Senate Finance Committee Chairman Max Baucus's (D-MT) stimulus
proposal would extend unemployment insurance (UI) benefits to 39
weeks in an attempt to stimulate the economy. Workers have no
economic need for a longer period of unemployment benefits.
Congress should not extend the duration of UI benefits for the
- Unemployment is low, and the number of new UI claims is
falling, not rising;
- Long-term unemployment has been stable over the past 2 years;
- Little evidence suggests that extending UI benefits improves
Unemployment Historically Low
In most cases, workers can collect unemployment insurance
benefits for 26 weeks. This limit discourages employees from using
the system to collect benefits instead of working. In fact,
substantial numbers of workers find jobs immediately after their
benefits expire. Congress has allowed workers to collect
more than 6 months worth of benefits during times of high
unemployment, when it is more difficult to find a new job. This
last occurred after the 2001 recession, and Congress allowed the
extended benefits to expire in 2004.
Currently, however, unemployment is well below average levels.
In December, the unemployment rate stood at 5 percent. Unemployment
has been above this rate 65 percent of the time over the past 20
years-a period that includes the tech bubble.
Extending UI benefits in the current economic environment makes
little sense. Workers are not having an unusually difficult time
finding new jobs. Few diligent workers would use the additional
Shorter Unemployment Spells
Extended UI benefits are intended to help the long-term
unemployed-those out of work for longer than the six-month limit
for collecting UI benefits. However, the long-term unemployment
rate has been stable for the past two years and is well below its
peak following the 2001 recession.
Chart 2 shows the number of workers who have been unemployed for
more than 6 months as a percentage of the total labor force. The
long-term unemployment rate has been fairly stable over the past
two and a half years, fluctuating between 0.7 and 1 percent.
Substantially fewer workers are experiencing long-term unemployment
now than when extended UI benefits expired in early 2004.
Furthermore, few unemployed workers stay unemployed for the 26
weeks necessary to begin collecting extended UI benefits. The
typical unemployment spell now lasts 16.6 weeks, nine weeks less
than the maximum length of time workers can collect benefits. Most
workers do not need more than the 6 months of unemployment benefits
the law currently provides.
Initial UI Claims Falling
If larger numbers of workers were losing their jobs and
they had greater need to rely on UI benefits, the number of initial
claims for unemployment benefits would rise. This also has not
happened. Instead, the number of weekly initial unemployment
benefit claims has been fairly stable, between 291,000 to 342,000
per month since October 2005. This is much lower than the
levels immediately following the 2001 recession.
New UI claims have also decreased-not increased-in recent weeks.
Chart 3 shows the four-week moving average of new UI claims. It has
fallen steadily throughout January 2008.
There is no economic justification for extending unemployment
benefits beyond 26 weeks. Unemployment is low, few workers are
experiencing long-term unemployment, and new claims for
unemployment insurance are falling.
UI Is No Stimulus
Extending UI benefits does not help the economy. The UI system
was designed to provide workers with insurance against the risk of
involuntary job loss, not to stimulate the economy. Paying workers
to stay unemployed longer does little to promote economic
Supporters of extended UI benefits point to a 2004 study
concluding that this approach provides the most "bang for the buck"
because each $1 spent on additional UI benefits would increase GDP
by $1.73. However, that study is flawed. It relies
entirely on the theoretical assumption that government spending has
a "multiplier effect" on the economy and that the key to economic
growth is greater government and consumer spending, not saving or
investing. In the actual economy, money the government spends comes
from somewhere. When the government borrows money to finance new UI
benefits, the individuals it borrows from have less money to spend
or invest elsewhere in the economy, which offsets the stimulus.
Government spending does not have a multiplier effect so much as it
redirects economic activity toward the activities that government
spends money on. Additionally, the government must eventually repay
the loan, which requires spending reductions or higher taxes in the
The 2004 study also erroneously assumed that recipients spend
every dollar of additional UI benefits. In fact, households respond
to more generous benefits by changing their behavior. Only 50 cents
of every dollar in UI benefits finances new consumption. The
other 50 cents finances consumption that households would have made
otherwise, either by spouses working longer hours or by spending
Given these flawed assumptions, the study's conclusion is not
surprising. Real-world studies of the effect of UI spending on the
economy come to the opposite conclusion. Empirical research finds
little to no evidence that increasing UI benefits boosts the
Congress has no economic or policy reasons to extend
unemployment benefits beyond the current maximum of six months.
Economic conditions do not justify providing additional
unemployment benefits. The unemployment rate is low, and unemployed
workers are not having unusual difficulty finding new jobs. New
claims for unemployment insurance are dropping, not rising. Also,
paying workers not to work does not encourage economic growth.
Empirical studies find little evidence that unemployment insurance
boosts the economy or provides much "bang for the buck." Congress
should leave extended UI benefits out of any stimulus package.
James Sherk is
Bradley Fellow in Labor Policy, and Patrick Tyrrell is a Research
Assistant, in the Center for Data Analysis at The Heritage