EPI and AEI Agree: Cutting Jobless Benefits Did Not Boost Employment

Perhaps Hell has not frozen over, but it appears that someone down there may have leaned on the thermostat. That’s right, the Economic Policy Institute and the American Enterprise Institute are in lock-step agreement on an important fiscal policy matter.

During the Great Recession and its aftermath, the federal government acted to help victims of the severe downturn by funding programs that extended unemployment benefits—to up to 99 weeks in some cases, up from the standard 26 weeks. As the economic recovery continued, weak as it was for many in the working class, many lawmakers on the right began to believe that these extended benefits were a drag on employment—the theory being that government checks reduced the incentive for recipients to find a job, and that cutting off this lifeline would compel unemployed workers to look harder for work and perhaps take jobs they may not have accepted if the benefits had continued. Relying on this premise, Congress allowed the federally-funded Emergency Unemployment Compensation program to lapse last December.

Now, more than seven months later, data are available to test this idea. Coming from perspectives that diverge greatly along the ideological spectrum, scholars at both AEI and EPI have come to the conclusion that this “bootstraps” theory is incorrect—curtailing jobless benefits did not boost employment. Because unemployment benefits are contingent upon the people who receive them proving that they are looking for a job, receiving jobless benefits appears to make recipients at least just as likely, and certainly not less likely, to rejoin the ranks of the employed.

Relying on papers from the Boston Fed and the National Bureau of Economic Research, AEI’s James Pethokoukis writes that “the unemployed tended to remain so until their UI benefits were exhausted. But their next move wasn’t into a job,” but rather to give up looking for one. Pethokoukis adds that “it is important to keep people in the labor force looking for work,” and that, “jobless benefits were a key part of that safety net” that propped incomes for people at the middle and bottom of the income distribution during the recession and its aftermath.

Pethokoukis’s colleague at AEI, Michael Strain, agrees that federal jobless benefits should not have been allowed to expire. Writing at the National Review, Strain concludes that “federal unemployment benefits should [have been] extended beyond the standard twenty-six weeks,” and points to an older piece he wrote arguing that benefits should not be cut when long-term unemployment remains elevated, when job seekers so outnumber job openings, and when benefits have been shown to keep recipients on the job hunt.

Both Pethokoukis and Strain point to a New York Times article in which economist Justin Wolfers looked at data from North Carolina—which cut the duration and dollar amount of its state-based unemployment benefits last summer, thus opting out of the federal emergency benefit program before it expired for other states. In the article, Wolfers concludes that “the bottom line is that North Carolina looks quite similar to its peers, and certainly not better” in terms of labor market outcomes.

In a recent paper, I, along with my colleagues Josh Bivens and Valerie Wilson, come to the same conclusion. Indeed, we found that “there was no visible improvement in state labor market outcomes (specifically, the employment-to-population ratio of workers age 25 to 54) following cuts to UI durations.” And in looking at the state level, we found that “even the North Carolina cuts to state UI, which were so extreme that they triggered a cutback of federal UI extended benefits to the state, provided no evidence of spurring employment growth in the state.”

For economics to be taken seriously as a social science, its practitioners, no matter their political outlook, should be able to look at the same unambiguous data and reach the same conclusion. That is exactly what has happened in this case, with scholars from AEI and EPI agreeing that paring back jobless benefits did not have a positive labor market effect. If only Congress could get the memo.