As
the country recovers from a mild recession, Congress is considering
a further extension of unemployment benefits. Such an extension is
not needed, would be unnecessarily expensive, and could delay
employment growth.
Unemployment insurance (UI) offers three
tiers of benefits. Regular benefits, lasting 26 weeks, are paid out
of state funds. "Extended benefits," which may be triggered by
unemployment rates on a state-by-state basis, are paid out of a
combination of state and federal money and may be offered to
workers for an additional 13 weeks. "Emergency benefits" may be
enacted by Congress, further extending the length of benefits
available to workers.
The
most recent emergency benefits program, the Temporary Extended
Unemployment Compensation (TEUC) program of 2002, was passed partly
as a response to the economic fallout from the September 11, 2001,
attacks. As the economy recovered from the unusual combination of
cyclical recession and the destruction brought about by terrorism,
TEUC was allowed to expire in December 2003. The House of
Representatives has passed legislation (H.R. 3030) with a new
emergency benefit provision, but a review of the economic effects
of unemployment insurance and current economic conditions indicates
that such benefits are not needed.
Creating
Disincentives for Hiring and Employment
Unemployment insurance was designed to provide short-term
income stability that allows workers time to look for work while
maintaining customary spending patterns, thereby stabilizing the
overall economy. But it can also be a disincentive to finding work,
an effect that is intensified when recipients are allowed to
receive benefits for a longer period of time.
- Because workers continue to receive an
income while unemployed, they are likely to demand a higher wage
before accepting a new job as long as benefits are available.
- Employers may be more likely to resort to
temporary layoffs rather than other cost-cutting measures because
UI recipients are less likely to find other employment. Some
employers may be using UI to help keep their workforce intact
during temporary layoffs.
- Economists have found that the likelihood
of a given recipient's finding work (or being recalled to his or
her prior job) increases significantly in the week before UI
benefits run out.
In
general, increasing the length of time that UI benefits are
available intensifies the incentives for workers to decline
employment and for employers to lay off workers, slowing down the
process of economic recovery. In spite of these effects, however,
emergency benefits might be called for during a recession, when
jobs are difficult to find. When jobs are scarce, incentives
against taking a job become less relevant, and there would be a
strong case for providing economic relief for those who remain
unemployed for long periods. Such is currently not the case.
Keeping the
Condition of the Economy in Perspective
Compared to prior economic downturns, the U.S. job market
was relatively undamaged during the most recent recession. (See
Table.)
Of
the four recessions the U.S. economy has encountered in the past 35
years, the most recent has produced the least severe unemployment.
Since 1973, the lowest monthly unemployment rate the nation has
experienced was 3.8 percent in April 2001. Last June's peak
unemployment level of 6.3 percent was closer to that astonishingly
low level than to the peak unemployment encountered in the
mid-1970s or early 1980s.
Given the relatively modest unemployment
rate associated with the most recent recession, it should be
neither surprising nor disappointing that job gains have been
modest. Overall, while certain sectors, especially in
manufacturing, have seen significant job losses, they did not
eliminate many jobs initially.
Job Market
Improving
Nonetheless, job creation has picked up, in large part
because of the President's pro-growth economic plan. The Bureau of
Labor Statistics payroll survey estimates that the economy created
112,000 jobs in January and 366,000 since August. The total number
of U.S. workers is at an all-time high of 138.6 million, and since
peaking at 6.3 percent in June, unemployment has steadily decreased
to 5.6 percent.
Nor
do discouraged workers explain the drop in unemployment. The Bureau
of Labor Statistics estimates that only 432,000 Americans--less
than 0.3 percent of the workforce--qualify as "discouraged."
Moreover, even if discouraged workers were included in unemployment
statistics, the unemployment rate would still only be 5.9 percent.
With a current unemployment rate of 5.6 percent, the U.S. may in
fact be fairly close to full employment.
Conclusion
TEUC cost the federal government roughly $900 million
monthly while it was in effect, and a six-month renewal of the
program would likely cost over $5 billion. Democratic supporters of
the more generous benefit program recently passed by the House
estimate that their program would cost $6.7 billion. Extending
these benefits at a time when unemployment is steadily declining
and jobs are being added to the economy does not bode well for
Congress's ability to curtail the growth in federal spending.
Economic indicators suggest that an
economic recovery is underway, and that recovery is beginning to
affect the job market. In such an economy, with jobs becoming more
and more available, emergency unemployment benefits are not needed
and might actually slow down the pace at which workers return to
their jobs or find new ones. The best course of action for Congress
is to let that recovery take its course.
Paul Kersey is Bradley Visiting Fellow in Labor
Policy in the Thomas A. Roe Institute for Economic Policy Studies
at The Heritage Foundation.