Note: This commentary first appeared in The Patriot-News.
In college, several friends of mine studied seemingly incompatible subjects: Computer Science and Music Performance, Biology and Theater Arts, Management and Philosophy to name a few. I believed at the time that my own career choice made far more sense. Only later did I fully grasp the constant clash between Politics and Economics.
In the policy debate, political expediency and economic reality often collide, to damaging results. Politics demand that whenever we face a crisis, lawmakers need to “do something” to address the problem. Economics teaches that there are always tradeoffs, and every well-intended policy will have unintended consequences.
Unfortunately, it’s policies intended to help the needy that often backfire and cause harm to those least able to bear it. A key example lies in the debate over extended federal unemployment compensation benefits.
Our nation’s economy has just gone through worst five year period since the Great Depression. Our recovery from recession has already been the longest in the post-war era, and it remains the slowest job recovery in the past 50 years.
Those suggesting the federal government continue its temporary extension of unemployment benefits point to our stagnant economy and high unemployment as justification. But, in truth, these results have been caused by poorly designed government policy, including excessive unemployment benefits.
Economists—those on the right as well as Obama appointees—largely agree that extended unemployment benefits result in a higher unemployment rate and prolonged periods of unemployment. Even advocates of extending the federal benefit acknowledge this side effect. One study finds that each week of extended benefits increases recipients’ duration of unemployment by up to 1.4 days. In other words, if the federal government guarantees 50 weeks of additional benefits, the average person on unemployment will spend an extra 10 weeks—more than two months—looking for work.
Here’s how unemployment benefits work. The program was established as a state-administered insurance program, offering workers temporary benefits after a job loss to smooth the transition into a new position. It was limited to 26 weeks and was never intended as a long-term welfare program.
Starting in 2008, though, the federal government provided extended benefits further, at one point reaching up to 99 weeks—or nearly two years. But, while providing an income for those struggling to find a job, this spending also encouraged unemployment and hurt many of those workers it was meant to help.
Most of the unemployed are eager for work, and very few game the system. But given a choice between taking a new job at a lower salary and collecting unemployment benefits while holding out for a better deal, many opted—rationally—for the latter. But this can have harmful long-term consequences.
Employers are reluctant to hire anyone who hasn’t been working for more than six months—much less for nearly two years. Encouraging workers to hold out for extended periods of time until they find just the right job actually makes them less desirable in the marketplace.
So, what will happen if Congress lets unemployment benefits return to normal? Let’s look at September 2012—the last time the length of federal extended benefits declined. In that month, the unemployment rate fell by 0.3 percent, equaling the second largest monthly decline in a decade. The labor force participation rate also rose that month, bucking long-term trends.
Media coverage labeled this a “surprise decline”—but it shouldn’t have been. In reality, reducing unemployment benefits encouraged those biding their time to take the best job they could find. The result? More people returned to work and got back on a career path.
If politicians truly want to help the unemployed, the solution isn’t to give them cash taken from those working—nor is this really what the unemployed want. Rather, lawmakers should adopt policies that encourage job growth and put people back to work.
But those policies should—and have—come from state leaders who learn from the best practices of their peers, not from Washington. Unemployment compensation reform is a place to start. Reforms signed last year that will help Pennsylvania lower its business taxes are another step that promotes hiring and reduces the strain on the unemployment benefit system.
Reducing our overall tax burden will also make Pennsylvania more competitive—as seen by the dramatically higher job growth and income growth in low-tax states. Right-to-work laws, now in place in 24 states, also result in faster economic growth, as well as lower unemployment rates and greater standards of living.
Ultimately, unemployed workers need opportunities, not handouts. By adopting policies that unleash job creators and get rid of government obstacles, we can call a truce in the war between politics and economics and return Pennsylvania—and America—to prosperity.
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Nathan A. Benefield is director of policy analysis at the Commonwealth Foundation (CommonwealthFoundation.org), Pennsylvania’s free market think tank.