Should Unemployment Compensation be Extended? Becker

 

President Obama during this past week signed into law extending unemployment benefits to a maximum of 99 weeks, or almost two years, for persons who have been unemployed for over half a year and have exhausted their state benefits. The degree of extension varies among states depending on a state’s unemployment rate, with higher unemployment states getting longer durations of coverage. The bill that became law is highly partisan, passing with almost all Democrats, 31 House Republicans, and only 2 Republican senators.  I believe the law extends unemployment benefits for too long, although the economics of optimal unemployment insurance gives a less than certain answer.

Unemployment insurance tries to balance two conflicting goals. One is to protect at least some of the earnings of workers laid off from their jobs through no fault of their own, while the conflicting goal is not to make unemployment status so comfortable that workers try to get laid off, and do not look seriously for jobs when they are unemployed. The first aim is a typical goal of insurance against bad outcomes, while the second goal is to reduce the degree of “moral hazard”; that is, to reduce the incentive of persons to reduce their efforts to remain employed and look seriously for work when unemployed because they have insurance against the cost of being unemployed.

One typical way insurance tries to reach a compromise between these conflicting goals is to have a deductible that is paid by insured persons, such as the $500 deductible many car owners have on their automobile insurance. The trouble with practically all the state-run unemployment insurance plans is that they typically have no or a minimal deductible because they provide coverage essentially from the first week of unemployment. In addition, they usually limit coverage to a fixed number of weeks, such as 26 weeks. This is an inefficient and costly approach since practically all the unemployed can readily cover their first several weeks of unemployment from savings, spouses’ earnings, or borrowing on credit cards and in other ways. Unemployed workers usually run into financial trouble only when they have been unemployed for an extended time. An optimal unemployment insurance plan would make unemployed workers responsible for their first month or two of unemployment, and mainly spend unemployment insurance resources on the longer-term unemployed.

A second insurance approach to the moral hazard problem is to require significant co-payments, so that the insured have to pay a portion of any additional losses they experience after they exhaust the deductible. American unemployment insurance plans usually do pretty well on this by only paying about half or so of the earnings the unemployed had received when they were employed. Many European plans had usually replaced most or all of the earnings of the unemployed, and covered unemployed for many years. After they learned the hard way the prediction of economic theory that this encouraged significant increases in unemployment, several countries greatly cut back both the duration and payment (i.e., replacement) rates for the unemployed. Interestingly, In Germany this was done under a center-left Social Democratic government.

This analysis of insurance provides background for evaluating the new extension of unemployment benefits for the longer-term unemployed. The approximately $30 billion committed to this extension has been partly justified as a stimulus to what may be a slowing US economy. However, since any “stimulus” from $30 billion would be paltry even to the most optimistic stimulus calculations, such a stimulus can hardly be a serious justification for this extension of benefits. This is especially the case when federal budget deficits have been so large during the past couple of years, and there is no serious evidence that the $800 billion stimulus package passed over a year ago has had much stimulating effect on unemployment or GDP. Much of the evidence usually cited about number of jobs created by the stimulus package is based on terrible analysis. Any new hires under stimulus money is assumed to be net jobs created by the stimulus rather than a transfer of employment from non-stimulus activities to stimulus-supported activities.

So the case for the new law rests on its insurance provisions rather than on its stimulus capabilities. I argued earlier that covering the longer-term unemployed is the more optimal way to approach unemployment insurance since the long-term unemployed face the largest economic hardship. From that viewpoint, extending the duration of coverage beyond 6 months makes sense in an environment where the unemployment rate remains excessively high at 9.5%, especially if the extension is accompanied by the elimination of unemployment coverage for the first 6-8 weeks of unemployment.

However, the actual large extension poses a major risk of creating an unemployment culture where men and women remain “ unemployed” for years. Once the period of unemployment becomes long enough, people begin to get the habits from being unemployed for a long time: they sleep late, develop various leisure interests, and at the same time their work skills depreciate from not using them for an extended period. Studies have shown that skill depreciation is a serious effect of being unemployed for a long time.

