Jobless Benefits' Effect on Unemployment

December 14, 2010

A likely rise in the U.S. jobless rate is the unfortunate reality of the government's move to fund extended unemployment benefits for another 13 months, says Kelly Evans.

A recent study by the Federal Reserve Bank of San Francisco found the unemployment rate at the end of 2009 would have been nearly half a percentage point lower -- 9.6 percent, instead of 10 percent -- if jobless benefits hadn't been extended beyond their usual 26 weeks to as much as 99 weeks.

Lately, the weekly tally of new applications for such benefits has trended down:

  • An average 431,000 applications were filed in the four weeks through Nov. 27, which, while high by historical standards, is the lowest level in more than two years.
  • Yet that hasn't been accompanied by a similar improvement in the unemployment rate.
  • It rose to 9.8 percent in November from a recent low of 9.5 percent over the summer.
  • That is largely because the sluggish pace of job creation hasn't been strong enough to absorb growth of the labor force.

The extension of jobless benefits is likely to worsen that trend for at least several months.  For one, individuals not actively searching for work or willing to take available jobs may claim they are unemployed in order to receive benefits.

Another concern, as the San Francisco Fed notes, is that the extension of jobless benefits may "reduce the intensity" with which the unemployed search for work.  Longer term, this could lead to a higher level of structural unemployment in the economy as workers' skills erode.

Regardless, policy makers are hoping that extending benefits -- along with other tax breaks -- will generate enough short-term strength in spending and growth to overshadow any rise in the unemployment rate.

That may prove wishful thinking, says Evans.

Source: Kelly Evans, "Jobless Benefits' Effect on Unemployment," Wall Street Journal, December 9, 2010.

For text:

http://online.wsj.com/article/SB10001424052748704447604576007930423227562.html

 

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