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Does Cutting Unemployment Insurance Benefits Promote Job Growth?

Many of those arguing against extending unemployment insurance (UI) benefits claim that by shortening benefit duration we will give people more incentive to find jobs. This view is that we are effectively allowing people to avoid seriously looking for work by providing benefits for an extended period of time. If this were true, then it would be a good argument for not extending benefits.

The extent to which access to benefits is keeping people from finding jobs is actually an extensively researched topic. Insofar as this claim is true, we should expect that workers who are approaching the end of their benefit period end up taking jobs before or just after their benefit period expires. In fact, the research (Rothstein 2012 and Farber and Valletta 2013) finds that the overwhelming majority of people reaching the end of their benefit period simply leave the labor force.

The reason is that UI requires that people look for work in order to continue to receive benefits. After unsuccessfully looking for work for more than a year, many workers undoubtedly decide the effort is futile; therefore they stop looking.

Since a number of states have reduced their period of benefit duration during the downturn, we actually have a quick way of examining the extent to which the job creation story holds water. We can compare the job growth of states that have reduced benefits in the period before the duration was shortened with the period after it was shortened. For comparison, we looked at the rate of job growth for other states in the region that did not change benefit duration over the same period.

Table 1 shows the states where cuts in benefit duration have already gone into effect. While the shortening of benefit duration only applies to new applicants, if it has the effect of increasing incentives to work, it should be felt quickly. Workers who know that they have a shorter period to find employment before losing benefits are not likely to wait until the expiration of the benefit period before seriously looking for work. This means that any incentive effect should be visible in the data long before workers actually hit the end of the period of benefit duration.

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Dean Baker / January 09, 2014