Some might retort that this argument is persuasive during periods of normal unemployment rates, perhaps 7% and under, but not when jobs are scarce, the unemployment rate is over 9%, and it is coming down slowly. There is merit to this response, but on the other hand, the JOLTS data show that even with the current high unemployment rates, about 4.5 4 million persons were hired in May 2010 (and about the same number are either being laid off or quitting their jobs). So for the most part, even the long term unemployed can find jobs if they are willing to take a cut in their earnings, and/or move to other industries and occupations.

This analysis leads me to the following conclusions. During bad times, 6 months of unemployment compensation may not be long enough, but the 2 years in the new law is too long.  About 9 months of unemployment compensation would be the right length. Anyone unemployed longer than that would lose these benefits. If they want to work they should be forced to adjust, at least temporarily, to the bad economic environment, and accept jobs that they would turn down during good economic times.

 

 

 

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 [K1]“The vote in the House was 272 to 152, with 31 Republicans joining 241 Democrats in supporting the measure. Voting against were 142 Republicans and 10 Democrats.”

 

NYT: http://www.nytimes.com/2010/07/23/us/politics/23jobs.html?scp=3&sq=unemployment%20benefits%20extension&st=cse

 

Fewer senators crossed partisan lines (2 Republicans and 1 Democrat) on this issue.

Comments

[Joshua Norman]

I would personally paid back all my unemployment compensation if the following policies were implemented:
1. The U.S. deports all the illegal immigrants in the country back to their home countries.
2. The U.S. enforces the immigration laws already on the books and removes the anchor baby loophole.
3. The U.S. reduces the number of legal immigrants permitted to enter the country as well as implements formal policies that focus immigration efforts on immigrants with the desired education, skills & capital.
4. The U.S. implements tariffs on imports, particularly on imports from the Third World.
5. The U.S. dedicated the revenue raised by tariffs to cut taxes for individuals, businesses and U.S. corporate entities.

I'm not wedded to these ideas but like the progressives I insist that those oppose to them are duty bound to offer alternatives.

[dan bloom]

Professor Posner, did you see IAN SAMPLE ...Guardian UK article quoting you re risk? short quick qusetion for you, may I? dan bloom, reporter, Taiwan

danny bloom, Tufts 1971
http://pcillu101.blogspot.com

[dan bloom]

is Dr Posner there email me at danbloom AT gmail dot com thanks am in Taiwan for the summer

Professor Posner, did you see IAN SAMPLE ...Guardian UK article quoting you re risk? short quick qusetion for you, may I? dan bloom, reporter, Taiwan

danny bloom, Tufts 1971
http://pcillu101.blogspot.com

[msgnet]

I think unemployment benefits should be scaled back to the minimum amount necessary for the worker and family to remain slightly above the poverty level. But I think these benefits should be available indefinitely. This is both insurance against catastrophic job loss effects and should also prevent moral hazard while being decent and humane at the same time.

[Tyrone J]

There's no doubt in any working person's mind that unemployment benefits should be extended. In light of the tax dollars these hard working people have paid and the golden parachutes and bailouts given to the banks, this is the only way every one else can make it through: http://lawblog.legalmatch.com/2010/03/10/greedy-ceos-are-overpaid-pigs-also-do-not-fly/

[www.999wholesale.com]

good post like it, perfect

[Brian Davis, Austin, TX]

