But unemployment compensation also has an economic cost. For one thing, it encourages businesses to lay off workers faster and more often than they otherwise would. At the same time, unemployed workers are encouraged to extend their job search, rather than taking the first job they can get. This raises the average rate of unemployment without generally improving the quality of jobs ultimately obtained by the unemployed.
Economists have also isolated the effects of extended unemployment benefits. Since many workers wait until their benefits are almost exhausted before taking a new job, the effect of extending benefits beyond 26 weeks simply extends the date when they have to take a job. One estimate concluded that for each week benefits are extended, the average duration of unemployment increases by about a day.
Forcing a worker to take a job that he may not want may seem cruel, but the alternative can be worse. In Europe, every country has unemployment benefits more generous than they are here. It is not uncommon for benefits to replace 80 percent to 90 percent of gross wages, compared to 50 percent to 70 percent in the United States. Standard unemployment benefits in Europe typically last for a year, with a number of countries allowing people to receive them for up to 5 years. In Belgium, they never lose benefits.
But the cost of this compassion is high. Taxes are vastly higher, and so is the unemployment rate. In Belgium, the current unemployment rate is 11.6 percent. Italy, Germany and France all have rates over 9 percent. Europe as a whole has an unemployment rate of 8.5 percent, compared with 5.9 percent here.
Thus, ironically, elimination of extended unemployment benefits will almost certainly reduce the unemployment rate. The House Ways and Means Committee estimates that it will bring the rate down by half of a percent below what it would be if extended benefits remain in place. The Council of Economic Advisers estimates 0.3 percent.
This could be important because the unemployment rate is generally considered to be the most important economic statistic from a political standpoint. The unemployment rate is falling due to business expansion and economic growth, but it may not fall quickly enough to defuse it as a political issue next year. If elimination of extended benefits reduces the rate a further 0.5 percent, it means that the unemployment rate could be below 5 percent on Election Day.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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