Improving Labor Market Calls for Reducing Unemployment Insurance Duration

February 23, 2012

In a normally functioning economy, unemployment insurance (UI) benefits have generally been confined to six months.  However, in the interest of aiding recovery and caring for those newly unemployed, the federal government extended UI to a maximum of 99 weeks in November 2009.  However, given that the labor market has improved significantly since then, it is time for significant reductions in UI to be considered, says James Sherk, a senior policy analyst in labor economics at the Heritage Foundation.

  • When UI benefits were extended to 99 weeks in November 2009, the unemployment rate had recently reached its recession peak of 10.0 percent.
  • Since then, the labor market has steadily recovered, as the unemployment rate has now fallen to a three-year low, amounting to only 8.3 percent in January 2012.
  • Additionally, new UI claims have fallen to a four year low of 366,000 new claims per week in January 2012, which is only slightly more than the 340,000 per week seen in early 2008.

Economists and researchers from both parties have agreed that there are significant consequences of long-term, highly generous UI benefits for the economy.

  • Indeed, Alan Krueger, chairman of President Barack Obama's Council of Economic Advisers, has acknowledged that receiving UI benefits tends to extend the amount of time that workers spend unemployed, as they are not fully incentivized to seek new work.
  • Krueger points out that, as the expiration date for UI benefits approaches, workers approximately triple the amount of time they spend looking for new jobs.
  • Partially, this is because recipients of UI benefits are not fully motivated to seek jobs, but these benefits also reduce the urgency with which workers seek jobs, encouraging them to hold out for high-paying positions.
  • Researchers from many institutions, including Federal Reserve banks, have concluded that UI benefits lasting 99 weeks have increased the unemployment rate by approximately 0.5 percent.

While congressional negotiators have agreed to gradually reduce the maximum claim duration to 73 weeks by September, more significant actions should be taken to bring policies closer in line with their prerecession levels.

Source: James Sherk, "Improving Labor Market Calls for Reducing Unemployment Insurance Duration," Heritage Foundation, February 16, 2012.

For text:

http://www.heritage.org/research/reports/2012/02/ui-benefits-reduce-unemployment-insurance-duration

 

Browse more articles on Economic Issues