As the chorus for providing an economic stimulus grows louder, several plans are recommending an extension of basic Unemployment Insurance (UI) benefits beyond the current six months of coverage. There are good reasons for these plans. Most importantly, they are targeted toward people who are actually hurt by an economic slowdown--those who are involuntarily unemployed. The benefits are politically attractive because they only go to people with work histories and who continue to try to find employment. The benefits are somewhat calibrated with the magnitude of any slowdown; more benefits would be paid (there would be a stronger stimulus) the greater the extent of unemployment. Finally, they are skewed toward low-income households, so the money is likely to be spent rather than saved, again providing for a larger stimulus.
More generous or extended UI benefits, however, also have a serious drawback, which is that they reduce people's incentives to quickly find work. The benefits allow unemployed people to be choosier in accepting their next job, leading to longer unemployment spells and a slower overall recovery.
Given that unemployment appears to be headed up and that jobless spells are likely to grow longer, extending UI benefits to either nine months or a year seems both compassionate and reasonable. However, policymakers should consider an additional change to the UI system to mitigate the employment disincentives and that is to offer re-employment bonuses.
The way that a re-employment bonus would work is that a job seeker would receive a bonus payment if she accepted a job before her UI eligibility ran out and if she held that job for some period of time (that is, stayed off the UI rolls). The bonuses could be structured like exploding job offers in high-powered law and finance firms so that the amount of the bonus declined with the period of unemployment. For instance, the bonus could be half the value of someone's remaining and unused UI benefits. All or part of the bonus payment would be withheld until after the worker had worked a certain period.
The logic behind the re-employment bonuses is straightforward: they provide incentives to go back to work instead of staying out of work and provide those incentives earlier in an unemployment spell rather than later.
There is good evidence that re-employment bonuses not only shorten unemployment spells but also save the government money. With funding from the U.S. Department of Labor, the state of Washington experimented with (randomly assigned) different re-employment bonus amounts for unemployed workers there in 1988. An analysis of the Washington experiment found that it reduced both the length of unemployment spells and the overall amount of compensation. Bonus experiments conducted in Pennsylvania and Illinois also showed that unemployment spells could be trimmed.
Given the many existing strains on the federal budget, the stimulus package should be as effective as possible. Creating cost-effective incentives for out-of-work people to get back on their feet as quickly as possible should be an element in the current proposals.