By Kimberly Amadeo. US Economy Expert
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Unemployment benefits were created by the Social Security Act of 1935 to allow the millions who had lost jobs due to the Great Depression of 1929 to buy food, clothing and shelter. Today, anyone who was laid off (as opposed to fired or resigned) is eligible to receive unemployment benefits. The programs are administered by the state, and are funded through unemployment taxes .
The solution for unemployment is, obviously, to create new jobs. Unemployment benefits pay, on average, $292 a week.
Unemployment Benefits Were First Extended in 2009:
Federal unemployment benefits were initially extended 33 weeks as part of the March 2009 American Recovery and Reinvestment Act. President Obama extended benefits to help the 13.1 million people suffering from the (at that time) 8.5% unemployment rate. Until then, the unemployed could only receive 26 weeks of benefits.
In November 2009, as the unemployment rate climbed to 10%, unemployment benefits were extended for another 14 weeks with the Unemployment Compensation Extension Act of 2009. By that time, the economy had had 19 months of job losses. There were 15.2 million people unemployed, down just 400,000 from the all-time high of 15.6 million the previous month. Unemployment benefits were extended for an additional six weeks for those in states with unemployment rates at 8.5% or higher.
2010 Unemployment Benefits Extension:
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In July 2010, unemployment rates were stuck at 9.5%, and 14.6 million people were unemployed. Congress reluctantly passed the Emergency Unemployment Compensation Act. It allocated $34 billion in funds to extend benefits for up to 99 weeks.
However, in December Congress allowed the extended benefits to expire, directly impacting 800,000 unemployed workers who relied on the extension to tide them over. Why? Because Republicans said the extension added $30 billion to the budget deficit. They also refused to extend the Bush tax cuts for families making under $250,000 unless the cuts are also extended for higher income families. That would add $80 billion to the deficit over the next 2 years.
How the 99-Weeks Unemployment Benefits Extension Works:
Extensions of unemployment benefits are arranged according to four tiers. The first tier
gives 20 weeks of benefits, while Tier 2 allows another 14 weeks. Tier 3 applies to states where the unemployment rate is 6% or higher. The unemployed there get another 13 weeks. States where the unemployment rate is 8.5% or higher get Tier 4 benefits of 6 additional weeks.
2011 Benefits Extended Again:
In 2011, President Obama submitted America's Jobs Act to Congress, following an August Employment Report that showed exactly zero jobs were created. It seemed the economy was at a standstill, with the unemployment rate stuck at 9.1%. There were 13.97 million people unemployed. The Jobs Act allocated $64 billion to keep 99 week benefit extension, which was due to expire at the end of 2011.
Opposition to Extended Unemployment Benefits:
Despite the severity of the unemployment situation, there were legislators who opposed extending the benefits in July 2010. They were concerned about adding $34 billion to the (at that time) $13 trillion national debt. Representative Paul Ryan (R. WI) was particularly vocal, stating that "The American people are fed up with Washington's push to spend money we don't have, add to our crushing burden of debt, and evade accountability for the dismal results." Fortunately for the long-term unemployed. the benefits were extended. In September 2011, members of Congress were also opposed to continuing the extension of unemployment benefits for the same reason.
Pros and Cons of Benefits
The downside of unemployment benefits is that it can, like any other government spending. increase budget deficits. and add to the government debt. How can this hurt the economy? As debt approaches 100% of total output for the year, investors become worried that the government can't pay back its debt. Demand falls for U.S. Treasury bonds. which are used to finance government spending. This makes interest rates rise, increasing the cost of borrowing for everyone. That's because most loans peg their interest rates to the yield on Treasuries.
However, benefits have a similar, but even more direct, effect as lower interest rates. It gives the unemployed more money to spend, increasing demand. In fact, every $1 of unemployment benefits puts $1.47 into the economy.
Most government spending usually takes the form of jobs programs, where the government hires workers and businesses directly to build things or provide services. Benefits eliminate the middle man, sending money directly into the pockets of those who will spend them right away. For more, see Why Are Unemployment Benefits the Best Way to Boost the Economy?