A new paper by Jesse Rothstein, a professor of public policy and economics from the University of California Berkeley and former chief economist at the Department of Labor, throws cold water on the notion — touted by many conservatives — that extending unemployment insurance benefits provides a strong disincentive for the unemployed to look for work and thus, is a major reason for our persistently high unemployment rate.
Using data from the Department of Labor’s Current Population Survey, Rothstein demonstrates that extensions of unemployment benefits have actually had a very small effect on the unemployment rate during the Great Recession. He estimates that extended unemployment benefits have raised the unemployment rate by between 0.2 and 0.6 percentage points. And about half or more of that increase is attributable to individuals who remained in the labor force and searching for a job because unemployment benefits allowed them to continue to do so.
In fact, Rothstein finds that unemployment insurance benefits extensions increased the share of people who became reemployed by about 1.3 percent, as of January 2011, because it motivated people to not exit the labor force and stop looking for work. Rothstein writes:
Any negative eﬀects of the recent unemployment insurance extensions on job search are clearly quite small, too small to outweigh the beneﬁts of transfers to people who have been out of work for over a year in conditions where job-ﬁnding prospects are bleak.
This evidence directly contradicts the talking points of many conservative lawmakers such as Sen. John Kyl (R-AZ) who has said unemployment insurance “is a disincentive for [the unemployed] to seek new work” because it pays them to do nothing. It also rebukes other research by Robert Barro (2010) and David Grubb (2011) that has claimed that unemployment insurance extensions have contributed approximately 2.7 percentage points to the unemployment rate.
Rothstein’s findings are especially important as Congress begins to consider extending emergency unemployment insurance benefits amidst conservative opposition to grant such an extension. As recently as last month, Majority Leader Eric Cantor stated that Washington should stop “worrying” about providing unemployment benefits, given the budget deficit.
As President Barack Obama made clear in his recent joint speech to Congress, “If the millions of unemployed Americans stopped getting this insurance, and stopped using that money for basic necessities, it would be a devastating blow to this economy.” This is because economists estimate that for every dollar spent on unemployment insurance benefits, the economy grows by $2.00, since recipients typically spend — not save — those dollars.
Unless Congress passes an extension of these benefits, millions of Americans currently still unable to find a job will be left without unemployment benefits beginning in January 2012. Failure to extend these benefits would be devastating to the 14 million American workers still searching for a job and the 6 million people have been out of work for six months or more.