Extending Unemployment Benefits Will Increase Unemployment, Hurt Economy

Washington, D.C., July 21, 2010—The Senate today approved an extension of federal unemployment benefits to a maximum of 99 weeks. This move is likely to create unintended negative consequences which will have effects throughout the economy.

Statement by Ryan Young

Warren Brookes Journalism Fellow

Competitive Enterprise Institute

One of the iron laws of public policy is that when you subsidize something, you get more of it. Governments subsidize countless things that politicians want more of, from renewable energy to mohair. Those same politicians are now raising the subsidy for unemployment. The unintended result will be more unemployed Americans.

There are other unintended consequences as well. The federal government will have to borrow as much as $34 billion to pay for the benefit extension. That leaves as much as $34 billion less investment capital available for job-creating by private businesses. By crowding out private sector investment, the benefit extension will make it harder for the unemployed to find work.

Moreover, unemployment benefit extensions give people a disincentive to look for work. The University of Chicago’s Bruce Meyer and Harvard’s Lawrence Katz found that for every week that unemployment benefits are extended, the average duration of unemployment goes up by 0.16 to 0.20 weeks. According to a paper coauthored by Alan Krueger, President Obama’s Assistant Secretary of the Treasury for Economic Policy, the unemployed more than triple the time they spend job-hunting, from 20 minutes per week to 70 minutes per week, in the weeks right before benefits expire.

CEI is a non-profit, non-partisan public policy group dedicated to the principles of free enterprise and limited government.