Is it Time for Another Extension of Unemployment Benefits?

With the unemployment rate at 10 percent and expected to go higher, it would seem that Congress should again extend the length of time that unemployed workers can receive benefits.

If you take into account people who are working part time when they prefer a full-time job, the discouraged workers and others who are marginally attached to the work force, then the unemployment rate is really 17.3 percent in the nation. With many firms still laying off workers, it’s taking longer for the unemployed to find jobs. The average duration of unemployment was 29.1 weeks in December, according to the Department of Labor.

In Virginia, recipients of unemployment insurance are typically eligible for up to 26 weeks of benefits.

Last year, Congress passed a bill that included four federal extensions. If a person in Virginia qualifies for all four extensions, it is possible for him to receive 86 weeks of unemployment benefits. The expiration dates for these extensions vary, with the last extension for benefits expiring at the end of July. Extending unemployment insurance seems like a good policy. But could it be contributing to the higher unemployment rate?

Studies show that unemployment insurance lengthens the duration of unemployment. A 1990 study by Bruce D. Meyer, for example, showed that a job-seeking worker’s chance of finding a job improves dramatically the week his benefits run out.

It should not be too surprising that the job seeker becomes more motivated to find a job as that final unemployment check is looming. Neither is it surprising that many studies have found that the amount of money received in unemployment insurance benefits affects the duration of unemployment. That is, the higher the proportion of weekly earnings that are replaced by unemployment insurance benefits, the longer the length of unemployment.

States vary in the amount of unemployment insurance benefits they offer. However, all states have a minimum and maximum payment. The minimum benefit typically provides a higher replacement ratio of wages for lower-paid workers than high-wage earners. Consequently, it motivates workers with lower wages, including younger workers who don’t have much experience, to remain unemployed longer. Unemployment rates reflect this phenomenon.

One study suggests that reducing the replacement ratio by 25 percent would reduce the average length of unemployment by three to four weeks.

So, the question remains, should politicians again extend the length of time that unemployed workers can receive unemployment insurance benefits?

Reprinted with permission from the Richmond Times-Dispatch.