trouble finding work. Unemployment compensation was designed to help those who unexpectedly find themselves out of work to manage the transition back to productive unemployment. For recipients, though, the program is a double-edged sword that can slow this transition, giving recipients an incentive to sit out the job market too long, and ultimately reduce their employment prospects.Unemployment compensation was not designed as a welfare program, and for people who really want a job and are unable to come up with anything, we do have a set of safety-net programs to support the unemployable. By extending unemployment compensation, we have weakened the economy and actually made it more difficult for the unemployed to find work.
Now that the extended benefits have expired, we should leave them that way to speed the recovery, which ultimately will help those who are out of work and want a job.Randall G. Holcombe is a senior fellow at the James Madison Institute, a Tallahassee think tank, and DeVoe Moore professor of economics at Florida State University.