In the Wall Street Journal today, economist Alan Binder suggests that we should consider extending the already extended 99-week unemployment payouts (extended from a normal of 26 weeks).
If Congress fails to maintain this assistance [i.e. extend the 99-week unemployment payout period], about 1.3 [million] jobless people will lose their benefits at the end of this month. In fact, due to a quirk in the EB formula, some will start losing them even sooner. As the year wears on, that number will rise closer to five million. Isn’t that a serious hole in the safety net?
As I said, extending both the payroll tax cut and the long-term unemployment benefits should be no-brainers under current circumstances.
Yet, Blinder fails to connect the dots in his own column. Appearing just before those two paragraphs is this one:
In stark contrast with all U.S. experience since the Great Depression, over 42% of today’s unemployed have been jobless for more than 26 weeks. That’s an extraordinarily high number. It means, among other things, that more than 18 million Americans have drawn on the EUC or EB programs since 2008.
Past data and data from other countries show that the unemployed tend to become employed right around the time their unemployment benefits run out.
This is just another version of incentives matter. Even though most people consider unemployment payouts to be small, many people will do what they can to keep collecting it if they happen to also have a nest egg, severance pay or an off-the-books source of income. They will also try to hold out for a job that pays them as much as their previous one, even if they have lower paying job options available. It only pays them to go with the lower paying job when their unemployment benefits run out.
So it’s not surprising, as Blinder points out, that more people have remained unemployed for more than 26 weeks in this recession than in others. That’s exactly what we’ve encouraged with the unemployment benefits policy.
What is surprising is that an economist like Blinder doesn’t understand that.