Leading With Lagging Indicators
That the unemployment rate "lags" in a recession is well-known. This means that when economic growth returns, most households - and particularly the unemployed - experience little or no relief in the short term. Though this is accepted as a rule of thumb, policymakers have done very little beyond ad hoc extensions of unemployment benefits to account for it.
One reason is an obsession with "technical recessions," denoted by two consecutive quarters of negative economic growth. Indeed, a commenter last week was incredulous when I wrote that most people don't care that the recession is likely over. "Just because you don't understand" how recessions work, he wrote "doesn't make it stupid or wrong." That's the same reasoning that says: GDP is likely to rise, so let's terminate stimulus spending.
But while economists see signs of economic recovery, the perils of the recession remain. The unemployment rate continues to rise and now stands at 9.7%, keeping Americans at risk of being thrown out of work as a result of the economic downturn. Perhaps worse, the unemployed are having a very difficult time finding work. According to the National Employment Law Project, 5 million Americans have been unemployed for six months or longer and half of the unemployed cannot find jobs within the first six months of receiving unemployment insurance benefits. There are fully 6 jobless workers for every job opening.
Recent extensions of the duration of unemployment insurance benefits have been necessary but insufficient. 400,000 unemployed workers will have exhausted their benefits by the end of September, a number that will increase to a devastating 1.3 million by the end of the year. Though the American Recovery and Reinvestment Act also included important benefits for the unemployed, such as increased unemployment benefits and a subsidy for health insurance, these provisions will expire over the next several months even as unemployment lags behind economic growth.
Moreover, the nature of unemployment during the current recession - longer bouts of unemployment - means that many households will continue to be at risk of running out of unemployment insurance which, according the San Francisco Federal Reserve, "will further offset the intended roles of [unemployment insurance] payments as an automatic stabilizer and means of low-income support." Even with extended unemployment benefits, long-term unemployment can lead to a loss of the skills and knowledge necessary to function in today's complex economy.
The House acted yesterday to mitigate some of the pain associated with long-term unemployment. The Unemployment Compensation Extension Act extends federal unemployment insurance by 13 weeks for workers who have exhausted their unemployment benefits. The 13-week extension, which builds on two previous expansions, applies only to the 27 states with unemployment rates of 8.5 percent or higher. Depending on state residency, a worker can currently obtain unemployment benefits for a maximum of 79 weeks.
The legislation would ease the financial pain associated with long-term unemployment for approximately 300,000 Americans. Unemployment benefits provide direct assistance to the current and aspiring middle-class Americans likely to be hardest hit during the economic downturn, people who want to work but have lost their means of support through no fault of their own. The legislation would ensure that the jobless in the worst-hit states - places like Michigan that has an unemployment rate of 15.2 percent - would avoid losing unemployment insurance at a time when finding a job is extremely difficult. Allowing unemployment benefits to expire for hundreds of thousands of families would also undermine the successes of the American Recovery and Reinvestment Act and slow recovery.
No matter when the technical recession ends, the downturn will continue for American families until unemployment stabilizes at a much lower level and job creation resumes. At the very least, Congress should extend the more generous benefits provided in the stimulus package until the unemployment rate has significantly declined. But policymakers must also reconsider how the social safety net can be adapted to the needs of workers during - and between - future recessions.