Rand Paul Claims That Unemployment Benefits Encourage Unemployment

December 02, 2010 6:37 pm ET

Senator-elect Rand Paul (R-KY) appeared on Fox News' Your World with Neil Cavuto today where he was asked about his position on a potential deal that would extend unemployment benefits as well as a package of Republican-favored tax cuts. Paul railed against an extension of the benefits, criticizing their cost and suggesting that they encourage unemployment. However, economists and the non-partisan Congressional Budget Office have concluded that these benefits have a marginal effect on the duration of an individual's period of unemployment and actually are one of the most cost-effective ways of stimulating the economy.

Paul: "You Get Out Of A Recession By Encouraging Employment Not Encouraging Unemployment."

From the December 2 edition of Your World with Neil Cavuto:

CAVUTO: They want to extend a lot of the stimulus-related tax cuts that I guess normally would have expired this year, um, roll it in with an extension of jobless benefits. Uh — I'm — I'm taking the leap here Rand, so I could be very wrong and, in fact, count on me for likely being wrong — but that this is a negotiating chip with Republicans to say you extend ours, we'll extend yours, deal Done. Would you vote for something like that?

PAUL: Well, you have to tell me a little more — we're talking about extending beyond 99 weeks, the unemployment benefits, or what are we talking about?

CAVUTO: Yes, yep.

PAUL: Well, I think 99 weeks is an incredibly long time and the uninsurement — the uh, uh, unemployment benefits are paid for through somewhat of an insurance program that pays for itself through taxation through 26 weeks, so anything beyond the 26 weeks is just added to the deficit and we are actually talking about pretty large numbers now. We're talking about over $100 billion a year and I don't think that's how you get out of a recession. You get out of a recession by encouraging employment not encouraging unemployment.

Economists Agree: Unemployment Benefits Don't "Encourage Unemployment"

Key Researcher On Unemployment Benefits Says Unemployment Benefits Have "Modest Impacts" On Duration Of Unemployment. According to the bipartisan Joint Economic Committee: "While earlier research suggested that the unemployment insurance program in the 1970s and 1980s had important disincentive effects, the current consensus is that these dated studies overstated the effects of unemployment insurance benefits on job search behavior. The older studies noted a jump in the fraction of workers who found a job just before they exhausted their benefits. In contrast, in testimony before the Joint Economic Committee, the author of one of the seminal papers in this earlier wave of research, Dr. Lawrence Katz, said that 'the most compelling research shows only modest impacts of UI extensions on the search effort and duration of unemployment of unemployment insurance recipients.' [...] Katz pointed out that these studies overstate the overall impact of unemployment insurance benefits on the length of unemployment spells 'by ignoring the spillover effects of shorter unemployment spells for the other unemployed workers not receiving UI benefits.'"  ["Does Unemployment Insurance Inhibit Job Search?" Joint Economic Committee, July 2010, emphasis added]

Other Economists Who Study Unemployment Agree That Extended Benefits Do Not Significantly Prolong Unemployment. According to the bipartisan Joint Economic Committee:

"Dr. Katz is not the only economist who holds these views. Dr. Till von Wachter, in testimony before the Joint Economic Committee, also shared Katz's opinion. 'It is likely that in severe recessions, the benefit of extended UI outweighs the costs,' argues von Wachter. Analyzing data from Germany that was of much higher quality than most other studies on the disincentive effects of unemployment insurance, von Wachter found that 'extended UI would lead to a moderate increase in the rate of unemployment.' He also inferred that the increase in the unemployment rate would be smaller in the United States right now because labor market conditions are tight and jobs are scarce. Another prominent economist who has studied unemployment insurance and other social insurance programs, Dr. Raj Chetty, has reached similar conclusions. In one paper, he and coauthors showed that even though there is a 'spike' in exit rates from unemployment insurance at the time of benefit exhaustion, the probability of reemployment doesn't change significantly. In other words, many of those who exit the unemployment insurance rolls as their benefits are about to expire are not moving on to another job. Furthermore, Chetty argues that 'work disincentive effects' are likely to be small because people are 'likely to take any job they can get' in the current economic downturn." ["Does Unemployment Insurance Inhibit Job Search?" Joint Economic Committee, July 2010, emphasis added]

Economic Policy Institute: Claim That "Unemployment Benefits Make People Less Likely To Find Jobs" Is A Myth. According to a Washington Post opinion piece by Heidi Shierholz of the Economic Policy Institute:

"Unemployment insurance replaces a maximum of half of a worker's prior wages (up to a cap), and when we're not in a prolonged recession, it gives laid-off workers a little breathing room to find a job that matches their skills and experience. This is one of the goals of the unemployment insurance system, since the economy works best when people are in jobs that maximize their skills. Today, however, unemployment insurance isn't providing breathing room -- it's providing a lifeline. There are now roughly five unemployed workers for every available job. That doesn't mean there are five applicants for every job opening; there may be scores of applications for every posting, as people apply for many jobs. Instead, it means there literally aren't jobs for four out of every five unemployed workers. This is why nearly half of the unemployed have been out of work for more than six months, the maximum duration of state unemployment benefits. In this environment, allowing extended unemployment benefits to expire would indeed make workers who have exhausted their aid more desperate to find work. But it wouldn't make them more likely to find work, because the jobs don't exist." [Washington Post, 7/25/10, emphasis added]

Unemployment Benefits Are One Of The Most Effective Methods Of Stimulating The Economy

CBO: Unemployment Benefits Are The Most Effective Way To Boost The Economy.  Below is a chart created by the Congressional Budget Office to show the "cumulative effects of policy options on employment in 2010 and 2011":


[Congressional Budget Office, 9/28/10]

CBPP: "Extra Benefits Are Effective Economic Stimulus." According to an April 16 report by the Center on Budget Policy Priorities:

Extra Benefits Are Effective Economic Stimulus

Temporary increases in unemployment insurance benefits score high in "bang-for-the-buck" calculations of their economic impact as stimulus. The money gets spent fast and its effects spread through the economy. As a result of such policies, local businesses are less apt to lay off workers and cut back on orders from their suppliers during a downturn; and in the early stages of a recovery, they are more apt to hire additional workers and step up their orders. Policymakers have always ended these emergency UI benefits once a strong and sustainable economic recovery is underway.

[CBPP.org, 4/16/10; emphasis original]

CBO: Extending Unemployment Benefits Is "Both Timely And Cost-Effective In Spurring Economic Activity And Employment." According to the Congressional Budget Office: "Extending additional unemployment benefits would directly help those who would otherwise exhaust their unemployment benefits between March and December of this year. Households receiving unemployment benefits tend to spend the additional benefits quickly, making this option both timely and cost-effective in spurring economic activity and employment. A variant of this option would extend assistance with paying health insurance premiums, which would allow some recipients to maintain health insurance coverage they would otherwise have dropped." [Congressional Budget Office, 2/23/10]