NCPA - National Center for Policy Analysis

How Unemployment Benefits Harm Workers

January 6, 2003

Congress is expected to reauthorize a temporary program extending unemployment benefits this month. The measure is meant to aid eligible unemployed workers whose benefits ran out at the end of December 2002. But economists warn that unemployment benefits can actually delay the reemployment of workers. Instead of extending the program, they say Congress should reconsider the assumptions behind it.

Despite the 6 percent unemployment rate, there are jobs available. Net new job creation is always the smallest source of jobs. A second source is "churn," as new businesses are formed and existing businesses expand while other companies cut staff or shut down. When net new job growth is two percent, we may experience a gross gain in new jobs of 12 percent, offset by a gross decline in existing jobs of 10 percent. The largest source of jobs is normal turnover as people leave jobs voluntarily. The turnover rate may average about 15 percent, with rates as high as 100 percent in sectors that hire entry level workers.

Numerous academic studies have found that unemployment benefits actually harm the unemployed by encouraging less job search effort. For example:

  • The likelihood a person receiving UI compensation will find a job more than doubles just before benefit eligibility ends -- spiking in the last two weeks. (See Figure I.)
  • Workers who are not eligible for UI find jobs more than twice as rapidly as those who are receiving UI. (See Figure II.)

For most workers, the problem with extending benefits is that it delays more effort to find a job. Reorientation of state employment departments to help people become self-sufficient and structural changes to the federal unemployment tax system to reduce the tax on jobs, are better alternatives.

Source: William B. Conerly, Ph.D., "Is Extending Unemployment Benefits A Good Idea?" Brief Analysis No. 426, January 6, 2002, National Center for Policy Analysis.

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