Extending unemployment benefits doesn't stop people from looking for work

Brian Wallheimer | Jun 06, 2016

Sections Economics

Unemployment insurance is a safety net designed to keep unemployed Americans on their feet while they’re looking for work. Most states offer it for 26 weeks, give or take a few months, but in cases of high unemployment, the federal government can fund extensions. From June 2012 to December 2013, for example, jobless people in states with at least a 6 percent unemployment rate received an additional 14 weeks of unemployment insurance. It was one of numerous such extensions the government authorized during the Great Recession, extensions that added up to as many as 99 weeks of benefits for recipients in some states.

But extending unemployment benefits is contentious. Supporters say it can stimulate a sluggish economy by putting money in the pockets of people most likely to spend it. Critics say it exacerbates the problem by giving unemployed people less incentive to look for jobs.

Research from Harvard’s Gabriel Chodorow-Reich and Chicago Booth’s Loukas Karabarbounis suggests that extending unemployment insurance from 26 weeks to 99 weeks had little effect, raising state unemployment rates, but only by 0.3 percent or less.

Measuring the effect of extended unemployment insurance is difficult, since states that receive extensions naturally have the highest levels of unemployment to begin with. So Karabarbounis and Chodorow-Reich took advantage of an imperfection in the system: because the unemployment rate measured by the US Bureau of Labor Statistics is often imprecise—and is later revised as more data is collected—there are some cases in which a state that shouldn’t qualify for an extension of benefits nonetheless receives one, and vice versa. The researchers looked at how the erroneous application or omission of benefits extensions affected state unemployment rates.

If benefit extensions discouraged recipients from seeking work, one would expect to see unemployment rates rise in states that erroneously got extensions. But even taking into account the margin for statistical error, the authors find that unemployment in those states increased very little. “Our results . . . suggest that concerns about large negative macroeconomic effects of unemployment insurance are not warranted,” they write.