Cutting Off Unemployment Benefits Could Worsen Deficit -

Real Time Economics - WSJ

Deficit concerns have been the major stumbling block to extending unemployment benefits, but cutting off older workers could make the long-term budget outlook worse.

Extending unemployment benefits isn’t free, of course, and has the potential to keep unemployed workers out of jobs for longer. But it could also be preventing a “lost generation,” economists say. That generation is the crop of 50-somethings who might have worked for another decade. Their outlook isn’t bright.

Once older workers are laid off they take the longest to find new jobs. For workers 65 and up, it takes a median of 45.1 weeks to find a new gig. For those 55 to 64, 38.7 weeks. It takes a slightly shorter 30.4 weeks for those who are 45 to 54-years old.

Unemployment checks have the added benefit of helping these people feel like they’re still a part of the labor force. When the checks run out, and with few glimmers of hope in their job searches, they’re more likely to drop out of the labor force and turn to a program like disability.

And unlike a relatively short-term fling with jobless benefits, their attachment to disability is more likely to be permanent.

“Current program incentives make it highly likely that marginally qualified applicants drawn into the program by the business cycle will provide a long-term burden for the disability rolls even if business conditions Improve and the severity of the person’s disabling condition(s) does not worsen,” according to a  1995 study by Kalman Rupp and David Stapleton.

Other studies have shown that for each percentage point increase in the unemployment rate, disability rolls increase anywhere from 2% to 7%. Some studies show that effect grows larger in the following two years.

Those increases, if they prove true again in this recession, could increase the strain on an already stressed disability system.

“I would worry about a generation basically going onto disability,” said Phillip Swagel, a former Bush Treasury official and a Georgetown University professor. But an alternative to help prevent that, instead of continuing jobless benefits, would be the put more money into retraining, he said.

“We have a strong community college system in this country,” Mr. Swagel said. “That’s probably the right place to look for how do we avoid writing off a generation.”

That might not feel like a feasible option, particularly for those in their mid-to-late 50s. “At some point it becomes not worth a two-year training program to work another year and a half,” said Jesse Rothstein, chief economist for the Labor Department.

Posted via email from Jim Nichols