In my opinion the last two extensions of federal support for unemployment compensation might as well be labeled welfare. Who pays for unemployment benefits? Employers, largely the sectors of Corporate America with the largest employee headcounts. Small business pays the unemployment taxes, too, but it's less able than Wal Mart or GE to absorb them or distribute them across a revenue base comprised of great numbers of customers. Small enterprises end up NOT hiring, NOT expanding, NOT incurring new cap-ex, NOT leasing more space, NOT improving employee wages, hours, or benefits. The tax-and-spend crowd likes unemployment compensation, always has. The theory holds that the payments represent economic stimulus that recipients will surely spend at the grocery store, the gas pump, and Wal Mart. I suppose that's true, but since when did unemployment compensation ADD JOBS and INCOMES to the American economy sufficient to offset the ones that disappeared? The answer is NEVER. There's very little any more, if anything, that the principal beneficiaries (retail sector) of unemployment compensation transfer payments can't obtain in sufficient volume and cheaper from non-U.S. suppliers, which, of course, don't pay U.S. and State unemployment taxes, if they pay ANY U.S. taxes. So it's all a huge mismatch, this last go-round to the tune of $33 Billion we can consider unrecoverable vote-buying.

[NEH]

I have an idea. Before anyone is allowed to speak on the topic of "Unemployment Compensation" they should first have to join the ranks of the millions of unemployed created by this current Economic Crisis. It's easy to condemn, when one sits in the position of being comfortably ensconced in a full time paying job with benefits. Try being tossed into the unemployed pool when there are no jobs available except as a "Walmart Greeter" (and then most won't qualify because they're over qualified) and have to maintain ones Health,Home,Life,Auto Insurances, one's mortgage, one's association fees, one's car payment, one's utility bills water/gas/electric/phone, one's food bill and keep shoes and clothes on Dick and Jane's feet and back. These are just the essentials of life in modern America. By Law, indivduals are not allowed to live under the Bridges or set up Unemployed Camps in order to reduce costs.

As for that tired old argument that Unemployment Comp. results in the development of a "lazy" unemployed worker is just B.S. as it always has been. Instead of "Unemployment Comp.", those who are currently unemployed would much rather have a "Full time, paying job with benefits" rather than "Unemployment Comp". So why are there NO JOBS?

Perhaps the sign of the times should read, "If out of work and looking for a job, don't stop in this town. We can't take care of our own." Adapted from signs hung all over America during the "Great Depression".

[Michael]

My state (Colorado) requires all individuals receiving unemployment compensation to apply for x number of jobs per week of benefits received. How does this fit into your calculations? Thank you.

[acuvue oasys]

Totally agree -99 weeks is far too long. I feel this directly ties into a social aspect as well - that by making it so long, people simply aren't motivated to seriously exhaust work search efforts until this time frame nears expiration.

[NEH]

Hey acuvue oasis! Ever been in the unemployment line and had to humiliate yourself just so you could eat. The fact of the matter is, that the Labor aspect of the current Economic Crisis has become so disjointed that the "normal" time on the unemployment role has risen from the "accepted" unemployment interval of three months to six months to nine months to twelve months and longer. I hope someday you get to experience it. Then we'll have to see what you say. And this is coming from an educated highly trained indvidual who's been caught up in this mess. State Dep't of Employment, can't help, over qualified or under qualified.

As for being seriously motivated? I've been putting out anywhere from five to ten resumes a week for the last six months. What happens? They're swallowed up in the Internet wasteland and black hole. Contact the HR Dept's, "How did you get our number? We're not supposed to talk to anyone! We'll contact you!" Network? No one knows anything - no job openings to speak of. Go door to door with hat in hand? Asked to leave or escorted out by Security. And remember the bills still fall due.

I stand by my original statement. Only those who have experienced "unemployment" should be allowed to comment on it.

[Don the libertarian Democrat]

"Once the period of unemployment becomes long enough, people begin to get the habits from being unemployed for a long time: they sleep late, develop various leisure interests, and at the same time their work skills depreciate from not using them for an extended period. Studies have shown that skill depreciation is a serious effect of being unemployed for a long time."

This is so silly it defies belief. When you go to a job interview, has anyone ever been told "We hear you've been sleeping late". You can only go to so many interviews. In fact, a lot of pre-interviews are now done online. Plus, sleeping late compared to what? You don't even know the hours of the job you might get. And what are these skills?

