Unemployment benefits for 1.3 million expire Saturday. Here’s why.

December 23, 2013

On Dec. 28, roughly 1.3 million out-of-work Americans will lose their unemployment insurance. That's because Congress declined to renew an emergency aid program for the jobless that's set to expire that day.

(Photo by Joe Raedle/Getty Images)
(Photo by Joe Raedle/Getty Images)

This could still change: Senate Democrats have said they'll come back in early January and try to renew the Emergency Unemployment Compensation program for another year, which would cost roughly $25.2 billion. But if that effort fails, the nation's safety net for the unemployed will shrink significantly in 2014.

So, here's our primer on what this emergency unemployment program is and why it's shrinking, as well as the arguments for and against renewing it.

What is the Emergency Unemployment Compensation program? The unemployment insurance program, which dates to 1935, provides laid-off workers with a fraction of their old salary for a fixed period of time while they search for a new job. In 2008, Congress expanded this program to deal with the recession. That expansion is what's at issue.

To get more specific: In normal times, the states and federal government work together to fund up to 26 weeks of unemployment benefits. (The precise number varies from state to state — North Carolina only provides up to 19 weeks, Michigan 20 weeks.) When unemployment is particularly high, states can usually get some federal funding to provide an extra 13 or 20 weeks of "extended benefits."

But starting in 2008, Congress expanded this program significantly. First, the federal government promised to pick up the entire tab for those "extended benefits" and made it easier for states to receive this money. Second, Congress created the Emergency Unemployment Compensation program to provide additional aid to workers when their state benefits ran out.

This additional financing has shrunk somewhat from its peak — currently only about one-third of the 4.1 million long-term unemployed receive benefits, and budget cuts have pared back benefit levels. Even so, at the moment, many states still offer up to 63 or even 73 weeks of unemployment aid, and benefits average around $300 a week.

What will change when this program expires on Dec. 28? This is best shown in map form. Again, most states currently offer jobless benefits for up to 63 or 73 weeks:

But come Dec. 28, the maximum length of time that states can offer jobless benefits will suddenly drop to 26 weeks or less:

That means anyone who was on, say, his 36th week of benefits will suddenly get cut off.

How many people will be affected by this change? Starting at the end of the year, some 1.3 million people who have been out of work and receiving benefits for longer than 26 weeks (or less, in some states) will lose those benefits immediately.

Then, over the course of the year, other unemployed workers will fall out of the program once they hit 26 weeks (or less). All told, the Center on Budget and Policy Priorities estimates that 4.9 million people will get less unemployment aid than they would under an extension:

Or: The Wall Street Journal has a nice interactive map showing where the workers likely to be affected all live. Nevada, California, Illinois, Georgia, and New Jersey are among those states that get hit hardest:

extended benefits map

Can't workers who lose their unemployment benefits find jobs? In theory, sure. But this isn't as easy as it sounds. The economy is still pretty weak, and there aren't always enough jobs to go around — the Bureau of Labor Statistics estimates that there are now  about 2.9 unemployed workers for every job opening. That's worse than the ratio at any point during the 2001 recession.

What's more, the long-term unemployed — those who have been out of work for 27 weeks or more — face additional challenges. Studies have found that most companies will barely even consider their résumés. Employers seem to assume that if these workers have been unemployed for so long, there must be something wrong with them. Most of the 1.3 million workers who are seeing their benefits cut off are in this category.

If they can't find work, what will happen to people who lose their benefits? That's not entirely clear, since there are few studies that track these workers.

One possibility is that they'll try to get on disability insurance. But a recent NBER working paper by Andreas Mueller, Jesse Rothstein and Till M. von Wachter found that in the past, by and large, American workers have not been going on disability after their unemployment benefits have lapsed. After all, it's not easy to qualify for disability.

Another possibility is that they'll simply drop out of the labor force entirely. That was the conclusion of a recent research note from JP Morgan chief economist Michael Feroli, who argued that many of those 1.3 million workers may simply give up looking for jobs once their benefits lapse. Many of those workers were only continuing their search in order to qualify for benefits. Once the aid is gone, they'll stop looking.

