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Unemployment Insurance Benefits Don’t Prevent Job Searching

Debunking the Conservative Myth

SOURCE: AP/Matt Rourke

Pennsylvania Republican Gov.-elect Tom Corbett noted a common conservative argument against unemployment insurance while on the campaign trail: “People don't want to come back to work while they still have unemployment [benefits]... If we keep extending unemployment the people are going to sit there.”

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Conservatives often claim that unemployment insurance, or UI benefits discourage the unemployed from seeking employment. They argue that reduced job seeking on the part of the unemployed actually increases unemployment as people choose to rely on benefits rather than find a new job.

Republican Sen. John Kyl, for example, has said that “[Unemployment insurance] doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.” Similarly, Pennsylvania Republican Gov.-elect Tom Corbett noted while on the campaign trail that “People don’t want to come back to work while they still have unemployment [benefits]. … if we keep extending unemployment the people are going to sit there.”

The facts tell a different tale, however. Our nation’s extraordinarily high level of unemployment is due to a lack of demand for workers rather than a lack of people willing to work.

Consider that right now there’s only one job opening for every five job seekers and this has been the case—or worse—since January 2009. Think of this like a game of musical chairs: There’s one chair but five players (or 3 million chairs and 15 million unemployed). When the music stops, four out of five people won’t be able to find a seat. These long odds of finding a job are highly unusual. Before the recession began in 2007 there was just over one worker seeking a job for every opening available (1.5 workers per job opening).

Four in 10 of the unemployed (41.8 percent as of October 2010) have been out of work and seeking a job for at least six months. Our economy has seen more “long-term” unemployed during the Great Recession than at any other point since the Department of Labor began tracking unemployment in the 1940s.

Because the problem is a lack of demand for workers the link between receiving UI benefits and weak job search effort is currently very weak. Research by the San Francisco Federal Reserve Bank shows that unemployed workers who qualify for UI benefits stay unemployed for only 1.6 weeks longer than those who do not qualify for such benefits. In a strong labor market more weeks of UI benefits may not make sense, but in this especially challenging economy they help those who simply cannot find work.

Some economists find that people tend to exit unemployment benefits right around the time that they expire. They argue that this means that people only stayed on benefits to avoid work. But this work often uses data that only looked at whether a worker received benefits, not whether that worker actually found a new job. New work by economists David Card, Raj Chetty, and Andrea Weber shows that much of the spike in people exiting unemployment insurance is due to people moving off the rolls but not necessarily finding new work.

UI benefits keep workers in the labor force. They save an estimated $23.5 billion by reducing the number of unemployed who move onto the disability insurance rolls as they become discouraged in searching for new jobs and often have many health problems. Evidence shows that many people who move onto disability rolls never return to the labor force.

These benefits also help families stay afloat. Economist Raj Chetty finds that nearly half of job losers in the United States report zero liquid wealth at the time of job loss, suggesting that many households simply do not have the resources to continue to pay their bills and put food on the table in the absence of unemployment insurance benefits.[1]

The real story is that UI benefits are not a distinctive to work. And they actually spur job creation. Unemployment benefits for the long-term unemployed have saved or created 1.7 million full-time equivalent jobs since 2007 and raised gross domestic product by $244.8 billion—a 1.7 percent boost.

They create jobs by increasing demand. Income from benefits is spent quickly and boosts economic growth and employment. Every dollar spent on UI benefits raises gross domestic product by $1.61. Using CBO estimates, letting UI benefits expire in November will cost between 320,000 and 820,000 jobs over five years.[2]

In sum, Congress should continue benefits to the long-term unemployed until the unemployment rate comes back down. Giving unemployed workers the insurance benefits that they’ve earned to help them job search is the right thing to do and it is not causing today’s high unemployment. Our nation’s lingering high unemployment is the result of the damage wrought by Wall Street’s excesses. Let’s stop making the unemployed pay for their mistakes.

Heather Boushey is a Senior Economist and Jordan Eizenga is a Policy Analyst at American Progress.

Endnotes

[1]. Raj Chetty, "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," Journal of Political Economy 116 (2) (2008): 173–234.

[2]. Calculated by taking the CBO-estimated total cost (over 10 years) of the most recent benefits extension ($34 billion) and multiplying that figure by the Zandi-Blinder multiplier of $1.61 to arrive at $66.01 billion. This figure is then multiplied by the CBO’s employment five-year multiplier (see here). The range reflects the low and high estimated multipliers of 6 and 15.

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