Letting Unemployment Benefits Lapse is a Bad Idea

by Benjamin Studebaker

Congress has decided to let the extension in unemployment benefits it passed in the wake of the economic crisis in 2008 lapse. It’s estimated that 1.3 million Americas will lose their unemployment benefits completely, with 5 million seeing a reduction in benefit of some kind. This is a very bad idea. Here’s why.

First, what’s the justification for letting the extension lapse? Arguments against further extending the benefits come primarily in two related forms:

  1. Disincentive to Work–in order to get people on unemployment benefit to take jobs, employers have to offer them a larger wage than they would if these people were choosing between working and living on the street.
  2. Benefits are No Longer Needed–the economy and the employment picture have improved since 2008 such that the unemployed could now find work, if only they would get off their butts.

Usually these positions are invoked in combination–the claim is that benefits are no longer needed, but people continue to claim them because they create a disincentive to work. I’d like to consider each of these arguments in turn.

“Disincentive to Work”

The average person on extended unemployment benefit in the United States currently gets $300 a week from the government. That adds up to $15,600 a year. By contrast, a person working for the federal minimum wage is currently $7.25 an hour. Assuming a 40 hour workweek, that’s about $290 a week, good for $15,080 a year. This means that unemployment benefit is of slightly greater value than a minimum wage job.

It’s established that it is completely impractical for a person to survive on a single minimum wage job. McDonald’s provided its employees with a sample budget in which it presumes that they will work a second minimum wage job for additional hours to bring the monthly income up to $2,060:

This budget presumes a workweek between 70 and 80 hours, and it still leaves minimum wage workers with only $27 in daily spending money. Since heating, gasoline, and groceries are not included in this budget, it’s fair to say that the picture is even worse than McDonald’s presumes. Point being, a person living off the federal unemployment benefit would have about half as much income as this hypothetical McDonald’s worker. Over any extended period, this benefit would be insufficient to maintain even a very minimal standard of living in the United States. That said, it’s not the only benefit poor people in the United States receive–a person of this level of poverty would likely get food stamps, which, for a single individual, are good for ¬†an average of $133 a month. McDonald’s rightly presumes cheap health insurance, because a person of this income level would likely be in Medicaid. Nonetheless, it’s fair to say that a person on extended unemployment benefit who isn’t sitting on a pile of savings is likely in fairly desperate economic straights.

But what happens when a person takes a minimum wage job while on unemployment? If working means losing unemployment, then a worker choosing between a minimum wage job and unemployment benefit is effectively choosing between doing nothing for his money or working for slightly less. That said, working typically dose not mean losing unemployment, at least not right away. But when earnings exceed the benefit amount, benefits do cease. So taking a minimum wage job really is not a significant advantage over staying on benefits–but most people on unemployment benefit were fired from jobs that paid above the minimum wage and are seeking jobs that pay comparable wages to those they earned previously. The median individual income in the United States is somewhere between $25-30k annually, or about $10k larger than the minimum wage. In order for unemployment benefits to be a major incentive problem, the majority of new jobs would have to be minimum wage jobs. Given that minimum wage jobs don’t presently provide a living wage, this would itself be problematic. Even if most new jobs were minimum wage jobs, it doesn’t necessarily follow that the right way to induce the unemployed to take those jobs is to put them on the street–we could raise the minimum wage to make those jobs more attractive. If minimum wage jobs paid $10.51, as they did in real terms at their peak value in 1968, they would pay $420 a week, good for about $21,800 a year. For someone on unemployment benefit, that would amount to a 40% increase in income in exchange for taking a real job, more than enough to induce the average person to work.

“Benefits No Longer Needed”

Many claim that economic conditions have improved since 2008 such that this extension of unemployment benefit is unnecessary. They point to the recent US unemployment figures, which show that we’ve recouped 3 out of the 5 points of employment we lost:

However, the unemployment rate is misleading because it excludes the long-term unemployed and those who have dropped out of the labor force due to discouragement. To adjust for these problems with the unemployment rate, economists often look to the Bureau of Labour Statistics (BLS)’ employment-population ratio (EPR), which looks at the portion of the population over 16 that is in work of some kind:

We should expect the rate to be somewhat smaller than it was in 2008 because the population is ageing. A larger percentage of Americans are retirees now than they were 5 years ago. That said, the population also aged between 2003 and 2008, yet the figures went up during that time period. It’s unreasonable to expect that an ageing population could supply us with 4.5 points worth of decline in the ratio during a 5-year period. Even taking into account an ageing population, the ratio is likely a solid 3-4 points off of where it should be. Indeed, the ratio is about the same now as it was in 2010. While it cannot be denied that jobs have been created since that point in time, the EPR shows us that this job creation has not kept up with population growth. Once population growth is taken into account, the employment picture has not improved much.

There’s further evidence that the employment picture has not improved as much as opponents of the benefit extension allege. The BLS also takes data on the ratio of job openings to job seekers. Currently, that rate is just under 3 to 1, which is about the same as it was at the very worst point during the early 00’s recession.

To cap it off, the Center on Budget and Policy Priorities takes a measure of the long-term unemployment rate, the portion of the population that has been unemployed for longer than 27 weeks. In past recessions, the federal government has instituted similar extension programs, and it has consistently cut those benefits when the long-term rate was between 1 and 1.5%. However, congress is now ending the benefit program when the rate remains in excess of 2.5%, which is higher than any recorded figure pre-2008:

In summary:

  1. The jobs landscape for the long-term unemployed is still much worse than it was at any point in the half century that preceded 2008.
  2. The unemployment benefit pays about as much as a minimum wage job–the median job is much better than unemployment benefit, and if the minimum wage were equal to its value in 1968, it would be much better too.

Just because it’s been 5 years doesn’t mean the economy is ready for long-term unemployment benefits to end. Our politicians easily forget (given that 47% of the people in congress are millionaires, it’s not surprising), but the 2008 crash was extremely serious, and current conditions even now are much worse than anything we would have considered normal or acceptable in 2006.