A Minute With...

labor economist Ron Laschever

7/26/2010  8:00 am

President Obama signed a bill July 22 extending unemployment benefits for millions of jobless Americans, despite objections that the $34 billion program will deepen the nation’s mounting deficit. Labor economist Ron Laschever says the much-debated move is likely necessary as hiring languishes in the wake of the deepest economic downturn in decades. Laschever discusses the benefit extension and its implications in an interview with News Bureau Business & Law Editor Jan Dennis.

Is extending unemployment benefits a good move – for the economy, the welfare of displaced workers or both?

image of professor ron lascheverGiven the current labor market conditions, it is likely a necessary move. The extension covers those designated as long-term unemployed, defined as unemployed for six months or more. According to the most recent U.S. Bureau of Labor Statistics figures, among all those unemployed, the share of long-term unemployed in June 2010 was 43 percent, up from 17 percent in June 2008. In addition, this number probably understates the current labor market conditions, as it does not include the “discouraged” – those who have decided to drop out of the labor force, and have stopped searching for a job.

It is worth keeping in mind that besides providing a safety net for those who have lost their jobs, unemployment insurance also benefits employers and the economy as a whole.  Unemployment benefits play an important role in making sure workers and firms are matched more efficiently. Without the benefits, workers might opt to take the first job offer they receive, rather than waiting for a job that better fits their qualifications and abilities, making them more productive, and therefore benefiting both them and their employer.

From the economy’s standpoint, unemployment benefits act as a useful stabilizer during downturns when consumption and overall spending decrease. They play a similar role to that of a stimulus plan, as some of the benefits will be spent on goods and services in the economy. The extension benefits are financed by the federal government and will therefore increase the current deficit. While there is an ongoing debate regarding the appropriate level of debt, the cost of this bill is $34 billion, compared to the trillions that the government spends each year on benefits such as unemployment insurance and Social Security.

Could additional unemployment checks keep people from seeking work, as some opponents contend?

Unemployment benefits vary greatly across states in their generosity, but the replacement ratio is usually less than 100 percent. Because benefits are subject to a cap, for high earners the replacement ratio could be as low as 10 percent in some states. In the U.S., on average, it is around 50 percent of pre-unemployment wages. The lower income from benefits, the eventual expiration of the benefits, the job search costs, the fact that prospective employers might negatively view those with long unemployment spells, as well as the associated psychological costs would lead many people to prefer working to unemployment. However, a growing body of research does suggest that both more generous benefits and longer time limits do lengthen the duration of unemployment. Some have documented a spike in the proportion of those who find a job a week or two before their benefits are set to expire, though the majority of workers find jobs well before or after the expiration date. In the current economic climate, there are locations, sectors, and occupations in which there are far fewer vacancies available, and therefore increased search intensity among job seekers might not lead to a large reduction in unemployment.

Based on the lessons of this deep recession, should the nation’s unemployment insurance system be revamped? Is there a better way to safeguard both workers and the federal treasury?

Like with any insurance plan, there is always some opportunity to take advantage of the system, thereby adding to the overall cost of the program. However, some form of insurance is beneficial for the reasons mentioned above. In addition to changing the benefit levels and potential duration of benefits, the more traditional proposals for change have focused on increased monitoring to verify unemployed people are actively searching for jobs, requiring those unemployed to participate in public projects, and mandating job-skills workshops. These measures all entail additional costs.

A different approach that could potentially reduce incentives to overuse benefits is a move to personal unemployment insurance savings accounts, where the employer and employee premiums are saved under the worker’s account, to be used if they become unemployed. Under some proposals, any remaining balance could be withdrawn at retirement or when facing financial hardship. This approach could potentially decrease the overall costs of the program. Personal accounts have been implemented in several Latin American countries (most recently Chile in 2002). In addition to the private accounts, there may still be a “solidarity fund” set for those who have exhausted their accounts. There is some evidence that personal accounts may decrease the incentives of workers to overuse unemployment benefits.

By and large, the U.S. unemployment insurance system has served us well during the 75-plus years of its existence. It is probably useful to maintain the flexibility and the option to legislate extensions during hard economic times, an option the federal government has just exercised, as have various states in the past.

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