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An economic argument for extending unemployment insurance [Commentary]

Today, the U.S. Senate is scheduled to consider whether to reinstate the Federal Unemployment Insurance (UI) program, which provided an average of 29 weeks of benefits past the 26 weeks states provide. A decision to discontinue this program will immediately affect one million job seekers looking for work in an extremely tough labor market.

Those against the extension often argue that if they were unemployed they would stop at nothing to find a job and that those on UI are choosing government dependency. While opponents have rightly identified an important issue, they have ignored its magnitude. Economists have long documented that more generous UI benefits do adversely impact some job seekers' search behavior and increase the average length of an unemployment spell. However, the effect of programs like the current federal UI extension is probably quite limited. My estimates, based upon the 1990s extension, suggest that the average length of unemployment would fall just 6.2 percent without Federal UI. So, while some UI recipients may increase their search effort if the federal program is discontinued, we must ask ourselves if we wish to deny one million people, who wake up every day with the goal of finding work, a critical financial lifeline because a relative few do not search as actively as we would like.

While opponents suggest the loss of benefits is just the encouragement the unemployed need to pick up the pace of their search, they ignore the real financial costs involved in finding work. Without UI, it may be unaffordable for the long-term unemployed to move to where jobs are plentiful or to pay to get certified in a specific skill. Those who really struggle may not be able to afford the most basic requirements of a modern job search — including computing resources, telephone service, proper attire and transportation — without UI benefits. Thus, even if the loss of benefits motivates the unemployed, they may lack the finances to translate their motivation into a successful search.

Opponents also argue that if they were struggling to find work they would simply accept any job at any wage, and current UI recipients should do the same. Forgetting for a moment that employers often will not hire overqualified workers, this logic ignores the reason we insure against unforeseen events. When an accidental fire occurs, we want homeowner's insurance that provides a home that is comparable to the one that is lost and not just any home. Similarly, UI should not only replace income until one can find any job, but a job that is as comparable as possible to the one that is lost.

This is not just desirable for the job seeker, but for society as a whole. If we ask unemployed managers, engineers, teachers, architects etc. to take any job available regardless of their qualifications, we must also accept that their skills will depreciate while their talents go unused, leaving the U.S. with a less competitive workforce. If we choose instead to invest in the unemployed, by providing a limited amount of additional UI so that they may find an opportunity that takes advantage of their skills, the economy as a whole benefits from not wasting precious human capital.

Finally, opponents claim that even if the extension is good policy, the $25 billion cost is unaffordable. This is hardly the case. The 155.3 million U.S. workers, borrowing at today's near 0 percent interest rates, could pay for the program by each making payments of just $2.68 per month over 60 months. This estimate is conservative, however, because it does not account for any stimulus effect that would increase employment and tax revenues. It also does not account for increased costs of other social programs that current UI recipients would qualify for if they lost their benefits and continued to be unemployed or took a low paying job.

Over the past year, social programs that assist society's most vulnerable, from food stamps to Head Start, have faced budget cuts and criticism. At the same time, tax preferences received by hedge funds and oil and gas companies and the zero payroll tax rate paid on income over $113,700 continue. These tax benefits, which accrue to the most well off, have escaped serious scrutiny despite little economic justification and the Congressional Budget Office estimate that reforming these policies could save $511.2 billion over 10 years. Hopefully, Congress will reverse this trend in the coming year and recognize the economic argument for extending UI and the crucial assistance that it provides fellow Americans.

Jeremy Schwartz is an assistant professor of economics at the Sellinger School of Business and Management at Loyola University. His email is jsschwartz1@loyola.edu.

To respond to this commentary, send an email to talkback@baltimoresun.com. Please include your name and contact information.

Copyright © 2015, The Baltimore Sun
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