Umemployment Benefits

July 10, 2010

My View: Time to index jobless benefits
By Richard Schiming

— One of the controversial issues currently before Congress is the extension of unemployment benefits. An extension passed the U.S. House but is currently stalled in the Senate. Some basic facts about unemployment and unemployment compensation can illuminate the issues in this debate.

Unemployment benefits are not especially generous and not everyone who is unemployed receives benefits. The average benefit replaces about 36 percent of a worker’s weekly wage. Under the standard 26 weeks of unemployment benefits, only 35 percent of those currently unemployed are eligible for benefits. Under the proposed extension, only 67 percent of those unemployed would receive benefits.

There is no correlation between the generosity of unemployment benefits and the rate of unemployment. Some states are more generous than others with their unemployment benefits. If people chose unemployment over a job because of the level of unemployment benefits, the states with the most generous unemployment benefits would also have the highest unemployment rates.

Yet this is not the case. Using the latest figures available, the average unemployment rate in the six states with the highest unemployment benefits is 9.3 percent. The six states with the lowest unemployment benefits have an average unemployment rate of 10.1 percent.

The U.S. Department of Labor calculates a statistic called “Insured Unemployment Rate,” the percentage of those covered by unemployment insurance who are unemployed. If unemployment benefits encouraged unemployment, one would expect that this rate for those with unemployment benefits would be higher than the overall unemployment rate. As a matter of fact, it is substantially lower (currently less than 4%).

Unemployment benefits increase economic activity. According to the non-partisan Congressional Budget Office, a dollar spent on unemployment benefits has anywhere from 4 to 8 times greater an impact on the economy than a dollar of tax cuts for higher income individuals. You get more bang for the buck with unemployment benefits as a fiscal stimulus than with just about any other kind of government spending.

More of our unemployment is now structural unemployment. Changing job demand as some U.S. firms and industries decline and even disappear causes structural unemployment.

In the past, many workers who lost their jobs returned to their old jobs with their former employer when the economy recovered. Now many of the jobs lost are gone forever.

Structural unemployment takes longer to cure since it requires unemployed workers to acquire new job skills. Longer unemployment benefits help workers navigate this transition to their new jobs.

Very few people choose to be unemployed or to remain unemployed. Long lines at job fairs and other employment opportunities typify the strong American work ethic. People’s jobs are such an important part of their sense of identity and self-worth that few would choose the psychological cost of continued unemployment even if it were monetarily advantageous.

Just the way few people would choose to remain sick because they have health insurance, few who are unemployed would choose to stay at home because they have unemployment benefits. In both cases, people are usually suffering through no fault of their own. Sometimes illness or unemployment happens. A decent society should be willing to take care of both of these situations.

There might be a way to avoid all this legislative gridlock in the future. My proposal is that, just like we do with other parts of the social safety net such as food stamps and Social Security, we index unemployment benefits to maintain a more consistent and dependable coverage.

Over the past 30 years, the average length of unemployment has been about 15 weeks and the standard coverage of unemployment benefits has been 26 weeks. In other words, the length of unemployment benefits has typically been 1.7 times the average length of unemployment. Using this ratio today, standard unemployment benefits would last 59 weeks.

If we look at periods of high unemployment in the past 30 years, unemployment benefits lasted 1.3 times as long as the average duration of unemployment. It would seem that a standard of 1.5 times the average length of unemployment would be a fair way of indexing the duration of unemployment benefits.

Such indexing would avoid the partisan rhetoric and delay over the extension of unemployment benefits just when they are needed the most now and in the future.