Is Unemployment Compensation Inhibiting Recovery?

Second to the growing national deficit, unemployment is perhaps the most important issue to be resolved before the U.S. economic recovery will be sustainable. And because the Emergency Unemployment Compensation (EUC) program that provides benefits to individuals who have exhausted regular state benefits is 100% federally funded, it also contributes to the growing deficit (note: President Obama's emergency extension of the EUC expired on April 5 according to the USDL and has yet to be renewed by Congress). Now while it would be socially and economically unconscionable to oppose unemployment compensation, the system, as it is currently structured, has enormous problems.

The administration of unemployment compensation is handled by state governments as are the rules and regulations that govern it. And while these parameters vary too widely to address here, I began noticing some serious impediments to future employment among unemployed friends and acquaintances over the past year in Pennsylvania:

- Compensation is granted at a percentage of previous income so long as that income was derived from a full-time position. And if one's salaried income was in the median range or higher, the unemployment compensation amount is likely to provide sustenance while pursuing future employment – a stabilizer as economists call it. But those who were employed part-time and/or self-employed do not qualify and by definition destabilize the economy.

- Working at a part-time job – regardless of the number of hours or hourly wage -- results in a cancellation of benefits for the week worked. This provides a disincentive to pursue contingent labor positions -- a great stepping stone to future full-time employment -- if the hourly rate amounts to less than unemployment compensation. It also results in rusting skill sets while away from the work place.

In addition, The Fiscal Times reports "Many economists have examined the sometimes conflicting goals of unemployment programs that partially replace income while possibly creating disincentives to search for employment. A 2006 paper by Walter Nicholson and Karen Needels, published in The Journal of Economic Perspectives, notes that most studies conclude that each additional week of available benefits accounts for somewhere between 0.1 and 0.4 weeks of extra unemployment." This finding is especially troubling considering that The Fiscal Times also states that "All totaled, the 2008 EUC program now adds a maximum of 53 weeks to the basic 39 or 46 weeks of coverage under the permanent state programs. That adds up to a maximum duration of 99 weeks of benefits, depending on which states you look at."

The EUC along with the state's systems of unemployment compensation is a clear case of throwing bad deficit enhancing money after shallow policy. But while I'm butchering clichés, let's not throw unemployment stabilization out with short sighted programs. Why not mandate a sliding scale to unemployment compensation that would permit those seeking employment to work their way back to full employment without being penalized for doing so? It could help job seekers stay sharp, reduce aggregate compensation cost and accelerate recovery.

William Busch

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