It's also illegal. If this fraud is so rampant, it should be easy to find. You have to list every 2 weeks the places you applied for work at and who you talked to. Plus, I paid in for 37 years before using it, only to get a small amount.

I have yet to see one piece of evidence compiled from following actual human beings. The idea that you can easily find a job right after your UI ends is silly. If it's not, show me the people and the jobs. As for moving, it costs money and there's no assurance you'll get a job.

It's about as scientific as saying that the people who don't join the military are cowards, whatever other reasons they give for their decision.

[Zorba]

It is exactly these policies that have made Europe a continent with past, current and future long term growth prospects in the self-extinction range of 1.5% per year; IN SPITE of the fact that Europeans, as individuals are more competent than the average American.

Therefore, for the US, a fraction of the European Welfare state burden will be enough to set the US on a similar perpetually anemic 1-2% annual growth rate. If the rate of the current recovery is so weak, what will the steady state long-term growth rate for the US be?

Therefore – as I keep reminding as a broken record now – in a world that grows by 4% on average, the US and Europe will loose standard of living at a rate of about 2.5% per year compared to the rest of the world. Of course, compounding inevitably leads to a situation where in a mere 30 years (one generation) the standard of living of Europeans and Americans compared to the rest of the world will have halved (1.025^30), with no end in sight. So with such a desperate future facing their children, what will Americans do? You guessed it! Vote for even more redistribution and more taxes i.e. even slower growth.

This, in a nutshell, is the Grecian vicious cycle at work, which is now eating the bowls of American exceptionalism. Once past the tipping point, there is no return. Just hope that you have not past it yet and can/will, make a 180 turn soon.

P.S. BTW, a fact that is ironically prescient and perhaps not quite a coincidence. Do you know the slogan under which the 1st socialist Greek prime minister (Mr. Andreas Papandreou, the man most responsible for setting in motion Greece’s eventual bankruptcy) got elected? That’s right: “Αλλαγή”, spelled “Allaghi” that is: “Change”. Who is in the Vanguard of political progress? The US or Greece?

http://www.yourdictionary.com/biography/andreas-papandreou
“…Papandreou campaigned with the slogan Allaghi (change), which led to PASOK’s triumph with 48 percent of the vote and 173 seats in Parliament….”

[Eric Smith]

Seriously we have people who have been on unemployment for 2 years, the system rewards them for not moving on. The system itself it highly flawed.

[J]

Let's see. Under U.S. Poverty Guidelines, a single person family with an income of under $10,830 in the 48 Contiguous States and the District of Columbia is considered to be impoverished. If it is a family of 2, the income level is $14,570. Unemployment pays somewhere between $200 and $300 per week. So, that's somewhere between $10,400 and $15,600 over the course of a year.

Anyone who thinks people on unemployment have it made just does not understand and should try living as an unemployed American for a little while. They also fail to grasp economics and unemployment levels. Jobs do not simply appear in the economy because people are looking for work. In fact, unemployment rolls increase when more people begin looking for work. Additionally, there has to actually be a demand for workers for there to be a reduction in current unemployment levels.

I feel that your analysis of comparing unemployment insurance to other forms of insurance fails to take into account that the premiums are paid each pay cycle out of the employee's paycheck.

The unemployment system could be improved with more job training and more government works programs to actually improve and enhance an unemployed person's job skills and making them more marketable to future employers but I doubt the funding is there for these programs.

[B. G.]

That’s right. Jobs do not just appear because people are looking for work – in the short term over a period of months that is.

But when American and European workers demand higher salaries and benefits (including unemployment benefits) beyond the economic fundamentals of worldwide competitiveness, then jobs do disappear. Not only that, but job scarcity then becomes permanent and endemic (see European perpetual high unemployment).

[C. Ling]

Perhaps people should take some personal responsibility and build safety buffers (savings etc.) for hard times, including recessions. Personal planning and responsibility? What a novel concept! Perhaps could have used two instead of three cars per family all these years, or a two bedroom rather than a three bedroom house etc. and put some money aside. Perhaps maybe even invest it, if I dare imagine. Is it really that hard to save 10% of your income in America, regardless of income level? Would it really degrade one’s standard of living that much, regardless of wealth level?

