CBO says jobless benefits encourage joblessness

Generous unemployment benefits are a great way to boost the economy in the short term but are leading hundreds of thousands of workers to stay out of the workforce longer than they would otherwise, according to the latest report by Congress’s official scorekeeper.

The report by the Congressional Budget Office comes as President Obama and lawmakers on Capitol Hill are trying to forge an agreement to extend those generous benefits, as well as continue the 2 percentage-point payroll tax holiday for the rest of this year.

CBO said unemployment is likely to remain above 8 percent into 2014 — a dreary picture that suggests the last few months of progress will not continue.

And over the last four years the worst-hit industries were construction, which lost 28 percent of its workforce, and manufacturing, which has lost 16 percent of its workforce.

By contrast those in education and health care or mining and logging have done well, each growing by 9 percent. And government workers have avoided most of the pain, with the public workforce shrinking just 1 percent from 22.2 million to 22.1 million workers between 2007 and the end of 2011.

Going forward, the report said extending the payroll tax holiday for employees has a solid return on investment — but said it actually would have been better if the tax cut had gone directly to companies, rather than to individuals. CBO said that was the second-best option it reviewed.

The best return on investment came from increasing aid to the unemployed. That was a chief item Democrats pushed for as part of the deal to extend the payroll tax.

But that policy also will lead to some folks staying unemployed rather than taking jobs, CBO said.

“In order to remain eligible for unemployment benefits, more people without jobs have continued looking for work — though, in some cases, less intensely and more selectively than they otherwise would have — after the normal 26-week benefit period,” CBO said. “In that way, the extensions of benefits have kept more jobless individuals in the labor force, thereby pushing up the unemployment rate by roughly one-quarter of one percentage point.”

CBO said once the extensions of benefits end, those folks will likely jump back into the job market.