Extending Unemployment Benefits: Economic Boon or Bust?


More than a million Americans rang in the new year without the safety net of long-term unemployment benefits, and now the president is urging Congress to act swiftly to reinstate the lifeline.

On Dec. 28, 1.3 million long-term unemployed individuals lost their cash assistance from the Emergency Unemployment Compensation Program after lawmakers failed to pass an extension before leaving for their holiday recess.

In his weekly radio address on Saturday, President Barack Obama said not renewing the federal program could lead to an economic slowdown.

“If folks can’t pay their bills or buy the basics, like food and clothes, local businesses take a hit and hire fewer workers,” the president said. “That’s why the independent Congressional Budget Office says that unless Congress restores this insurance, we’ll feel a drag on our economic growth this year.”

The president will host an event Tuesday at the White House to intensify support for extending benefits.

Since 2008, Congress has extended jobless benefits from a maximum of 26 weeks to as many as 99 weeks every year, but failed to do so for 2014. According to Paul Harrington, director of Drexel University’s Center for Labor Markets and Policy, the average length of long-term unemployment currently stands around 36 weeks, much longer than the standard 26 weeks of benefits.

Senate Majority Leader Dem. Harry Reid pledged to bring a bill extending the benefits to a vote as soon as Congress returns from recess. Many Republicans oppose such a bill, saying the program was always intended to be temporary. However, Speaker of the House John Boehner said the GOP is open to extending the benefits if the costs are balanced and don’t add to the country’s deficit.

“We’ve never cut extended benefits when the long-term unemployment rate is so high and the normal unemployment rate is also high,” says Gary Burtless, senior fellow, economic studies at the Brookings Institute. “The fraction of the labor force that has been without work for six months or longer is 2.6%, and it would be fair to say it’s partly high because people are collecting benefits, but the regular unemployment rate is also very high.”

The debate on whether to extend unemployment insurance benefits gets clouded by a mixed economic picture; the housing market has been recovering since 2012 and stock markets closed 2013 at record highs, but the labor market remains feeble, with a 7% unemployment rate.

“Back in 2007, 7% unemployment would seem disastrously high, but now it’s more like a humble brag,” says Harrington. “We really haven’t had strong job growth and there is a tremendous amount of labor supply. The job vacancy rate is about 2% right now with roughly three people per open position.”

The Federal Reserve announced in December it will begin to draw down its quantitative easing program by $10 billion a month starting in January, citing a stronger job market.

"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases," the Fed said in a statement.

“In terms of macroeconomic impacts, the reduction in the $85-billion-a-month program will have a much bigger effect than extending long-term unemployment benefits,” says Harrington, adding that the reduction in cash flow to people could hurt some housing markets, particularly in the Midwest.

Burtless says continuing the program is one the quickest ways to get $25 billion, the estimated cost of extending benefits for a year, recycled back into the economy. “We are talking about giving people money that they will spend very quickly. It’s not going to be used to pay down debt or credit card bills, the people who get these benefits will be putting it back into the economy by buying groceries, paying rent or a mortgage and covering doctors’ bills. There are few programs that work as well to maintain consumer spending and boost economic growth.”

According to reports, 1.9 million more Americans will run out of their state-funded benefits within the first half of 2014 if Congress doesn’t approve an extension to the federal program. Harrington points out that just because a person has been out of work for a long time doesn’t mean they’re eligible for benefits.

“You have to work for a substantial period of time before being laid off in order to collect benefits. If you are a kid coming out of college or a mom or dad getting re-entering the workforce, that doesn’t mean you can collect the insurance.” He estimates only about 40% of the long-term unemployed collect benefits.

Peter Morici, economist and professor at the University of Maryland, argues extending benefits would lead to more people postponing their job search. “From Wall Street to Main Street, white collar professionals have delayed accepting lower pay and changing occupations by running down savings and collecting maximum unemployment benefits of about $300 a week,” he said in a note.

Some experts predict letting the benefits program expire will quickly reduce the unemployment rate as people drop out of the labor force after losing their benefits. “It will make the country look better in purely a cosmetic sense, but it will not change the number of people employed, if anything it will make it worse,” says Burtless.

Studies show the longstanding unemployed face discrimination in the hiring process, and Harrington says there are better ways to overcome this problem. “Part of the reason people don’t want to extend the program is because they feel like it’s a behavioral incentive or signal that we are going to reward you for not working, at some point we need to figure out a better incentive instead of paying people.”

He suggests the federal government creates programs to help the unemployed become more engaged in their job search. “There is merit in providing income support, but evidence shows that when you work with people in a systematic way and help them re-learn how to search for a job, network, make connections and update their skills, they will be much more successful in their job search.”

The government has taken steps, like offering companies tax breaks, to help get those out of work for a long time back into the game, but Burtless says these programs may not be effective.

“All that is doing is re-odering who stands where in the queue to get jobs. Moving those who have been out of work for a long time is good for humanitarian reasons, but nonetheless, there will still be others in the queue. We need to create more job vacancies.”