March 18, 2004

March 18, 2004 | WebMemo on Jobs, Jobs and Labor Policy

Extending Unemployment Benefits: Wrong Solution to the WrongProblem

While Federal Reserve Chairman Alan Greenspan has opined that an extension of unemployment benefits would be a tolerable policy, Congress should be careful to avoid "irrational exuberance" over an extension that, at best, does not address the underlying causes of sluggish job growth and, at worst, could make the problem of unemployment worse.


A Tepid Endorsement

Speaking before the House Education and Workforce Committee, Greenspan discussed rising concern about the effect of foreign competition on the American workforce and called on Congress to avoid protectionist measures, warning that stifling free trade would likely lead to economic stagnation. Under questioning by Rep. George Miller Greenspan predicted that "in all likelihood, employment will begin to increase more quickly before long as output continues to expand" but also allowed that "…considering the possibility of extending unemployment benefits is not a bad idea."


This is hardly a ringing endorsement. Greenspan is known for understatement, but his comment - "considering" the "possibility" is "not a bad idea" - amounts to ambivalence cubed. Such ambivalence is understandable given the state of the economy and research on the effects of unemployment insurance (UI) on employment.


The Employment Situation

Both the administration and Congress are understandably dissatisfied with the growth of employment during the current economy, but policymakers should bear in mind that there are two measurements of employment that differ wildly in describing the current situation.


The Bureau of Labor Statistics (BLS) payroll survey, which is the more commonly cited, shows that the number of jobs has grown by122,000 since last February, well below what one would ordinarily expect of a recovering economy. But the household survey, also compiled by BLS, shows a healthier gain of 854,000 jobs over the same period.


Unemployment, meanwhile, remains at a modest 5.6 percent, below the average rates for the eighties and nineties, while overall economic growth is strong, at 4.1 percent in the fourth quarter of 2003. New unemployment insurance claims are well below historical averages. While the low payroll jobs figures are grounds for concern, conflicting numbers mean it is not clear that the nation is experiencing a "jobless recovery."


Clearly, though, there are some workers who are suffering; the Department of Labor reports that the percentage of UI recipients who exhaust their benefits is increasing, up to nearly 44 percent in 2003. Extending these workers' benefits would seem an obvious way to alleviate the financial difficulties that they face, but it is not necessarily the best solution, or even a worthwhile one.


Mismatched Skills

Congress and the administration are confronted with a growing number of previously employed workers who find it remarkably difficult to find jobs in a growing economy featuring low unemployment and few new layoffs. This pattern raises the possibility that the main problem is not necessarily low demand for labor but rather a lack of the skills needed to succeed in a constantly changing economy.


Chairman Greenspan himself - the same day he gave his halfhearted endorsement of unemployment insurance extensions - stated that the labor market may suffer from a shortage of highly skilled workers and a surplus of unskilled workers. As evidence, Greenspan pointed to the growing gap in wages between these groups. Steady rises in compensation for college graduates are not being matched by those lacking a degree, indicating a shortage of the former and a glut of the latter.


Greenspan's theory is supported by a survey undertaken by the National Association of Manufacturers (NAM) in May of 2001, in the midst of a recession, in which 80 percent of NAM members reported a shortage of qualified job candidates. Shortages of qualified applicants were severe enough that most small manufacturing firms and nearly half of larger manufacturers had difficulty meeting customer demands.


The Problem with UI

There is a strong consensus among economists that unemployment insurance increases the length of unemployment by allowing workers to delay their search for a new job or put off changes, such as learning new skills or relocating, that might be necessary for them to find new jobs. Extending benefits is only likely to exacerbate these negative effects.


It is possible that the slow growth in jobs is attributable to a mismatch in skills, and not low demand for labor. Extending unemployment insurance benefits will not address this mismatch and might even worsen it by lulling the unemployed into putting off needed retraining.


The desire to "do something" to help workers who are struggling because of sluggish job growth is understandable and healthy, but lawmakers should resist the temptation to take actions, like extending unemployment insurance, that could actually make matters worse.


Paul Kersey is Bradley Visiting Fellow in Labor Policy at The Heritage Foundation.

About the Author

Paul Kersey Visiting Fellow