The need to extend emergency unemployment insurance

There are two key actions Congress should take to promote more equitable economic growth before they depart Washington to campaign for the November elections. The first is passing commonsense immigration reform. The second is to extend emergency unemployment insurance.

During the Great Recession of 2007-2009, Congress extended unemployment insurance several times as the damage to the labor market became apparent. Unemployment eventually came down and Congress allowed these time-limited extensions to expire. At the end of 2013, emergency unemployment benefits for long-term unemployed workers expired. These workers, who lost their jobs through no fault of their own and after months of looking for work and having no luck, were left to fend for themselves.

Isn’t this how our labor market should work when the economy is recovering? After all, the unemployment rate has come down considerably since the height of the crisis and economic growth is consistent, if tepid. Could it be that emergency benefits are actually be harmful to workers, reducing the incentive to search for a job? The reduction of these benefits might spur those workers to find work.

But this view doesn’t conform to the record. A recent Equitable Growth issue brief by University of California, Berkeley economist Jesse Rothstein highlights the importance of extending unemployment insurance benefits.  By looking at the differences in the extension of unemployment benefits among states, Rothstein found that extended benefits keep long-term unemployed workers from dropping out of the labor force. This means that unemployment benefits give workers the added income boost that keeps them searching for a good job match.

Because unemployment benefits keep unemployed workers in the labor supply, this means that the share of workers without a job in the labor force is larger than if those workers simply dropped out. Preventing these workers from dropping out would stop a decline in the potential growth rate of the economy as more individuals are available to work and produce output. And in the short term, extending these benefits would provide a consumption boost to the economy.

Rothstein also points to resent research he has done with Rob Valletta of the Federal Reserve Bank of San Francisco on the effect of unemployment insurance on family incomes. They tracked the incomes of workers as they lost their jobs, received unemployment insurance benefits and then lost the benefits. Rothstein and Valletta found that there’s a large income drop after losing a job and that, on average, unemployment insurance benefits only fill half that gap. After the expiration of benefits, the average family only retains 70 percent of its pre-job loss income.

In short, many families end up with starkly lower incomes after their unemployment insurance benefits are exhausted.

Rothstein’s brief makes a powerful argument for the extension of unemployment benefits as a pro-equitable growth policy. Extension would make sure that workers don’t drop out of the labor force and remain part of the economic potential of the U.S economy. Extended benefits would also prevent a large decline in household incomes that would devastate families and increase income inequality.

Reviving a crisis-era program may seem misplaced when the labor market appears to be on the mend. But the research shows the importance of extending this program. To not do so would harm the economic future of millions of households and of our country’s long-term economic growth.