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Why reducing jobless benefits is unwise

Alan Gin, University of San Diego

Alan Gin
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As part of the recently passed legislation that extended the payroll tax cut, Congress also limited the maximum duration of unemployment insurance benefits, so that the unemployed living in high-unemployment states such as California would be limited to 73 weeks of benefits as opposed to the current 99 weeks. Why would Congress do this, even in the face of high long-term unemployment?

Supporters of the reduction argue that extended unemployment benefits provide an incentive for people to stay unemployed, and that reducing the duration of benefits would encourage the unemployed to go back to work sooner.

But does this argument hold up in an economy where the national unemployment rate is still above 8 percent, and the local rate is near 9 percent? Or is an extension of benefits more important than ever, given the changing economy?

Supporters of the reduction draw on the labor economics theory that says individuals make a choice between leisure and work, which yields income. If someone wants more leisure, the trade-off is that they work and earn less. Unemployment insurance reduces the cost of choosing leisure, thus theoretically allowing workers to remain unemployed longer.

The thinking is that the unemployed will draw the benefits and not seriously look for work until the benefits are about to expire. Some people, including some members of Congress, undoubtedly hold the view that the long-term unemployed are lazy bums with moral failings who are gaming the system. This is why certain Congress members attempted to include in the legislation requirements that all benefit recipients undergo drug testing and have a high school diploma or be enrolled in a GED program.

While the education requirement was rejected, a modified version of the drug testing measure was adopted, with testing required only for those who were fired because of drug use or for those involved in occupations where drug testing is normally done.

The problem with this approach is that it focuses exclusively on the supply of labor by workers and ignores the demand for labor by businesses. It assumes that workers voluntarily choose leisure — and therefore unemployment — over working.

While this might be possible when the economy is doing well and jobs are plentiful, there is likely to be more involuntary unemployment when the economy is in a recession, the demand for workers is low, and there are four or five applicants for every job opening. It also ignores that leisure and unemployment have a cost, including social stigma and reduced future earnings.

There is one way that the extension of unemployment benefits could result in higher reported unemployment rates: It encourages the unemployed to continue searching for work to receive benefits. Without the extension, they might give up earlier and fall into the category of “discouraged workers,” where they would still be unemployed but not counted in the statistics. So that is not necessarily a negative development.

Although the economy is improving and job growth is picking up, it will be years before the labor market rebounds to pre-recession levels. San Diego County lost almost 80,000 wage and salary jobs in 2008-2010.

Even with solid projected job growth of 20,000 to 25,000 over the next few years, it will take four to five years just to gain back all the jobs that were lost.

Unemployment insurance will be needed to tide people over until the recovery is complete. By allowing the unemployed to maintain some buying power, jobless benefits will help speed the recovery.

Alan Gin is associate professor of economics at the University of San Diego, where he created and continues to publish the San Diego County Index of Leading Economic Indicators, now in its 20th year.