Jobless Benefits: An Issue That May Need Rethinking

If I were a U.S. Senator right now my heart would be telling me to vote for extended unemployment benefits for some 1.3 million Americans whose unemployment insurance ran out last month. But my head may be telling me otherwise.

The argument for voting in favor of a three-month extension seems obvious: the unemployment rate, although falling in December to 6.7%, remains stubbornly high five years into the economic recovery. And the number of long-term unemployed, or those who've been out of work for more than 27 weeks, is nearly twice as high today than during any other period when Congress allowed extended benefits to expire following a recession, according to the Economic Policy Institute.

So the thinking of any empathetic lawmaker would understandably lean toward extending those benefits, which average out to about $300 per week. The extra money might be the difference between paying the rent and not paying the rent.

What's more, many economists believe that extra money pumping through the economy has a macro impact. Specifically, it generates additional spending money which creates demand for goods which, in turn, creates jobs.

All of that makes sense and that's been the thinking since at least 2008; Congress has extended jobless benefits from a maximum of 26 weeks to up to 99 address the needs of millions of Americans adversely impacted by the financial crisis.

Meanwhile, the other side of the unemployment benefits arguments -- the argument against providing long-term benefits -- is even simpler, in theory. It goes something like this: giving people money for doing nothing provides a disincentive to going out and ardently seeking a job.

Typically, lawmakers have been divided along party lines on either side of the argument, with Democrats siding with the former and Republicans coming down on the side of the latter. That's essentially where it stands now, as the Republican-led House of Representatives allowed the benefits to expire at the end of December. The Senate, which has a Democratic majority, is still debating the issue.

But what if there were a new theory culled from innovative research by a non-partisan group of top U.S. economists that didn't fall along typical political party lines? A theory that provided a new and convincing argument against extending unemployment benefits that didn't come off as harsh and uncaring. Indeed, a theory that made a sound argument that extending jobless benefits actually exacerbates the problem of long-term unemployment.

In short, a theory that provided strong evidence that a government program intended to help people in need was actually hurting them.

If the research that led to that conclusion were reviewed carefully it might force quite a few supporters of a three-month extension to rethink their positions.

Such a theory exists.

A study released in October by the non-partisan National Bureau of Economic Research (NBER) states plainly that the benefit extensions initiated in the wake of the crisis are the primary reason unemployment in the U.S. has remained so high for so long.

"Most of the persistent increase in unemployment during the recent Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility," wrote the authors of the study, Iourii Manovskii and Kurt Mitman, both economists at the University of Pennsylvania, Fatih Karahan with the New York Federal Reserve Bank, and Marcus Hagedorn, an economist at the University of Oslo.

Just to make it clear, these guys weren't conducting research for a conservative-leaning think tank seeking to support a theory the conclusions of which they'd already determined. They did the research and presented their conclusions based on their findings.

Here's their conclusion: "Extending unemployment benefits exerts an upward pressure on the equilibrium wage. This lowers the profits employers receive from filled jobs, leading to a decline in vacancy creation. Lower vacancies imply a lower job finding rate for workers, which leads to an increase in unemployment."

In other words, the money the government pays in benefits forces employers to raise their wages, which cuts into their bottom lines and limits their ability to create more jobs. Thus there are fewer jobs to be filled by the ranks of the unemployed.

A sad and strangely ironic vicious cycle.

Here's what's innovative -- and compelling -- about the NBER report. The economists reached their conclusions by studying data from counties that border one another but lie in difference states since unemployment benefits vary from state to state.

The reason the researchers chose this method was that, all things being equal, the two counties were very similar in demographics, economic makeup and geography. They just happened to lie in different states with different unemployment benefit laws.

According to their findings, unemployment rose "dramatically" in the border counties where benefits were extended as opposed to the nearby county where benefits weren't extended. The impact, they said, was so pronounced "that our estimates imply that benefit extensions can quantitatively account for much of the unemployment dynamics following the Great Recession."

The NBER findings were so compelling, in fact, that they prompted a direct response from the Obama administration within a 30-page report issued in December titled "The Economic Benefits of Extending Unemployment Insurance" released by the Council of Economic Advisers (CEA) and the Department of Labor.

Not surprisingly, the government report concludes that the NBER's "argument and the model it stems from have important inconsistencies."

The NBER economists responded swiftly, rebutting each of the government's specific take-downs of their research in a followup report, at one point summing up their view of the CEA's findings succinctly: "The Council simply has no idea what our paper is about."

Far be it from me to get in the middle of a jousting match between top flight U.S. economists, whether they be working as independent academics or for the government. I'm not qualified. However, one obvious thing the NBER report has going for it is that it wasn't generated in Washington, where everyone has an agenda.

So, again, if I were a Senator and I had to vote on this very emotional issue, I'd be hard-pressed to ignore the innovative -- and plausible -- findings of a group of economists serving no obvious master.