The U.S. unemployment insurance (UI) system has historically underperformed as a macroeconomic stabilizer. While UI, like other automatic stabilizers, is designed to automatically spur aggregate demand when private spending falls (in UI’s case by temporarily replacing some lost wages of jobless workers), the boost is weaker than it could be.
The UI system’s fuller potential was highlighted by the extraordinarily large but temporary UI expansions enacted by Congress during the COVID-19 pandemic, which made more workers eligible for benefits, raised benefit levels, and lengthened the duration of benefits. With these expansions, UI benefits as a share of wage and salary income provided an economic boost roughly four times as great during the pandemic as during any previous recession.
Weak automatic stabilizers mean that recessions last longer and inflict more damage than they need to—unless Congress and the president act nimbly and in concert to pass discretionary relief. Even then, the discretionary programs end earlier than they should. Consider for example the UI expansions enacted during the Great Recession that were turned off in 2014— well before a full recovery had taken hold. The less that American families have to rely on ad hoc relief offered only when there is political comity, the better it is for their economic security. As the pandemic UI programs showed, more forceful UI interventions are possible during recessions. If these expansions were set on autopilot, then future recessions would be shorter and less painful, and recoveries would come more quickly. Read more...
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