Emergency Unemployment Insurance: The Costs

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Many people in the U.S. are drawing extended unemployment benefits. Data courtesy of the Bureau of Labor Statistics.

Many people in the U.S. are drawing extended unemployment benefits. Data courtesy of the Bureau of Labor Statistics.

Unemployment is capitalism’s way of getting you to plant a garden — Orson Scott Card

In a perfect world, everyone would have a high-paying job doing something they loved. There would be no poverty, no economic strife, no socioeconomic classes. While we’re at it, we’d all own new cars, boats and mansions. The oft-cited “American Dream” would come true for everyone.

During the run-up toward the Great Recession, society ticked a few notches toward this modern-day Nirvana. There was poverty, of course, but it dropped precipitously in the 1990s, reaching its lowest level in over 50 years just prior to the turn of the century before increasing slightly, then leveling off until 2008. In the 15 years between 1993 and 2008, per capita income nearly doubled, as did housing prices. Lastly, although the unemployment rate rose during the early-2000’s recession, it fell to a low of 4.4% in May 2007 — just a hair above the traditional definition of full employment.

Meanwhile, consumer spending grew steadily until the Great Recession. People were buying cars, boats and in more than a few cases, mansions, believing they had the ability to service the requisite easy-in loans they were taking on with stable jobs and speculative gains. The sharp rise in consumer spending helped carry the economy to new heights until the debt-fueled bubble finally exploded.

When the economy cratered in 2008, huge numbers of jobs were lost in a flash, which began a series of ripple effects that even today are still being felt throughout the economy. Arguably the primary driver of widespread economic health — employment — remains the missing link toward a return to prosperity. The official number of unemployed Americans stands at about 12.2 million, although the unofficial number is considerably higher. An estimated two million people are on extended unemployment insurance, which begs the questions: what are the economic costs of the government’s jobless benefits program?

Unemployment: Three Types

First, let’s discuss unemployment, as not all unemployed people are created equally. Fundamentally, there are three different types of potential unemployment within an economy, enumerated as follows:

  • Frictional Unemployment: Workers voluntarily entering the labor force, either for the first time or when between jobs, must search before they find employment for which they are qualified.
  • Structural Unemployment: Unemployment that occurs when the job seeker’s skills are not in demand due to either geography or obsolescence.
  • Cyclical Unemployment: There is a surplus in the labor force due to a contraction in the business cycle.

As we all understand by now, the majority of the unemployed in the United States at this time would be placed in the latter category. Furthermore, the extraordinary measure to be discussed momentarily was passed to combat that burgeoning segment of the labor pool.

Unemployment Insurance: What is it?

Unemployment insurance began with the passage of the Social Security Act of 1935, and had two primary objectives:

  • Provide temporary and partial wage replacement to involuntarily unemployed people for a period of time
  • Help stabilize the economy during economic downturns.

Per Investopedia.com, the definition of unemployment insurance is “A source of income for workers who have lost their jobs through no fault of their own. Workers who quit or are fired are generally not eligible for unemployment insurance. Workers who are self-employed are also not eligible to receive unemployment insurance and must provide their own rainy-day funds to cover times when no work is available.” 

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