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Unemployment compensation extensions: For better or for worse?

By Benjamin Che
web posted October 11, 2010

Unemployment has always been one of the key issues of economic policy here in the United States.  A high unemployment rate is almost directly linked to a slow economy.  Political elections hinge on the economical outlook and unemployment rate; incumbents realize that high unemployment equals a lesser chance for reelection.   Unemployment benefits are a form of welfare payments to the citizens of this country that have no work.  These unemployment compensations are, to an extent, disadvantageous or harmful to our economical health.

Where does the money come from?  This fundamental question allows us to analyze the costs and benefits of unemployment compensations.  In all fifty states of the U.S., there are unemployment insurance programs available.  These programs are funded under the Federal Unemployment Tax Act (FUTA) which facilitates the Internal Revenue Service in diverting a significant portion of annual federal employer taxes for this program.  The benefits themselves are tailored by the individual states according to their needs. 

In the recent recession, we have seen federal aid and grants increase exponentially in an effort to curb the recession and soaring unemployment rates.  In July of 2010, the Senate voted 60-40 in favor of bill to grant millions of unemployed compensations for being without work for more than six months.  It would ensure 99 weeks of continued benefits for these citizens that are out of work.  This may sound like a beneficial plan to aid those out of work, but is it really?

One must examine the marginal costs and benefits of such government subsidies in order to determine its effect on the economy.  By using marginal analysis to examine the costs and benefits of making these changes from the current state of affairs, we can then judge whether or not the bill would have positive effects on the economy.  On one side are the marginal benefits of government stimulus, welfare support, and the potential for better results for job searches because of the fact that the benefited unemployed could focus more on the search for jobs.   On the other side are the marginal costs of expanded deficit, the lack of strong incentives for finding a job, and the increased taxes for employers and other taxpayers who pay for these benefits.

The costs of increased benefits to the unemployed far outweigh the benefits.  For one, the approximate cost for the extended plan ramp up to around $34 billion, adding burden to the federal budget, especially with all the other federal stimulus bills in place.  Another cost would be the one of wasted government money, as benefits to the unemployed make living on these subsidies easier than looking for a low-paying job, especially if these subsidies last for 99 weeks, almost two years.  This bill is basically giving the unemployed two options:  one, of landing a full-time job for maybe $10 an hour,  the other, collecting approximately $400 each week for not working at all.  Most job-seekers would go with the benefit package, defeating the original intent of the legislation, that of reducing the unemployment rate.

Americans will simply not take a low paying job for the benefits of being unemployed under the 99 week extension of unemployment benefits.  As Stephen Colbert pointed out in his testimony to Congress, Americans are simply not willing to take the jobs that immigrant workers will readily pick up.  Achieving but little of the marginal benefits promised, the new unemployment compensation extension increases the tax burden placed on American employers and citizens.  A government stimulus always achieves lasting economic results, but is it for the better? ESR

This is Benjamin Che's first contribution to Enter Stage Right. © Benjamin Che

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