The Benefits of Extending Benefits

The San Francisco Federal Reserve released a fairly interesting paper this week about the effects of benefit extensions on the unemployed. The author, Rob Valletta, came to the conclusion that the large number of benefit extensions by the Federal government have a very small effect on the duration of time job losers are out of work. He looked at a fairly large data set and determined that the extensions, up to 99 weeks in some cases, added only 0.4 percentage points to the almost 10% unemployment rate. This paper contradicts some claims that extended benefits are creating disincentives for people who are laid off to find new employment.

I find Valletta's research very timely in the current economy. Last week, after much partisan wrangling, Congress passed an extension continuing their program of support for unemployment benefits. In normal situations, a person who is laid off is entitled to about 26 weeks of benefits. The amount of their benefit depends on their state of residence but averages about $350 a week. This formula takes into account their prior earnings and length of employment. During the current recession, the Federal government passed a series of laws granting extensions of several months to individuals who are facing the loss of benefits after their 26th week.

The San Francisco paper attempts to quantify how involuntary job losers are not voluntarily extending their periods of unemployment compared to those who decide to quit their job or enter the market. The unemployment benefits only serve to provide a cushion to those out of work. In most cases the benefits are only sixty percent, or less, of a person's prior income. And it is obvious that such a drastic cut in earnings force people to severely cut back their expenses or deplete their savings. The jobless benefits only provide for part of the earnings loss.

Clearly it is not in a person's best interest to remain on the unemployment rolls, even when they can receive benefits for almost two years. The immediate result of a layoff is not the loss of all income, but the loss of about half. In an era when most individuals are spending either more than or their entire income when they have a job, to take away such a large portion of their funds can create sizable shocks to an individuals finances. Thus, while the government provides a cushion of money to soften the economic blows to the unemployed, they are by no means comfortable receiving such a fraction of their prior income. In most cases, rational individuals will do whatever they can to move back to their prior earnings level by finding new work as quickly as possible. Or at least that's what a new San Francisco Fed paper says...