July 30, 2014

Responsibly Financed Extension of Long-Term Unemployment Benefits Can Boost Economy

Extending emergency unemployment compensation for another year would add 200,000 jobs but carries a price tag of $25 billion, according to an analysis released recently by the Congressional Budget Office (CBO). Such an extension now appears to be a central focus of negotiators trying to reach a budget deal before Congress adjourns for the year.

Emergency unemployment compensation (EUC) provides more “bang for the buck” than many other policies aimed at improving the economy. It provides an immediate surge in economic activity due to recipients quickly spending their benefits on consumer goods and services, which boosts aggregate demand and induces businesses to increase production and hire more workers.

CBO noted that part of this positive effect is offset as some workers reduce the intensity of their job searches in response to the extension of benefits.

Emergency unemployment compensation was approved in 2008 as the unemployment rate was rapidly rising due to the recession. It provides at least 14 additional weeks of benefits to individuals who have exhausted their state-sponsored unemployment insurance.

While emergency unemployment compensation is one of the more effective forms to support the economic recovery, its cost would ideally be offset with a deal that reduces the debt over the long term. CBO states that if its cost is not offset by spending cuts or revenue, the extension would increase the debt, slightly reducing the country's future output and income.

Last year Congress reauthorized the program without offsetting the cost, adding $30 billion to the deficit.

CBO’s analysis was published as Congress once again considers whether to continue the program, part of an annual end-of-year list of reauthorizations Congress considers before adjourning. If EUC is allowed to expire, 1.3 million workers would lose their emergency benefits on Dec, 28.

According to the latest jobs report, just over 4 million people have been unemployed for longer than 6 months. Thirty-seven percent of the unemployed have been jobless for more than six months, a figure that has gradually declined in recent years from a peak of 45 percent, but is still higher than in any other period since the Second World War.

Democrats in both chambers have introduced legislation extending the program for another year, and some Democratic leaders have called for an extension to be included in the budget deal currently being negotiated. The CBO analysis was produced at the request of House Budget Committee Ranking Member Chris Van Hollen (D-Md), who is one such leader.

Republicans say they want to keep the EUC extension separate and find offsets to its $25 billion price tag. The Obama administration supports an extension and has even said it is willing to consider offsets to the cost of the program in order to ensure its reauthorization.