Extending Unemployment Benefits Makes Good Economic Sense Too

Our lawmakers will be debating this week the emergency benefits received by the long-term unemployed. There are solid economic and social arguments in favor of restoring these important benefits that lapsed on December 28th for 1.3 million Americans.

The social case is clear.

The long-term unemployed are among the most vulnerable segment of society today. They are also part of two problems whose size and duration is unprecedented in modern American history, and worrisome: the growing threat of high structural unemployment and the curse of excessive societal inequalities of income, wealth and opportunities.

For any given opportunity, the long-term unemployed faces much greater difficulties in securing a job than others who have been unemployed for less time. (And, unfortunately, there are still quite a few of the latter too.)

Finally, the country can afford to pay these benefits without undermining other programs and priorities. And in no way does the monetary burden of these benefits threaten the overall national wellbeing and its financial soundness.

What seems less clear on Capitol Hill is the economic case. It shouldn't be.

Here, too, the weight of arguments favors extending emergency benefits.

While they may differ on the relative importance of each of these three components, most economists agree that the US economy is being held back by a combination of inadequate aggregate demand, insufficient supply responsiveness, and residual debt overhang.

The extension of benefits helps on two of these. It does not really aggravate the third. If anything it could help.

Benefit recipients have, what economist call, the highest marginal propensity to consume. Their consumption is supportive of the general economic healing that America is undergoing after the trauma of the global financial crisis. And the bigger aggregate demand is, the higher the probability that more companies would be tempted to convert their high cash balances and record profitability into greater investment.

The benefits also help the economy to gradually overcome debt overhangs that have been frustrating proper market clearance. (And while a more direct approach to removing the overhang would be preferable, Congress seems in no position to deal with this more complicated and contentious issue at this time.)

The only valid economic argument against extending benefits relates to incentives -- namely, by extending emergency benefits, those who are unemployed would lack sufficient incentives to compete for a job; and, in turn, companies would end up with a higher overall wage bill and, thus, offer fewer jobs.

I am a believer in the role of incentives in an economy, including how badly-aligned incentives can result in sub-optimal outcomes. But I find it hard to make the case here given the evidence on the extent and duration of long-term unemployment.

At 4.1 million, the long-term jobless account for a still-stunning 37 percent of the unemployed notwithstanding the fact that labor force participation is down to levels that we have not seen for over thirty years. Meanwhile the average (mean) duration of unemployment has been -- unusually -- stuck at around 37 weeks, a high number by any measure.

In short, the data underscore a deep and serious problem, and one that certainly goes well beyond incentives. Accordingly, any reasonable gain that would accrue from eliminating incentive misalignments would pale in comparison with what is forgone on other fronts, both economic and social.

Extending emergency unemployment benefits is the right thing to do economically, as well as socially. Let us hope our lawmakers will be open this week to the weight of the evidence.

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