Unemployment Insurance Must Be Included in Fiscal Cliff Deal

In negotiating on the fiscal cliff, Congress shouldn't focus on extending tax cuts for the wealthy but instead on extending emergency federal unemployment insurance.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

The Congressional Budget Office, known as the CBO, has released a timely new report on an important element of the "fiscal cliff" that policymakers should not overlook:  Federal emergency unemployment insurance, which has been in effect since the summer of 2008 but is scheduled to expire at the end of this year.

As befits its nonpartisan status, CBO presents a balanced analysis of the issues that policymakers face as they consider whether to renew the program for another year, scale it back, or allow it to expire. The agency also discusses a panoply of longer-run changes to the regular federal-state unemployment insurance system that policymakers might consider.

[See a collection of political cartoons on the fiscal cliff.]

CBO doesn't make recommendations, but I will: President Obama and Congress should renew the current emergency federal unemployment insurance provisions for another year, and not make changes in unemployment insurance's structure like those that House Republicans proposed in last year's debate over renewing the program. Federal emergency unemployment insurance provides additional weeks of federally funded benefits to jobless workers who exhaust their 26 weeks (or fewer in some states) of regular state benefits before they find a new job. The National Employment Law Project estimates that if lawmakers don't renew the program, about 2 million people will abruptly lose federal unemployment insurance prematurely at the beginning of 2013. Moreover, the National Employment Law Program estimates, through the rest of 2013 several million more will exhaust their regular benefits before they can find a job—but there will be no federal benefits to help them.

Critics argue that the extra weeks of unemployment insurance make people less willing to take a job and are an important reason why unemployment remains so high. Supporters counter that any such effects are small and that unemployment remains so high mainly because jobs remain scarce. Moreover, as CBO notes, in a weak job market, any disincentive for unemployment insurance recipients to take a job potentially raises the likelihood that people who are not eligible for unemployment insurance (e.g., those looking for their first job or re-entering the labor force) will get a job.

[Read the U.S. News Debate: Should Congress Extend Federal Unemployment Benefits?]

Besides, unemployment insurance provides not just financial support to unemployed workers and their families. It also provides important support to the economy. In fact, CBO estimates that extending unemployment insurance for one year would boost gross domestic product by between $0.40 and $1.80 per dollar of budgetary cost, and full-time-equivalent employment by between 2,000 and 10,000 full-time-equivalent years per billion dollars spent (one full-time-equivalent year is 40 hours of employment per week for one year). The lower end of the range seems much too pessimistic, and it probably derives from CBO's desire to encompass most economists' views about those effects—including a minority who don't believe stimulus policies are effective under any circumstances.

Those growth and employment increases are net of any effects on employment due to the work disincentives that get critics of the program so riled up—effects CBO says "make little difference to overall output or the number of people employed under the weak economic conditions [it] projects for the next few years."

[See a collection of political cartoons on the economy.]

CBO estimates that it would cost $30 billion to reauthorize the current federal emergency unemployment insurance program for another year and "that extending benefits in this way would increase inflation-adjusted GDP by 0.2 percent (by 0.1 percent to 0.5 percent under CBO's full range of assumptions) and increase full-time-equivalent employment by 0.3 million (with a range from 0.1 million to 0.5 million) in the fourth quarter of 2013."

Contrast those economic effects with CBO's estimate of the economic effects of extending President Bush's tax cuts for upper-income Americans for another year, which would cost more and deliver considerably less growth and job creation in 2013. Moreover, lawmakers always have let temporary federal unemployment insurance measures expire once the economy was strong enough, while supporters of the high-income tax cuts want to make them permanent despite their very high budgetary cost.

Policymakers must not let emergency federal unemployment insurance fall through the cracks as they work to solve the fiscal cliff dilemma. The stakes are too high for unemployed workers who are still struggling to find a job and for the economy itself.

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