Effects of Long-Term Unemployment Insurance

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Through econometric regression techniques, this research seeks to analyze data in regard to the effects of Unemployment Insurance Benefits (UI) extended beyond the initial allocation cap on Unemployment. This research will explore the extension of such benefits within the United States through the examination of original research in economics and government databases.

This research will contribute to the current knowledge we have in regard to various social-welfare projects. Previous research on the subject contends the existence of basic unemployment benefits has a positive economic correlation in various areas; however, the data on extended benefit consumption has been varied. The analysis of data pertaining to individuals whose benefit has extended beyond 26 is expected to have correlated a negative impact.

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History of UI

Throughout history modern societies have been subject to economic cycles in which economic booms and down turns occur. In the United States we have seen many low cycles with the most notable down turns being the Great Depression of the 1920r’s/30r’s and more recently the Great Recession that occurred in 2008.

During these times, the unemployment rate (calculated as the people out of work and actively looking for reemployment) generally rises. During the Great Depression of the 1920r’s and 1930r’s, the United States faced some of the largest unemployment numbers ever recorded in history. This economic devastation rendered many people without work, consequently the widespread economic suffering inspired the U.S. government to enact several social-welfare policies. One of these policies was use of Unemployment Insurance (U.I.) benefit programs to ease the intermediate burden of joblessness.

U.I. benefits are intended for people whom have become unemployed through no fault of their own and meet particular eligibility requirements. The social-welfare program supplements the income of the unemployed person(s) while they are searching for other employment opportunities. The U.I. benefits are meant to lessen some of the immediate financial needs to cover essential bills and necessary costs of living (Perez 2015).

Since its creation like many of the other social welfare programs, U.I. benefits have seen many changes in order to adapt to the current situational needs. In general, the maximum duration of U.I. benefit entitlement has been at or below 26 weeks. For the purpose of this research, however, we will examine data where economic recessions have forced the extension of such beyond the traditional amount.

Purpose for Research Initiative

The volatility of economic conditions provided by the interaction between world markets lends a great likelihood for economic declines. For this reason, it is relatively unavoidable to evade periods of increased unemployment rates which lends to the importance of deeper examination of the policies and benefits employed during such occasions. Due to the contradictive positive and negative correlative evidence previously presented by the various studies conducted on this policy, it is imperative further research be conducted to aid legislators in the decision-making processes.

One of the more prominent arguments for continued U.I. benefits beyond traditional amounts is that they create an economic stimulus. In the short run, there is evidence to support this claim. According to former research U.I. benefits save jobs and prevent decreases in consumption initially (Furman 2013; Perez 2011). However, this cannot be a sustainable model. Keynesian economists believe government entities should transfer money to workers in times of economic downturns with the intention of such workers immediately spending it. This is beneficial because greater spending increases aggregate demand and thus stimulates the economy (Rustici 2015). Unfortunately, contributions such as Milton Friedman, have discredited Keynesian theories. It is seen that workers base their consumption decisions on their expected permanent income, not a fixed percentage of any income they receive, meaning prolonged U.I. benefits will see a diminishing return on society.

Problems and Issues

Unemployment can affect individuals, families, and communities in various ways that may contribute to prolonged unemployment and use of UI. Often times when individuals are out of work, their skills may degrade due to lack of use. That erosion of skill is known as depreciation of human capital. The longer a person remains out of work the more their human capital diminished, meaning as time passes that the potential wages the unemployed person meaning both the potential earning wage and the chances of finding a new job decrease the longer that they are out of work. Another disadvantage to unemployed persons is the depreciation of their ?social capital. A persons social capital consists of the network of business contacts and associates they interact with which often aids in finding desired employment easier.

Other issues surrounding reemployment, in addition to the depreciation of skill and network, include the possibility that being out of work may affect a persons physical and mental health. The impact unemployment has on a familyr’s ability to sustain childcare or standard of living may also contribute to prolonged unemployment and use of U.I.

Model design and Data

It is impossible to completely control the noted and various other inconsistencies that may contribute to unemployment duration. To protect the integrity of the results regarding the effect of extended U.I. on unemployment we have to control for such socio-economic factors and personal differentiation amongst the sample population using a regression equation.

The data is compiled from data.iowa.gov showing Iowar’s Unemployment Insurance recipients and UI benefit payments for the years 2008-2011 along with various statistics from the Burau or Labor Statics regarding Iowa over the same years.

We are looking to show a positive correlation between recipients of UI beyond the standard 26 weeks with longer unemployment durations than otherwise observed.

The dependent variable is weeks of unemployment. The independent variables are: benefitspaid = recipients receiving less than 26 weeks; firsttimepayment = recipients receiving the full 26 weeks; finalpayments = recipients receiving UI beyond 26 weeks. To account for the socio-economic conditions the following dummy variables were set equal to 1: Sex, Age, Education.

Findings

For this particular dataset, the coefficient for initial UI payment does not contribute to prolonged unemployment. The coefficient for UI ending at the standard entitlement indicates that for every additional UI payment you can expect unemployment prolonging to increase by an average of 7. The coefficient for UI payment beyond the standard length of entitlement suggests an average increase in length of unemployment by 13.5.

The dummy variables were omitted for multicollinearity problems.