(It's worth noting that North Carolina recently slashed its state unemployment benefits, so that's one place to look for a possible answer here. So far, the evidence is a bit ambiguous — Evan Soltas and Kevin Erdmann bother offer good analysis.)

Will the expiration have a broader economic impact? Yes, possibly. First, if workers who get cut off stop looking for jobs, they won't count in the "official" unemployment rate. JP Morgan's Feroli estimates that this rate could drop from 0.25 to 0.5 percentage points. But that lower rate won't be a sign that the economy is getting any better.

The lapse in benefits could also exert some drag on the U.S. economy, since those jobless workers will have less money to spend. Feroli estimates that the expiration of benefits will shave about 0.4 percentage points from first-quarter economic growth next year. The Economic Policy Institute recently estimated that the lapse will cut GDP by about 0.2 percent and cost 310,000 jobs.

This is an emergency program. Isn't the emergency over? That's one argument for letting the extended benefits lapse. The program was never supposed to last forever. So why not end it now?

One counterargument comes from economist Chad Stone of the Center on Budget and Policy Priorities, notes that that, technically, we're still facing a jobs "emergency." That's particularly true for workers who have been out of work for 27 weeks or more — the people most likely to be affected by the cut-off in benefits:

In each of the previous three recessions, Stone notes, federal aid for the unemployed didn't end until the long-term unemployment rate had dropped to around 1.3 percent. Right now, the nation's long-term unemployment rate is falling, but it's still at 2.6 percent, roughly as high as it's been at any point since World War II.

Is Congress going to do anything to offer more aid? Possibly, though that's not certain. Lawmakers could have folded a one-year extension of the emergency program into their end-of-the-year budget deal, which would have cost $25.2 billion. But that didn't happen.

Senate Democrats are planning to push for a one-year extension when they get back to work in January. That extension would apply retroactively to the 1.3 million people who see their benefits end on Dec. 28.

"It's a good bill, and it deserves a vote, and I hope my Republican colleagues will work with us to schedule a vote in a very timely fashion," Senate Majority Leader Harry Reid (D-Nev.) said this week. And at least some Senate Republicans have signaled that they'd be open to an extension.

Are there opponents of an extension? Other Republicans object to the idea, including Sen. Rand Paul (R-Ky.). "I do support unemployment benefits for the 26 weeks that they're paid for. If you extend it beyond that, you do a disservice to these workers," Paul said this month. "When you allow people to be on unemployment insurance for 99 weeks, you're causing them to become part of this perpetual unemployed group in our economy."

Still other conservatives don't want to spend $25.2 billion to extend the program unless it's offset by cuts elsewhere. "What is it coupled with? How is it paid for? Are there reforms in how it's being administered?," Sen. Bob Corker (R-Tenn.) told National Journal.

Is this the only way to help the long-term unemployed? No. Far from it. Michael R. Strain is a conservative economist at the American Enterprise Institute who has done a lot of work on the long-term unemployed. He thinks the emergency aid program should be extended. But he also thinks that it's insufficient, and that Congress should be doing far, far more to help 4.1 million long-term unemployed get back to work.

Some ideas: Strain has proposed that policymakers try everything from job-relocation assistance to reducing the minimum wage for some of the long-term unemployed (and adding wage subsidies). His AEI colleague Kevin Hassett has proposed that the government directly hire workers who can't find work elsewhere. On the liberal side, Dean Baker of the Center on Economic and Policy Research has proposed a variety of ideas, such as incentives for employers to hire or "worksharing" programs.

"The role of government is to help the most vulnerable in society, and helping the long-term unemployed should be at the top of that agenda," Strain told me. "And anything we can do to help within reason should at least be discussed."

Further reading:

-- CBPP has a more detailed primer on the history of the unemployment insurance program.

-- Michael Strain explains why we should worry much more about long-term unemployment. Dean Baker offers further thoughts here.

-- Here's a closer look (pdf) at the demographics of the long-term unemployed from the Urban Institute.

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