The Unemployment Insurance Cliff

At the end of the year, the long-term jobless could see a big cut in benefits.

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Unless the president and Congress act before the end of the year, more than a million Americans will have the plug pulled on their jobless benefits the week after Christmas, and many others who've recently become unemployed or will become unemployed next year will see them sharply curtailed.  That would increase hardship for those workers and their families, and it would be bad for the economy.

Here's some background. The federal-state unemployment insurance (UI) system provides financial assistance to workers who've lost their jobs through no fault of their own by temporarily replacing part of their lost wages. In most states, the maximum duration of these regular state benefits is 26 weeks — though a handful of states have shortened it recently. 

In normal times, most people find a job in less than six months but, in a recession, when jobs become scarce, unemployment spells lengthen and the number of people experiencing longer spells of unemployment grows. Income losses from unemployment drain purchasing power from the economy, making an economic downturn worse and the recovery from it weaker. To combat the increased hardship and drag on the economy from rising unemployment and longer unemployment spells, policymakers in every recession starting in 1958 have enacted a temporary federal UI program to provide additional weeks of federal benefits.

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

The current program, Emergency Unemployment Compensation (EUC), was enacted in June 2008, relatively early in the Great Recession.  Policymakers increased the number of weeks of federal emergency benefits as the Great Recession worsened in late 2008 and 2009 and they have extended the program several times as the economy has struggled to mount a strong enough recovery to restore the labor market to normal health. 

At one point, the maximum number of weeks of UI available in states with particularly high unemployment rates was 99 weeks, counting the 26 weeks of regular state benefits. That number is now 73 weeks or fewer depending on a state's unemployment rate (see map). 

EUC is scheduled to expire at the end of the year, however, abruptly dropping the maximum number of weeks available to 26 or fewer, even though long-term unemployment (27 weeks or longer) remains much worse than in any previous recession (see chart).

[See a collection of political cartoons on the budget and deficit.]

Unfortunately, the only policymakers with the EUC expiration on their radar screen are House Ways and Means Committee Republicans — and they want to kill the program. Their analysis, complete with a mock McDonald's logo, argues that EUC is "supersized" compared with past federal emergency UI programs and they cite a study that they say identifies EUC as the "cause" of the painfully slow labor market recovery.  Their argument evokes the popular conservative narrative that adding extra weeks of UI benefits has created a "Great Vacation" in which workers prefer unemployment benefits to a job.

To be sure, EUC has lasted a lot longer, helped a lot more unemployed workers and paid out substantially more in benefits than the programs enacted in past recessions. But that's because the blow to the economy and especially the labor market from the Great Recession was so much worse. In fact, without the consumer spending UI generated, the recession would have been even deeper and the recovery even slower, according to conventional economic analysis.  

As to that study, it does contain statistical estimates of the relationship between UI and unemployment that the authors say "imply" that the expansions in UI could have been responsible for most of the rise in unemployment in the Great Recession. The study does not, however, directly test the proposition that EUC caused the rise in unemployment or rule out other plausible explanations.

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

Contrary to the Great Vacation theory, the study does not claim that EUC discourages unemployed workers from looking for jobs — it accepts the findings of other studies that this effect is very small. The focus of the study is on employers' decisions to create jobs, and its premise is that employers expect that the additional weeks of UI provided by EUC will raise their hiring costs because they now have to "lure workers" off UI, so they make fewer job offers. 

That's an interesting piece of economic and statistical analysis, but the more plausible mainstream explanation for why unemployment is so high is that businesses still don't have enough sales to justify hiring enough workers to restore normal levels of employment.

EUC benefits help create that additional demand and contribute positively to job creation.  The economy is still too weak and unemployment is still too high to let the program expire.

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

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