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  • Unemployment Benefits: No Free Lunch

    Would spending more money on unemployment benefits create jobs? The Congressional Budget Office (CBO) thinks so.

    According to a new CBO report, extending the current 73 weeks of unemployment insurance (UI) benefits would lead employers to create 300,000 new jobs.

    This seems highly implausible. Economists widely agree that UI causes workers to spend more time unemployed.

    So how did the CBO conclude that UI spending creates jobs? Their assumptions virtually dictated the conclusion.

    The CBO made three key assumptions:

    1. Government spending has a large “multiplier” effect in the economy and creates jobs;
    2. Unemployed workers spend every additional dollar of UI benefits they receive; and,
    3. Extended benefits have little offsetting effect on the unemployment rate.

    These assumptions logically imply that additional spending on UI benefits creates jobs. That does not make these assumptions true. Academic research casts serious doubt on all three.

    As the CBO acknowledges, the size of the “multiplier effect” is highly controversial. Government spending does not create wealth out of thin air; the government taxes or borrows those resources from elsewhere in the economy. Some studies find that government spending actually contracts the private sector. It often does not stimulate growth—as the $500 billion spent on unemployment benefits during the recession demonstrates.

    Neither do UI recipients spend every additional dollar of benefits they receive. Each dollar of UI spending increases consumption by about 55 cents. Why not more? Because UI benefits often provide alternative financing for consumption that would otherwise take place without the benefits. UI recipients also (unsurprisingly) draw down their savings at a slower rate than those without benefits.

    In addition, the spouses of workers without UI benefits work more hours than those getting the benefits. Each dollar of benefits a married man collects reduces his wife’s earnings between 36 and 73 cents.

    Research also shows that extended benefits have raised the unemployment rate during the Great Recession. University of Chicago economist Casey Mulligan finds that this has significantly held back the labor market. Even Mark Zandi—one of the strongest supporters of the stimulus (and UI spending)—agrees on this point.

    Had the CBO made different assumptions based on these studies, it would have come to a different conclusion.

    The Heritage Foundation did this analysis at the start of the recession. We used a smaller multiplier and assumed only half of UI benefits finance new consumption and that benefits delay some workers’ return to work. With these assumptions, macroeconomic models show that extended benefits somewhat depress the economy.

    This does not mean that Congress should return unemployment benefits to six months. UI benefits provide important assistance to those struggling to find jobs. Rather, Congress should make policy tradeoffs between the humanitarian benefits of UI spending and the economic costs they entail. But they should not be under the illusion that UI benefits are an economic free lunch.

    Posted in Featured [slideshow_deploy]

    10 Responses to Unemployment Benefits: No Free Lunch

    1. CLA says:

      This is the first time on unemployment. The last time I was out of work, I had a new job in only a few weeks. This time it is not the same. I am older and searching for a new job. Any job that I get, will be I went on a job interview this week that lasted less than 8 minutes. My UI income is only a portion of what my monthly income was. Now in December they are going to cut my UI income. how do unemployment work? Do the employer pay into unemployment compensation. Where do that money go?

    2. Brando says:

      No offense but "income" is not the proper term for your UI. Unless you live in CA I guess…

    3. Faith says:

      CLA: Employers are charged an unemployment tax by the government. The revenue the state collects from this tax goes into an unemployment "trust fund" and UI benefits are paid out from that. The employer often passes this cost on to the consumer, so in a round-about way, we all contribute to the UI trust fund. (Extended benefits are different… these come from the federal government, not the state.)

    4. John Detwiler says:

      Some honest unemployed workers actively seek jobs. But others simply sit back and enjoy their paid vacation. Example. I talked to an unemployed carpenter who had a job offer. He explained to me why he didn't intend taking it. Figuring the FICA tax Income tax deductions his take home pay would be 15 to 20 dollars less than his unemployment check. And I imagine this is prevalent among those receiving unemployment and extended unemployment benefits. After all it is human nature to take the much easier path of receiving money for doing nothing.

      • True.I have been unemployed before and I could find a job or I became more self employed in the old 6 month system.The reason for this is I wanted to work.I have always felt better about myself when I worked at something,no matter what I made for money.

    5. Sol of Texas says:

      This (CBO) conclusion demonstrates how poorly the government school system has educated the citizenry with respect to deductive reasoning. It is one thing to have a valid argument (the CBO argument is valid by syllogism). It is another to have a sound argument (an argument where the premises are also true). In order to have a proof, both the conditions of soundness and validity must be met. The CBO has failed (again).

    6. Pete says:

      There is no such thing as an government spending multiplier any more than when I spend my money there is a multiplying effect. Each dollar I spend compensates the merchant for his costs plus a return on his investment. When he pays his expenses.. he pays for his vendor's costs plus investment. I believe the brainy ones confuse money velocity with a multiplier effect. These are distinctly different things.

    7. Helen Spingola says:

      Gee, I remember when 'unemployment benefits' were provided for only 26 weeks!!!! But
      of course, there were many more jobs to be had in 'those days' and also, many more 'qualified
      achievers' to handle those jobs…

    8. allen says:

      In the State Of Washington,Seattle, I know a Union Labour Dry-Waller that gets $525.00 per week on unemployment and has been on a ninety nine week vacation. I am not kidding a nice Union Co. helps pay for this.

    9. Blair Franconia, NH says:

      No, it wouldn't. Why? According to Fox News' John Stossel, Denmark once had the most generous unemployment benefits in the world. Five years' worth of benefits. It was like the UAW's so-called "job banks."
      Danes went on unemployment, pretended to look for work, and got more unemployment. They became adept at gaming the system. When the unemployment office called and said: "Ole, we have a job for you." Ole would reply: "No thank you. I can make more money on unemployment than I can going to work." So what happened?
      The Socialist government of Denmark cut it back to four years. What happened? Danes got the incentive to work. The same thing's happening here.

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