Extending unemployment insurance

Extending unemployment insurance

I would like to offer a few thoughts on extending unemployment insurance.

Supply-side effects & the tradeoff

There are negative supply-side effects from providing unemployment insurance (UI) benefits. The best estimates I have seen suggest the current 9.5% unemployment rate is 0.5 – 1.0 percentage points higher than it would otherwise be because of previously-enacted expanded and extended UI benefits. I will start by using the bottom end of that range (0.5).

I use 5.0% to represent full employment. We are 4.5 percentage points above that. If we did not have expanded UI we would be 4.0 percentage points above full employment. That means for every 9 people out of work, one is being discouraged from taking a new job because of the expanded benefits (0.5 / 4.5). Said another way, eight people who would like a job but cannot find one are getting more generous UI benefits for each person who is getting those same benefits and choosing not to take a new job. We have to make a tradeoff between our desire to help those who want a job but cannot find one and those who would choose to stay unemployed while they have extra benefits.

The judgment call for policymakers: does an 8:1 ratio make a UI extension good policy? I say yes. If, however, the supply-side disincentive is a full percentage point, then we have a 3.5:1 ratio. That is a tougher call, but I would still say yes. Given the range of possible supply-side disincentives, I would recommend extending UI benefits when the unemployment rate is 9.5%.

I assume that most everyone would agree that at full employment it is foolish to provide more generous UI benefits. So somewhere between 5.0% and 9.5% there is a breakpoint at which the supply-side disincentive is not worth the compassion benefit of providing aid to others who want a job but cannot find one.

At a 7% rate our ratio is between 1:1 and 3:1. At an 8% rate it’s between 2:1 and 5:1. My breakpoint is around 8%. I would support a (paid for) UI extension as long as the rate is 8% or above. There is nothing magical about this judgment, and yours may differ.

Stimulus effects

The fiscal stimulus argument in favor of extending UI benefits is silly. The numbers are too small. The pending legislation would spend $33 B over the next year on UI benefits. In a $14+ trillion economy, that’s less than one-quarter of one percent of GDP. When you’re running a 10% deficit, another 0.2% is not meaningful. Sure you can argue that “every little bit helps,” and yes the unemployed are likely to spend almost all of the assistance they receive. But the reason to extend benefits is to help those people who would receive them, not because the cash will significantly accelerate economic growth and benefit everyone else. If this $33 B of spending were concentrated into a month or two it might be barely big enough to register, but it would be spread out over the next year. $3 B per month is a lot of money, but not when compared to a $1+ trillion per month economy.

For instance, the second (bolded) phrase of this statement by Speaker Pelosi is a huge stretch: “These benefits help struggling families make ends meet, boost consumer demand to spur hiring by small businesses, and strengthen our economy as a whole.” This effect is so trivially small that no one could reasonably claim to estimate or measure it.

The Republican position

While a few Congressional Republicans are arguing that UI benefits should not be extended, the overwhelming majority are for an extension as long as the deficit impact is offset. The $33 B deficit increase could be offset immediately by other spending cuts or tax increases. For those who ignored my last point (too small to matter from a macro fiscal stimulus perspective), you could easily offset the $33 B by enacting changes now that would reduce spending by $33 B beginning three or four years from now. This eliminates the “contractionary” excuse for not offsetting the spending increase.

There is overwhelming bipartisan supermajority support for a UI extension if it is offset. Speaker Pelosi and Leader Reid chose not to follow this path, presumably because it would split their side of the aisle. They instead chose a partisan route that resulted in partisan stalemate, and we are now in the midst of a traditional blame game. Do not be fooled into thinking this is a debate about whether to extend UI benefits. It is instead a debate about whether that increased spending should be offset by spending cuts or instead increase the deficit.

Reducing the supply-side disincentive

There is a simple way to reduce the labor disincentive from expanding and extending UI benefits. In 2003 President Bush proposed personal reemployment accounts as a substitute for expanded unemployment insurance benefits.

