1. News & Issues
You can opt-out at any time. Please refer to our privacy policy for contact information.

Why Are Federal Unemployment Benefits the Best Way to Boost the Economy?



Each dollar of unemployment benefits generates $1.64 in economic growth.

Photo: Tetra Images/Getty Images

Question: Why Are Federal Unemployment Benefits the Best Way to Boost the Economy?

Answer: Obviously, unemployment benefits provide a lifeline to the jobless when they need it most. By giving those without jobs enough money to supply the basics of life, these benefits help prevent the rampant breadlines and tent cities seen during the Great Depression of 1929.

Unemployment benefits also help economic growth. Those who are unemployed use the money to buy basics, including shelter, food, and clothing. As a result, every dollar spent on unemployment benefits stimulates $1.64 in economic demand, according to a Moody's Economy.com study. How can $1 create $1.64? That's because of the ripple effect. For example, a dollar spent at the grocery store pays not only for the food, but also helps pay the clerk's salary, the truckers who haul the food, and even the farmer who grew it. They also buy groceries with their salaries, which pays more staff, and on it goes.

This ripple effect keeps demand strong, creating an additional benefit. Stores keep their employees to supply the goods and services the unemployed need. In fact, every $1 billion spent in unemployment benefits creates 19,000 jobs, according to study by the Congressional Budget Office. Without extended benefits, demand would drop and retailers would need to lay off their workers, adding to unemployment rates. Unemployment benefits work fast. The government just writes checks, which immediately goes into the economy.

For example, during the final quarter of 2008, unemployment programs paid about $34.9 billion in benefits to some 8 million unemployed workers. This boosted economic growth by $57 billion. It's estimated that every month benefits are extended costs taxpayers $10 billion. However, it also generates $16.4 billion in economic growth.

Extended Unemployment Benefits Work Better Than Tax Cuts

Unemployed benefits are more cost effective than other methods of stimulating the economy, such as across-the-board income tax cuts. A study done by U Mass/Amherst found that $1 billion dollars in tax cuts created 10,779 jobs -- less than the 19,000 created if the same funds went to the unemployed. That's because those who have a job will only spend half of their tax cuts. They have the luxury, because they are receiving an income, of using their cuts to pay down debts, save or invest the rest.

Studies showed that each dollar from the 2008 Bush tax rebate only generated $1.19 in additional economic growth. Looked at this way, the $168 billion from the Bush rebates generated $200 billion in demand. One of the advantages of the Bush tax rebate was that it was sent out in checks, which people promptly spent.

Reductions in the tax rate actually hurts the economy. That's because every dollar in lost tax revenue only creates 59 cents in economic growth. That's because people usually don't even realize they're getting a tax break until tax time. Since they are paying out money in taxes, they are less likely to spend anything extra. It just doesn't feel like a bonus, so people are more likely to save anything they get, or use it to pay down other debts. To compare unemployment benefits to other forms of stimulus, see Unemployment Solutions.

  1. About.com
  2. News & Issues
  3. US Economy
  4. Fiscal Policy
  5. Taxes and Tax Policies
  6. Why Are Federal Unemployment Benefits the Best Way to Boost the Economy?

©2014 About.com. All rights reserved.