Unless Congress decides to extend it, long-term unemployment compensation will expire on December 28. Unemployment compensation has typically been available for up to 26 weeks of unemployment, but has been extended during the past recession to up to 99 weeks. When you pay people to be unemployed, then not surprisingly, you get more unemployed people. The extended unemployment compensation is responsible for a substantial amount of current unemployment.
Prior to the current recession long-term unemployment of over 26 weeks has been less than 20% of total unemployment. During the recession in the early 1980s it did go as high as 25%. During the previous recession it went well above 40% and right now stands at 37%. Why?
We are paying people to be unemployed longer, so it stands to reason that more people will take up the government’s offer and remain unemployed to keep receiving unemployment compensation.
I know this is not true of everybody. Some people genuinely have trouble finding work. But unemployment compensation takes away some of the incentive to find a job, and the longer people are out of work, the harder it is to find one. We are doing a disservice to many people by paying them not to work, rather than pushing them to get a job — any job — from which they can move up as the economy recovers.
The unemployment rate is currently 7%, but if we consider the normal fraction of long-term unemployed to be 20% or less of total unemployment, 17% of unemployed people are unemployed because of the long-term benefits that extend out beyond 26 weeks. If those 17% of unemployed people were working, as the historical data shows they would be if not for the long-term unemployment benefits, today’s unemployment rate would be 5.8% rather than 7% and the economic recovery would be much further along.
There would be a substantial economic benefit to limiting unemployment compensation to 26 weeks, as it was before the recession. Congress should let the extended unemployment compensation expire.
About the author: Randall G. Holcombe
Randall G. Holcombe is Research Fellow at The Independent Institute, DeVoe Moore Professor of Economics at Florida State University, past President of the Public Choice Society, and past President of the Society for the Development of Austrian Economics. He received his Ph.D. in economics from Virginia Tech, and has taught at Texas A&M University and Auburn University. Dr. Holcombe is also Senior Fellow at the James Madison Institute and was a member of the Florida Governor’s Council of Economic Advisors.