Will the U.S. Extend Unemployment Benefits?

Bipartisan infighting may be over (on one issue) ...

Feb 7, 2014 at 9:36AM

As of this past December, just under 7% of Americans are unemployed. While economists see this jobless percentage as well within expected limits, this is little consolation to the more than 4 million out-of-work Americans. Given that nearly half of these are long-term unemployed, there are economic ramifications as these Americans are more removed from the economy. 

During his State of the Union address this past week, President Obama announced that he would push Congress to extend unemployment benefits as a stopgap effort. With federal unemployment benefits in place since June 2008, it has been increasingly difficult to continue the benefits as budgetary concerns have mounted. Up until now, all previous attempts at unemployment restructuring have been resounding failures due to partisan conflicts.

That may change with the newest attempt. For the first time since benefits lapsed in December 2013, both parties are making cautious moves to extend insurance once more. While both parties continue to point toward the other as the rate-determining factor, Senate Majority Leader Harry Reid (D-Nev.) commented that he is "cautiously optimistic that Republicans will heed their constituents at home and help Democrats restore emergency benefits to Americans in need."

This new deal depends on a couple things, not least of which is Reid's Senate being opened up slightly more in procedural matters. Fearful of being bogged down in political ideology, the process has been extremely slow.

Why does this matter?

Economists point out that long-term unemployed Americans' consumption contributes less than .25% annual GDP growth. Normally, such a small contribution could go unrecognized, but with growth still relatively anemic, even this minor contribution could make a huge difference in the US economy. 

Politicians are unsure currently as to how this newest proposed extension will be financed; there are indications that the proposed three month/$6.4 billion extension would be paid for by "pension smoothing." If this is the case, there may be long-term implications for federal employees as pension investments will be taxed more heavily. 

What if this works?

If this amendment is successful and benefits are extended another three months, then the long-term unemployed will receive income for a little while longer. Unfortunately, this would seem to only shift the problem three months down the road. Despite the intention of the administration to also raise minimum wages, the real question is whether or not Obama's secondary commitment is carried out effectively; seeking to employ the 4 million noted above, Obama has called for companies to remove employment practices that give preferential treatment to applicants that are currently employed. 

With 300 companies currently signed onto a government-inspired pact, optimism seems rather misplaced as many of the companies are shifting to more subtle tactics. Many job applicants have reported an increase in comments referencing over-qualification instead of age-related comments as a reason for unemployment. Additional skepticism has arisen by the pro forma commitment by companies without a great deal of concrete planning to back this pact.

What if it doesn't?

To be perfectly frank, if the newest amendment does not come through, then it will just mean a continuation of the status quo. However, both politics and business have much more to lose than they have to gain by blocking an extension of unemployment benefits. Despite not knowing where to go, it seems to be in everyone's best interest to see a swift and favorable conclusion to the ongoing Congressional negotiations.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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