New Study: Unemployment Benefits Weaken Economy

Research supports conservative case against unemployment benefit extensions

Traders on Wall Street / APTraders on Wall Street / AP
January 24, 2014

New academic research released last week showing that extending unemployment benefits is a net economic drag could strengthen the conservative case against extending those benefits at the federal level.

Congress allowed benefits for the long-term unemployed to expire at the end of 2013 as part of a larger budget deal. Democrats have offered proposals to extend the benefits.

The latest legislation, a 10-month extension with budget offsets, was held up in the Senate on Thursday after Majority Leader Harry Reid (D., Nev.) blocked Republicans from offering amendments.

The liberal case for an extension of benefits for the long-term unemployed rests on the supposed simulative effect of greater disposable income for the unemployed.

The new study, conducted by economists at the University of Pennsylvania and the Federal Reserve Bank of New York, contends that any such stimulus is dwarfed by the economic damage done by extending jobless benefits.

The study examines policies enacted by North Carolina that reduced the length and generosity of unemployment benefits from the state. The reforms have been presented as a test case on the likely effects of allowing federal benefits to expire.

The study found that the state’s reforms were an economic positive. After the reforms were implemented the unemployment rate and the number of unemployed workers both declined, even as it saw "a strong increase in the labor force."

The increase in North Carolina employment was primarily in the private sector. Wages and earners remained mostly steady, while the average number of hours worked slightly increased.

The results stood in stark contrast to employment trends in neighboring South Carolina and Virginia.

"North Carolina stands out among its neighbors in the improvement in its labor market performance since its unemployment insurance system was reformed," the study said.

"People respond to incentives," said Ryan Young, a regulatory studies fellow at the Competitive Enterprise Institute.

"Unemployment benefits reduce one’s incentive to look for a job," Young wrote in an email. "They allow some people to wallow in discouragement longer than they otherwise would. Other people decide that receiving benefits can let them wait until a higher-paying job opens up, instead of having to take the first job available, whatever it is."

The authors noted that the results of the study "should be interpreted with extreme caution," as the outcomes of similar policies in different states—and at the federal level—can vary widely.

Advocates and opponents have both presented North Carolina’s reforms as an indication of how an expiration of unemployment benefits would affect growth and other macroeconomic trends.

Indeed, the study singled out one writer specifically, Wonkblogger Evan Soltas, who wrote a piece for Bloomberg News warning of the dire economic consequences of North Carolina’s policy.

"The picture is troubling," Soltas wrote.

His conclusions, the study’s authors wrote, "are not grounded in economic theory and are not supported by available empirical evidence."

Contrary to Soltas’ and other suggestions, reductions in hiring as a result of an increased duration in unemployment benefits dwarf the stimulative effects of providing disposable income to unemployed workers.

"The negative effects of unemployment benefit extensions on job creation decisions of employers dominate any potential stimulative effect that some ascribe to such policies," the authors wrote.

"The study affirms the obvious," Young said.