Unemployment Insurance

Posted on January 10, 2011 by Ben Connard 

As part of the political deal to extend the Bush tax cuts, Congress also extended unemployment benefits through 2011.  State unemployment benefits usually max out at 26 weeks. The federal program extends those benefits up to 99 weeks, depending on the state’s unemployment rate.  A state unemployment rate of above 8.5% allows for the maximum eligibility.

Unemployment benefits are a controversial topic.  No one is going to get rich collecting unemployment- the max benefit in New York is $405 a week (about $10 an hour vs. minimum wage of $7.25)- but many have heard stories of a friend not taking a job because his benefits would stop.  Economists have done studies showing that the probability of finding a job rises dramatically right before benefits elapse.

Regardless of incentives, unemployment insurance is a great counter cyclical tool for the government to combat a slowing economy.  Benefit claims move inversely to the economy- when demand slows, claims increase.  Additionally, since the money is going to those without jobs it is most likely spent and therefore pumped back into the economy.  The benefits also increase the efficiency of the labor market.  When an engineer loses his job, instead of taking the first available, he waits to find a job suited to his skills.

The optimal length of the benefit is tricky.  The goal of our economy is not 100% employment.  Most economists consider full employment to be an unemployment rate of about 4%.  This allows for some job turnover without sending masses to the poor house and driving consumer spending to a halt.  Job turnover is also good because it increases the incentive to be productive at work and can spur new business creation when displaced employees build their own entrepreneurial companies.

The economy was last at 4% unemployment in 2000.  At the time, the median duration it took someone to find a job was 5.9 weeks.  The last time the economy was under 5% unemployment was 2006 and 2007, when it took 8.4 weeks to find a job.  Let’s assume 26 weeks of unemployment insurance is the standard as I don’t recall the length to be an issue in 2007.  Currently, the median duration it takes to find a job 21.6 weeks.  This is 3.7 times the full employment duration and 2.6 times the pre-crises duration.  This suggests current unemployment benefits should range from 67 to 95 weeks.

The numbers indicate unemployment benefits are not overly extended given the employment level and the time it takes to find a job.  However, further extending them would be excessive and not be in line with our historical norms.