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Behind the Jobless Benefits Debate #5: How Does Unemployment Insurance Affect the Economy?

This is the fifth of a series of posts that look behind the debate over continuing a federal program that provides emergency unemployment benefits and explain what’s at stake for jobless workers and the economy.

This week’s report from the Congressional Budget Office (CBO) details the importance of unemployment insurance in relieving hardship for unemployed workers and their families, as we discussed in the previous post in this series.  But the CBO report also reminds us that unemployment insurance helps preserve and create jobs in a weak economy.  Unemployment insurance “adds to overall demand and raises employment over what it otherwise would have been during periods of economic weakness,” CBO found.

A new report commissioned by the Department of Labor during the Bush Administration reinforces CBO’s conclusion.  It found that in the depths of the recession, federal emergency unemployment benefits — which will expire November 30 unless Congress renews them — boosted employment by about 750,000 jobs.  (Regular, state-funded unemployment benefits boosted employment by an additional 1 million jobs.)

CBO ranks assistance for unemployed workers as the most effective policy for generating economic growth and creating jobs among the 11 spending and tax measures it evaluated recently.  Mark Zandi, Chief Economist of Moody’s Analytics, estimates that each dollar of unemployment benefits generates about $1.60 in new economic activity in the first year.  Only an increase in food stamp benefits, which Zandi estimates generates roughly $1.70 of GDP for each dollar of cost, has greater bang for the buck.

The economy still needs a boost and, as Federal Reserve Chairman Ben Bernanke said in his speech today, “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.”  If Congress wants to respond seriously to Bernanke’s plea, it can start by renewing for another year the program providing emergency unemployment benefits.  That program has “great taste” and is “less filling”:  it spurs growth and create jobs in the short run but, because it is temporary, it doesn’t add to the budget deficit in the long run.

Other posts in the series: