The “Feel-Goodism” of Unemployment Insurance Benefit Extensions

unemployment-words-speedometer-17498695Next week the Senate will vote on a bill to extend unemployment benefits for another three months to some 1.3 million unemployed whose benefits expired on December 28.   At a cost of a whopping $6.5 billion, it is expected to produce $141 million in revenue over the next 10 years.  (Unemployment benefits are taxed, after all.)  But revenue aside, it’s all about helping the American worker…or is it?

Just on the surface, it doesn’t make much sense to add $6.5 billion to the deficit in order to reap $141 million in tax revenues, but hey –  that’s just me.  There are other reasons to extend unemployment benefits, say proponents – such as to help the unemployed stay on their feet while they are feverishly searching for a job.  But is there evidence to support that unemployment insurance leads to eventual employment?

A NBER study released last year measured the effects of the 99-week extension of unemployment benefits during American’s “Great Recession” of 2007 to 2009.  Henry Farber and Robert Valletta found that extending unemployment benefits beyond the standard 26 weeks statistically and significantly increased the unemployment duration and unemployment exits (the exits were primarily due to beneficiaries leaving the work force, not in them finding employment).

Several studies suggest that reducing the length of benefits, in fact, encourages employment.  In case the United States wants to become more like Europe desire to copy so many of its socialist and welfare tendencies, first consider a 2010 study on unemployment benefits reform in Germany.  In 2002, the German government decided to reform its generous unemployment system, in which benefits often served as a bridge between unemployment and retirement for older workers.  After the reforms were enacted in 2006 (which reduced the length of benefits, among other measures), the unemployment rate among 57 to 64 year olds fell 20 percent (although benefit lengths were reinstated in 2008).

If the goal is to promote measures that actually put people back to work, extending unemployment benefits does more harm than good.  If on the other hand, we want to simply pass a feel-good policy that furthers the debt, hurts the taxpayer and promotes structural unemployment, this $6.5 billion extension (along with many others that could follow) would do it.

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