Long Recession Ignites Debate on Jobless Benefits

From the Wall Street Journal | July 6, 2010 | By SARA
MURRAY

Management Recruiters of Sacramento,
Calif., says it recently had a tough time filling six engineering
positions at an Oregon manufacturer paying $60,000 a year—and suspects
long-term jobless benefits were part of the hitch.

Politicians
and economists are now in a fierce debate that could have big
consequences for the jobless: Did more-generous unemployment benefits
prompt jobless workers to be pickier in their searches? Or was the
program a prudent response to the worst recession in generations?

The
debate remains pressing as Congress wrestles with whether to extend the
expired benefit program. The House passed an extension renewal backed
by President Barack Obama as part of a broader bill that died in the
Senate, after skirmishes about the wisdom of enlarging the deficit. The
House passed a scaled-down version last week, but the Senate won't
revisit this issue until after its week-long recess.

Economists
have argued for years about the extent to which government benefits
prolong unemployment—and possibly augment the overall jobless rate. Most
believe that expanding benefits does discourage some unemployed people
from looking for work or taking available jobs. But they disagree on how
acute that effect is, particularly at a time when jobs are scarce.

John Messinger for The Wall Street
Journal

Paul A. Johnson prepares for a
yard sale at his mother's home in East Hampton, N.Y. Mr. Johnson says
that he held back on job offers while receiving unemployment benefits of
$475 a week.

"Given the current economic
situation I doubt that effect is very large," says Harvard University
economist Raj Chetty. "I think people will take whatever job they can
get"

Economists on the right see a danger to prolonging benefits.
"I don't think anybody's getting rich off of unemployment, and I'm not
saying people are lazy," says Michael Tanner of the Cato Institute, a
libertarian think tank in Washington, D.C. "The fact is, when you have a
check coming in, even if it's a fairly low check, you're less motivated
to either look for work or accept less optimal jobs."

The recent
recession was unusual in almost every respect. Compared to other
post-World War II recessions, it was deeper, longer and put more people
out of work. A year after the economy began growing, unemployment is
still a very high 9.5%. Nearly half the jobless—6.8 million total—have
been out of work for more than six months, and 4.3 million of those have
been without work for more than a year. The typical unemployed person
has been out of the job market for a median of 25.5 weeks.

Still Looking for Work

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The government
response was also unusual, and not just in the big bank bailout. In
normal times, the unemployed are offered up to 26 weeks of benefits,
largely financed by a tax on employers. In recessions, state and federal
governments often jointly finance up to an additional 20 weeks in
hard-hit states. In this recession, Congress added up to another 53
weeks of federally funded benefits; in the deep crisis of the 1980s, the
maximum total never exceeded 55 weeks.

The unemployment
compensation system, created in 1935, was designed to tide workers over
during periods of temporary unemployment. Benefits are based on a
worker's prior wages; the average is $310 a week. Only workers who have
lost a job through no fault of their own are eligible. Those who quit or
who are new to the work force don't qualify. They must reapply weekly
or biweekly, depending on the state, and indicate that they are looking
for work.

In the 1980s, only half of all unemployed received
benefits. In the first quarter of 2010, 69% of the unemployed did.
That's partly because the benefits lasted so much longer, economists
say. It's also because Washington gave states incentives to extend
benefits to workers looking for part-time jobs and those who enrolled in
training programs.

A variety of studies suggest that adding
another 53 weeks of benefits increases the time the average worker is
jobless by between 4.2 and 10.6 weeks. The higher estimates are based on
studies conducted decades ago when layoffs were often temporary; in
this recession, many unemployed workers will never return to their old
positions.

"People do get jobs in a substantial number," when
their benefits run out, Cato's Mr. Tanner says, citing a study from the
1980s recession. The study, by economists Štěpán Jurajda, of Charles
University in Prague, and Frederick Tannery of the University of
Pittsburgh, discovered 29% of workers who lost jobs in Pittsburgh
between 1980 and 1985 found positions as soon as their benefits ended.
Mr. Tanner expects that will also be true this time around, though the
fraction could be smaller given the high rate of unemployment.

In a
recession such as this one—with five unemployed workers for every job
opening—it's not clear whether the old academic findings apply.

