Continuing extended UI benefits will make the labor market stronger

As the debate over continuing extended unemployment insurance (UI) benefits rages in Washington, there has been an endless barrage of claims that UI is bad for the labor market because, among other things, these benefits make people lazy and keep them from looking for work or accepting jobs (see e.g., the last few paragraphs from this The Hill blog post).

THIS IS NOT TRUE. The macroeconomic benefits of UI (keeping spending power in the economy from falling as far as it otherwise would) are large and completely unambiguous, while the microeconomic impacts (for example, the incentive it may provide people to search either more or less hard for work while collecting benefits) are small and can actually cut in very useful directions for the economy.

Let’s look at the evidence. Jesse Rothstein has written the most careful study available on the microeconomic effects of UI extensions in the Great Recession. Note that an unemployed worker can leave unemployment in one of two ways – by either getting a job, or by giving up looking for work (and thereby dropping out of the labor force and no longer being counted as unemployed). Rothstein finds that in the fourth quarter of 2010, the average monthly rate of leaving unemployment for a displaced worker was 22.4 percent. He finds that it would have been around – wait for it – 24.0 percent if UI benefits hadn’t been extended. Furthermore, he finds that about two-thirds of the decline in the rate of leaving unemployment that can be attributed to UI comes from reduced labor force exit, rather than reduced reemployment. In other words, about two-thirds of the very small reduction in the rate of leaving unemployment is due to people not giving up looking for work! Let me say that again – most of the increase in unemployment duration that can be attributed to the UI extensions comes from increased job search, since UI gives people a reason to continue looking for work even though job prospects are so bleak (which will likely increase the share of displaced workers who ultimately find work).

Of course, only reduced reemployment – i.e., a slower rate of displaced workers actually finding a new job – is what policy makers are worried about. What does Rothstein find there? In the fourth quarter of 2010, the monthly rate of reemployment for a displaced worker was 13.4 percent. He finds that it would have been around 13.9 percent if UI benefits hadn’t been extended, an extremely small effect. Furthermore, other research shows that most of the increase in time-to-reemployment that can be attributed to UI is not a harmful work disincentive effect, but rather a beneficial “liquidity” effect. In particular, it is actually efficiency enhancing to give liquidity-constrained displaced workers the needed space to find a job that matches their skills and experience and meets their family’s needs. This is of course more important now than ever, when job openings are so scarce.

Finally, as mentioned above, UI has large, positive macroeconomic effects. Spending on extended UI benefits is a very effective way to inject money into the economy, since that money gets immediately spent by cash-strapped, long-term unemployed workers. This spending creates demand for goods and services, which take workers to provide, so it generates new jobs. The spending of extended benefit checks will create over a half-million jobs in 2012. If the extended benefits aren’t continued, those jobs will be lost, and, all else equal, the loss of those jobs would increase the unemployment rate by around 0.3 percentage points.

Claims that continuing the UI extensions will further weaken the labor market are simply not supported by the evidence.  Continuing extended UI benefits will create jobs, incentivize people to keep looking for work who otherwise would have given up, and provide a lifeline to the families of workers who lost their job during the worst, and ongoing, labor market downturn in seven decades.