The program would have spent $3.6 B to provide 1.2 million unemployed people who are least likely to quickly find a job with a $3,000 account. That person could make regular incremental withdrawals from the account for reemployment services: job training, search services, transportation costs, child care, or even getting a suit cleaned for interviews. If the person started a new job within 13 weeks of receiving his first UI payment, he could keep any balance in the account as a cash reemployment bonus. If he did not, he could continue making regular withdrawals from the account to use for reemployment services while receiving UI benefits.

This bonus feature would reduce the incentive for workers to remain unemployed so they could keep receiving benefits. A worker who takes a job today will get part of that future stream of benefits in a lump sum payment.

Unemployed workers are not a uniform population. Some need help with their job search, while others need retraining. Still others need transportation or child care while they look for work. Rather than having government determine how to allocate these funds for the unemployed, a PRA would allow a worker to decide how best to use his account funds for any purpose related to finding a new job.

Reemployment bonuses have been tried in the past. In the 1980s experiments were conducted in Washington, New Jersey, Pennsylvania, and Illinois. Workers were provided with reemployment bonuses of between $300 and $1,000 if they found a job before their UI benefits expired. These bonuses reduced the amount of time workers remained unemployed by about a week, and the new jobs they took were comparable to those who did not get bonuses.

In the recession of 2003 Congress rejected (ignored, really) President Bush’s PRA proposal on a bipartisan basis. At the time a cynical legislative expert friend said, “Republicans hate personal reemployment accounts because they know they won’t work. Democrats hate them because they know they will.”


  • Congress should extend unemployment insurance benefits as long as the unemployment rate is above 8%. I would extend the law for six months and then reevaluate.
  • Congress should offset the deficit increase from this new spending by cutting an equal amount of spending, effective three or more years from now to remove the silly anti-stimulus argument.
  • Congress should allow States to instead use the additional funds to experiment with personal reemployment accounts for those who are hardest to reemploy.

20 responses

  1. Pingback: Tweets that mention Extending unemployment insurance | KeithHennessey.com -- Topsy.com

  2. Pingback: The Unemployment Benefits Debate | TightWind

  3. Mr. Hennessey,

    Another great analytical post. As a non-insider, I appreciate the wealth of explanation you provide in your posts. I did have a question and an idea about unemployment that I can't evaluate well due to my policy ignorance.

    Question: Early on, you say "The best estimates I have seen suggest the current 9.5% unemployment rate is 0.5 – 1.0 percentage points higher than it would otherwise be because of previously-enacted expanded and extended UI benefits." Statistically, where do you derive this idea from, that UI benefits discourage job-search? I observe it anecdotally, but am unsure how this would be tracked.

    Idea: Unemployment benefits presently restrict the recipient to either collecting unemployment, or being employed. This seems to create a risk aversion situation where the safe bet is collecting unemployment until they run out. Each of my coworkers and myself know at least one person apiece who is collecting unemployment and not looking for work at all, planning to start only when their benefits run out. The rational actor, then, would do exactly that: take their guaranteed money until it stops coming, and then look for work. My proposal is to continue paying UI benefits for the full term of benefits, which should be significantly shortened to help offset the costs of paying these additional benefits. This would reverse the negative incentive to look for work by making a "bonus round" for people who get a job quickly, either an opportunity to replenish lost savings from being jobless, or as a direct stimulus to the end user.

    Benefits: (1) make a positive incentive for the unemployed to get work, (1a) remove a negative incentive for the unemployed to get work, (2) potential stimulation of economy at a consumer level, (3) simplification of UI budgeting? (not sure if applicable), (4) probable shortening of employment gap

    Drawbacks: (1) higher guaranteed payout per user of UI benefits, (2) easy to spin as a push toward a welfare state, (3) uncertainty regarding magnitude of response to provided incentive (we don't know how well it would work).

    I understand that this would fly politically about as well as a concrete hang glider, but the important take-away idea is the negative incentive to job-seeking that we currently have in place. I don't hear that talked about often, and as such I am unsure whether my knowing a wealth of UI abusers is a niche thing and not happening on a large scale, or if it's happening on a large scale indicating a failure in data collection.

