More Unemployment Insurance Won't Stimulate Growth
Extended benefits keep some workers searching for jobs they will not find
December 9, 2011
Some increase in unemployment insurance benefits beyond the normal six months in a recession makes sense, but the current length of 99 weeks (just under two years) is excessive. Moreover, any extension comes with a real economic cost and should be paid for with spending reductions.
No one suggests eating a large Thanksgiving dinner to help lose weight, but some in Congress do suggest spending more on unemployment insurance to boost the economy. Both proposals would backfire—and miss the point.
Congress created unemployment insurance as exactly that: insurance for employees against the risk of suddenly losing their jobs and being unable to pay the bills. It was not meant to grow the economy. It was meant to partially replace workers' pay as they looked for new work. Now, however, some in Congress argue that America does not face a trade-off. They contend that unemployment insurance allows the unemployed to spend more, creating jobs throughout the economy. It would be wonderful if this were the case. It would also be wonderful if pumpkin pie helped shed pounds. Unfortunately, neither will happen.
What advocates miss is that the government does not create wealth out of nothing. The government finances its spending by taxing or borrowing from elsewhere in the economy. Unemployment insurance benefits do allow the unemployed to spend more—but someone else in the economy spends less. Worse, that someone would usually otherwise invest his or her funds in the private sector, creating jobs. The overall economy gets no boost. This is why the stimulus failed.
Government spending on unemployment benefits is even less stimulative. Economists consistently find that extended unemployment insurance benefits increase the time workers stay unemployed. Even Alan Krueger, chairman of President Obama's Council of Economic Advisers, agrees.
This is not primarily because workers on unemployment insurance are slacking (though some do). Rather, extended unemployment insurance benefits change the types of jobs workers look for. Most unemployed workers want jobs similar to their old ones—in the same city and in a similar occupation. Extended unemployment insurance benefits lead many workers to spend more time looking for these jobs than for jobs they are likely to find. When benefits start to run out, they cast a wider net.
Unfortunately, a lot of the jobs lost in the recession will not return. Many of the former General Motors employees in Michigan will have to move to find new work. Extended benefits keep some workers searching for jobs they will not find.
Empirical studies show that extending unemployment insurance benefits has increased the unemployment rate by 0.5 percentage points. The humanitarian benefits unemployment insurance provides come at an economic cost. They are not an economic free lunch. Spending more on unemployment insurance will not stimulate the economy any more than the last $300 billion did.
That is why any increase in unemployment insurance benefits should be paid for by reducing spending on less important programs. The government is already spending too much. The national debt recently hit $15 trillion. To avoid becoming the next Greece or Italy, spending must come down. Congress should not use the plight of the unemployed as an excuse to avoid the need for spending restraint. Most Americans diet and exercise after Thanksgiving. Congress should exercise similar discipline.