[Dean]

unemployment is such a grey area, you have the geneuine people out of work, and looking for new employment this is what the system was set up for.
And the other people who cheat the system and taking Tax payers money.
These sound be made to pay the money back with Interest.

[Hyena]

The idea that "it's not significant stimulus" but also a budgetary concern seems laughable to me. It's insignificant as stimulus because it is also insignificant in the budget, representing less than one-tenth of one percent of the budget.

So far, Fed analysis estimates that the impact of unemployment extensions on the unemployment rate is between 0.4% and 1.7% with the 1.7% being doubtful because it is based on a paper using data inapplicable to hiring practices since the late 1980s or so (namely layoff-rehire cycling, which is no longer common). A number closer to 0.4% seems likely.

Whatever the theoretical problems with unemployment insurance, the actual magnitude of the problem seems very small, amounting to between several hundred thousand to just over a million people in the labor force. Any marginal improvements in employment seem very small, especially if people are settling for lower wages (and hence likely lower levels of labor utilization). Reforms which increase worker stress seem unlikely to realize economic profits relative to the insurance scheme and reforms that work primarily by enhancing liquid savings present the possibility of creating artificial demand for liquid, high-quality assets (a problem that got us to this recession). I find the case for reform dubious and the proposals even more so.

[Andrew Potter - Make Money Online Like A Guru]

In my opinion, part of the economic problems currently being faced are due to the "handouts" being made. A rather sweeping statement I know, but the systems set up are generally flawed and open to abuse.

As a previous commentor made a point, there are too many people who cheat the system and also too many people who just aren't interested in employment.

I am always amazed at how easy it is to get "free money" - should people not be made to work for it in some capacity?

[new balance]

The office of the scholar is to cheer, to raise, and to guide men by showing them facts amidst appearances.Do you understand?

[fdsgfg]

Seriously we have people who have been on unemployment for 2 years, the system rewards them for not moving on. The system itself it highly flawed.http://www.wxshenzhou.com/

[Ignacio]

I think that this discussion is due only to the lack of market mechanisms.
Let me provide an example: In the case of Chile, the unemployment insurance is a mandatory saving (that create a personal account) + a tax (that create a public fund). The money is invested on the capital markets and the information is available (you receive a letter every 6 months with the data on your personal account and you can reveiw every time that you want on internet).
In the case that you need it, you will use the your personal account and if you don't have enough funds, then the public fund will put the money that you need. There is a time limit and the payment is decresing with time. For example the first month you receive X, the second 0.8X, the third 0.6X, until month 6 (I am not sure if it is 6 or 4).
The key issue is the link with ownership, due to that if I never use those funds, then the money will go to my pension account without taxes. As a consequence, I have the incentive to use the money only if I need it. Obviously this incentive is less strong if you have less money on your account.
You can get more information on http://siteresources.worldbank.org/SOCIALPROTECTION/Resources/SP-Discussion-papers/Labor-Market-DP/0612.pdf

PS: The pension system is a private system with personal accounts and the money is invested on capital markets, not like social security

[Jaime L. Manzano]

Perhaps unemployment benefits should result in increasing the age of eligibility for Social Security benefits by the same amount of time that the present unemployed receive unemployment benefits. That way, part of the unemployment costs would result in reducing the unfunded liability of Social Security by delaying future benefit outlays.

[Joshua Norman]

With regards to the criticism of unemployment benefits by B.G., Eric Smith, Brian Davis, acuvue oasys, Andrew Potter, C. Ling and fdsgfg will your allies in the business community stop bringing in cheap exploitable immigrants, legal or illegal and stop the practice of offsoring jobs to Third World countries? If illegals had been deported and the US limited immigration to those with advanced education, the number of unemployed would be no more than one-third of what it currently is, in spite of weak economic growth during the decade.