President Obama during this past week signed into law extending unemployment benefits to a maximum of 99 weeks, or almost two years, for persons who have been unemployed for over half a year and have exhausted their state benefits. The degree of extension varies among states depending on a state’s unemployment rate, with higher unemployment states getting longer durations of coverage. The bill that became law is highly partisan, passing with almost all Democrats, 31 House Republicans, and only 2 Republican senators. I believe the law extends unemployment benefits for too long, although the economics of optimal unemployment insurance gives a less than certain answer.
Unemployment insurance tries to balance two conflicting goals. One is to protect at least some of the earnings of workers laid off from their jobs through no fault of their own, while the conflicting goal is not to make unemployment status so comfortable that workers try to get laid off, and do not look seriously for jobs when they are unemployed. The first aim is a typical goal of insurance against bad outcomes, while the second goal is to reduce the degree of “moral hazard”; that is, to reduce the incentive of persons to reduce their efforts to remain employed and look seriously for work when unemployed because they have insurance against the cost of being unemployed.