Extended unemployment insurance benefits in the wake of the Great Recession raised the average time that jobless people remained out of work and also increased the overall jobless rate by four-tenths of one percent.
That’s the conclusion of a striking new study by the National Bureau of Economic Research, which compared economic growth in adjacent counties of different states with varying unemployment insurance benefits. It’s a conclusion that should resonate with Massachusetts lawmakers currently contemplating structural changes to the benefit-rich Bay State Unemployment Insurance System.
"Most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility," conclude the authors of Unemployment Benefits and Unemployment in the Great Recession.
Workers who lost their jobs in the aftermath of the 2007-2009 recession were eligible to receive UI benefits for a maximum of 99 weeks in most states, compared with the normal UI availability of 26 weeks- 30 weeks in Massachusetts. The NBER finds that these extended UI benefits in the aftermath of the Great Recession prolonged the average duration of unemployment by 7 percent and caused the unemployment rate to increase by an extra 0.4 percentage points.
The same dynamic occurred during the much milder downturn of the early 2000s, but the effects were smaller because the extension of benefits was not as widespread, or as generous, as in the Great Recession.
The study found that people who lost jobs during the 2001 recession and whose unemployment duration placed them in the top fifth of the distribution were unemployed for an average of 5.4 months. The authors estimate that this group experienced one extra week of unemployment due to extended benefits. By contrast, in the aftermath of the Great Recession, during 2009-11, individuals in the top fifth of the unemployment distribution were unemployed for an average of 6.8 months, and experienced about two extra weeks of unemployment due to extended benefits.
AIM has for years supported long-term structural reforms that would bring Massachusetts into line with Unemployment Insurance practices in a majority of other states by limiting the duration of benefits to 26 weeks, increasing work and wage requirements for benefit eligibility, and updating rate tables to create equity in employer UI payments. Massachusetts currently has one of the highest Unemployment Insurance rates in the nation.
The Wall Street Journal, writing about the NBER study, notes that the problem with extended UI benefits is not that they discourage people from finding new jobs but that they deter the creation of jobs for those people to fill.
“The reason is that extended unemployment benefits create upward pressure on wages. The higher wage level reduces the employer's potential profits on any new job created, so naturally they don't create them. With fewer jobs available, the number of unemployed who land a job also stays low. High unemployment persists,” the Journal argues.
The bottom line for Massachusetts policymakers: holding onto the longest UI benefit duration in the country actually harms the workers those benefits are intended to help.