Fed Report: Unemployment Benefits May Prolong Unemployment

Kevin Glass | July 09, 2014 6:39 PM

It's not exactly a landmark finding, as other studies have shown the same thing, but a new report from the Federal Reserve Bank of St. Louis has provided another datapoint: extended unemployment benefits tend to actually increase unemployment relative to the baseline.

The authors of the report, Maria Canon and Yang Liu, write:

In summary, we find that the extension of unemployment benefits affected the labor market status of long-term unemployed workers in late 2013. Without extended UI benefits, these unemployed workers would have been more likely to be employed, more likely to exit the labor force, and on average 1.9 percent less likely to remain unemployed in the following period. In short, our simulated early termination of the EUC program lowered the unemployment rate by 3 to 5 basis points, suggesting that the December 2013 expiration of the EUC program might have slightly lowered the unemployment rate in early 2014.

The amount that the authors found that the emergency long-term unemployment benefits artificially propped up the unemployment rate was relatively small. For example, they found that the likelihood of someone to move from unemployment to employment in the absence of the emergency benefits was only 1.2 to 2.1% higher. Every little helps, however, and it's certainly a counterpoint to those who argue that unemployment benefits have had no effect on unemployment.

Hat tip: Victoria Stilwell