To help unemployed workers, extend benefits rather than raise them

Áine Doris | Apr 11, 2018

Sections Economics

Collections Jobs

Unemployment is a shock to most households, leading to acute professional and economic stress. Most US states offer unemployment insurance benefits, but policy makers have been debating reforms to this system and wrestling with a question: Which better helps people regain stability and reenter the labor market—increasing monthly payments, or extending the payment period beyond the six-month cap?

University of Chicago Harris School of Public Policy’s Peter Ganong and Chicago Booth’s Pascal Noel argue in favor of extending unemployment payments, calculating that extending benefits is three to four times more effective than raising monthly benefit levels.

Ganong and Noel analyzed data from more than 200,000 US households affected by unemployment between 2014 and 2016. They find that spending dropped sharply when people first lost their jobs, and there was another dramatic drop when insurance payments ran out—even though recipients knew in advance that the payments would end.

People are not prepared for unemployment, says Noel. Household economies are “vulnerable to the shock once it occurs.”

And this finding implies that if people are inadequately prepared to manage the financial trauma that comes with losing their jobs, increasing the sum paid each month won’t help because recipients will continue spending until they come to the end of the support period and the money runs out. Therefore, the researchers argue, it would make more sense to extend that support period and give people more time to adapt to their new situation, plan their spending adequately, and even find a new job.

US unemployment stood at around 4 percent in February 2018, near a 17-year low. But the United States typically enters a recession cycle every five years, notes Noel, so it could be a compelling time to reexamine the design of unemployment insurance systems.