Unemployment insurance is a valuable program for people enduring the stress and uncertainty of temporary joblessness. But if the benefits become too generous, unemployment insurance can incentivize people to stay out of work longer, hurting them — and the overall economy — in the long term.
A new report by the JPMorgan Chase Institute sheds new light on the unemployment insurance debate, concluding that shorter benefit periods spur people back to work. Chase measured the spending and income habits of 160,000 families that received unemployment in states that offer benefits for up to 26 weeks, compared to families in Florida, which only offers unemployment insurance up to 16 weeks.
Not only are benefits of shorter duration in Florida, they’re also less generous compared to most other states. Yet the key conclusion of the JPMorgan Chase report was that the shorter benefits resulted in people going back to work sooner.
Though unemployed people in the Sunshine State experienced larger initial spending cuts, their long-term financial outcomes were not much different than those who had a full 26 weeks of benefits.
“Despite these deeper cuts in income and spending in Florida, income and spending exhibit similar recovery paths after 12 months,” the report found.
The JPMorgan report does conclude that unemployment insurance “is highly effective at cushioning the short-term blow from job loss,” mitigating almost 75 percent of the potential spending drop that the recently unemployed could experience.
However, the bottom line is that unemployment benefits should focus on what the programs do well: providing short-term support for the recently unemployed.
When the program turns into a transfer system offering more than six months of benefits, taxpayers are on the hook for subsidizing those who, in many cases, are not actually interested in working. Former U.S. Treasury Secretary Lawrence Summers concluded, “unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits.” Summers estimated that this group could be close to 1 million people.
In 2014, Democrats lobbied to extend unemployment federal unemployment benefits beyond 26 weeks. When Republicans blocked the bill (they wisely “refused to vote on extensions unless they were paid for,” summarized The Fiscal Times), Democrats warned of catastrophe for the unemployed.
They were wrong. Research supports the Republicans in this case. A National Bureau of Economic Research working paper concluded that letting the extended unemployment benefits expire resulted in an additional 1.1 million people participating in the labor force.
“In contrast to typical predictions, the labor force participation rate suddenly halted its steady secular decline,” wrote the authors.
Short-term unemployment insurance is important, but it should be limited to make sure people who can go back to work have an incentive to do so. By focusing on the core mission of unemployment insurance, we can protect the unemployed, increase the labor force participation rate and save significant tax dollars.