THE BLOG
11/23/2009 05:12 am ET Updated May 25, 2011

Leading With Lagging Indicators

That the unemployment rate “lags” in a recession is
well-known.  This means that when
economic growth returns, most households – and particularly the unemployed –
experience little or no relief in the short term.  Though this is accepted as a rule of thumb,
policymakers have done very little beyond ad hoc extensions of unemployment
benefits to account for it.

One reason is an obsession with “technical recessions,”
denoted by two consecutive quarters of negative economic growth.  Indeed, a commenter last week was incredulous when I wrote that most people don’t care that the
recession is likely over.  “Just because
you don’t understand” how recessions work, he wrote “doesn’t make it stupid or
wrong.”  That’s the same reasoning that
says: GDP is likely to rise, so let’s terminate stimulus spending.

But while economists see signs of economic recovery, the
perils of the recession remain.  The
unemployment rate continues to rise and now stands at 9.7%, keeping Americans
at risk of being thrown out of work as a result of the economic downturn.  Perhaps worse, the unemployed are having a
very difficult time finding work.  According to the National
Employment Law Project
,
5 million Americans have been unemployed for six months or longer and half of
the unemployed cannot find jobs within the first six months of receiving
unemployment insurance benefits.  There
are fully 6 jobless workers for every job opening.

Recent extensions of the duration of unemployment insurance
benefits have been necessary but insufficient. 
400,000 unemployed workers will have exhausted their benefits by the end
of September, a number that will increase to a devastating 1.3 million by the
end of the year.  Though the American
Recovery and Reinvestment Act

also included important benefits for the unemployed, such as increased
unemployment benefits and a subsidy for health insurance, these provisions will
expire over the next several months even as unemployment lags behind economic
growth. 

Moreover, the nature of unemployment during the current
recession – longer bouts of unemployment – means that many households will
continue to be at risk of running out of unemployment insurance which,
according the San Francisco Federal Reserve, “will further offset the intended
roles of [unemployment insurance] payments as an automatic stabilizer and means
of low-income support.”  Even with extended unemployment benefits,
long-term unemployment can lead to a loss of the skills and knowledge necessary
to function in today’s complex economy. 

The House acted yesterday to mitigate some of the pain
associated with long-term unemployment. 
The Unemployment Compensation Extension Act extends federal unemployment
insurance by 13 weeks for workers who have exhausted their unemployment
benefits.  The 13-week extension, which
builds on two previous expansions, applies only to the 27 states with
unemployment rates of 8.5 percent or higher. 
Depending on state residency, a worker can currently obtain unemployment
benefits for a maximum of 79 weeks.

The legislation would ease the financial pain associated
with long-term unemployment for approximately 300,000 Americans.  Unemployment benefits provide direct
assistance to the current and aspiring middle-class Americans likely to be
hardest hit during the economic downturn, people who want to work but have lost
their means of support through no fault of their own.  The legislation would ensure that the jobless
in the worst-hit states – places like Michigan that has an unemployment rate of
15.2 percent – would avoid losing unemployment insurance at a time when finding
a job is extremely difficult.  Allowing
unemployment benefits to expire for hundreds of thousands of families would also
undermine the successes of the American Recovery and Reinvestment Act
and slow recovery.   

No matter when the technical recession ends, the downturn
will continue for American families until unemployment stabilizes at a much
lower level and job creation resumes.  At
the very least, Congress should extend the more generous benefits provided in
the stimulus package until the unemployment rate has significantly
declined.  But policymakers must also
reconsider how the social safety net can be adapted to the needs of workers during – and between – future
recessions.