The Case For and Against Unemployment Insurance

Following news coverage can be easy. Understanding some of the terms it uses, less so. In our Flashcard series, The Atlantic explains ideas you may read about but never see spelled out. In this installment, we explain how unemployment insurance works and why it's become so controversial in the last few months.
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The News

Today the Senate is expected to renew unemployment insurance benefits after months of partisan wrangling. The new law would not extend unemployment benefits past their 99-week duration. Instead it would retroactively compensate 2.5 million Americans who have lost benefits in the last six weeks, and extend the current program until November. Unemployment insurance stands to become a lightening rod in the midterm elections, but how does the program actually work?

The Gist

Unemployment insurance (UI) is paid by states and the federal government to people who have lost their jobs through no fault of their own (ie: did not quit, and were not fired for misconduct). It is what economists call a counter-cyclical program, pumping money into the economy when the private sector stalls. In this way, it provides insurance both for folks who lost jobs and for an economy that's lost momentum.


In normal times, states pay for up to 26 weeks of unemployment insurance with a payroll tax. Some choose to provide extended benefits. The federal government fills a rainy fund and splits the cost of the extended benefits by collecting $56 per worker, nationwide. In the last two years, Washington took over the extended benefits program. Further extensions to UI were financed with deficit spending (see: Deficit Spending Flashcard).


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There are three basic qualifications for UI. First, you lost your job. Second, it wasn't your fault. Third, you're looking for work (some states require beneficiaries to show job contacts). This spring, about 11.4 million people collected UI benefits.

How much you get is determined by how much you've made. States typically cut a check worth 50 percent of your recent earnings, up to a cap. The national average is around 36 percent of pre-layoff earnings (it's a low cap). In Virginia, the maximum weekly compensation is $378. For more, click on this graph from the Washington Post.


In response to the Great Recession, Washington extended the duration of jobless benefits to 99 weeks for the hardest hit states. First, the federal government took over paying for the Extended Benefits program. Second, Congress created four additional "tiers" of benefits. All states are eligible for the first two tiers. Only the most hard hit states can also qualify for the third and fourth tiers. Here's an unemployment insurance ladder that shows how people in some states can receive almost two years of UI:

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Since June 4, when the program expired, each beneficiary could collect the balance of his tier -- and no more. In other words, a man who just started Tier 1 could receive checks for 19 more weeks. But a woman on her last week of state benefits stopped receiving checks. Today Congress is looking to retroactively award benefits to the 2.5 million people who've been bumped off UI rolls.

The Debate

There's a political debate and a substantive debate over unemployment insurance. In the political arena, Republicans have repeatedly blocked UI extensions because the program, which costs about $10 billion a month, adds to the deficit. Democrats and the president respond that jobless benefits should be treated like emergency disaster relief and should not require "off-setting" spending cuts or tax increases. So the political fight over UI is really about the deficit.

The policy argument against UI goes like this. Jobless insurance is a subsidy -- an incentive to stay unemployed. Somebody on UI might choose to stay unemployed longer, or hold out for better jobs, knowing he's got a few hundred dollars a week holding him over. Even liberal economists like Paul Krugman have argued that especially generous or lengthy jobless benefits in Europe artificially inflate the unemployment rate.

To be sure, UI might increase the unemployment rate slightly. The San Francisco Fed concluded that extended benefits added 0.4 percentage points to the unemployment rate. But in an economy with five unemployed for every job opening, Americans don't need unemployment benefits to discourage them from working. The job market is doing that all by itself.

Unemployment insurance might even be good for the economy. The Congressional Budget Office and economist Mark Zandi of Moody's both said extending UI was one of the most effective ways to stimulate in a downturn -- above tax cuts or infrastructure spending. It puts timely money in the hands of people who are likely to spend it locally, increasing the taxable income of the people and businesses around them.

Like any government stimulus, jobless benefits will eventually become a drag on the economy. The federal government should not subsidize two years of unemployment forever. But today, with average unemployment duration at 29 weeks -- longer than standard state benefits -- jobless benefits are a small price to pay to keep hard-hit families, and the hard-hit economy, above water.


For more Flashcard posts:

The Value-Added Tax

The Contagion Effect

Deficit Spending (Stimulus)

The Oil Spill Liability Cap

Carbon Pricing


Renewable Electricity Standard