Extending unemployment insurance during the recession didn’t just give the unemployed some extra income, but actually prevented millions from being foreclosed on, according to a new study from Joanne W. Hsu, David A. Matsa, and Brian T. Melzer.
Given that different states have different amounts they’ll pay out in unemployment benefits — in 2011 it ranged from $6,000 in Mississippi to $28,000 in Massachusetts — the researchers looked at what impact more generous benefits had on mortgage delinquency. They found that for every $1,000 extra in maximum benefits, the likelihood that an unemployed worker’s mortgage would go into delinquency declines by 25 basis points. Getting benefits for a longer period has a similar effect, as each additional week decreases the chance of delinquency by 34 basis points. “Based on this variety of tests, we conclude that the estimated effect of UI generosity is causal,” they write, meaning that bigger checks reduce the chances of going into delinquency directly.
They also found that the effect isn’t just a temporary forestalling of an inevitable foreclosure, but that it has a lasting impact on keeping people in their homes. “The effect seems to be long term,” they write, “as UI [unemployment insurance] benefits not only mitigate loan delinquency, but also reduce homeowner relocations and evictions.” Each additional $1,000 in benefits reduces the chance of an unemployed person’s mortgage going into default by 2.4 to 11 basis points. “We find that UI helps not only to postpone delinquency but also to keep laid off homeowners in their homes,” they conclude.
Extrapolating out from their findings, the authors estimate that the expansions in the unemployment benefits program during the recession prevented about 1.4 million foreclosures.
The research shows that bigger unemployment benefit checks have a positive effect for the people who receive them, proving that “[h]aving a source of income following job loss can enable households with credit obligations, such as mortgage payments, to continue making loan payments rather than defaulting,” as they write. The other option would have been that bigger benefits reduced the incentive for recipients to look for work, prolonging their unemployment spell and increasing the risk of default, but that’s not what their research shows.
Other research from the Government Accountability Office in 2010 comports with the new study, filling in the picture on the other side for people who don’t get unemployment benefits. Their poverty rate spiked and 40 percent had incomes below 200 percent of the poverty line. More than a third relied on government programs, while others relied on family members or savings.
The new research cuts against one argument in favor of letting the federal long-term unemployment benefits program lapse, as it did in December, which is that it would take away a cushion keeping people from job hunting and push more to get jobs. There’s other evidence that disproves that view. In Illinois, more than 80 percent of the long-term unemployed still had no income two months after being cut off from benefits.
And North Carolina has served as a testing ground, as it was cut off from the federal program months before it lapsed. There is no evidence that the cutoff helped the state’s labor force and in fact it is now experiencing the largest contraction in its workforce ever.