Magazine article Economic Trends

Emergency Unemployment Compensation and Long-Term Unemployment

Magazine article Economic Trends

Emergency Unemployment Compensation and Long-Term Unemployment

Article excerpt

11.08.11

The recent recession was the longest on record since the Depression. As it wore on, more and more workers entered the ranks of long-term unemployed. To minimize the impact of these unemployment conditions on household incomes, the federal government implemented an unemployment insurance benefit called the Extended Unemployment Compensation (EUC) program. The program allows unemployed workers to collect unemployment insurance benefits longer than they normally would be able to. In this article, we provide some context for interpreting the program's effect on the unemployment rate.

The EUC program was implemented in tiers. In June 2008 (7 months after the recession started), Congress legislated the first tier: unemployed workers could receive an additional 13 weeks of benefits. Five months later, that period was extended an additional 7 weeks and henceforth referred to as Tier 1. Tier 2 was introduced at the same time and gave an additional 13 weeks of benefits to those in states with unemployment rates above 6 percent. A year after it was enacted, Tier 2 extended benefits by 1 week and made the extension unconditional on state unemployment rates.

As the economy continued to stagnate, more tiers were introduced. In November 2009, the Tier 3 extension went into effect, adding 13 weeks of benefits in states with unemployment rates above 6 percent, and Tier 4 gave an additional 6 weeks of benefits in states with unemployment rates above 8.5 percent. All of the tiers together amount to a potential maximum additional benefit duration of 53 weeks. Adding that to the what the states provide--the traditional 26 weeks of benefits and 20 additional weeks of extended benefits--amounts to potentially being able to receive unemployment insurance benefits for 99 weeks (just about 2 years).

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Initially, EUC benefits were available to anyone who had exhausted his or her regular benefits before March 28, 2009. However, as the recession wore on this date was continually moved later and later and is currently January 3, 2012.

Unemployment insurance is intended in general to provide some additional income during extended periods of unemployment, but it also creates incentives that can lead to effects that would otherwise not occur. One possible incentive might be that unemployment insurance encourages people to stay in the labor force who would otherwise drop out, since receiving benefits is conditional on searching for work. Or unemployment insurance might incentivize people to reject employment offers by raising their reservation wage, the wage above which they will accept a job.

We can check the data to see if either of these effects is occurring as a result of EUC. Consider first whether EUC incentivizes unemployed workers to stay in the labor force when they would otherwise drop out. As their EUC benefits expire, unemployed workers can choose to leave the labor force or to stay in. If they leave, the number of long-term unemployed workers will decrease (all else equal), since, by definition, a worker receiving EUC is counted among the long-term unemployed. If they stay, they continue to seek work but receive no further unemployment benefits.

If EUC creates this incentive, we ought to observe evidence of workers exiting the labor force as their benefits expire. Over the past two years, however, though we have seen a noticeable decline in the number of those receiving EUC and extended state benefits, the number of long-term unemployed workers has been stuck around 6 million and shows little sign of downward momentum. …

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