Why Cutting Unemployment Benefits Wouldn’t Help Anyone

Source: Justin Sullivan/Getty Images

Source: Justin Sullivan/Getty Images

As the financial crisis struck in 2008 and 2009, the United States, along with much of the developed world, faced economic hardships unlike anything that had been seen in generations. Pensions and savings were lost, jobs disappeared overnight, and there was little anybody could do about it. As a result, belt-tightening measures of all kinds were deployed by businesses, families, and government bodies across the country, in many ways only exacerbating the problem. After all, how can an economy be healthy when nobody is spending any money? And how can anyone spend money when they don’t have a job? And finally, how can any business hire employees when they don’t have customers spending any money?

The whole situation was akin to a snake eating its own tail — each problem cascaded into the next, which ultimately kept the cycle going.

It’s exactly for situations such as these that we have in place a series of social safety nets. Programs that provide relief and aid to those in financial strife are deployed in different combinations depending on what state you live in, but usually are offered in a some sort of blend from state and federal governments. These can include SNAP benefits and housing assistance, and, most importantly for people who lost their jobs as a result of the wrecked economy, unemployment benefits.

Unemployment benefits became a hot topic in the years following the financial crisis, as the recession tightened its coils around the throat of the American middle and lower classes. A great number of people suddenly found themselves without jobs — and with little hope of finding one in the near future. As a result, unemployment numbers swelled, placing great strain on the system. This led to many states attempting to cut jobless benefit programs, in efforts to keep them solvent and save taxpayers money.

Well, according to new research from the Economic Policy Institute, those cuts were found to not actually have any positive impact for anyone, neither workers or taxpayers.

As the EPI puts it in their findings, “most state unemployment insurance fund accounts became insolvent in the wake of the Great Recession because states did not adequately fund them in the early to mid-2000s recovery. States that responded to the insolvency by cutting the duration of unemployment benefits did not save significant amounts of money or boost employment.”

Finally, it appears that states that did actually make cuts to their unemployment programs may have had ulterior motives to do so.

“The benefit-cutting states did share some things in common: an overall lack of support for social programs that predates the Great Recession, and fiscal policies that feature low per capita state spending and tax collection. In short, states that decided to cut the available duration of jobless benefits appear to have made a political decision more than a fiscal one.”

Source: John Moore/Getty Images

Source: John Moore/Getty Images

Most people would not be shocked to learn that cuts to unemployment benefits had some sort of political motivation, rather than fiscal, but having empirical evidence that supports that conclusion will be important the next time the economy tanks. The research the Economic Policy Institute conducted not only found that to be true, but several other interesting caveats in the data.

For example, it was found that the problem mostly stems from actions taken well before the crisis even hit. Most states did not adequately fund their programs during the time between recessions, from late 2001 and early 2002 until late 2008. This was the main factor that drove many state’s accounts into insolvency once the programs were tapped by newly-unemployed masses during the recession. Only fifteen states were able to get through the crisis with their unemployment benefit programs still solvent.

Of the 35 remaining states that did run into problems keeping their benefit programs afloat, a mere eight of them took the steps to actually reduce the duration of extended benefits offered to those in need. The findings show that the factor those eight states had in common was not that they were particularly worse-off than the others states facing similar issues, but that they simply all have a history of not supporting social safety net programs, meant to provide relief to those in need.

In fact, the duration-cutting measures barely saved those states much money at all, while taking a lot from the unemployed who desperately needed the money. How much are we talking about in terms of dollars and cents? How about a trade-off of roughly $250 to a handful of change?

“The savings per covered worker in the six of these eight states for which data are available ranged from $0.06 to $0.69 per week. In short, unemployed workers lost an average $252 per week of curtailed benefits just so states could save roughly 37 cents per covered worker per week”, the findings said.

Another interesting finding was that extending unemployment benefits to those in need did not necessarily create an incentive for the jobless to stop looking for work. This is a common talking point, particularly in right wing and conservative circles, meant to garner support for cutting benefits to those in need.

