Unemployment rates in the U.S. in the recent past had been unprecedented in the country’s history. During the period from 1948 to 2010, unemployment rate averaged at 5.7 % except for a historical high of 10.8 % in November 1982 and a historical low of 2.5 % in May 1953. And in October 2011, it was 9 %. (United Sates Unemployment Rate).
In November 2011, unemployment rate fell to a 2/12 year low. It has dropped to 8.6 % in November 2011 from 9 % prevailing since 2009. There were nonfarm payrolls which increased by 120,000 jobs. With this trend, the U.S. economy shows signs of recovery sustainability of which depends on the economy’s ability to create additional jobs (Mutikani).
By this, the number of unemployed people placed at 13.3 million, was reduced by 594,000 in November 2011 (UnitedStatesDepartmentofLabor). In the last labor market downturn, unemployment duration remained higher than the previous levels. The extended duration is one of the indicators of severe economic crisis in the country due to recession. Consequently, duration of unemployment insurance benefits also extended up to 99 weeks as against the normal duration of six months.
In fact, the 99 weeks of unemployment insurance benefits were facilitated by Congressional legislation that encouraged people to remain artificially unemployed. This would show that long unemployment spells might have been false, though historically unemployment duration tends to rise during recession. There are two explanations offered for this scenario (Kuang and Valetta).
Extended unemployment insurance benefits may reduce the incentive to search for jobs by the unemployed people. It is quite likely to be true because “it reduces the net gains from finding a job” (Chetty) besides serving as a cushion for households to maintain reasonable levels of consumption during unemployment shocks (Chetty).
The above said hypothesis of artificially inflated levels of unemployment rates is another explanation. This phenomenon is not new as the economists have always confirmed the correlation between “availability and the value of Unemployment Insurance (UI) benefits” and “unemployment spells.” (Kuang and Valetta).
Chetty (2008) has found that 10 % increase in the UI benefits have resulted in the increase of unemployment duration by 4.8%. Other studies that focus on the duration rather than monetary benefits, have found lesser levels of duration than the above (Card and Phillip).
These findings show some uncertainty of estimates of the impact of the unemployment duration. Further, the empirical study undertaken by Kuang and Valetta, has concluded that among the several unemployment determinants, UI benefits contribute to a smaller percentage of 0.4 out of 6 % increase in the unemployment rate during the recent past.
However, it should be noted that the percentage of 0.4 represents a population of 600,000 unemployable workers if they were to continue to receive UI benefits “indefinitely”. Though the same generous UI benefits are prevailing in the European countries with the resultant increased unemployed levels, Kuang and Valetta (2010) concludes that a permanent level of unemployment increase is not likely to continue indefinitely, given the past experience of the U.S. economic recoveries.
Recent study by the Federal Reserve Bank of Chicago in July 2011on the impact of UI benefits on unemployment levels, found that if the UI benefits had continued indefinitely, “unemployment rate would have been cumulatively about 0.1 to 0.3 percentage points higher between October 2009 and January 2011, which represents about 10 % to 25 % of the decline in the actual rate over that period” (Hu and Schechter 1).
Card, David and B Levine Phillip. “Extended Benefits and the Duration of UI Spells: Evidence from the New Jersey Extended Benefit Program.” Journal of Public Economics (2000): (78) 107-138 in Kuang, Katherine; Valetta, Rob,”Extended Unemployment and UI benefits ” Economic Research, Federal Reserve Bank of San Francisco, FRBSF Economic Economic Letter,( 2010) .Web. 3 Dec 2011
Chetty, Raj. “Moral Hazard versus Liquidity and Optimal Unemployment Insurance.” Journal of Political Economy (2008):116(2) 173-234 in Kuang, Katherine; Valetta, Rob,”Extended Unemployment and UI benefits”, Economic Research, Federal Resreve Bank of San Francisco, FRBSF Economic Economic Letter, (2010) Web. 3 Dec 2011
Hu, Luojia and Shani Schechter. “How much of the decline in unemployment is due to the exhaustion of unemployment benefits?” Chicago Fed Letter, Essays on Issues, The Federal Reserve Bank of Chicago (2011).288 Web 3 Dec 2011
Kuang, Katherine and Valetta, Rob. “Extended Unemployment and UI benefits, Economic Research, Federal Resreve Bank of San Francisco.” FRBSF Economic Economic Letter (2010).Web.3 Dec 2011
Mutikani, Lucia. “U.S. jobless rate drops to 2 1/2 year low.” Reuters (2011): Web. 3 Dec 2011
“United Sates Unemployment Rate .” Trading Economics (2011): http://www.tradingeconomics.com/united-states/unemployment-rate..Web.3 Dec 2011
UnitedStatesDepartmentofLabor. “Economic News Release Employment Situation Summary.” Bureau of Labor Statistics (2011): Web. 3 Dec 2011