Back to previous page


What the debt ceiling deal means for the unemployed

By ,

The debt-ceiling deal, as we know, contains no stimulus. Nothing on jobs. No relief for the out-of-work. And that’s a real worry because, at the end of this year, existing emergency unemployment benefits — the ones that were extended as part of the 2010 tax-cut deal — are set to expire. Yet there are still millions of Americans who can’t find work. So what happens to the unemployed at that point?

First, a quick primer on how unemployment insurance currently works, via a handy chart from the Center on Budget and Policy Priorities:

The first column is what people ordinarily get from the states — 20 to 26 weeks, depending on the state. The next two columns — with benefits extending up to 99 weeks — are benefits funded partly or wholly with federal aid. About 3.8 million people are in those latter two columns, with the average benefit running about $300 per week, and these are the programs scheduled to lapse at year’s end. Once that happens, anyone who’s in a given tier and still doesn’t have a job can’t move up to the next one. And anyone who loses their job after July 1 this year will get the 20 to 26 weeks, no more.

If jobs were plentiful and the unemployment rate were low, that wouldn’t be a pressing concern. But the job market is dismal. It’s hard to sketch out a scenario where the employment picture at the end of 2011 is significantly rosier than it was at the end of 2010 — when Congress thought it utterly necessary to extend benefits. “All the facts suggest that if we extended unemployment benefits last year, we should extend them this year,” says Judy Conti of the National Employment Law Project.

The macroeconomic effects of failing to extend could be significant. Chad Stone, an economist at CBPP, walked me through a back-of-the envelope calculation. Currently, about 3.8 million people receive those additional, federally funded benefits scheduled to expire. The average benefit is about $1,300 a month. That comes to roughly $60 billion a year in spending. Now, UI benefits are one of the most effective forms of stimulus out there — people without jobs tend to spend most or all of the money, rather than pocket it. Moody’s chief economist Mark Zandi estimates that every dollar spent on unemployment benefits boosts GDP by about $1.60.

Add it all up, and letting unemployment benefits dwindle could provide a hit to the economy of about 0.5 percent of GDP. That’s a sizeable dent, especially when we’re barely seeing any economic growth as it is.

Meanwhile, the effects would ripple down to the state level. Conti notes that 33 states are already borrowing money from the federal government to pay their unemployment benefits. (In his January budget, President Obama proposed waiving state interest payments, but that idea went nowhere.) If Congress doesn’t extend aid, states probably will restrict eligibility and cut back existing benefits even further. Stone points out that a lot of states have automatic triggers that will automatically cut unemployment programs if federal money stops flowing.

Conservatives might be inclined to say, fine, that will force people to look for work. They might even cite Harvard economist Robert Barro’s suggestion in the Wall Street Journal that the jobless rate would be 3 percent lower if unemployment hadn’t been extended to 99 weeks. But there’s reason to think Barro’s wrong. Conti points out that there are now at least five unemployed people for every one job opening — the main roadblock here hardly seems to be lazy, unmotivated laid-off workers living high on fat UI benefits. Second, two recent studies by the San Francisco Fed and Goldman Sachs suggest that extended unemployment benefits contribute just 0.4 percent to the jobless rate. Cutting off aid would produce a small gain in exchange for a lot of extra hardship.

Meanwhile, apart from stimulus, unemployment benefits can also benefit the long-term health economy in another way, as Harvard’s Raj Chetty has argued. In a bleak job market, when unemployment benefits expire quickly, out-of-work folks tend to seize the first opportunity that comes along — even if it’s a job for which they’re not particularly suited. We end up with the specter of engineers, desperate to make ends meet, settling for low-wage food-service jobs. Giving people extra time to search can lead to more optimal outcomes.

That all said, it’s hardly assured that unemployment benefits are a lost cause. Congress still has five months to act. But, at least for now, the issue isn’t garnering much attention.

© The Washington Post Company