In
his scholarly past, Lawrence Summers, now Mr. Obama's economic guru,
wrote in 1993 that "government assistance programs contribute to
long-term unemployment...by providing an incentive, and the means, not
to work." When an April Wall Street Journal editorial described his
position, Mr. Summers fired back in a letter to the editor: "In the wake
of the worst economic crisis in eight decades...there can be no doubt
that the overwhelming cause of unemployment is economic distress, not
the existence of unemployment insurance."

A 2000 study by David Card of the
University of California at Berkeley and Phillip Levine of Wellesley
College looked at a one-time 13-week extension of jobless benefits in
New Jersey. It found that in normal times, such an extension added about
one week to the duration of unemployment. If that study's formula was
applied to the current recession, the typical spell of unemployment
would be about 4.2 weeks longer than normal.

In times when jobs
are scarce, Mr. Levine argues that any disincentive to work is minimal. A
recent Federal Reserve Bank of San Francisco study arrived at the same
conclusion: Those who were eligible for unemployment benefits were out
of work just 1.6 weeks longer than those who weren't receiving benefits.

Most workers, economists say, wouldn't risk holding out for an
ideal job in this economy. But individual attitudes and circumstances
vary widely.

Paul A. Johnson's $65,000-a-year job
evaporated when the digital entertainment company for which he worked
folded in May of 2009. The 31-year-old went on unemployment benefits,
collecting $475 a week.

A few offers surfaced, but Mr. Johnson
says the pay wasn't tempting enough to give up his government check.
"The jobs I was being offered were less than I was making when I got out
of college," he says. "I didn't see a point."

After two months
of unemployment, he took a $72,000-a-year job with an advertising
agency, but quit after a week. Mr. Johnson says he became depressed as
he realized he was miserable in his career. No longer eligible for
benefits, Mr. Johnson moved in with his mother in East Hampton, N.Y. He
says he plans to launch his own company selling baked goods online.

Partnership
Staffing Inc. in Richmond, Va., which supplies temporary workers to
warehouse and manufacturing companies at wages between $8 and $14 an
hour, occasionally finds workers who refuse offers, says Bill Auchmoody,
chief executive. "We only get about 2% or 3% who use the excuse to us,
blatantly, face-to-face, 'You know, that's not enough money, I make more
money on unemployment,'" he says.

When benefits run out, some workers
take jobs but still struggle. After Gale Satchell's benefits of
$232-a-week ran out in March, the Pittsburgh resident found a part-time
position at a local Dollar Tree Inc. store. But she works just eight
hours a week for a weekly check of $58. Ms. Satchell, 43, gets $200 a
month in food stamps and recently borrowed money from a relative to pay
her gas and electric bill.

"Before I even applied to unemployment,
I was applying for jobs," says Ms. Satchell, who lost her
customer-service position in 2007. She's applied for work as a cashier, a
housekeeper and a telemarketer, among other gigs. At a recent
interview, some 50 people turned out for one position, she says.

While
curtailing benefits could prod some jobless workers to take unappealing
jobs, benefits supporters say there would be other negative effects.
The expanded benefits may have underpinned consumer demand at a time
when it was weak. Unemployed workers tend to spend most or all of their
unemployment checks quickly, economists say. In one analysis this year,
the Congressional Budget Office said that each dollar spent on extending
benefits would increase economic output by $0.70 to $1.90.

Some
economists argue that benefits can help the jobless perceive themselves
as still part of the labor force. If benefits end, these workers may be
more likely to apply for disability or similar benefits.

"It's a really worrisome situation,"
says Lawrence Katz, a Harvard University economist. "That could be very
fiscally expensive and there are large human costs."

Cindy
Paoletti, 58, understands those costs. Laid off from her job as a
bookkeeper in J.P. Morgan Chase & Co.'s operations center in
December 2007, she used a severance package to pay bills, and then began
collecting $330 a week in unemployment benefits. She has exhausted her
99 weeks of benefits, and still can't find a job. Employers "just don't
want to hire anybody in our age group," she says.

For now, she's
budgeting the $2,000 left over from her late husband's life-insurance
policy.

"Unemployment benefits do not pay the bills," she says.
"The people that I know that have been unemployed are searching every
single day."