The father of the German Empire, Otto von Bismarck, first introduced unemployment insurance in the 1880s. Bismarck conceived of this new social mandate as a way to generate goodwill among the growing working class and prevent socialists from calling for more radical action. Despite the Iron Chancellor’s hard-line credentials, the move drew harsh criticism from conservatives; his followers called him a socialist. In a speech to the Reichstag in 1881, Bismarck replied, “Call it socialism or whatever you like. It is the same to me.”
If only we could afford to be so glib today. With the Obama administration’s historic extension of unemployment benefits to two years, fully 50 percent longer in duration than the prior record in the 1970s, the matter of the program’s true nature demands clarity. The unprecedented extension of benefits, combined with today’s dramatically high national unemployment, pushes the program out of the realm of political compromise and into the uncharted territory of grand social experimentation.
Our current unemployment compensation system, in fact, matches the Oxford Dictionary definition of welfare: “Financial support given to those who are unemployed or otherwise in need.” Unlike Bismarck, the Obama administration is not apathetic about the labels attached to its policy. Our government promotes unemployment benefits not as welfare but as an entitlement. An entitlement is something someone deserves because he has earned it; whereas welfare is government charity, given to those who are needy. By calling unemployment insurance an entitlement, the government hopes to shed the stigma that would come attached to charitable handouts.
Sensitivities aside, the extended benefit program that pays healthy people direct government distributions bears a strong resemblance to welfare, as we commonly understand the concept. The five specific requirements for collecting unemployment are that the person is able to work, is involuntarily jobless, wants a job, is available to work, and is actively looking for work. The Department of Labor’s stated goal for unemployment compensation is to provide payments to ensure “that at least a significant proportion of the necessities of life, most notably food, shelter, and clothing, can be met on a week-to-week basis while a search for work takes place.” Like all of our country’s social insurance policies, it aims ultimately to improve Americans’ health, happiness, and well-being.
Sadly, the current sample size for this social experiment is enormous. Today there are 26.1 million Americans who are either unemployed or underemployed. Of these, more than nine million are receiving unemployment compensation. Although the Labor Department’s December report showed that the unemployment rate fell to 9.4 percent, nearly half of the improvement was due to dropouts from the labor force, which is now smaller than it was before the recession began. According to Heidi Shierholz, an economist with the liberal Economic Policy Institute, if only half of the 4.2 million “missing workers” were counted, the unemployment rate would jump to 10.4 percent.
Currently, 44 percent (or 6.4 million) of the unemployed have been out of work for more than six months, a post-Depression first. When President Obama first lobbied for the 99-week extension of unemployment compensation in the summer of 2010, he noted that 2.5 million Americans were about to run out of benefits.
Historically, in every recession since the unemployment program was created in the 1930s, Congress has extended benefits beyond the traditional 26 weeks. The rationale is that high unemployment makes it harder to find work, and extra time to obtain a job that suits one’s skill-set leads to the best outcome for economic growth.
The current extension is nuanced. Some states have payments that last 99 weeks and others do not, depending on the depth of a state’s unemployment. All payments in excess of 26 weeks are taken from the federal government’s general fund (our tax money) and not employer-paid premiums. In point of fact, the extended benefits are not insurance at all, as no premiums are paid or collected. They are structured like the payments for welfare.
There is nothing nuanced about the cost to taxpayers. “Additional unemployment insurance beyond the regular-26 week benefit period has been far and away the most costly type of stimulus spending,” wrote the liberal Princeton University economists Alan Blinder and Mark Zandi in a paper titled “How the Great Recession Was Brought to an End.” Unemployment compensation replaces 50-70 percent of average previous after-tax wages, averaging $350 a week nationally. The total price tag is $300 billion. With the December 2010 passage of a yearlong reauthorization of the emergency benefits, the cost is estimated to increase by roughly $65 billion. (This excludes almost $50 billion in other transfers, such as food stamps and COBRA payments, that allow the unemployed to retain access to health care.) For comparison, we spend $15 billion a year on stigmatized, anachronistic “welfare.”
