WASHINGTON — Is there any downside to extending federal jobless benefits, as Congress is about to do? The benefits are a crucial lifeline to the longtime unemployed. But they also can be a disincentive to looking for work and prolong joblessness, economists say, as lawmakers weigh shortening them.
If Congress does nothing, the current law that provides federal benefits to augment state assistance that last for only 26 weeks will expire at the end of this month. As a result, more than a million out-of-work Americans could lose their benefits in January, and a total of five million could lose them by year's end.
The Republican-led House has passed a bill that extends the coverage but gradually reduces the ceiling on federal and state benefits combined from 99 weeks to 59 weeks by mid-2012.
At the heart of the controversy is something economists and politicians have long debated. Conservatives argue that prolonging government assistance to the unemployed can discourage active job searching so long as it lasts, keeping jobless rates higher than they would be if aid were ended.
Supporters of a full new extension, including Obama and most congressional Democrats, argue that these are unusually dire times and that jobs are harder to find than after run-of-the-mill recessions. Therefore, additional aid is warranted and can contribute directly to economic growth, they say.
Mark Zandi, chief economist at Moody's Analytics, backs the full extension because "it is needed and necessary given the stress in the labor market."
"But this is not a slam-dunk positive," Zandi said. "There is something to the argument that the length of unemployment benefits creates disincentives to work." He said some studies found that benefit extensions have added as much as half a percentage point to the unemployment rate. That would suggest the most recent unemployment rate, for November, would be 8.1 percent rather than 8.6 percent. "Still, on net, the positives outweigh the negatives," Zandi said.
Douglas Holtz-Eakin, a former head of the Congressional Budget Office who was 2008 GOP presidential nominee John McCain's top economic adviser, said there are both benefits and costs to extending the benefits.
"It gives them some cash and allows them time to perhaps find a better match, a better job for them in the future." But Holtz-Eakin also said "there is unambiguous evidence that longer unemployment insurance extends spells of unemployment" and is especially hard on older workers whose skills diminish the longer they're out of work.
"You've got to figure where to draw the line. There's no magic number," said Holtz-Eakin, now president of the conservative American Action Forum. The House bill "is an attempt to do this," he said.
In the current extensions, the first one voted by Congress in early 2008, some 17.6 million Americans have collected federal benefits. How much varies from state to state, but the nationwide average is about $300 a week.
Republicans say they are willing to extend the benefits, but also want to cut back the coverage by 20 weeks.
They argue that even under the full extension sought by Obama, federal benefits tied to state-by-state levels of unemployment will likely expire in 20 states under the current formula as jobless rates decline. Even under Obama's plan, the cap would become 79 weeks instead of 99 weeks.
The House formula reducing the cap "reflects the more normal level typically available following recessions," said House Ways and Means Chairman Dave Camp, R-Mich.
But economists say there is no guarantee that unemployment rates won't rise once discouraged workers start looking for jobs again and are officially counted by the government as rejoining the ranks of unemployed.
The unemployment rate dropped to 8.6 percent last month after hovering at or above 9 percent for more than two years. But part of the decline came because many jobless workers became discouraged and stopped looking for work and left the work force.
The government's official count of unemployed workers is 14 million. But add to those what the government calls discouraged workers because they have quit looking for a job or are working only part-time because they can't find full-time jobs, and the unemployed and underemployed together total 25 million.
Democrats said the GOP legislation would hit states with the highest unemployment rates the hardest. They tried unsuccessfully to amend the bill to guarantee 99 weeks of maximum benefits without regard to jobless rates in individual states.
The Republicans' version passed the House on Tuesday on a largely partisan vote as part of a larger measure that also extends the Social Security payroll tax cut and includes an unrelated provision to force a presidential decision on a controversial Canada-U.S. oil pipeline. It's now before the Senate, where Democratic leaders have pronounced it dead.
Despite the standoff, renewing the federal jobless benefits seems likely before year's end since both sides favor some form of extension.
Here's how the existing program works.
States shoulder the initial costs of jobless benefits, for up to 26 weeks. Then a federal program takes over, under a law first passed in 2008, offering up to 53 weeks in four categories based in part on state-by-state unemployment rates, and a final 20 weeks of extended benefits in states with the highest or rising unemployment.
Thus, out of work Americans are eligible for up to a total of 99 weeks of combined state and federal benefits.
Labor Department and congressional studies show that there are 4.3 job seekers for every single job opening. Four out of 10 jobless have been without work for more than six months, and nearly one-third have been unemployed for at least one year.
According to a Democratic analysis, the Republican bill would reduce benefits by 40 weeks in 21 states plus the District of Columbia: Alabama, California, Connecticut, Florida, Georgia, Illinois, Idaho, Indiana, Kentucky, Michigan, Missouri, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, Tennessee, Texas and Washington.
All other states would lose between 14 and 34 weeks of federal benefits, the analysis said.
Labor economist Heidi Shierholz at the liberal Economic Policy Institute said that the maximum 99 weeks of benefits is still needed because "things are not really expected to get better next year."
She acknowledged there was some disincentive effect from prolonging unemployment benefits, but said it was slight. Continuing benefits to longer-term unemployed people makes economic sense, she said. "They are cash-strapped. So they have very little choice but to spend that money immediately. It just goes right into the economy."