Do generous unemployment benefits prolong the length of unemployment?
The latest news is that unemployment benefits will be extended from 59 weeks to 79 weeks in California with the help of the new Federal stimulus money. The maximum benefit has risen to $475 a week and it means that some of the unemployed Californians could collect over $2000 a month for more than one and half years. This makes me wonder if people will now stay unemployed longer because they have more benefits for a longer period of time. After all, more "free" money would make a person less motivated to find a job, right?
Here is some anecdotal evidence that more unemployment benefits actually makes people less inclined to work. There are a couple of my friends who actually want to be laid off just so they can collect the unemployment. They all qualify for the maximum benefit and they do not particularly like their jobs. They actually do not mind getting a "vacation" while living on unemployment because they are young and single and their expenses are low due to shared living conditions with their parents or friends. There are a couple others who are already unemployed who think it is awesome because they do not really have to do much to collect the money. At least one of them plans to use the break to prepare for graduate school, and that seems fairly productive. If you think about it, $475 a week is nearly $12 an hour if you consider each week as 40 work hours. $12 an hour is much better than minimum wage, and they do not have to put in much effort to get this money.
Then I did a bit of research and it seems that I am not the first person to question the effects of generous long term unemployment benefits. There has been many studies done on the amount of unemployment insurance in relation to how long people stayed unemployed, and most of them do find that more unemployment benefits do steer people to stay out of work for a longer duration. This is not really surprising because if the unemployment benefits cover someone's expenses then they would not be in a hurry to find another job.
I talked about this to another friend for a bit and he said that in a way unemployment benefits is efficient in that it allows skilled workers to take their time to find a job that suits them, and not just settle for a minimum wage job out of desperation. This is actually the same argument by an economist named Raj Chetty. Basically, he argues that there is nothing to celebrate when people have to work at unsuitable jobs. I believe there is definitely merit to this argument because if you are an unemployed engineer you would probably be very unhappy to be working at a fast food joint out of desperation. Also, the engineer would be taking the job of someone whose skillsets are more suited for fast food, and that would make the other person unemployed.
The bottom line is that I believe that unemployment benefits is definitely useful in our economy because it keeps many people in their homes and away from crime in times of need, but there needs to be a reasonable cut off to how much benefits are given. I personally think 79 weeks of benefits is just a bit too long, and sometimes people just have to put the "perfect job" on hold for a bit in order to survive. However, activities like preparing for graduate school or starting ones own company during unemployment may turn out to quite productive. What do you think? Is 79 weeks of benefits way too long? Do you think more unemployment benefits will be a boost or detriment to this economy? Have you felt less motivated to find a job when you receive extremely generous unemployment benefits?
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