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Treasury Notes

 Why We Need Long-term Unemployment Insurance

By: Seth Carpenter
4/8/2014

Yesterday, in a bipartisan vote, the Senate passed a bill that would restore Emergency Unemployment Compensation, a supplemental, long-term unemployment insurance program that provides financial support to unemployed American workers whose standard unemployment insurance has run out as they search for employment.  This program was allowed to lapse in December, despite the fact that long-term unemployment spans all ages, all industries, and all states.  By allowing job seekers to pay for basic necessities like housing and food while they continue their job search, the long-term unemployment insurance program also provides a boost to private-sector spending.  Indeed, the non-partisan Congressional Budget Office has called the long-term unemployment insurance program a cost-effective means of spurring growth and creating jobs.   As the economy continues to recover from the worst economic recession since the Great Depression, long-term unemployment insurance should be part of our economic policy strategy.    

This legislation has now passed the Senate and awaits action by the House before it can go to the President to be signed into law.
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The long-term unemployment insurance program provides support to American workers who are unemployed and have exhausted regular unemployment insurance benefits while looking for a new job.  Since 2008, more than 69 million workers and family members have benefited from long-term unemployment insurance.  For many of these families, long-term unemployment insurance benefits have been critical to their ability to maintain a basic standard of living.  When the Congress allowed long-term unemployment insurance to lapse at the end of last December, 1.3 million American job seekers lost their benefits.  If no action is taken, by May of this year, another 1.5 million Americans who are looking for jobs will be denied benefits.  By the end of 2014, the number of Americans who will have lost access to benefits will rise to 4.9 million.  

Long-term unemployment insurance provides time to find jobs

The depth and duration of the Great Recession pushed millions of American workers into unemployment, and 4.5 years into the recovery, the unemployment rate remains elevated.  While the rate of layoffs has returned to pre-recession levels, the pace of hiring has lagged, and so millions of Americans have been trapped in unemployment for long periods of time.  The main difference between those who are long-term unemployed and those who are short-term unemployed is simply the duration of their unemployment.

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Workers who are long-term unemployed are distributed across occupations in a pattern that is nearly identical to the short-term unemployed.  This pattern reflects a general, widespread problem for the economy.  The workers who rely on long-term unemployment insurance are a critical part of our labor force and the productive capacity of our economy; these workers have valuable skills to contribute to the economy and should be supported while they look for a job.  During the recovery, workers who are long-term unemployed have been as committed to the labor force as other workers.  This attachment is reflected in the fact that the long-term unemployed have not exited the labor force at any higher rate than those who are short-term unemployed.  Long-term unemployment insurance is critical, however, because compared to workers who have been unemployed a shorter period of time, the long-term unemployed face a lower probability of finding a job in any given month.

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Long-term unemployment is widespread

Just as long-term unemployment is not isolated in one or two occupations, long-term unemployment is spread across the country.  This pattern suggests an overall need for a more robust economy in order for these workers to find jobs.  Private-sector economists expect an acceleration in the economy in 2014 relative to last year, so the prospects for employment will be improving, but for now, long-term unemployment remains stubbornly high, and long-term unemployment insurance will help to support the long-term unemployed as the economy picks up.

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All states, even ones that now enjoy relatively low overall rates of unemployment, are facing long-term unemployment that is higher than it should be, with long-term unemployment rates in 2013 higher than in 2006, when the economy was at full employment.  On average across states, long-term unemployment is more than three times its 2006 level.  The lowest state long-term unemployment rate in 2013 was in South Dakota, where it was still 1.3 times the rate of long-term unemployment in 2006.  Nevada, a state particularly hard hit by the housing bubble collapse, had a 2013 long-term unemployment rate that was more than 7.5 times its 2006 rate.
 
Long-term unemployment insurance provides support to private spending

Extending long-term unemployment insurance would spur economic growth by increasing spending by long-term unemployment insurance recipients in the communities where they live, creating more demand for the goods and services produced by American businesses, and in turn, increasing the demand for workers.  Indeed, the nonpartisan Congressional Budget Office estimated that reinstating long-term unemployment insurance through the end of 2014 would boost GDP growth by roughly 0.2 percentage point this year and create 200,000 payroll jobs.  Of course, with a smaller extension of long-term unemployment insurance, the benefit to the economy will likewise be smaller, but the CBO’s analysis suggests that the long-term unemployment insurance is one of the most cost-effective policies for spurring growth and creating jobs.  The economic recovery has created over 8.9 million private-sector jobs over the past 49 months, but millions more jobs still need to be created before American households and businesses can again reap the benefits of an economy at full employment.  


Seth Carpenter is the Deputy Assistant Secretary for Macroeconomic Policy at the United States Department of the Treasury. 
Posted in:  Economic Policy
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