Sunday, April 4, 2010

Extending Unemployment, Part I

Currently, $10 billion a month is spent on unemployment benefits for 11.4 million people.1 That's an average of about $900 a month per person. Normally, these benefits can only be received for 26 weeks, but recently there have been multiple extensions due to high unemployment. People in states with the highest unemployment can now receive benefits for 99 weeks. Sadly, extending unemployment benefits discourages recipients from taking available jobs, which just extends unemployment.

Say that you're offered a job. Which monthly salary would entice you more, $600 or $1500? Clearly, $1500 is more attractive. Now consider hypothetical Joe — unemployed and receiving monthly benefits of $900. Say that Joe is offered a job for $1500 a month. Since he already gets $900, the job would only give him an additional $600 a month. So his reward for taking the job is really only $600 a month, not $1500. Just as you're less enticed to work for $600 than for $1500, Joe is less enticed to take this job. And just as unemployment benefits reduce the incentive to take this job, they reduce the incentive to take any job.

Virginia resident Jerome Boyd has been unemployed for seven months, and currently receives $1200 a month in benefits.1 Jerome admits that he's only looking for jobs that pay above minimum wage, saying, "I can't take something that's minimum wage because I just won't be able to pay my bills." But bills aside, he would be a sucker to take a minimum wage job! Minimum wage is $7.25 an hour, so a full-time job (8 hours a day) would pay $1276 a month (22 working days). Why would he work a full month for $1276 when he can stay home and receive $1200 in unemployment benefits? With these benefits, Jerome is better off avoiding many available jobs.

This tendency to avoid available jobs is natural so long as benefits continue to come. With temporary benefits, recipients have to find work before the benefits stop; recent extensions have significantly delayed this urgency, and have likely led to widespread expectation of future extensions. In this way, the extension of benefits has reduced or removed the incentive for people to take available jobs.

Despite the consequences, extending unemployment benefits seems compassionate. My next post will show how this policy hurts the unemployed by making it more difficult for them to find work.

1. Michael A. Fletcher and Dana Hedgpeth. "Are Unemployment Benefits No Longer Temporary?" The Washington Post, March 9, 2010.


  1. How about tying unemployment benefits to job training programs. For example, let's say the govt was going to give $1000 in benefits to an unemployed worker. Instead, they could give him $500 and a $500 "gift card" only redeemable at select job training institutes (Lincoln Tech, community college credits, whatever). You could also tie the cash compensation to the successful completion of the program (to prevent ppl from just signing up and not going). This way, the unemployed are replenishing their skills and increasing their chances of getting a job and off of welfare. And we also increase the skills of our population in general.

  2. I think that's a really good idea because it would encourage people to acquire skills, which helps them and everybody else.

    There are a lot of factors with this idea though, all of which make me think it would be best administered as a state or local policy:

    - It would be very difficult for the federal government to know enough about all communities to ensure that people are completing appropriate programs, or even whether there are appropriate programs in certain places.

    - These policies are currently made possible by taxing employers, which incentivizes employers to cut jobs and makes it more difficult for them to create new ones. If the unemployment benefits policy was localized, different communities could best make the tradeoff between negative impact on employment and positive impact on the newly unemployed. For example, perhaps an area with industries that make it more difficult for the unemployed to find work could have higher benefits than an area with a more dynamic economy where people can quickly find new jobs...

    I worry in general about people's increased reliance on government because (a) the money is coming from somewhere, namely producers/employers, and (b) government inefficiencies have left many (all?) entitlement programs in debt, meaning that we'll reach a point where benefits will be severely cut. That's a course that's bad for everyone. I think localizing the unemployment benefits policy, combined with your idea, allows for more flexible and sensible policy.