Is this an efficient use of funds? Blinder and Zandi argue that unemployment benefits are potent forms of economic stimulus and for every $1 spent on benefits, $1.61 is put back into the economy. The conservative Heritage Foundation disputes the multiplier argument, saying it is based on two faulty assumptions: that every dollar of unemployment spending funds new consumption and that unemployment insurance does not change workers’ behavior.
The Heritage study’s authors, Karen Campbell, James Sherk, and John Ligon, created a model showing that for each dollar spent extending unemployment benefits to 46 weeks, GDP expanded in the first year by just 17 cents. The wide disparity between the two results stems in part from the fact that mathematical models are only as good as their inputs. Given that our nation has such a low savings rate, the idea that unemployed people might spend all their benefits when they get them is plausible. That they might spend most is likely.
No less important than cost is the matter of results. All 10 of the economists interviewed for this article agreed that longer availability of benefits would, in fact, lead to a more leisurely job search. The Heritage study showed that “a 13-week extension of unemployment benefits results in the average worker remaining unemployed for an additional two weeks,” wrote Campbell, Sherk, and Ligon.
A recent study by Denmark’s Economic Council showed that many of those who do not find work right away wait until just before their benefits expire to take anything available. The study argues against lengthy payments, showing that recipients tend not to seek the jobs they could get but rather those they would like to have. The results encouraged the Danes to halve the country’s four-year benefit system, which, like those of other European countries, is more generous than the American one.
While it is hard to measure the impact of jobs not taken, a recent German study by the Institute for the Study of Labor found that jobs taken near the time benefits expired were less stable and lower paying than those found earlier.
While extended unemployment benefits are more costly than welfare and have little to show in the way of verifiable success, actual welfare is now proving more effective in offering incentives to work and in managing joblessness. What used to be called welfare in the U.S. is now known as the Temporary Assistance to Needy Families (TANF) program. TANF has 4.5 million recipients, of which one million are adults. The program’s enrollment has been steady for five years, and its reliance on means testing makes it unlikely that the unemployed whose benefits have run out are moving into TANF. As some states abandon means testing, this could change.
TANF allows the recipient to have a job and also collect benefits, but those collecting unemployment compensation lose those benefits when they take a job. TANF trains and places its recipients in jobs; some of those jobs are subsidized by the government, some not. According to a recent TANF report to Congress, almost one-third of its families had someone working for at least 30 hours per week. South Carolina, Oklahoma, Colorado, and Oregon are among just a few of the states that have reported that TANF recipients have shown improvements in either subsidized or unsubsidized job retention.
TANF placements tend to be into low-paying jobs, which many unemployment recipients do not necessarily want because they have, or believe they have, exceptional skills. However, the welfare recipient has a greater incentive to work, since welfare payments average only $350 per month, while unemployment pays about $350 a week (although unemployment payments are partially offset by tax).
For all this, the usual welfare traps endure. That TANF allows people to remain on the welfare rolls while working provides many instances where one can have greater income on welfare than on unemployment. Even after 25 months of earnings, recipients in places like Alaska, Minnesota, Connecticut, and California may retain almost $2,000 a month and receive welfare. Some states, such as Alabama, Nevada, and North Carolina have no maximum on earnings a TANF family may collect and still remain eligible for payments. But the fact that traditional welfare now functions more effectively than the less-stigmatized, quickly expanding alternative is cause for alarm.
Any such expansion is particularly hard to reverse, as, mechanically, the shortcomings of our unemployment experiment make it self-reinforcing. The burden of paying the unemployed is being passed from the federal government to the states and then onto employers, whose subsequent inability to hire makes the process a closed loop. Thirty states are facing a bill for $1.3 billion in interest payments on the $41 billion they’ve borrowed from the federal government simply to continue paying their basic unemployment benefits, which generally last up to 26 weeks. These borrowings are not related to the emergency extensions paid out of federal monies. Already, 35 states were forced to raise their state unemployment taxes on employers in 2010, according to a survey by the National Association of State Workforce Agencies.
Under a provision of federal law that automatically reduces the tax credits given to businesses in states that carry loans for unemployment benefits for two years in a row, nearly half the states could be forced to raise federal taxes on employers by $21 per worker this year.