“There is little evidence that extending unemployment aid provides a disincentive to work that is large enough to materially change the trajectory of key labor market aggregates,” the EPI concluded.

“Our review finds that the cause of the persistent problem of a depressed number of workforce participants relative to the overall population is that employers’ demand for workers remains weak, not that workers have effectively chosen to stay unemployed to get benefits.”

As it’s easy to see, there looks to be plenty of political motivation behind the duration cuts which provided very little in terms of taxpayer savings.

Unemployment cuts

The chart above shows the characteristics of the eight states that took measures to cut unemployment benefit durations for their citizens, and it’s easy to come to a few conclusions. First off, there is a mix of political alignment among the governorship and controlling party in the state legislators, but it tends to lean towards the Republican side altogether. Also, all of these states are either in the south or the Midwest, areas that are typically more conservative than others. Finally, with the exception of Illinois, most states rank fairly low in the amount of state and local tax revenue they collect, possibly providing some insight into how their programs went insolvent during the crisis.

Now, conservative states in the south and Midwest tend to take fiscal responsibility very seriously. Most of the eight states above, however, do take in far more in tax revenue from the Federal government than they put in. Once again, Illinois being the exception.

One more area of concern is within the demographics of those who were on the receiving-end of state duration cuts to UI benefits. It was found that African Americans were disproportionately effected by program cuts, and that it may not be limited to only unemployment.

“Gais, Dadayan, and Bae  have identified a strong correlation between a state’s spending on safety-net programs and the share of its population that is African American, even after controlling for a range of other influences,” the EPI notes, citing a 2009 study released by The Nelson A. Rockefeller Institute of Government. “Cuts to UI benefit duration in these eight states were disproportionately borne by African American workers, who make up a larger share of the labor force in each of the eight states that cut the duration of jobless benefits than they do in the labor force of the other 42 states collectively. African Americans are also largely overrepresented among the long-term unemployed.”

It’s easy to draw conclusions for what exactly these figures indicate, but the fact remains that the cuts levied by the eight states that decided to take that path appear to be politically motivated more than anything.

Savings from unemployment Cuts

When someone usually loses their job, they are typically provided with unemployment benefits for up to twenty-six weeks. After that, extended benefits kick in, providing an additional thirteen weeks of coverage, at the very least. But through the last recession, the country’s economic standing was so bad that emergency programs were put into place. At the time of the expiration of those emergency extensions in December of 2013, unemployment sat at 6.7 percent, with average long-term unemployment at 2.5 percent, according to the EPI‘s calculations.

Since then, especially over the past six months, the picture has brightened considerably. Unemployment figures have dropped to pre-recession levels, and the stock market has rebounded dramatically, hitting record numbers. But the fact is, when the numbers are finally crunched and we are able to take a look back at cost-saving measures different states took when facing insolvent unemployment benefit accounts, cutting the duration of people’s benefits did not help.

As the EPI found, it didn’t help workers, it didn’t help taxpayers, it didn’t incentivize people to find work faster, and it certainly didn’t help those who needed that funding the most. Like anything else, there are costs and benefits to social safety nets, including unemployment benefit programs. Those who receive benefits are expenses on the system, and by cutting those benefits, taxpayers would benefit in terms of savings.

What can be concluded is that by slicing unemployment benefit duration, there was no discernible advantage in cost-savings as compared to states that did not reduce durations. Though taxpayer savings were marginal at best, the cuts didn’t do much to improve employment figures either, but creating incentives for the jobless to find employment.

The more likely scenario is that there simply weren’t jobs for them to find.

As far as the racial makeup of those who were burdened unfairly with the majority of duration cuts, the African American community ended up on the short end of the stick. This may be evidence of some sort of institutionalized racism, but also have political motivations behind it as well.

It seems that political motives were the reason the eight states made duration cuts when they did, and with little benefit. When the next recession hits, and it will at some point, empirical data like that presented by the EPI‘s study will be very valuable in determining how to handle cuts to social safety nets and unemployment benefits.

More from Business Cheat Sheet: