In a 2011 study, the CBO found that increasing aid to the unemployed is among the policies that would have “the largest effects on output and employment per dollar of budgetary cost” CBO 2011. Since unemployment benefits tend to flow to people who need the dollars for necessary expenses, the literature suggests that increased spending from unemployment compensation happens very soon after the outlay of federal dollars. In contrast to many other job creation programs that involves longer lags between Federal spending and economic benefits, extensions to UI are “both timely and cost-effective in spurring … economic activity and employment” CBO 2011.
In addition to providing income insurance for families, unemployment compensation also helps the economy as a whole Auerbach and Feenberg 2000. Job loss results in a significant decline in income and therefore consumption for workers and their families. This drop in consumption means a loss of demand for businesses, amplifying the original drop in aggregate demand.
Unemployment compensation is an automatic stabilizer; it mitigates the impact of a recession on the broader economy because unemployed workers—whose income has been severely reduced due to the job loss—tend to spend their benefits rather than save them. Economic research examining UI suggests that, in the absence of the UI system, a typical family whose head of household becomes unemployed would spend 22 percent less on food—as compared to the 7 percent drop that is actually observed because of the help of the UI system Gruber 1997. More recent, preliminary, work by Rothstein and Valetta 2013 finds similarly that household income falls by about 16 percent when UI benefits are exhausted, with the drop in UI income partially compensated by slightly increased participation in SNAP and other programs.
In recent years, unemployment compensation has had a significant role in maintaining household income levels. Council of Economic Advisers CEA calculations based on data from the Current Population Survey show that, from 2007 to 2010, the share of households receiving income from unemployment compensation rose from 4.1 percent to 9.6 percent and the average amount received by these households increased from $4,400 to $8,343. As the economy improved the share of households receiving UI fell to 6.6 percent, and the average amount received fell to $6,681, but both figures are still more than 50 percent higher than their pre-recession levels. Previous research suggests that recipients tend to understate their unemployment compensation by up to one-third Meyer, Mok, and Sullivan 2009, so these are likely to be lower bound estimates of the effect of unemployment insurance on household income.
In addition, unemployment is a leading cause of mortgage defaults, and the income provided by unemployment insurance helps avert foreclosures—giving much needed support to our housing market Foote et al. 2009. Because the EUC and EB programs support hundreds of thousands of jobs and increase economic activity significantly, they also generate partially offsetting tax revenue for the 17
Federal government through income and payroll taxes and help state and local budgets by increasing sales tax revenues. Additionally, without the income support from extended unemployment compensation, many families would need to draw on other programs such as the Supplemental Nutrition Assistance Program SNAP, formerly known as food stamps, Temporary Assistance to Needy Families TANF and SSDI.4
In short, as a form of insurance, the Federal unemployment compensation programs provide important income support for workers and their families during periods of job loss, but they have substantial benefits to the broader economy as well. As a result, the net cost to the Federal government is less than the official cost that is scored for these programs when they are considered in isolation.