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Unemployment Insurance Dollars Create Millions of Jobs

Benefits Help Plug the Demand Hole in the Economy

SOURCE: AP/Rick Bowmer

Eric Rosenkrantz waits on the unemployment insurance phone at WorkSource Oregon on September 2, 2011. Unemployment benefits have played a key role in helping unemployed workers pay their bills while they search for a new job.

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The unemployment insurance program is our economy’s first line of defense when unemployment is high. Workers who lose jobs through no fault of their own get needed support, which helps families and preserves a customer base for local businesses. In this way, unemployment insurance provides a safeguard that prevents the economy from entering a free fall.

Over the past few years, unemployment benefits have played a key role in helping unemployed workers pay their bills while they search for a new job. There are fewer people living in poverty in the United States because of these benefits. The Census Bureau has reported that unemployment benefits pulled 3.2 million people out of poverty in 2010, on top of 3.3 million in 2009.

Unemployment benefits also boost the economy. They provide the biggest bang for the buck of the various kinds of government spending. Over the Great Recession, for every $1 spent on unemployment insurance benefits, the economy grew by $2, since recipients typically spend—not save—those dollars. That spending helps boost local economies as the unemployed can continue to pay their mortgage or rent and put food on the table.

The boost that benefits provide leads to job creation. According to a 2010 analysis by Wayne Vroman, an economist and senior fellow at the Urban Institute for the Department of Labor, unemployment benefits increased employment on average by 1.6 million jobs each quarter from mid-2008 through mid-2010. Of that increase, nearly 900,000 more jobs existed because of regular unemployment benefits, while two federally financed programs—Emergency Unemployment Compensation and Extended Benefits, which provide additional weeks of benefits after workers have exhausted the standard 26 weeks—were responsible for increasing employment on average by slightly more than 700,000 each quarter.

Unemployment benefits have the largest impact when the unemployment rate is high. Figure 1 below shows that the unemployment insurance system was clearly an automatic stabilizer throughout the Great Recession, pumping more money into the economy as the number of unemployed rose.* This resulted in millions more jobs for American workers. For instance, when unemployment peaked in the fourth quarter of 2009, unemployment insurance had its greatest effect—resulting in about 2.3 million more jobs during that quarter than would have otherwise existed between regular and long-term benefits combined. As recipients spent these dollars, businesses in turn hired new workers.

Additionally, new research by University of California, Berkeley, economist Jesse Rothstein finds that unemployment insurance benefits extensions increased the share of people who became reemployed by about 1.3 percent as of January 2011 because they motivated people to not exit the labor force and stop looking for work.

jobs saved or created by unemployment insurance over the great recession

With so many Americans out of a job, the unemployment insurance system continues to be a critical support mechanism for families and the economy. Even though the recession officially ended in June 2009, the labor market remains depressed. As of August 2011 the unemployment rate has been at or above 9 percent for a record 26 months, 14 million American workers are still searching for a job, and a near-record numbers of those—6 million (42.9 percent)—have been out of work for six months or more. But benefits for the long-term unemployed expire in December 2011.

Since the creation of the modern unemployment benefits system in 1935, Congress has never failed to act on extending benefits for the long-term unemployed while the national unemployment rate remains above 7.2 percent. The American Jobs Act that President Barack Obama recently introduced includes renewing unemployment benefits for the long-term unemployed through the end of 2012 through two federally funded programs, the Emergency Unemployment Compensation and Extended Benefits.

If Congress chooses not to extend these benefits, nearly a million U.S. workers could lose their jobs as the economy reacts to the withdrawal of between $70 billion and $80 billion in 2012. The typical worker has been searching for a job for nearly 22 weeks, and unemployment benefits help keep families afloat.

The evidence is conclusive. Unemployment insurance is a critical social protection program that funnels key investment dollars into our economy while simultaneously helping to keep millions of American jobseekers from slipping into poverty. With so many Americans out of work, we need these benefits to continue.

*We adapted Vroman’s analysis to create Figure 1. Vroman calculates the amount of gross domestic product growth attributable to unemployment benefits each quarter from the third quarter of 2008 to the second quarter of 2010. We take those numbers and multiply them by the jobs multiplier that Vroman calculates for the entire period.

Heather Boushey is a Senior Economist at the Center for American Progress. Matt Separa is a Research Assistant for the Economic Team at the Center.

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