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Economic Impact of Unemployment Funding to Urban Communities in the United States

Employment is heavily tied with the economy and its productivity, as the two grow and

shrink proportionately to one another (Bod’a, Považanová). With this in mind, the government

works to limit unemployment whenever possible, doing this through unemployment funding.

There is an ongoing debate as to whether the implementation of this type of funding improves a

community economically through the alleviation of unemployment, specifically in densely

populated U.S. urban communities.

The U.S. Census Bureau defines an urban area as a "core census block groups or blocks

that have a population density of at least 1,000 people per square mile (386 per square kilometer)

and surrounding census blocks that have an overall density of at least 500 people per square mile

(193 per square kilometer).” Effectively, this outlines the list of the large cities in the United

States. Within these urban areas, there is generally a large concentration of small and large

businesses as well as a surplus of workers. This competition for jobs among these workers can

lead to destitution from lack of a stable wage (Turnovsky, Schubert 2), and government funding

is used to compensate for this missing income. According to Heather Boushey and Matt Separa,

investigative journalists with an economic focus, “for every $1 spent on unemployment

insurance benefits, the economy grew by $2, since recipients typically spend—not save—those

dollars.” In the time frame of the latter days of the 2008 recession, this money was used to boost

the economy in a fairly significant way. Over the time period of 2009-2010, these government

funds helped to lift 6.5 million people out of poverty and, for the most part, into employment

(Boushey, Separa). With the increased competition for jobs (and, thus, unemployment) in urban

areas, this can lead to increased spending by the government on more people (Yegorov 1),
furthering these benefits. Gregory Mankiw, a macroeconomics professor, wrote in his book,

Principles of Microeconomics, ​that 83% of economists agree that redistribution of wealth is a

key role of the government, further providing evidence that this form of unemployment funding

could be foundational to a properly functioning society.

Even though most economists believe that this redistribution of wealth is a governmental

issue and helps the economy grow, especially in the time of a recession, some believe the

opposite. According to Juan Sanchez, senior economist of the Federal Reserve Bank of St. Louis,

the issue comes down to a debate between “insurance and incentive,” by which he means that,

while greater government unemployment funding may lead to more insurance against poverty

from unemployment, it also decreases the incentives of workers to get employed and be

productive in the economy. Specifically, he states, “The time devoted to job search drops by

about 16 percent when unemployment benefits increase by 10 percent,” leading to less total

employment, stagnating the economy.

The cost of this funding is also a huge drawback of providing it, as federal funding is

often necessary to support the spending of these funds, especially in an economic downturn, and

this can lead to increased government debt (Norcross, Hamilton). The counter argument to this,

however, is that increased economic growth and activity that is a direct result of this funding can

result in greater governmental revenue, allowing for an offset of the expenditure of this funding

and, potentially, a benefit for both the government and the private sector (Boushey, Separa).

Additionally, 79% of economists also agree that this funding should not be implemented

through direct monetary funding, but rather through a negative income tax (Mankiw 32), which

is when taxes are partially lifted from people in a certain bracket of income, including the

unemployed (Linke). According to Rebecca Linke, Milton Friedman, one of the most influential
economists of the 20th century, supported this system of simulated welfare, as it would lower the

tax rate (for certain income brackets) and it would result in a total higher retained income from

all, even the rich, when contrasted with direct unemployment funding. However, MIT Sloan

senior lecturer Robert Pozen says that it is a more complicated question than we are originally

led to believe, as the implementation of a negative income tax becomes difficult when

unemployment and external living conditions arise that may affect the income of an individual

(Linke). For example, the “earned income tax credit” stems from this concept of the negative

income tax, but there is a stipulation that the recipient of this credit must have earnings greater

than one dollar, a qualification not met for a large majority of the unemployed (Linke). In short,

although the negative income tax may be important and useful for alleviating the burden of

poverty from low-income individuals, it does very little for the majority of unemployed

Americans; thus, it is not altogether more useful than welfare unless the unemployed can be

included into the negative tax through carefully drafted legislation (Linke).

A second possible solution to these problems of disincentivization and looming debt is

the implementation of an unemployment insurance savings account. This unique savings account

is a system through which employers put a percentage of their employees’ income into a savings

account that will only activate upon the unemployment of the employee (Norcross, Hamilton).

This system has the unique advantage of being immune to the threat of government debt, as it

forgoes the need of the government to subsidize the unemployed, using instead the income that

they are already receiving. It is also helpful at preventing disincentivization, as Emily Hamilton

co-writes, “Workers must finance their own unemployment, providing an incentive to avoid job

loss and increase the job search effort during unemployment.” While this solution seems like it

may negate both problems that most unemployment prevention programs face, it faces many of
the same external problems that the negative income tax faces, as it requires a sufficient duration

of employment in order to function effectively, and it revolves around low income wage-earners

rather than the chronically unemployed. Although it may be beneficial for alleviating much

unemployment, it also inherently discriminates against those who have not worked before, as

they now must compete against those who have money stored away in their savings accounts.

Unemployment funding helps the economy tremendously, especially in an economic

downturn, but too much of it can lead to disincentives to seek employment and a stagnation of

the economy. Too much of this type of government spending can also, if it does not spur the

economy effectively enough, lead to loss of government revenue and large amounts of public

debt. If this kind of funding is to be avidly pursued, there are two primary options for its

implementation. Most economists agree that it should be implemented through negative taxation,

as this leads to a much less complicated and effective method of unemployment insurance.

However, it can also lead to uncertainty over legislative interpretation, and, even so, the potential

for the snowballing of government debt. Another solution is an unemployment insurance savings

account, which can alleviate many of the problems that the unemployed face, but is similar to the

negative income tax in that it relies on previous employment in order to function.

 Works Cited

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Law at a Regional Level.” ​Papers in Regional Science,​ vol. 99, no. 4, Aug. 2020, pp.

1113–1136. EBSCOhost, doi:10.1111/pirs.12511.

Mankiw, N. Gregory. ​Principles of Microeconomics.​ Cengage Learning, 2021.

Norcross, Eileen, and Emily Hamilton. “The Costs and Consequences of

Unemployment Benefits on the States.” ​Mercatus Center​, George Mason University, 15

Sept. 2019,

www.mercatus.org/publications/regulation/costs-and-consequences-unemployment-benef

its-states. Accessed 21 Jan. 2021.

Sanchez, Juan. “What Are the Pros and Cons of Unemployment Benefits.” ​Federal Reserve Bank

of St. Louis,​ 26 Apr. 2016,

www.stlouisfed.org/on-the-economy/2015/january/what-are-the-pros-and-cons-of-unemp

loyment-benefits.

Schubert, Stefan, and Stephen Turnovsky. “Growth and Unemployment: Short-run and Long-run

Tradeoffs.” ​University of Washington, ​January 2020,

econ.washington.edu/sites/econ/files/documents/research/schubert-turnovsky-jedc.pdf.

Separa, Matt, and Heather Boushey. “Unemployment Insurance Dollars Create Millions of

Jobs.” Center for American Progress​, 26 Sept. 2011,

www.americanprogress.org/issues/economy/news/2011/09/21/10367/unemployment-insu

rance-dollars-create-millions-of-jobs/.
“Urban and Rural classification.” ​United States Census Bureau​ 2012.

Yegorov, Yuri. “Economic Role of Population Density.” ​ECONSTOR, 2​ 8 Aug. 2015,

www.econstor.eu/bitstream/10419/124607/1/ERSA2015_00207.pdf