Living Economics

Jobless Safety Net
Jobless benefits cushion the fall of disposable income during economic recessions.

If you (an American worker) lose your job through no fault of your own, you may be entitled to jobless benefits. Part-time and low-wage workers are usually excluded because they don’t earn enough to be eligible. Even if you are eligible, the average weekly benefits of just under $300 are less than half the average private-sector wage. And the benefits run out after 6 months (Economist 12/30/2008).

Since the non-farm payrolls of major post-WWII US economic recessions did not recover to pre-recession level until at least 20 months after the onset of the recessions, such meager short-duration benefits do not provide much of a safety net (WSJ 4/8/2010).

In Denmark, laid-off workers can collect up to 90% of their income for six months. But the much higher benefits are funded by top marginal income tax rate of 60%. Such rich benefits may dampen the urgency to find work as well as worker productivity (Forbes 3/12/2010).

Instead of fundamental reform, the US Congress has chosen to extend the benefits on an ad hoc basis. In the 2007 recession, for example, the 6-month state-funded jobless benefits were twice extended under the federally-funded Emergency Unemployment Compensation program providing up to 53 weeks of jobless benefits each time (Huffingtonpost.com 4/5/2009).

There may be a deep-seated philosophical reason for not setting higher benefits and longer eligibility. Specifically, low benefits and short eligibility are supposed to encourage more job-seeking urgency.

There may be humanitarian reasons for the jobless safety net, but there are also sound economic reasons for doing so. Specifically, jobless benefits provide an automatic stabilizer to falling income thus cushioning consumption expenditures. The contributions into the unemployment insurance funds during good times are dispensed for jobless benefits during bad times.

Unemployment benefits are but one of the automatic income stabilizers. Progressive income tax is also another significant stabilizer. As income falls during recessions, more workers will fall out of the higher income brackets where the marginal income tax rates are higher. In other words, taxes fall faster than after-tax income. For example, income tax revenue fell by an annualized 27% from the first quarter of 2008 to the third quarter of 2009 when income fell by only 3.6% (WSJ 12/23/2009)..

Other welfare programs such as food stamps and income tax credits also cushion the fall of after-tax income. The bottom line is much higher public budget deficits even without additional economic stimuli which must be separately legislated.

References:
  • Economist. "A safety net in need of repair." 1/3/2009.
  • Forbes. "Copenhagen capitalism." 3/12/2007.
  • Huffingtonpost.com. "More than 200,000 could lose unemployment benefits this week." 4/5/2010.
  • WSJ. "A big, bad…'great' recession?" 4/8/2010.
  • WSJ. "Consumers need more than just Uncle Sam." 12/23/2009.
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