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The Economywide Benefits of Unemployment Insurance Are Crystal Clear

Chicago Economist Uses Outdated Research that Doesn’t Reflect the Times

SOURCE: AP/Paul Sancya

A line worker assembles an engine for a Ford Focus at the Ford Michigan Assembly plant in Wayne, Michigan. The number of people applying for unemployment benefits dropped to its lowest level since April 2008, continuing a downward trend that reflects a strengthening job market.

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The holidays are approaching and yet in spite of the December 31 deadline to continue unemployment insurance for out-of-work job seekers, the House of Representatives left Washington without voting on the measure. The importance of unemployment benefits for individuals receiving them is obvious and undeniable—they keep food on people’s tables and roofs over their heads. But economywide the impact is equally important. Unemployment insurance kept 3.2 million Americans out of poverty in 2010, and increased GDP by $315 billion overall from the start of the recession through the second quarter of 2010.

This impact on the economy at large is clear from the research, yet a largely facetious “debate” continues to rage on in the media. In a recent piece for The New York Times, University of Chicago economist Casey Mulligan added to this misleading impression when he argued that the economic impact of unemployment benefits is unclear. In his words:

Some economists suggest that unemployment insurance prolongs unemployment because recipients have to give up their benefits as soon as they find and start a new job, or return to working at a previous job. Some economists also say they believe that unemployment insurance stimulates spending because unemployed people are thought to spend most, if not all, of the money they have on hand.

This alleged disagreement among researchers over the effect of unemployment benefits during this recession is nowhere near as strong as his statement implies. The first hint comes from the fact that the research he cites to support the claim that unemployment makes people less likely to return to work was published in 1990, using data collected between 1978-1983. The Great Recession is different from previous recessions, and contemporary approaches to understanding the role of unemployment insurance need to be different as well.

This is not the first time that Mulligan has argued that unemployment benefits are a cause of prolonged unemployment, but the research does not back his assertion up. Even the research paper he previously cited, which argues that somewhere between one-eighth to one-third of the increase in the unemployment rate was due to the extension of unemployment benefits, contains this caveat:

There are reasons to believe, however, that the true effect of extended UI benefits on unemployment duration is likely to be at the lower end of these estimates. Many of the larger estimates of the effect are based on data from the 1970s and 1980s.

Citing outdated research that does not reflect the reality of our current economic situation is not only disingenuous but also unnecessary given the existence of more contemporary data analyses. Jesse Rothstein, former chief economist at the U.S. Department of Labor and current professor of public policy and economics at the University of California-Berkeley, published recent research that analyzes current unemployment-insurance impacts.

Rothstein’s analysis found that extending unemployment benefits had a very small impact on the unemployment rate—only raising it by approximately 0.3 percentage points. Less than half of this effect was because people did not become re-employed, and he concludes that “the availability of extended benefits might have raised reemployment rates of displaced workers, by keeping them from abandoning their searches prematurely.” Unemployment insurance allows at least some people to hold out for a better job, and a better career path, rather than taking the first, possibly less desirable, position that comes along. Quickly getting people off of unemployment benefits does not benefit the economy if they are forced to return to less productive and less economically secure jobs.

Research on the stimulative effect of unemployment insurance is equally clear: In this recession unemployment benefits showed a stronger positive impact on the economy than in previous recessions. Unemployment insurance recipients are more likely to spend all of the benefits they receive quickly, thus pumping more money through the economy. And spending’s impact is greater now than in past years.

Analyses of past recessions shows that money spent on unemployment benefits deliver a large economic impact, though the rate varies. In fact, the impact of unemployment insurance benefits on the overall economy seems to be increasing. Between 1997-2001, for example, each dollar of unemployment insurance received expanded the economy by $1.54. A 2010 study by Wayne Vroman, an economist and senior fellow at the Urban Institute, found that presently every $1 of unemployment insurance doubles its impact, gaining the economy $2.

The University of Chicago’s Mulligan may be worried about the fact that record numbers of individuals are receiving unemployment, but that is because record numbers of people are among the long-term unemployed. Since December 2009 more than 40 percent of the unemployed had been out of work for 27 weeks or longer, and currently 43 percent of all unemployed job seekers—5.7 million people—have been looking for work for at least that long. Our real concern should be what will happen to the 5 million individuals who will lose benefits in 2012 if Congress doesn’t act soon, and the devastating impact this will have on our slowly recovering economy.

Sarah Jane Glynn is a Policy Analyst at the Center for American Progress.

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