In Europe, a Longer Perspective on Unemployment Benefits

Copyright, The New York Times Company
While Americans discuss the duration of unemployment benefits in terms of weeks, Europeans discuss them in terms of months and, sometimes, years. A few countries even pay unemployment benefits indefinitely, in some circumstances.

Unemployment insurance offers funds, for a limited eligibility period (in the United States, now up to 99 weeks) to “covered” people who lost their jobs and have not yet been unable to find and start a new job. In last week’s post, I showed that the United States, for at least 50 years, has never offered unemployment benefits for so long as it does now.

For the 50 years prior to December 2008, the maximum unemployment benefit period was 72 weeks during the 1992 recession. In the severe 1981-82 recession, the benefit period was much less, 55 weeks. This historical perspective may indicate that 99 weeks is long enough, or maybe even too long.

However, international comparisons tell the opposite story. The chart from 2009 Congressional testimony by Gary Burtless below compares the maximum duration of unemployment insurance benefits in 21 nations of the Organization for Economic Cooperation and Development, as of 2005, measured in months. The United States had the shortest duration of the 21 countries, six months. By 2009, when Mr. Burtless testified, the United States had increased its benefit period and would increase it still after that; he did not have 2009 data on the other countries.

Organization for Economic Cooperation and Development, “Benefits and Wages,” 2007.

Even in 2005, before the world financial crisis, many countries had unemployment benefits that lasted 18 months or more. Three countries offered benefits indefinitely, in some situations. By European standards, our 99 weeks appears too short.

Part of the reason that countries can disagree so much on the benefit period is that long periods have both costs and benefits. A longer benefit period makes it more difficult to get people back to work, because they are getting paid for not working. But for the relatively small fraction of people who cannot find a job even after looking for several years, the government benefits help cushion lives that can be very difficult.

Moreover, the aggregate consequences of a long benefit period may not be all that large, because a only small fraction of people are unemployed long enough for it to matter whether the benefit period is 99 weeks or 199 weeks. At the end of 2010, for example, when unemployment in the United States was quite high, only about 2 percent of the unemployed had been unemployed more than 25 months, let alone 50 months.

For the same reason, it makes a lot bigger difference if benefits last 12 months rather than six, because about half of the unemployed have been unemployed more than six months.

We know that long-lasting unemployment benefits have the cost of less employment and the benefit of more safety. But we still don’t know the optimal mix of the two.