Is Congress subsidizing slackers?
Congress has acted, after a cruel delay, to renew the extension of unemployment benefits. Those who are unemployed through no fault of their own will be eligible to collect benefits for as long as 99 weeks. This is an awfully long time, and it raises the question: Is Congress subsidizing slackers? To put it in a slightly less provocative way, do the beefed-up benefits encourage people not to work?
In theory, yes. In reality, in a recession this severe, probably not very much.
A bit of background: During normal times, unemployment insurance usually lasts for 26 weeks of joblessness. During downturns, Congress generally steps in to provide extra weeks of benefits beyond what states offer. During this particularly painful recession, workers have been able to collect benefits for an unprecedented 99 weeks -- nearly two years.
That's an long time, and it is a fair question whether these extended benefits contribute to unemployment. Here are the reasons for my answer that the supposed "moral hazard" is not a big problem in the current, dreary environment.
First, unemployment benefits in the United States are not terribly generous. As the congressional Joint Economic Committee recently noted, the average benefit -- about $300 weekly -- amounts to just three-quarters of the poverty threshold for a family of four.
Second, the jobs simply aren't there for people to take. There are five job-seekers for every available opening. Those tempted to slack off on the employment search because benefits are available for longer might not have found a job in any event -- and any job they spurned would have likely been snapped up by someone else.
As Harvard economist Lawrence Katz told the Joint Economic Committee earlier this year, the "most compelling research suggests only modest impacts of (unemployment insurance) extensions on the search effort and duration of unemployment" of jobless workers.
When layoffs tend to be permanent, as in the current recession, rather than temporary, as in the past, the risk of workers gaming the system is reduced: The unemployed can't simply hang out and collect checks expecting they'll eventually be called back.
A recent study from the Federal Reserve Bank of San Francisco examined unemployment duration during this recession for three different groups: those who lost jobs; those who left jobs voluntarily; and those who are new to the job search. Only the first of these are eligible to collect unemployment. The study found that the length of times unemployed grew slightly in the early part of the recession and then rose sharply just as the duration of unemployment benefits was extended.
Aha! Proof that more generous benefits cause indolence? Hardly. The involuntary job losers, those eligible for benefits, experienced a similar increase in time spent unemployed to that of job-leavers and new entrants. The differential between the two groups was a scant 1.6 weeks. Without the extended benefits, the study calculated, the unemployment rate at the end of 2009 would have been four-tenths of a percentage point lower. Not a negligible impact, but not a huge one either.
Economist Keith Hennessey, an adviser to President George W. Bush, looked at the issue from a different perspective. He assumed that the longer period for collecting benefits would result in increased unemployment -- contributing somewhere between 0.5 and 1 percentage points to the unemployment rate -- and considered whether the trade-off was worthwhile.
At the lower effect, with unemployment at 9.5 percent, he calculated that "eight people who would like a job but cannot find one are getting more generous (unemployment) benefits for each person who is getting those same benefits and choosing not to take a new job."
At an 8-to-1 ratio, extending unemployment is good policy, Hennessey said. And what if the more generous benefits contribute a full percentage point to the unemployment rate? Then the ratio of out-of-luck worker to loafer drops to 3.5-to-1. "That is a tougher call, but I would still say yes," Hennessey concluded.
Bottom line: With unemployment this high, and long-term unemployment at a record level, extending benefits is the sensible, humane thing to do. The risk of underwriting loafing is far less than the necessity of offering a safety net to those who would otherwise be without one.
| August 12, 2010; 2:37 PM ET
Categories: Marcus | Tags: Ruth Marcus
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