Let's stop funding unemployment benefits

More than 4 million people in the U.S. are long-term unemployed, a number that has more than tripled in the last five years.

Because the probability of reemployment drops significantly the longer someone is out of work, this situation suggests the possibility that the U.S. economy will suffer a permanent increase in structural unemployment.

Perhaps counter-intuitively, to avoid this becoming reality, Congress would do well to let the current extended unemployment benefits wind down and in the future refrain from leaping to fund nearly two years of benefits for unemployed workers.

Economists and pundits alike have been discussing the plight of the long-term unemployed and proposing policies to assist this group.

Notably absent from these discussions is an attempt to understand how we ended up in this dire situation.

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    To avoid a deepening of the problem in the next business cycle, policymakers must explore the causes of the historic rise in long-term unemployment, and they would do well to start by examining their own actions.

    The unprecedented expansion of federally funded unemployment benefits—from the traditional 26 weeks normally available to nearly two years—is a contributing factor to the current labor market crisis.

    From November 2009 through September 2012, Congress made available up to 99 weeks of unemployment benefits for eligible workers.

    Today, workers in some states can still receive benefits for 83 weeks, more than three times longer than usual. It is difficult to imagine that extending unemployment insurance from 6 months to nearly 2 years had no effect on the incentives for the unemployed to return to work.

    Robert Valletta and Katherine Kuang, economists at the San Francisco Federal Reserve Bank, estimate that the expansion of unemployment benefits boosted the unemployment rate about 0.4 percentage points in 2009. In other words, the unemployment rate averaged 9.3 percent instead of 8.9 percent, a difference of over 500,000 unemployed workers.

    For many people, unemployment benefits provide an essential financial cushion while they seek reemployment. For some, however, unemployment benefits have the perverse incentive of enticing them to remain unemployed so that they can continue collecting benefits. Indeed, as benefits have begun to phase out, the long-term unemployment rate has ticked down a bit.

    However, for many who have been jobless for over six months, finding employment is difficult if not impossible. According to economists Rand Gayad and William Dickens, employers become less and less likely to hire people who are unemployed for six months or more.

    In short, the extravagant duration of unemployment benefits in the last five years has had the unintended effect for many recipients of perpetuating unemployment until reemployment is out of the question.

    Adding insult to injury, the unprecedented expansion of unemployment benefits not only contributed to the long-term unemployment problem, but also was enormously expensive. From 2008 through 2012, federal spending on unemployment benefits totaled nearly $280 billion, and states spent an additional $313 billion during that period.

    After accounting for the spending attributable to the permanent unemployment insurance program, the Congressional Budget Office estimates that the expansion of benefits increased the federal debt by $210 billion.

    Those dollars are gone, and the federal debt is worse as a result.

    While some will argue that these payments were good stimulus at a critical time in the economy, this is only true if any short-run economic boost outweighs the adverse consequences to the labor market. But this is unlikely given both the higher unemployment rate that extended benefits induced and the permanent burdens they imposed on the long-term unemployed.

    It is an unfair and costly fiscal stimulus program that comes at the expense of millions of workers’ prospects for future reemployment.

    Unfortunately, it may be too late to undo the consequences of federal policy actions for many of the long-term unemployed.

    The solutions that have been proposed—new tax credits, federal hiring of long-term unemployed workers, and revamped job training programs, for example—are unlikely to have a large impact on the problem, as they are either too small to be effective or too costly and time-consuming to implement.

    The least that lawmakers can do is recognize the consequences of past actions and not repeat the same mistakes.

    They will likely face a test on this soon—the current expanded unemployment program is scheduled to expire at the end of 2013, and some in Congress undoubtedly will seek to continue it. Perhaps the best policy Congress can pursue is to let this program end.