Against Extending Unemployment Benefits—Posner

I do not favor extending unemployment benefits. The bill signed into law by the President last Wednesday would extend unemployment benefits by up to 13 weeks (depending on a state’s unemployment rate) for persons, estimated to number some 2.3 million, who have been unemployed for six months or longer, up to a maximum of 99 weeks (almost two years), at a total cost to the government estimated at $34 billion.

 

I would not object to the government’s giving the states some fraction of $34 billion to enable them to make additional welfare payments to persons experiencing serious economic hardship. But extending unemployment benefits beyond the standard six-month limit is a bad idea.

 

As Becker points out, the total amount of the additional benefits is too small to have a significant positive effect on employment—and for the further reason that a transfer payment cannot be assumed to have a positive effect on consumption or investment. The effect will depend on what the recipient of the transfer does with it. If he saves it, at least in an inert form such as cash or a federally insured demand deposit that the bank in which the money is deposited uses to buy a Treasury security, then it will not stimulate production and hence employment. Even if he uses it to buy something, it may turn out that the seller is selling from inventory and doesn’t plan to restock, in which event the effect on production will depend on what the seller does with the money he receives for the sale—maybe he will save it in some inert form!

 

Far from being effective as stimulus, the extension of unemployment benefits will have two negative effects on employment. First, it will increase the opportunity cost of the recipient’s rejoining the labor force. Unemployment benefits are set lower than earnings to reduce the moral hazard that Becker discusses, but the gap between benefits and earnings is narrowed by the costs of work (such as commuting, and any disutility associated with work, such as fatigue and boredom) and by the benefits of household production and of leisure—and those benefits, unlike earnings, are not taxed. The gap is so small for many unemployed people that studies show that they do not begin a serious job hunt until their unemployment benefits are about to expire.

 

So extending or otherwise enhancing unemployment benefits, far from stimulating employment, is likely to reduce employment and so slow the pace of economic recovery.

 

Second, extending unemployment benefits has a negative long-term effect on employment. The longer a person is unemployed, the less likely he is ever to return to the labor force, at least in a job comparable to the one he held before becoming unemployed. Apart from erosion of skills and of the habit of working, persons unemployed for a long time are unattractive hires because employers are suspicious of these persons’ attachment to or aptitude for work.

 

Thus the net effect of the just-enacted extension of unemployment benefits is likely to be to reduce employment and output. And while the amount of the benefits involved in the extension is not large, the negative effect on the economy may be if a substantial number of the 2.3 million persons who will be receiving the benefits are unemployed for a longer time, as a result, than they would otherwise be.

 

So the extension has to be defended if at all as a welfare measure. It is a bad measure because it is not means-tested. To be counted as unemployed you have to be looking for a job, so one can assume that the unemployed are involuntarily unemployed and so would prefer to work. But that doesn’t mean that they necessarily face economic hardship as a result of being unemployed. They may be unemployed because their attachment to the labor force is actually quite week; they do not try very hard to meet their employer’s expectations and so are quick to be laid off in bad times, or their search for employment is lackluster. They may have large savings or a high-income spouse. No doubt the bulk of the long-term unemployed are hardship cases, but it is only hardship cases that make a strong claim on a welfare program.

 

The fact that not all persons who have been unemployed for a substantial period of time are hardship cases reinforces my concern that extending unemployment benefits will cause disemployment. The persons who can afford, as it were, to be unemployed are likely to pocket any additional unemployment benefits that they receive and slow their search for a job.

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