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Five myths about unemployment

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By Heidi Shierholz
Sunday, July 25, 2010

After a hard-fought political battle, President Obama signed legislation Thursday restoring benefits to the long-term unemployed, aid that had expired more than seven weeks before. Under the extension, unemployed workers can receive up to 99 weeks of income assistance. Helping the long-term jobless in a prolonged recession is generally a bipartisan issue, but this time, Republicans argued that the measure will add too much to the national debt. It's a discussion that gets bogged down in myths about how to assist the long-term unemployed, and the economy, at the same time.

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1. Unemployment benefits make people less likely to find jobs.

It's true that if people receive unemployment benefits, they tend to take slightly longer to find a new job. That's the conclusion of a number of studies. Unemployment insurance replaces a maximum of half of a worker's prior wages (up to a cap), and when we're not in a prolonged recession, it gives laid-off workers a little breathing room to find a job that matches their skills and experience. This is one of the goals of the unemployment insurance system, since the economy works best when people are in jobs that maximize their skills.

Today, however, unemployment insurance isn't providing breathing room -- it's providing a lifeline. There are now roughly five unemployed workers for every available job. That doesn't mean there are five applicants for every job opening; there may be scores of applications for every posting, as people apply for many jobs. Instead, it means there literally aren't jobs for four out of every five unemployed workers. This is why nearly half of the unemployed have been out of work for more than six months, the maximum duration of state unemployment benefits.

In this environment, allowing extended unemployment benefits to expire would indeed make workers who have exhausted their aid more desperate to find work. But it wouldn't make them more likely to find work, because the jobs don't exist.

2. Unemployment insurance doesn't contribute to economic recovery.

Perhaps surprisingly, providing assistance to the unemployed is one of the most effective ways to create more jobs. The logic is straightforward: For laid-off workers, unemployment benefits replace only part of their prior income, meaning these workers are very likely to have no choice but to spend those benefits on necessities such as food and rent. Virtually every dollar spent by the government on unemployment insurance thus goes toward the eventual purchase of local goods and services, which boosts demand and saves jobs. This is why aid to long-term unemployed workers is consistently rated by the Congressional Budget Office as one of the most cost-effective forms of stimulus. I estimate that the unemployment compensation provisions in 2009's American Recovery and Reinvestment Act raised gross domestic product by 1.2 percent above what it would have been otherwise, supporting the equivalent of 1.2 million full-time jobs.

3. We can't afford to do this right now.

The deficit will reach about 10 percent of GDP this year, and many have used the deficit issue to attempt to block a wide range of legislation, including the unemployment insurance extension. For example, Senate Minority Leader Mitch McConnell (R-Ky.) said on Tuesday: "What we do not support -- and we make no apologies for -- is borrowing tens of billions of dollars to pass this bill at a time when the national debt is spinning completely out of control."

Efforts to assist long-term unemployed workers and generate jobs will add slightly to the deficit, but not enough to have any significant effect on our budget shortfalls in the long term. The large deficit we have now is predominantly due to the severe downturn, which means that the government brings in less revenue as people who've lost jobs or had hours or wages cut pay less in taxes, as do firms that have seen profits fall, and that government expenditures for programs associated with joblessness, such as Medicaid and food stamps, rise. Explicitly short-term policies to fight the recession, such as the Recovery Act, have also been enacted. This is all expected during a downturn, and it is temporary.

The United States does face budget challenges that will require policy action in coming years. But the primary causes of our long-run deficits are rising health-care costs and low revenues. According to an estimate by a colleague of mine at the Economic Policy Institute, Josh Bivens, the Recovery Act is probably responsible for no more than 1 to 2 percent of this country's long-run fiscal gap. Skimping on assistance to unemployed workers will not help with our long-term budget problems, and it could threaten the economic recovery.

4. The private sector can take care of unemployment on its own.

It's true that there is some good news from the labor market: The economy is adding jobs again. In the first six months of this year, the private sector gained nearly 100,000 jobs each month, on average. But the bad news is that between December 2007 and December 2009, the private sector shed 8.5 million jobs -- a staggering loss. We are not yet adding jobs fast enough to significantly undo that damage. The unemployment rate will probably hover near 10 percent for another year, and improvements after that are likely to be painfully slow. The most recent forecasts by the Congressional Budget Office show unemployment averaging 6.3 percent in 2013. This may sound welcome compared with where we are now, but it is higher than the worst annual unemployment rate during the recession of the early 2000s, 6 percent. To help understand why the labor market will take so long to recover, consider this: To get down to the pre-recession unemployment rate within five years, the labor market would have to add an average of roughly 280,000 jobs every single month between now and then.

5. The unemployment rate gives us a good sense of how many people are affected by the downturn.

The unemployment rate may be 9.5 percent, but that doesn't come close to measuring the share of the workforce that is directly affected by the crisis in the labor market. The underemployment rate, for example, now stands at 16.5 percent. This measure includes not just people who are officially counted as unemployed, but also jobless people who have given up looking for work and people who are working part time but want full-time jobs. But even that number doesn't include people who have had to accept a job that is below their skills, training or experience level.

The unemployment rate also masks enormous variation in joblessness within the population. In recessions, racial and ethnic minorities, young workers and workers with lower levels of education tend to be hit particularly hard. For example, right now the unemployment rate for whites is 8.6 percent, but it's a staggering 15.4 percent for blacks. Furthermore, with unemployment so high, employers do not have to pay significant wage increases to get (or keep) workers, so wage growth has slowed substantially, even for those who have kept their jobs. The reach of this crisis goes far beyond what the unemployment rate alone suggests.

Heidi Shierholz is an economist with the Economic Policy Institute.

Want to challenge everything you think you know? Visit the "Five Myths" archives.


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