According to one study, immediately initiating benefits at the onset of a recession would minimize uncertainty for employees.
Many individuals rely on unemployment insurance
when their jobs are lost. And when things become truly bad in the United States — during recessions and the Covid-19 outbreak — Congress has extended unemployment benefits for millions of employees.
Is there, however, a better way to organize the time of unemployment benefits? For some employees, benefits arrive too late after an economic slump to avoid family financial problems; for others, insurance payments are required just as Congress debates what will finally become benefit extensions. To prevent ad hoc policymaking, the federal government may theoretically use objective “triggers,” such as major increases in the unemployment rate, to automatically prolong unemployment benefits when a recession occurs.
A new research co-directed by an MIT economist explores the consequences of automated unemployment insurance policy using comprehensive modelling. According to the findings, unemployment insurance based on such triggers would not cost more – or less – than the packages finally adopted by Congress. However, in times of economic crisis, an automated system would give employees with greater certainty.
“There is a cost to the way Congress handles it, which is that individuals suffer uncertainty,” says Jonathan Gruber, an economics professor at MIT and co-author of a new article revealing the study’s findings. “Right present, Congress chooses to prolong benefits at the last minute or waits until a week or two after they expire.” People pay a high price for uncertainty.”
“The virtue of automatic triggers is that you remove ambiguity, and it wouldn’t really cost much more than the present system since Congress extends benefits anyhow,” Gruber notes.
The study, “Should We Have Automatic Triggers for Unemployment Benefit Duration and How Expensive Would They Be?” appeared in the American Economic Association’s annual magazine, AEA: Papers and Proceedings. Gabriel Chodorow-Reich, a Harvard University professor of economics, Peter Ganong, an assistant professor at the University of Chicago’s Harris School of Public Policy, and Jonathan Gruber, the Ford Professor of Economics at MIT, are the co-authors.
Unemployment insurance typically lasts 26 weeks; in principle, governments would extend payments beyond if unemployment surpasses specified levels. Congress has extended unemployment insurance nationwide five times in the past 40 years, with states administering the benefits.
To perform the study, the researchers created a model, dubbed the UI Policy Simulator, that examined the period from 1996 to 2019 by state. The researchers utilized Bureau of Labor Statistics data to mimic each state’s labour market and estimate the results of various kinds of unemployment insurance programmes.
For example, one set of simulations used what academics term a “Sahm trigger” (named after economist Claudia Sahm) to boost benefits following a rise in the
Unemployment was 0.5 percentage point more than the previous year’s minimum three-month average. Another “layered” set of simulations increased insurance coverage by 13 weeks when unemployment reached 5.5 percent in a state, 26 weeks when unemployment reached 6.5 percent, 39 weeks when unemployment reached 7.5 percent, and 52 weeks when unemployment reached 8.5 percent. Another set of simulations compared “hard” vs “soft” landings in terms of how long benefits would be extended once the unemployment rate fell below the triggering level.
Overall, the scale of the benefits (and hence expenditures) predicted by the model was quite similar to the size of the packages enacted by Congress in the aftermath of the 2001 and 2007-09 recessions. In principle, cost is not a major concern.
One quirk revealed by the modelling is that such a system might take root in labour markets that haven’t deteriorated as severely, which means that an extension of benefits may be triggered in a state that then rapidly falls back below the threshold unemployment rate.
“There’s a cost,” Gruber admits. “You may get folks benefits a month early with a lower triggering threshold.” On the other side, you risk having ‘false positives,’ where you give people benefits when you believe the economy would tank and it doesn’t.”
Another issue to consider is that “previous conduct is no guarantee of future legislative performance,” as the authors write in the article. Codifying an automated unemployment insurance system might help shield employees against a future deadlock in Congress on the subject.
Could such a proposal possibly become law? Gruber believes that changing the way the Congressional Budget Office (CBO) assesses policies is necessary (that is, evaluates its cost). The CBO is now compelled to compare the cost to having no built-in improved unemployment insurance coverage at all — despite the fact that Congress has frequently constructed such programmes in times of need. This method makes an automated policy seem to be a new government cost, making lawmakers less inclined to support it.
“In some ways, the way our congressional scoring works is why we never have automatic triggers,” Gruber adds. “If Congress is going to do it anyhow, it has a zero cost from today’s standpoint,” he notes. “I don’t want to [be critical of the CBO,” Gruber adds. They’re only carrying out their mission.”
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After unemployment spiked in the spring of 2020, the length and quantity of these benefits became a major problem during the first 18 months of the Covid-19 epidemic. In the recent year, unemployment in the United States has fallen to levels not seen in decades. However, at some point in the future, unemployment will undoubtedly become a larger worry, indicating to Gruber that any time would be a suitable moment to contemplate this kind of legislation.
“Hopefully, we won’t forget about it, and we’ll be able to repair the system as soon as possible,” Gruber adds.
“This is truly what I believe we can accomplish in economics that is so beneficial for the world,” he continues, “using the modelling tools we have to talk directly to policymakers about the things they care about.”
The study was funded in part by the University of Chicago’s Becker Friedman Institute, the Harvard Ferrante Fund, and the Alfred P. Sloan Foundation.
