By Jeremy Schwartz
4:29 PM EST, December 20, 2011
Opponents of continuing the extension of unemployment insurance often make one of the following arguments: (1) the program is welfare for the undeserving; (2) it subsidizes leisure and is a major contributor to the high unemployment rate; or (3) the extension does little to create jobs. The critics have it wrong on all counts.
The mischaracterization of unemployment insurance as welfare is a fundamental misunderstanding of the program — and insurance in general. Welfare is society's means of ensuring that the poorest among us have their basic needs taken care of, regardless of prior contributions to the system. Insurance is a financial instrument where individuals pay a premium in exchange for compensation in the case of an adverse event. For instance, people have health insurance so that if they get appendicitis, they will not have to bear the large and sudden costs of the operation and hospital stay. Unemployment insurance works the same way. Workers pay premiums in the form of a tax remitted by their employer while they are employed. If, suddenly, they lose their job through no fault of their own, they do not have to bear the full cost of the loss of their earnings.
Those who look at unemployment insurance from the welfare perspective like to claim, as did Sen. Rand Paul, a Kentucky Republican, that the program is "pay[ing] people not to work." This is about as true as saying that health insurance pays people to be sick.
As in the case of health insurance, a one-size-fits-all approach makes little sense. The cost of unemployment varies widely in terms of the time it takes to find another job. Currently, the average duration of unemployment is 40.9 weeks, almost three times what it was prior to the Great Recession. Paying the same standard six months of unemployment benefits in a poor labor market as a good one is as desirable as a health insurance policy that pays for the same number of days in a hospital for a heart transplant as it does for appendicitis.
Critics are right about one thing, however: These extensions are underfunded. The unemployment insurance tax should be sufficient to cover the program. A higher tax should be phased in once the economy improves. But that is not a reason to deny benefits that are needed now. To continue with the health care analogy, you certainly would not want your health insurance company — which for years promised it would cover organ transplants — to deny you coverage when your kidney fails on the grounds that it did not set the premium high enough during all those years you were making the required payments.
The second critique, that the unemployed use their benefits to fund leisure rather than to look for work, is also off the mark. To be fair, there is a kernel truth to the claim that unemployment insurance disincentivizes searching for work. However, it is far overblown by opponents. Research on the program's effects indicates that each additional week of benefits leads to about 0.18 weeks of additional unemployment, and a San Francisco Federal Reserve study suggests that the current extensions are responsible for just 0.40 percentage points of the increase in the unemployment rate. It is a little silly to suggest, as some do, that the country's high unemployment rate is due to unemployment insurance benefits when far more obvious possibilities exist — such as the collapse of the U.S. housing market, the euro crisis, and generally low demand that has left 10 million more workers unemployed than there are available job openings.
The final critique is that the extension of unemployment insurance benefits is part of a set of stimulus programs that "have not worked." Of course, when a treatment is applied and the patient is not cured, we may have either the medicine wrong or the dose. In fact, the administration's stimulus programs created 3.3 million jobs, according to the nonpartisan Congressional Budget Office. The CBO has also found that because unemployment insurance puts money in the hands of those most likely to spend it; for each dollar put into the extensions, economic activity increases by $1.90. The medicine was effective, it just was not strong enough — and stopping the treatment altogether, when the unemployment rate is still 8.6 percent, makes little sense.
Critics contend we should favor policies that lower taxes and regulation, but "job creators" do not need more disposable income or a freer hand to pollute. They need more customers. This is what the extension of unemployment insurance benefits provides.
Jeremy Schwartz is an assistant professor of economics at Loyola University Maryland. He has researched and written extensively on the issue of unemployment insurance policy. His email is firstname.lastname@example.org.
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