Extending the Debate on UI Benefits

by John Hood

Policy analysts from the left, right, and center continue to debate the wisdom of extending unemployment insurance benefits to the long-term unemployed. On July 1, 2013, my home state of North Carolina became the first to exit the extended-benefits program as part of a comprehensive reform of the state’s UI system that pulled North Carolina out from under a federal grandfather clause. At the start of 2014, the entire extended-benefits program expired for the country as a whole.

Republican leaders in Congress and most conservative analysts agreed with the expiration of extended benefits, citing a well-established conclusion in the scholarly literature that extended or rich UI benefits create disincentives for unemployed workers to make decisions that are painful or challenging in the short run but in their interest in the long run — such as accepting a less-than-ideal job, moving to another location where jobs in one’s field are more plentiful, returning to school to retrain for a new career, or starting a business. But some conservatives, including NRO contributors, argued that Congress should have made a deal with President Obama to extend UI benefits once again. They doubt the significance of the disincentive effect and worry that the long-term unemployed losing benefits would simply drop out of the workforce and end up on public assistance (or worse).

Because North Carolina exited the program six months before the rest of the country did, its experience is obviously of great interest. I’ve written about it multiple times, as have other analysts. My latest piece is a lengthy response to a thoughtful article by Brookings Institution fellow Justin Wolfers that ran in the New York Times a couple of weeks ago. My conclusion is that while Wolfers is a far better critic of North Carolina’s decision than most, his interpretation of the data is debatable. Using a broad range of valid, relevant economic statistics suggests that North Carolina’s labor market and broader economy improved faster during the last six months of 2013 than both the national and regional averages, and that ending the disincentive effects of extended benefits likely played some role (although not a massive one, since most unemployed workers were never eligible for UI in the first place and thus aren’t directly affected by changes in UI benefits).

I end the piece by observing that Wolfers’ interpretation (extended benefits have no macroeconomic effects either way) and my interpretation (ending extended benefits has positive macroeconomic effects) are only two of three positions on the issue:

The third possible interpretation, still favored by liberals and some conservatives, is that ending extended benefits had deleterious results for the labor market and larger economy, first in North Carolina in the last half of 2013 and then in the nation as a whole during 2014. I’m unaware of any persuasive evidence for this conclusion. Since the entire extended-benefits program expired at the end of 2013, the American labor market has clearly experienced substantial improvement. The U-3, U-4, U-5, and U-6 rates are all down substantially. The employment-population ratio is up. Fewer people are on food stamps. The gains appear to be particularly strong among the long-term unemployed.

In short, the supporters of UI extended benefits predicted dire economic consequences from the expiration of those benefits. The predicted consequences didn’t happen. On that, Wolfers and conservatives agree.