NCPA - National Center for Policy Analysis

GENEROUS BENEFITS RAISE LONG-TERM UNEMPLOYMENT

October 24, 2006

If you provide very generous unemployment insurance, you may end up with more long-term unemployment.  That's what economists Peter Kuhn and Chris Riddell find when they compare the long-term impact of a highly generous unemployment insurance (UI) program in the Canadian province of New Brunswick with the more modest UI program in the neighboring state of Maine.

  • In Maine's northernmost countries, about 6.1 percent of employed men worked fewer than 26 weeks (half a year) in 1990.
  • Across the Saint Croix River in New Brunswick, the comparative figure was more than three times as high, 20.8 percent.
  • The more-generous UI program in New Brunswick accounts for about two-thirds of this difference, the authors estimate.

In Canada UI is financed and administered by the federal government.  This allows for generous payments that, the authors note, "would likely be unsustainable if UI was self-financing within the region."  Personal per capita annual income in New Brunswick is 27 percent below the Canadian average. 

However, as a statement by the Canadian Construction Labor Relations Association cited by the authors notes, one consequence of the Canadian UI system is "…that many persons voluntarily make what amounts to a way of life out of working only long enough to establish benefits, then drawing them for the maximum period, and then repeating the cycle."

  • Overall, the authors find that a 10 percent UI-induced increase in the income associated with working for less than half a year raises the number of persons working less than a half year by about 10 percent. 
  • In New Brunswick, UI payments account for 6 percent of the province's gross domestic product; that's six times the proportion of gross domestic product (GDP) representing UI in Maine.

Source: David R. Frances, "Generous Benefits Raise Long-Term Unemployment," NBER Digest, October 24, 2006; based upon: Peter Kuhn and Chris Riddell, "The Long-Term Effects of a Generous Income Support Program: Unemployment Insurance in New Brunswick and Maine, 1940-1991," National Bureau of Economic Research, Working Paper No. 11932, January 2006.

For text:

http://papers.nber.com/digest/oct06/w11932.html

For study text:

http://papers.nber.org/papers/w11932

 

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