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The downside of unemployment benefits

at 12:00 PM ET, 12/17/2011

Congress still hasn’t reached an agreement over the unemployment benefit extension that expires at the end of this month. Republicans argue that the benefits will actually increase the unemployment rate, as workers on the dole will be less motivated to work. Democrats say the $44 billion in additional benefits will boost the economy while helping the downtrodden. A new study may help put Congress’s cost-benefit calculation into better perspective.


(SOURCE: AFP/GETTY IMAGES)
In a paper for the National Bureau of Economic Research, Jesse Rothstein finds that the recent expansion of unemployment insurance (UI)— extending benefits from 26 to 99 weeks—does increase unemployment, by up to 0.5 percent. But Rothstein’s estimates are also significantly lower than previous research on the issue. And none of these estimates factors in the additional jobs that could be created due to the UI program’s boost to GDP.

Rothstein, a public-policy professor at the University of California-Berkeley, looks at the impact of extending unemployment benefits from 26 weeks to 99 weeks—an extension Congress has taken up in fits and starts since July 2008. He explains that extending benefits can reduce some motivation to search for work: as their benefits expire, people tend to look even more intensively for work, so extending benefits would decrease that pressure. But the overall impact on the unemployment rate is small. On the other hand, UI benefits can also encourage the jobless to continue searching for work when they otherwise may have stopped looking and dropped out of the labor force altogether.

Overall, Rothstein estimates that unemployment benefits contributed about a 0.2 percentage point increase in the overall unemployment rate between 2007 and 2009. And he estimates that the UI benefit extension that Congress is currently considering would increase the unemployment rate by 0.1 to 0.5 percent in 2012, assuming they are extended by a full year. Rothstein’s figures are lower than other recent estimates: a number of economists concluded that the UI extension raised the unemployment rate by 1 percent in 2010 and 2011, with some saying the effect is many times higher.

So unemployment benefits do contribute to increased unemployment, but the impact may be smaller than previously thought. What’s more, the UI extension has other, more positive effects on the economy as well. The $44 billion program would increase GDP in 2012 by 0.3 percent by putting money in consumers’ pockets, according to J.P. Morgan’s chief economist, which in turn could help boost the employment rate.

Congress just passed a two-month UI benefit extension, but Democrats still want a full-year extension, so the issue will come up again shortly.

 
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