Title: The Costs and Consequences of Unemployment Benefits on the States | Mercatus Center
Headings: The Costs and Consequences of Unemployment Benefits on the States
The Costs and Consequences of Unemployment Benefits on the States
UNEMPLOYMENT BENEFITS
CONSEQUENCES OF UNEMPLOYMENT BENEFITS ON WORKERS
THE IMPACT OF UNEMPLOYMENT INSURANCE ON EMPLOYERS AND STATE FISCAL POLICY
POLICY RECOMMENDATION: UNEMPLOYMENT INSURANCE SAVINGS ACCOUNTS
CONCLUSION
ENDNOTES

Content: During periods of low unemployment, payments into the fund are high relative to benefits paid out, and the trust fund grows. During periods of high unemployment, payments into the fund fall, payouts increase, and the trust fund is depleted. When states exhaust their unemployment trust funds, states may borrow to continue paying benefits. The federal government may also offer aid to workers in states with high unemployment through Emergency Unemployment Compensation (EUC). The federal government has extended EUC four times since February 2009, amounting to an additional 86 weeks of unemployment insurance for states (see Table 1). CONSEQUENCES OF UNEMPLOYMENT BENEFITS ON WORKERS
In a troubled economy, unemployment benefits provide individuals with some income security as they look for work. However, unemployment benefits also change the incentives facing the unemployed, lengthening the job search. By easing the pressure of finding employment, the system benefits the unemployed at the expense of overall productivity and long-run economic growth. Social welfare programs may also change workers' mentalities, leading workers to become less driven and unhappier as their dependence on the state increases. 4 Optimal design of unemployment insurance must consider how the payoff and duration of benefits relative to the worker's previous income affect the individual's incentive to seek employment.