Which came first, long term unemployment insurance or high rates of long term unemployed workers? This chicken or egg argument is hotly contested by economists.
It is a nightmare to want, but have no work. Few would argue that it is a reflection of a responsible and compassionate society to want to aid unemployed workers, particularly in recessionary environments when finding a job is especially difficult. States have traditionally provided up to 26 weeks of unemployment insurance for workers who have lost jobs through no fault of their own and are prepared to work. The average unemployment benefit is about $300 per week. However, individual benefit levels vary greatly depending on the state and the worker’s previous earnings. The goal is to replace about half of a worker’s previous earnings, subject to a maximum payment. Because the benefit is capped, UI benefits replace a smaller share of previous earnings for higher-wage workers than lower-wage workers. No one is living grandly on these amounts.
The federal government has a history of funding extensions to the traditional six month state unemployment benefit programs. The previous record for unemployment benefits was 65 weeks during the recession of the mid-1970s. In the past decade, federal supplements of 13 weeks were funded first in 2002, followed by an increase to 26 weeks (for a total of one year of benefits) in 2003. These temporary programs were restarted in April 2008, for 13 weeks, and increased in 2009 to a historically high 73 additional weeks, for a total of 99 weeks including state benefits.
Many argue that extended benefits represent a “moral hazard” that results in higher than expected long term unemployment rates. A look at real world data such as in the chart below shows that there were immediate increases in the rate of workers unemployed longer than 27 weeks as soon as the extended benefits programs were introduced. Were the results causal or coincidental?
Say’s Law states that “supply creates its own demand.” In other words, as in the movie Field of Dreams, “if you build it they will come.” The current program will cost federal taxpayers about $44 billion in 2012, and will provide assistance to about 40 million Americans. According to the “law of unintended consequences” extended benefits paradoxically have increased long term unemployment rates.
“…government assistance programs contribute to long-term unemployment [by] providing an incentive, and the means, not to work. Each unemployed person has a ‘reservation wage’—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer.”
If extended benefits were not available, many workers would be forced to find and accept jobs outside of their fields of experience or at lower wages than they had preciously earned. While clearly painful for those individuals, that pain is a positive for our society. Government would spend less on benefits, and as those workers find “better” jobs at a later date in their fields or at higher wages, more turnover is created for other unemployed workers to find jobs. When someone quits, they make way for promoting and hiring. New employees bring new skills and ideas, and those lead to greater profits. High churn rates among American workers are often cited as a key underlying factor in the country’s economic success.
Many companies today try to avoid hiring workers who have been unemployed more than six months, believing that such workers have atrophied job skills and/or poor attitudes towards having and keeping jobs. Some employers, particularly of unskilled labor, say that many of the long term unskilled, unemployed are unable to pass their pre-employment drug tests.
Can the extended benefits program be improved so as to provide more disincentives to game the system? Should extended unemployment benefits be used to support those who can’t find a job they want, or should they support only those who can’t find ANY job through no fault of their own? The proposals currently being debated in Congress begin to cut back the duration of federal extended benefits and add hurdles for unemployment rates in the state of residence. Other countries such as Canada and Sweden have kept longer duration of benefits but cut back on the monetary value of the benefits as the duration increases. All of the proposals appear reasonable to Diogenes. What do you think? Are there other better ways to improve these benefits?