Unemployment has skyrocketed in this recession. Worse, it has remained abnormally high. Joblessness never rose above 8 percent in either the 2001 or 1991 recessions, but now almost one in ten Americans do not have jobs, and in some parts of the U.S. the rate is over 1 out of 5. Why?
The weak economy and the job-killing policies coming from Washington are the biggest culprits. The collapse of the housing bubble and the credit crunch hammered businesses, and new taxes and regulations are hitting employers when they are down. However, policies designed to help the jobless are – ironically – also at fault.
Congress extended the maximum length of time the unemployed can collect unemployment insurance (UI) beyond the usual six months. Congress often does this by recessions, but never before by so much. Now workers in high unemployment states can collect unemployment insurance for 99 weeks – almost two years of benefits. Congress did this to help those out of work. But economic studies consistently show that when workers collect longer UI benefits they also stay unemployed longer.
This does not happen because unemployed workers are lazy, or want welfare handouts. It happens because unemployment insurance changes the jobs the unemployed look for. Most job losers would like to find work near where they currently live, and in their same industry or occupation. Who wants to move away from friends or family, or take a pay cut in a field in which you have less skills?
Unfortunately a lot of workers will have to do just that. Many of the jobs the economy lost will never come back. The collapse of the housing bubble means construction employment will not recover anytime soon. The finance sector will likewise remain shrunken. General Motors cut almost three-fifths of its hourly workforce in recent years and most of those positions will never return.
Two years of UI benefits allows these unemployed workers to delay the inevitable. They look for similar jobs in the same area as they used to work. They do not look as intently for work in other states or in other industries, jobs that would involve painful transitions. Not until UI benefits begin to run out does their job searching surge. Then they become more willing to accept the painful sacrifices necessary to get a job, such as moving away.
UI keeps many workers unemployed while they look for jobs that they will not find. That does little to benefit them: in any event, they ultimately wind up having to take the less desirable jobs.
Studies show that extending UI benefits has this effect on unemployment whether jobs are hard to find or not. And it measurably raises the unemployment rate. A recent Brookings Paper on Economic Activity, written by economists at the Federal Reserve and the affiliated with the National Bureau of Economic Research, concluded that:
This back-of-the-envelope calculation therefore suggests that EUC [the extended UI benefits] can account for as much as 15 to 40 percent of the rise in aggregate unemployment duration, a potentially substantial effect. In terms of the unemployment rate, this corresponds to between 0.7 and 1.8 percentage points of the 5.5 percentage point rise in the unemployment rate witnessed in the current recession. There are reasons to believe, however, that the effect of extended UI benefits in the current recession on the duration of unemployment is likely to be at the lower end of these estimates.
In English, the unemployment rate would be roughly a percentage point lower, if Congress had left unemployment benefits at six months. We would have 8.7 or 9.0 percent unemployment instead of the current 9.7 percent. Policies intended to help the jobless have kept many of them from finding new work. That may be a policy tradeoff Congress chooses to make. But not one should mistake it for an economic stimulus.