Unemployment Insurance in the Wake of the Recent Recession

November 28, 2012

Between 2007 and 2010, unemployment benefits expanded nearly five-fold owing to high unemployment due to the weak economy, and decisions by policymakers to increase the number of weeks for which unemployed workers could receive benefits.

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The unemployment insurance (UI) system is a partnership between the federal government and state governments that provides a temporary weekly benefit to qualified workers who lose their job and are seeking work. The amount of that benefit is based in part on a worker’s past earnings. CBO estimates that UI benefits totaled $94 billion in fiscal year 2012 (when the unemployment rate was 8.3 percent, on average), a substantial increase over the $33 billion paid out in fiscal year 2007 (when the unemployment rate was 4.5 percent, on average).

Beginning in 2008, Increased Layoffs and Changes in the Unemployment Insurance System Have Expanded the Number of Recipients and Federal Spending for Benefits

Far more workers were laid off in 2008 and 2009 than in 2006 and 2007. The number of workers who lost their job and started receiving UI benefits peaked at 14.4 million in 2009, whereas an average of roughly 8 million laid-off workers started receiving benefits in each fiscal year from 2004 to 2007. Having so many more workers eligible for unemployment benefits would have substantially increased the number of recipients in the absence of any change in UI policies, but federal policies also were changed in ways that further expanded the number of UI recipients.

In particular, the periods for which eligible workers can receive UI benefits have been repeatedly extended during the recent recession and its aftermath. Regular UI benefits generally last up to 26 weeks. Additional weeks of benefits have been provided through the creation of the temporary Emergency Unemployment Compensation (EUC) program in 2008 and through modifications to the extended benefits (EB) program. The EUC program currently provides up to 47 weeks of additional benefits (depending on a state’s unemployment rate) after regular UI benefits have been exhausted. The EB program provides up to 20 weeks of benefits to certain eligible workers who have exhausted their EUC benefits (temporary changes in law have made it easier for states to qualify to provide extended benefits and have made the funding for the EB program entirely federal).

The benefits the three programs provide—at a total cost over the past five years of roughly $520 billion—have allowed households to better maintain their consumption while household members are unemployed. Under current law, the temporary benefits that have been provided in recent years are set to expire at the end of December 2012.

Spending on Unemployment Benefits, by Fiscal Year

With Temporary Benefits Set to Expire, CBO Considered Several Options—with Costs Ranging from $3 Billion to $30 Billion—To Continue Offering Additional Weeks of UI Benefits

The four options to extend benefits—including their estimated costs to the federal budget—are as follows:

  • Option 1. Fully extend the current EUC program and temporary provisions of the EB program for one year ($30 billion);
  • Option 2. Partially extend the current EUC program by providing at most 14 extra weeks of benefits for one year ($14 billion);
  • Option 3. Allow UI recipients to finish receiving up to 14 weeks of EUC benefits, depending on the number of weeks of benefits for which they will qualify at the end of December 2012 ($4 billion); and
  • Option 4. Extend the current EB program for one year, maintaining full federal funding and allowing states to more easily qualify for the program ($3 billion).

Separate from the options that would extend benefits, CBO considered another alternative that would provide temporary fiscal relief to states by delaying for one year the repayment of funds they have borrowed from the Unemployment Trust Fund, which is funded by a federal payroll tax on employers. Under that option, the federal government would forgo about $3 billion of revenue in 2013 but would collect roughly that same amount in subsequent years.

Extending Unemployment Insurance Benefits Would Have Several Effects on Individuals and the U.S. Economy in the Short Run

Extending unemployment insurance benefits would:

  • Afford greater protection against income lost during unemployment;
  • Provide incentives for UI recipients to remain unemployed longer than they otherwise would have because UI benefits stop when recipients find a job or stop looking for work; and
  • Lead to more consumer spending and increased demand for goods and services, which CBO expects would boost overall output and employment in the short term.

For the three options involving extensions for an entire year—Options 1, 2, and 4—economic output would be $1.10 higher per dollar of budgetary cost, on average, in 2013, CBO estimates, and employment would be increased by six years of full-time-equivalent employment per million dollars of budgetary cost (see figure below).

Estimated Economic Effects in 2013 of Extending Unemployment Benefits, Relative to the Budgetary Cost in 2013

Under Option 1, for example, which extends the benefits provided under the current EUC and EB programs at a total budgetary cost of $30 billion, CBO estimates that gross domestic product adjusted for inflation would be 0.2 percent higher in the fourth quarter of 2013 and that full-time-equivalent employment would be 0.3 million higher at that time than it would be under current law.

CBO Also Assessed More Fundamental Modifications to the UI System over the Longer Term

Some of the modifications that CBO considered would promote employment by increasing incentives for UI recipients to take a new job or by encouraging firms to reduce hours worked per employee rather than lay off some workers while retaining others full time. Other approaches would change the federal and state roles in administering UI, either by making the amount of funding more predictable and giving states more flexibility in implementing their UI programs or by making UI benefits and tax rates more uniform among states. Still other approaches would alter the distribution of resources within the UI system by expanding the wage base on which UI taxes are levied, by changing the weekly benefits the system provides, or by providing insurance against the earnings loss that many laid-off workers experience when they take a new job.

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