The economics of extending unemployment benefits

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How about more than two years of unemployment benefits? What might be the implications of extending unemployment benefits, which already has been pushed out to reach 99 weeks?

Let’s first consider the current state of unemployment in the nation. As reported by the U.S. Bureau of Labor Statistics early this month, the unemployment rate declined from 9 percent in October to 8.6 percent in November. The last time the unemployment rate dipped below 9 percent was March of this year.

While this rate remains far too high, any gain is welcome. At the same time, though, it must be noted that this drop in the unemployment rate was a good news-bad news story. The good news was that employment in the household survey increased by 278,000 in November. The bad news was that labor force actually declined in November by 315,000 — meaning that the number of people seeking work declined.

So, about half of the drop in the unemployment rate in November was due to people leaving the labor force, with many likely becoming discouraged.

Responding to the unemployment numbers, U.S. Secretary of Labor Hilda L. Solis naturally spun this as a big positive. And she concluded: “We know what has worked: extending payroll tax cuts and unemployment insurance, and making smart investments in our economy. The clock is ticking. If Congress doesn’t extend emergency unemployment benefits for our long-term unemployed this month, 5 million Americans will lose their benefits next year. These are the everyday heroes of our recovery who have lost their jobs through no fault of their own. They spend all day, every day filling out applications, sending out resumes and looking for work.”

As many of us who have ever been unemployed can testify, being without a job can take a toll, and a new position is vital and sought as quickly as possible. At the same time, many of us also know people who have taken advantage of the system, collecting government benefits and putting off getting a job until benefits have or are about to run out. Others find work, but since the pay is not high enough compared to unemployment benefits, they wait for something better to come along.

Pluralities of Americans have their doubts about long-term unemployment benefits. Rasmussen Reports polling from early this month found that 39 percent of adults agreed that 99 weeks of unemployment benefits is too long, with 33 percent saying that’s about right and 17 percent declaring it’s too short. In addition, 43 percent believe that 99 weeks of benefits increases the number of people remaining unemployed, versus 28 percent who say such benefits do not increase unemployment and 29 percent not sure.

Economics confirms the unease that these pluralities have about long-term unemployment benefits. For example, in their excellent text Economics: Private and Public Choice, economists James Gwartney (Florida State University), Richard Stroup (Montana State University), Russell Sobel (West Virginia University), and David Macpherson (Trinity University) pointed out: “In fact, empirical evidence indicates that there is a spike in the number of unemployed workers obtaining employment just prior to and immediately after their unemployment benefits are exhausted.”

Lawrence Summers, who was treasury secretary for President Clinton and director of President Obama’s National Economic Council, has found that government unemployment assistance actually increases the unemployment rate as individuals not actively seeking work say they are looking for a job, and as periods of unemployment are extended. In The Concise Encyclopedia of Economics, Summers explained: “Each unemployed person has a ‘reservation wage’ — the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.”

Of course, ever-extending unemployment benefits have to be paid for, with both federal and state taxpayers on the hook. That includes pushing up the unemployment taxes paid by employers, which, in turn, raises the costs of and reduces hiring.

Those costs come on top of a big pile of other governmental burdens and uncertainties that reduce private job creation. For example, when fully phased in, President Obama’s health care reforms include assorted tax increases that will reduce the resources available for investment and hiring, and a bevy of regulations that promise to raise health care costs for businesses, thereby working against employment growth.

The same goes for Obama’s push for increased taxes on upper income earners, who happen to be the people with the resources to invest in new, expanding, job-creating businesses.

In the end, the best scenario for the unemployed is to create an environment whereby entrepreneurs, businesses and investors have the incentives to build, invest and hire. Unfortunately, the current policy climate works against these crucial undertakings. To the extent that the economy and employment are growing is a tribute to the resiliency of private sector risk takers, and not due in any way to the actions taken and policies advocated by the Obama White House.

Indeed, the Obama agenda of subsidizing long-term unemployment and punishing job creators is a recipe for … well … creating unemployment. You don’t need to be an economist to grasp this simple economic reality.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.