Does Extending Jobless Benefits Help the Economy?

The debate about the economic benefits of unemployment insurance persists as deadline looms.

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The moral argument for extending unemployment insurance during tough economic times is pretty simple. At a time when unemployment is above 9 percent, and there are several job applicants for every opening, it would be cruel and inhumane to cut off assistance for as many as 1.8 million unemployed workers. But proponents of extending unemployment benefits also claim that by putting more money into the hands of spenders, extending unemployment benefits also helps the economy and reduces unemployment. Many economists agree with that proposition—but many also question how much, and whether the negative effects can outweigh the positive ones. It's an issue that gets murky, and emotional, fast.

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When the markets crashed in 2008, Congress extended unemployment insurance, making laid-off workers eligible for up to 99 weeks of benefits, which are normally about half of what the worker made previously. As the recession wore on, Congress extended the extra benefits, most recently through the end of the year as part of a broader tax deal passed in December of 2010. If Congress doesn't act again, then unemployed workers who've already gone through the 26 weeks of benefits guaranteed by law will soon run out of any extra assistance. Democrats are pushing to extend the unemployment benefits for another year, while Republicans are advocating that an extension at least be paid for.

Proponents argue that the more money people have, the more they spend, which means more business for local stores, groceries, or wherever else people would use a little extra cash. That triggers the so-called multiplier effect—the store owner has a little extra cash, which he spends, helping others, and so on. Chad Stone, an economist with the left-leaning Center for Budget and Policy Priorities, says that failing to extend unemployment insurance would cause the economy to shrink. "It would be taking spending power out of the economy. It would further weaken the expansion," Stone says. The non-partisan Congressional Budget Office backs up his claim, stating in a recent report that keeping the benefits could mean the difference of thousands of jobs.

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But conservatives question the benefit to the economy, noting that most economic studies—including those by the CBO—show that enhanced unemployment benefits cause the unemployment rate to rise, not fall. That is partially because, some economists argue, unemployment benefits reduce the incentive to find work. With unemployment benefits available, people might hold out and wait for the right job to come along, ignoring lower-paying job offers. "If the government subsidizes something, you get more of it,' says Chris Edwards, an economist with the libertarian Cato Institute. "By having extended unemployment insurance, you're delaying the tough decisions that people have to make." Even left-leaning economists agree that, when the economy is chugging along, extending unemployment benefits beyond 26 weeks causes more harm than good. The question is, during a recession when jobs are scarce, when is the best point? "There's no question there's tension," Stone says.

The issues get a lot less academic to the unemployed, many of whom find themselves strapped with college debt, mortgage payments, and family obligations. Speaking at a Democratic press conference on Wednesday, Jill Fleming-Salopek, a Pittsburgh-area teacher who was laid off over the summer, described trying to find the right job in the current, troubled economy. "You find one of two things. Either there are no jobs available, especially in my field, or the jobs that you find are not comparable to the one that you've lost," Fleming-Salopek said. "Not comparable enough to raise my three children. They do not offer benefits or a decent wage. When you see these numbers, that there are jobs out there, are they really jobs that working-class families can live on? I'm here to tell you they are not."

Right now, unemployment insurance is one of many balls in the air as Congress tries to finish up its business before leaving town for the holidays. Also yet to be resolved is whether to extend a payroll tax cut, how to keep the government funded through 2012, and a host of other year-end tax and Medicare issues.