Yet the states are partly responsible for their overtaxed systems. Many pay unemployment compensation to people who quit their jobs (for “just cause”). In Maryland, “compelling personal reasons other than health problems may constitute valid circumstances” for compensation, says the state’s Department of Labor website, as well as “if the conditions of employment cause an employee to violate sincerely held religious beliefs, there is good cause for quitting the job.”
In California, voluntary leavers may be eligible to collect unemployment compensation if they leave for an assortment of reasons, including “compelling domestic obligations,” “moving after marriage outside normal commute area,” and “moving after marriage no transfer available.”
Certainly the idea that quitters may receive unemployment compensation sheds new light on the theory that an increase in employee “quit rates” is a sign of confidence in the economy. It may instead only demonstrate the further incentivizing of joblessness.
Indeed, the greatest conceptual lapse in our current unemployment policies results from forgetting the cardinal behavioral rule: incentives matter. As the unemployed conduct a more leisurely search, they lapse into government dependence and strain their connection to the workforce. This has the potential to create a crisis whose reach goes far beyond the political, or even economic, domain and deep into Americans’ sense of worth.
The social implications of nurtured fecklessness should be self-evident. Longer unemployment leads to costs in motivation, expectation, and health. A 2009 study at Rutgers University surveyed 1,200 jobless people and found, unsurprisingly but verifiably, that they felt anxiety, helplessness, depression, and stress.
Crises first take hold of the individual and then move outward. A Pew Research Center survey found that longer-term unemployment has a deleterious impact on personal relationships. It showed that 46 percent of the people unemployed for over six months had strained family relations, and more than four in 10 said they also had lost contact with close friends. Of those who have been out of work for more than six months, 44 percent reported that the spell had caused “major changes” in their lives. By comparison, less than one-third who had been unemployed less than six months said they were similarly affected.
Typical adults define themselves by their accomplishments; Americans adults, by their aspirations. The facilitation of open-ended idleness lays waste to these pillars of self-worth. While welfare reform in the late 1990s recognized this and addressed the social cost of the dole in part by substantially reducing rewards for non-work, our current unemployment-benefit-extension plan has done the opposite.
Things might have been different, if the recession had been handled differently. In past downturns, economic growth enabled the government to institute time-limited unemployment benefits. But as University of Ohio economics professor Richard Vedder testified in February before a House committee, today’s recovery “is by many measures the weakest since the Depression amidst the most aggressive fiscal and monetary policy stimulus of any in American economic history save that surrounding World War II.”
Government intervention begets government intervention, and our current unemployment policies are predicated on the failure of the stimulus. As Vedder noted:
Between December 2007 and December 2010—three full years—employment fell by over seven million in the United States, despite a first $160-180 billion stimulus package in early 2008, a supersized second one of nearly $800 billion in early 2009 and the subsequent addition of four trillion dollars in debt through massive deficit spending. . . . On the monetary side, the monetary base more than doubled as the Federal Reserve gave banks literally a trillion dollars in excess reserves. The Fed pushed real interest rates into the negative territory in an attempt to provide monetary stimulus. Yet job formation was persistently negative, and we had the worst downturn in postwar history.
Unemployment compensation is meant to be a short-term salve. But if the economy cannot bring the unemployment level down, the combination of anemic job growth amid a precarious economic outlook with up to two years of unemployment compensation replacing 50-70 percent of average previous after-tax wages may make the extended unemployment-compensation program the next safety-net crisis.
Referring to our unemployment system, moreover, as an entitlement instead of a kind of welfare only makes it more difficult to enact reform. Under the cover of a new label, old bad policies are sure to be defended as innovations whose results cannot yet be measured. The first group of Americans who received unemployment benefits for 99 weeks is just falling off the unemployment roles now, and we will not have information about what happens to those within it, or how and when they re-enter the workforce, for a long time. According to the Congressional Research Service, workers who have been unemployed the longest are often the last to be hired after a recession. But we do not need research to back up the larger truth of what we have already witnessed. In a free market, nothing compounds a crisis like a well-meaning government, and nothing saps the individual spirit like dependence—under any name.