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One question I am frequently asked (usually after one of my local talks about the west Michigan economy) is whether unemployment benefits (also known as unemployment insurance or UI) are a cause of the high unemployment rate still seen both locally and nationwide. The logic behind the question is that some laid-off workers prefer collecting a UI check to working, and therefore turn down job offers or limit their job search for as long as they remain eligible for benefits. Unfortunately, the answer is not so straightforward, usually prompting a response from me along the lines of Yes, but
Economists generally agree that UI benefits and UI benefit extensions have an effect on the unemployment rate; however, the more difficult question to answer is whether the effect is a significant cause of high unemployment. For one, most states have long recognized the issue and have therefore implemented rules to help make sure that employment income is a more attractive option than UI benefits. For example, the State of Michigan UI system pays only a percentage of a workers average pay, up to a maximum of $362, which is less than half of the states average weekly wage across all industries. Second, not all unemployed persons qualify for UI benefits, which also minimizes the role such benefits play in altering the unemployment rate. Workers who quit, who are fired for causes such as theft, or who are entering the job market and cannot find jobs are not eligible for UI coverage and should face the same incentive to accept an offer of employment regardless of the length of benefit eligibility.
Fortunately, recent research released by the Chicago branch of the Federal Reserve provides a more quantitative answer to the question. Author Bhashkar Mazumder, director of the Chicago Census Research Data Center, finds that the extension of unemployment benefits during the 2007-2009 recession added approximately 0.8 points to the steady state or long-run average unemployment rate, which he estimates to be 5.1 percent.
A 0.8 percentage point increase in the unemployment rate, from 5.1 to 5.9 percent, seems significant. However, the extension of UI benefits did not occur in a vacuum, but in the context of a major economic downturn. The increase in unemployment that can be attributed to a lengthening of UI benefits pales in comparison to the overall increase in the national unemployment rate that occurred in conjunction with the 2007-2009 recession. According to the Bureau of Labor Statistics, the seasonally adjusted monthly unemployment rate peaked at 10.1 percent in October 2009, which represents an increase of 5.0 percentage points over the steady state unemployment rate.
Therefore, do UI benefit extensions dissuade some people from working? Yes, but the impact is modest in comparison to the huge growth in unemployment caused by economic conditions. Reductions in the maximum duration of eligibility for UI benefits have already begun as states like Michigan lose eligibility for federal emergency benefits. Additionally, the federal Emergency Unemployment Compensation bill is set to expire in January 2012, which will likely return most states UI programs to their standard duration. These reductions in benefit length will likely contribute somewhat to a future decline in unemployment rates. However, a return to a steady state level of unemployment will take additional, sustained economic growth to produce enough jobs for the existing unemployedregardless of whether or not those out of work are collecting UI benefits.Brad Watts can be reached at Watts@upjohn.org.