Unemployment Insurance for the Great Recession

SUMMARY

Since December 2007 the U.S. unemployment rate has nearly doubled and the number of payroll jobs has fallen by 6.9 million, or 5%. The severity of the current recession makes it very hard for laid off workers to find new jobs. This has clear implications for the design of unemployment programs. For typical American workers the most important protection they receive when laid off is provided by unemployment insurance (UI). The regular UI program provides up to 26 weeks of benefits.

When unemployment is high and job finding is hard, many UI claimants exhaust their regular benefits. In the worst month following the 1981-82 recession, 41% of UI claimants exhausted their regular state UI benefits. In July of this year, nearly 51% of UI claimants exhausted their regular benefits. This is the highest rate of benefit exhaustion on record. It is a painful indicator of the difficulty of finding a job in the current economy. In view of the fact that the unemployment rate is still climbing and the number of payroll jobs is shrinking, the exhaustion rate is likely to continue rising in the coming months.

In both humanitarian and economic grounds it makes sense to provide longer duration benefits to laid-off workers when the unemployment rate is high. Because unemployed workers need more time to find work in weak labor markets, there is a compelling equity argument for offering insurance over longer spells of job search.  In addition, the counter-cyclical effectiveness of unemployment compensation is reduced when a large percentage of laid-off workers is dropped from the rolls as a result of benefit exhaustion.

In 2008 and 2009 Congress authorized federally funded extensions of unemployment benefits through Extended Unemployment Compensation (EUC) and modifications in the Extended Benefits (EB) program. These programs provide federal funding for up to 53 weeks of EUC and EB benefits in addition to the 26 weeks funded by states under their regular UI programs. Authorization for EUC and 100%-federally-funded EB benefits will expire for workers who exhaust their regular unemployment benefits after December 31, 2009. The most urgent policy need right now is to extend the authorization for these programs until at least the end of the 2010 fiscal year. I expect the nation’s unemployed will find it harder to land a job after December 31, 2009, than was the case when the EUC program was authorized in the summer of 2008. Thus, the arguments for maintaining the EUC program in 2010 are even more powerful than the arguments for establishing the program in the first place. The 2010 unemployment rate is likely to be substantially higher than it was in either 2008 or the winter of 2009. This consideration also implies it would be highly desirable to authorize continued federal funding for the recent expansions in the federal-state EB program. The EUC and modified EB programs should be authorized to provide benefits to new UI exhaustees until at least the end of the current fiscal year. Congress should consider trimming potential benefit durations only when unemployment comes down and laid-off workers find it easier to secure new jobs.

Critics of extended UI benefits claim they have little effect in boosting consumption and have serious adverse incentives in prolonging unemployment. In view of the severity of the current recession, I find little merit in either argument. Extended UI benefits provide crucial help to the Americans who have suffered the most in the recession – the laid-off workers who have been without work for six or more months. The benefit extensions enable these workers to maintain higher consumption than would be possible without the extra benefits.