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The Economic Case for Extending Unemployment Insurance

NEC Director Lawrence Summers explains why extending unemployment insurance for those struggling to find work is not just a moral issue, but an economic one.

The lapse in extended unemployment insurance benefits at the end of May has resulted in 2.5 million jobless Americans exhausting their assistance.  If we do not reinstate benefits by the end of the month, this number will grow to 3.2 million.  These losses are exacting an enormous human toll on families who count on these benefits as they continue to search for jobs.

As the President recently remarked:  “Lasting unemployment takes a toll on families, takes a toll on marriages, takes a toll on children.  It saps the vitality of communities, especially in places that have seen factories and other anchoring businesses shut their doors.  And being unable to find work – being able to provide for your family – that doesn’t just affect your economic security, that affects your heart and your soul.  It beats you up.  It’s hard.”

It is also bad for the economy.  But unemployment insurance puts money in the pockets of the families most likely to spend the money – which in turn expands the economy and creates jobs.  The nonpartisan Congressional Budget Office has identified increased aid to the unemployed as one of the two most cost-effective policy options for increasing economic production and employment.

Missed unemployment insurance payments since May total over $10 billion – enough to have created 100,000 jobs. An abrupt and premature withdrawal of relief is not only something families cannot afford, it is something that the economy cannot afford at a time when the economy is at a critical juncture.  The economy is finally creating jobs, but not nearly fast enough to close the 8 million-job gap opened by the recession.

Some opponents of providing relief to unemployed families have been making the fallacious claim that unemployment benefits are a cause of the unemployment we are face today.  Some of them have even taken an article I wrote two decades ago, under different economic circumstances, and used excerpts out of context to suggest that I share their view.

This is a misreading both of my research and of the economic situation today.

In an economy that is as demand constrained as ours, whatever small changes in search intensity may be associated with unemployment insurance are not the reason for the persistence of joblessness.  With five unemployed Americans seeking work for every job opening available, there can be little doubt that the overwhelming cause of unemployment is not a lack of will among the jobless to find work, but a lack of work opportunities. 

Opposing extending unemployment benefits will do nothing to put people back to work.  It will not result in an increased number of job openings to apply for.  And it will not result in a higher level of employment.  What it will do is create a more difficult situation for thousands of families hit hardest by the economic crisis and cut off a powerful channel for spurring economic growth. 

That is why President Obama will continue to press Congress to extend unemployment benefits and pass commonsense measures to strengthen our economic recovery – like extending unemployment insurance and COBRA, supporting our clean energy economy, providing aid to state and local governments, and saving the jobs of thousands of teachers.

Lawrence H. Summers is Director of the National Economic Council