April 21, 2004

April 21, 2004 | WebMemo on Jobs, Jobs and Labor Policy

Extending Unemployment Insurance: Three Simple Charts Against

Although the perception of weakness in the labor market has led to calls for another extension of temporary unemployment insurance benefits, this is a political cure in search of a problem. An extension not only increases spending by roughly $1 billion per month, but also is unnecessary given the demonstrated strengthening of the labor market. Most damning of all is the well-established economic research that shows any extension of jobless claims generates exactly the wrong incentives and will extend the average duration of unemployment for those who qualify.

 

The three charts below illustrate succinctly why extending unemployment insurance benefits is ill-advised.

 

Making Unemployment Last Longer

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(click chart for larger view or download as PDF)

 

Unemployment insurance (UI) makes unemployment spells last longer. By making unemployment more attractive (or at least less unattractive) than it would otherwise be, UI benefits tend to increase the "reserve wage" of unemployed individuals who are considering new job offers-a possible employer will have to offer a higher wage, or some other inducements, before a new job is accepted.

 

Research has shown that the likelihood that a UI recipient will find a job rises dramatically as exhaustion nears. Research has also shown that employee recalls increase as benefits near exhaustion, suggesting that some employers may time unemployment spells to coincide with the length of unemployment insurance benefits.

 

The Strong Labor Market

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(click chart for larger view or download as PDF)

 

Initial jobless claims are historically low. The magic number on Wall Street is the initial claims number of 400,000 per week: Anything higher means a contracting labor market. Initial claims are declining and have been below 400,000 since October 2003. An even more striking view is the number of claims relative to the total U.S. population. The current level of population-weighted claims is as at the same level as 1997-1999, when the economy was "irrationally exuberant."

 

Robust Job Growth

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The Bureau of Labor Statistics Household Survey shows that over the past two years (March 2002 through March 2004), the number of Americans employed increased by nearly 2.2 million-robust job growth that renders comparisons between the current economy and the Great Depression absurd.

 

Conclusion

Now is not the time to extend unemployment insurance benefits. As reflected by initial jobless claims data and the Bureau of Labor Statistics Household Survey, the labor market is strong and picking up steam. Extending benefits would do nothing to aid this recovery and could even hinder it by raising "reserve wages" and, thereby, the cost of filling new jobs. Thus, those who call for an extension of unemployment benefits because it will "stimulate" the economy are not only out of touch with an economy that's averaging 6.1 annual growth in Gross Domestic Product, but also plain wrong.

 

Paul Kersey is Bradley Visiting Fellow in Labor Policy, and Tim Kane, Ph.D., is Research Fellow in the Center for Data Analysis, at The Heritage Foundation.

About the Author

Paul Kersey Visiting Fellow

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)