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    Long Term Unemployment Benefits Diminish Incentives to Look for Work

    03/26/2010

    Congress is set to vote on a measure that would expand soon-to-expire unemployment benefits and subsidized health insurance up to 53 additional weeks. Senator Coburn (R-Okla.) is expected to “pull a Bunning” in order to seek to delay the passage of these $10 billion unemployment benefits. According to Senator Bunning (R-KY) and Senator Coburn, these expensive measures are not paid for and will add to the federal deficit.

    The long-term unemployment statistics are a huge cause for concern. The Wall Street Journal claimed that within the past year,

    The average length of unemployment is higher than it's been since government began tracking the data in 1948.

    A report found that 6.1 million out of 14.8 million people out of work have been unemployed for over 26 weeks. Overall, the average duration of unemployment is 29.7 weeks. While these are troubling measures, it’s imperative to analyze the effect of long-term unemployment benefits on unemployment rates.

    The Economist concludes that unemployed workers have been granted unemployment benefits for an unprecedented period of time,

    during this recession, Congress has extended benefits for historically long periods. Those out of work can collect benefits for nearly two full years at this point, and for longer in some states.

    Unfortunately, a recent study by JPMorgan Chase found that these unemployment benefits are actually responsible for increasing the unemployment rate by 1.5 percent. According to analyst Michael Feroli,

    Jobless benefits have the potential to increase the unemployment rate through two channels. First, by softening the blow of losing a job, they allow unemployed persons to become more selective in what job offer they accept, thereby raising the average duration of unemployment and increasing the unemployment rate.

    In addition, Feroli concludes that expanded unemployment benefits increase one's average duration of unemployment,

    Most estimates of this elasticity have centered on a finding that an increase of one week in the availability of benefits raises the average duration of unemployment by 0.2 week.

    University of Chicago economist Bruce Meyer, confirms Feroli's findings,

     unemployment benefits do prolong unemployment spells by quite a bit.

    As the unemployed are continuously granted longer unemployment benefits, they have less of an incentive to actively search for jobs and they tend to pass up lower-paying jobs. As Nina Easton explains in Time Magazine,

    past studies by academics such as Meyer and Harvard's Lawrence Katz show that people are most likely to find a job just as their unemployment benefits run out. Many people use that thin cushion to wait until the last minute to act. They pass up lower-paying, less desirable jobs, or they avoid moving to take a job...surveys show people are very pessimistic about this labor market and their job prospects, and they think it's not worth the effort to look. The generosity of benefits makes it easier to take that view.

    Unemployment benefits may have good intentions of helping those who have been laid-off from their jobs. However, in reality, unemployment benefits are likely to increase unemployment, diminish unemployed workers incentives to search for employment and add to the federal deficit. Unfortunately, government manipulation of the labor market through benefits, taxes and regulation often causes unintended consequences such as uncertainty and higher unemployment. Congress should take all of the studies on unemployment benefits and employment into consideration while voting for this enormous expansion of unemployment benefits.