The Emergency Unemployment Compensation (EUC) program, introduced during the Great Recession, provided the long-term unemployed a maximum 99 weeks of benefits. The program ended in December 2013, and Congress decided not to reauthorize the unprecedented benefit extensions. Recent studies show that the economy had not been affected by the benefit cut, and unemployment kept decreasing thereafter.
The Council of Economic Advisers (CEA) and the Department of Labor (DOL) released a report right before the program ended, arguing that allowing EUC to expire would reduce demand and cost 240,000 jobs in 2014. It would be counterproductive to the economic recovery, they stated, as it is important to provide aid for workers who continue to struggle to find jobs in order to keep them in the job market, even though the job-finding rate is low for the long-term unemployed. Also, they asserted that extended benefits during times of high unemployment do not noticeably reduce incentives for workers to find jobs. The arguments claimed the beneficial impact of helping liquidity constrained unemployed workers meet their basic needs, and giving them financial support to search a job fitting them well for a longer time, more than outweighs the problem that longer benefits duration decrease the incentive for unemployed worker to exert effort to get a job, which is called “moral hazard” effect.
However, when the recession officially ended in June 2009, the number of people receiving EUC/EB benefits kept growing. Researchers at the St. Louis Federal Reserve Bank found that longer benefits may reduce unemployed workers’ job search efforts, decreasing their likelihood of becoming reemployed. A Federal Reserve Bank of Dallas study of employment data in Texas found that the length of joblessness is negatively correlated with the likelihood of getting a new job because very long durations off the job can lead to considerable skill depreciation, permanently limiting productivity.
The Council of Economic Advisers and the Department of Labor criticized the argument that extensions to the UI program have significantly impeded labor market recovery after the Great Recession. They denied that benefit extensions discourage job creation by putting upward pressure on wages. However, two studies by Marcus Hagedorn, et al., disagreed, pointing out the misunderstanding of basic economics in the CEA and DOL report. They found that since the benefit cut at the end of 2013, 1.8 million additional jobs were created in 2014. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.
The CEA and DOL also claimed unemployment benefits can support economic growth by compensating the decline in income and therefore consumption due to the job loss. According to the Congressional Budget Office (CBO), the increased spending on consumer goods and services due to extending EUC would raise aggregate demand, which would lead to a higher GDP and employment, as well as government revenue through income, payroll, and sales taxes. However, the Dallas Federal Reserve Bank study pointed out that chronic long-term unemployment, which would likely happen if EUC had been extended, potentially weakens the Federal Reserve’s monetary policy intervention to stable the price and keep unemployment low. If workers are potentially exposed to long periods off the job, they may start saving more money when they do work, simply to get by when they are unemployed. Such savings almost immediately slow consumer spending and impede short-term economic growth. Therefore, even though CBO’s demand-side theory is true, extending EUC would not contribute to economic growth.