In an online debate, AEI research fellow Aparna Mathur argues against extending unemployment benefits by six months in response to the current economic slowdown. She notes that few additional workers would actually be eligible for the benefits, and the incentives created by extending the benefits could do long-term harm to the economy.
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Research Fellow
Aparna Mathur |
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Extended unemployment benefits are targeted toward the long-term unemployed. The long-term unemployment rate, however, has been stable for the past two years and is below its peak following the 2001 recession, according to Labor Dept. statistics. Other Labor figures show the national unemployment rate in March was 5.1%, well below its long-term average of 5.5%. Weekly initial jobless claims have also been fairly stable since October, 2005, much lower than the levels immediately following the 2001 recession.
Current data suggest few unemployed workers stay unemployed for the 26 weeks necessary to begin collecting extended unemployment benefits. The average unemployment spell now lasts 16.2 weeks, according to the Labor Dept. Therefore, paying workers to stay unemployed longer will do little to jump-start the economy. Extending unemployment benefits in the current economic environment makes little sense.
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An increase in unemployment benefits could reduce labor supply and increase unemployment, therefore slowing down the economy. |
Those in favor of extending benefits cite the multiplier effect they have on consumer spending and GDP growth. This reasoning is flawed. It fails to account for the fact that when the government has to borrow money to finance new unemployment benefits, the individuals it borrows from have less money to spend or invest elsewhere in the economy, which offsets the stimulus.
In fact, decades of economic research suggests that in the long term, unemployment insurance could lead to moral hazard issues. An increase in unemployment benefits could reduce labor supply and increase unemployment, therefore slowing down the economy. Workers with unemployment benefits have a reduced incentive to search for work, especially since benefits are set to pay about 50% of the wage earned by the worker in his or her most recent job. According to a Journal of Public Economics study, each additional week the government extends unemployment benefits prolongs the length of time the average worker stays unemployed by 0.16 to 0.20 weeks.
Hence extending the period beyond the 26 weeks already mandated would create undesirable incentives for individuals to delay returning to work. As noted by Harvard economist Martin Feldstein: "That would lower earnings and total spending." This is hardly the stimulus the economy needs at this point.
Aparna Mathur is a research fellow at AEI.
