Ten senators agreed to a deal today restoring, through May, unemployment benefits for Americans out of work for 27 weeks or more. Five Republicans and five Democrats teamed up for a deal that should pass the Senate, barring any procedural problems, about a week from now, after the Senate comes back from St. Patrick’s Day recess (thanks Ted Kennedy?). The passage will take an issue largely out of the hands of Democrats looking to beat up Senate Republicans, including minority leader Mitch McConnell, over it. It’s unclear whether the House will take up the bill.
The economic case for and against extending the benefits is mixed (more on this below). If Republicans have anything to do with getting an extension through, they should have considered tying it to future reforms that will make the unemployment system more mobility-friendly and supportive for the unemployed to find the right jobs, something it does quite poorly now.
The Republican senators supporting the deal: Susan Collins (Maine), Dean Heller (Utah), Mark Kirk (Ill.), Lisa Murkowski (Alaska), and Rob Portman (Ohio).
Five months of benefits should cost about $8 billion, paid for by an extension of some customs fees included in the Ryan–Murray budget deal and a change to the federal tax code called “pension smoothing” that will cause employers to contribute less to their pension plans and pay more taxes in the near term (increasing pension payments and decreasing tax revenue in the future). It also includes reforms to encourage people to consider how they can return to work and to prevent people who earned more than $1 million the previous year from receiving benefits (an idea pushed by, you guessed it, Tom Coburn).
What exactly does “extending unemployment benefits” even mean? States, which collect funds for the unemployment-insurance programs and implement them, provide unemployment benefits that generally last up until about 26 weeks. During recessions, Congress usually votes to provide benefits for workers for a longer period of time. This recession, it did so for those unemployed up to 99 weeks, until the end of 2013, when the limit went back to 26 weeks or so, depending on the state’s policies and the funds they have (see the state-by-state durations here).
The basic argument for federal extensions during recessions: If we think 26 weeks is the normal amount of time to expect someone to find a job generally, that time frame should be longer when the economy is hurting. Michael Strain of AEI has argued on NRO in favor of keeping the extended term this year, but there are concerns (besides the budgetary cost). Longer-term unemployment benefits encourage Americans to stay out of work longer than they might otherwise by making work relatively less attractive. There’s even evidence it causes them to demand higher wages than they would otherwise, extending unemployment and pushing down hiring across the economy.
But, on the other hand, economists worry that cutting benefits will cause long-term-unemployed Americans to give up on work and leave the labor force entirely. There’s some evidence this happened in North Carolina when the state unilaterally shortened benefits in July 2013, as Reihan Salam has noted.
Reihan, however, suggests that the unemployment-insurance system remains problematic enough that maybe it should only be extended if we get a reform of it to become more mobility-friendly and economically helpful, like Strain has suggested. The Senate deal doesn’t include that, though perhaps some enterprising House backbenchers could suggest it as a compromise.
The number of Americans among the “long-term unemployed,” out of work for 27 weeks or more, certainly remains at a record high, as the below chart from the 2014 Economic Report of the President shows. He, however, has offered remarkably few ideas to deal with the problem (besides pushing to restore their benefits).
For what it’s worth, the Congressional Budget Office thinks the stimulative effects of unemployment transfers in a weak economy and the encouragement they provide to stay in the labor force has a very slight positive effect on the economy in the short term.