    A more politically palatable alternative might be to leave UI benefits as they exist today, but with a 6 month guarantee of payments within a maximum 18-month window. BLS statistics indicate that as of June, median time of unemployment is 25.5 weeks, and mean is 35.2 weeks, so 6 months seems like a great place to stick the goalpost for guaranteed benefits.

    I've run this idea by a few different people I know personally, nobody influential, and they, my fellow Joe Sixpacks, agree with me that this is a terrific idea. I'm really interested in how terrible of an idea you think this is – there has to be something I'm missing or somebody would already be proposing this.

    Thanks for another thoughtful post!

    • …or perhaps, rather than some guaranteed UI benefit payout, the UI benefits could incrementally decrease over time, perhaps every several months, such that the longer one fails to obtain employment, the less incentive one has to delay taking what is offered.

      Simple enough, but it worked as incentive for my kids to complete their [few] household chores earlier rather than later. ;-)

  4. Pingback: Extending unemployment insurance | KeithHennessey.com « blog01 – new life.

  5. Pingback: Extending unemployment insurance | KeithHennessey.com | Other Insurance | Save money right here!

  6. Pingback: Is auto insurance company required to pay for car rental AND tax? | car auto insurance

  7. Pingback: Is the auto-insurance claim information shared if I switch the insurance company? | free auto insurance quotes

  8. Pingback: Latest Car Auto Insurance Auctions | car auto insurance

  9. Pingback: philadelphia auto (car) insurance? | car auto insurance

  10. Pingback: Auto Car Insurance Laguna Niguel Car Auto Insurance | car auto insurance

  11. Pingback: living in north carolina, car has no auto insurance, what can happen? | car auto insurance

  12. Thanks for all the data, but your rational is baloney. Not extending benefits is purely and simply a political move designed to damage Obama/dems on the econ. People sending money revives the econ, if you run out of benefits, you having nothing to spend.

    I can't say if the roles were reversed, a dem congress would not do the same to a gop president.

    But your explanation fails the sniff test.

    That is all.

  13. You can't say that the stimulus effect is "silly," and also argue with a straight face that these temporary benefits need to be "paid for." If they don't have any stiumulative effect on the $14 trillion economy, they certainly have even less effect on the medium/long-term federal deficit.

    The primary reason to call for this temporary emergency spending to be "paid for" is to use is as an excuse not to spend the money (because you don't believe in unemployment), or because you want to use it as an excuse to cut somewhere else. No need to dress those motivations up. Just be honest.

  14. After reading about the idea of PRAs, it strikes as something created by someone who has never been unemployed. That may be a good idea if all the criteria to gain employment was the same for everyone. There are some people who lose a job and find it difficult to find another job due to issues such as felonies, lack of training, and of course being unqualified. For the situations where the applicant has a felony, they may be actively seeking employment but can and will get turned down as a grocery bagger. If Congress feels it is prudent to punish the unemployed, they need to reconsider the possible situations people face.

  15. Great post.

    Just to clarify the Republican position: You state: "..the overwhelming majority are for an extension as long as the deficit impact is offset." This isn't quite true. The overwhelming majority would only agree to a reduced spending offset rather than a small tax increase offset. Your recommendations seem to assume the offset be made on the spending side, which answers more directly the objection. But we need to be clear that there are very few (if any) fiscal problems that the GOP would answer with a tax increase in the mix.

    Your third recommendation really nails it, and might be the easiest to have happen. The unemployed are not uniformly out of work for the same reasons and those reasons vary regionally. Also, the idea of the PRA can certainly be made to work within the current UI benefits by incentivizing job searches through the use of some unused benefits as a bonus.

  16. Pingback: Our Ways of Telling Ourselves Who We Are « Just Above Sunset

  17. Pingback: When Presidents attack | KeithHennessey.com


Get every new post delivered to your Inbox.

Join 6,289 other followers