Unfortunately, the dataset used for this experiment is likely not applicable to the real world. The data set is biases and lacked appropriate control variables even though coincidently agreeing with some current literature.

This regression experiment had room for improvement in which variables are best for creating a valuable model. As it currently stands, the model did not account for the fact that people using UI are unemployed and therefore will positively correlate UI with unemployment. This research essentially does not give new insights as to the effects of extended UI entitlements.

Conclusions

This research, in addition to the growing research surrounding this topic suggests extended UI benefit entitlement is positively corelated with weeks out of employment and thus has a negative societal economic effect in the aggregate. Further research on such UI polices is necessary as to answer the controversial conversation surrounding their benefit.

Existing literature suggests UI may encourage the pursuit of low skill activities more so then they aid in workers finding gainful employment. This means that prolonged UI benefits make the labor force more vulnerable to skill biased shocks as human capital depreciation ensues. There also exist from previous research conducted on the topic, an association with the discouragement of gaining employment correlated with welfare entitlements. It is important to observe study and take seriously the impacts of welfare programs so that policy makers may one day successfully employ such benefits in a beneficial manner that renders low unintended consequential tax burdens.

While of significant importance to human capital depreciation, prolonged unemployment from UI extension is not the only outcome that should continue to be explored and researched. The social capital and physiological side-effects are much less explored and have their own important impacts for society. If UI does in fact create an employment disincentive prolonged unemployment is positively correlated with negative socio-physiological increases, extended UI entitlement policies should not only not be enacted but may be of a danger to those using them and society as a whole.

References

  1. Cuomo, M, Harnett, T. 1994. A History of Unemployment Insurance Legislation in the U. S. and New York State (1935-1989). N.p.: DIANE, 1994.Google Books. Google.
  2. Dellas, Harris. Unemployment Insurance Benefits and Human Capital Accumulation. NeuroImage, Academic Press, 11 June 1998, www.sciencedirect.com/science/article/pii/S0014292197000184.
  3. Furman, J, Stevenson, B. Dec. 5 2013. “New Report: The Economic Benefits of Extending Unemployment Insurance.” The White House. United States Government.
  4. Henry S. Farber, Jesse Rothstein, and Robert G. Valletta. The Effect of Extended Unemployment Insurance Benefits: Evidence from the 2012“2013 Phase-Out. American Economic Review. May 2015, Vol. 105, No. 5: Pages 171-176
  5. Howell, D, Azizoglu, B. 2011. “Unemployment Benefits and Work Incentives: The U.S. Labor Market in the Great Recession.” Economic Policy Research.
  6. Iowa Economy at a Glance. U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, www.bls.gov/eag/eag.ia.htm.
  7. Iowa Unemployment Insurance Recipients and UI Benefit Payments by County (Annual). Data.iowa.gov, 25 July 2018, data.iowa.gov/Economy/Iowa-Unemployment-Insurance-Recipients-and-UI-Bene/yhbr-3t8a.
  8. Isidore, C. Sept. 8 2010. “Do Unemployment Checks Keep the Jobless at Home?”CNNMoney. Cable News Network.
  9. Murphy, G. C., Athanasou, J. A. (1999), The effect of unemployment on mental health. Journal of Occupational and Organizational Psychology, 72: 83“99. doi: 10.1348/096317999166518
  10. Nichols, Austin, et al. Consequences of Long-Term Unemployment . Urban Institute, July 2013, www.urban.org/sites/default/files/publication/23921/412887-Consequences-of-Long-Term-Unemployment.PDF.
  11. Nicholson, Walter, and Karen Needels. Extended Unemployment Benefits: A Review of the Literature. July 2004, wenicholson.people.amherst.edu/EBLITREVIEWrev.pdf.
  12. Perez, T. 2015. Unemployment Insurance U.S. Bureau of Labor Statistics. U.S. Government. https://www.dol.gov/dol/topic/unemployment-insurance/
  13. Perez, T. 2011.”The Economic Impact of Unemployment Insurance.” U.S. Bureau of Labor Statistics. U.S. Government.
  14. Pavoni, N. 2009. “Optimal Unemployment Insurance, with Human Capital Depreciation, and Duration Dependence.” International Economic Review 50 (2): 323-362.
  15. Repeat Use in the U.S. Unemployment Insurance System : Monthly Labor Review. U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, 1 Sept. 2014, www.bls.gov/opub/mlr/2014/article/repeat-use-in-the-u-s-unemployment-insurance-system.htm.
  16. Rustici, T. 2015. “Macroeconomics.” ECON 104. GMU, Fairfax. Lecture.
  17. Shirk, J., Tyrrell, P. Jan. 18 2008. “Unemployment Insurance Does Not Stimulate the Economy.” The Heritage Foundation.
  18. Solon, Gary. Labor Supply Effects of Extended Unemployment Benefits The Journal of Human Resources, Vol. 14, No. 2 (Spring, 1979), pp. 247-255
  19. Tefft, N. 2011. “Insights on Unemployment, Unemployment Insurance, and Mental Health.” Journal of Health Economics30 (2): 258-264.
  20. Whittaker, Julie, and Katelin Isaacs. Extending Unemployment Compensation Benefits During Recessions. Congressional Research Service, 2 May 2013, fas.org/sgp/crs/misc/RL34340.pdf.

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