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Why big business needs unemployment benefits

September 29, 2011: 9:00 AM ET

Many business leaders are shrugging off the forthcoming expiration of extended unemployment benefits, but they may regret it. In this downturn, every little bit of extra money in consumer pockets counts.

By Mina Kimes, writer

unemploymentFORTUNE -- The heads of two grocery stores -- one giant, one tiny -- recently offered very different views on the subject of unemployment insurance.

Steve Burd, the CEO of Safeway (SWY), told an analyst during the company's last earnings call that he did not think temporary benefits provided a meaningful boost to consumer confidence. "There are those that would argue that unemployment benefits, the longer they are, the longer people stay unemployed," said Burd, whose supermarket chain did $41 billion in sales last year. The CEO went on to cite the theory that extending unemployment insurance artificially props up wages, slowing the pace of economic recovery.

Meanwhile, Joe Perry, the owner of Garland Street Market, a small grocery and convenience store in Bangor, Maine, told Fortune that he supports extending unemployment benefits for the simple reason that the program puts money in consumers' pockets. "The federal government can offer me any kind of tax cut, or credit for hiring, or anything they want -- and none of that is of any use to me if I don't have customers who have money they can spend," he says.

Which business owner is right? Economists have long sparred over whether unemployment programs stimulate or depress the economy. In recent years, though, research has largely supported extending benefits on the grounds that they are beneficial not only for consumers, but also for businesses. Several studies have disproved the theory that these jobless programs deter large swaths of the unemployed from seeking work.

The debate will likely resume when the government's extended benefits program nears its expiration date at the end of the year. The current plan grants the unemployed -- who typically receive 26 weeks of benefits -- up to 73 additional weeks of pay. The Obama administration, which wants to spend $49 billion on extending benefits next year, says that six million people will lose their benefits if Congress fails to authorize the extensions.

Some Republicans have already come out against renewing the emergency aid. Former House Speaker Newt Gingrich, who is currently running for president, recently said that he thought it was "fundamentally wrong to give people money for 99 weeks for doing nothing."

The motivation question

From an business standpoint, supporting unemployment benefits seems like a no-brainer: More direct government assistance equals more consumer spending, which translates into more revenue. But some economists argue that people who receive unemployment benefits are less motivated to pursue work, elevating the overall unemployment rate. In a Wall Street Journal op-ed last summer, the economist Robert Barro compared the current economic situation to the 1982 recession, when jobless rates were just as high but the duration of unemployment was much lower. Barro concluded that people were staying unemployed longer because they received generous benefits, and postulated that the unemployment rate was 2.7% higher than it should be as a result. Studies by the conservative Heritage Foundation and Mercatus Center came to similar conclusions. Both pointed to a 1990 paper by Lawrence Katz and Bruce Meyer that found that when unemployment benefits were increased by 13 weeks, it increased the average duration of unemployment by more than 2 weeks.

But Katz himself now argues in favor of extending unemployment benefits. In a 2010 Congressional testimony, he said that his much-cited study used data from the late 1970s and early 1980s, when workers were motivated to wait out their benefits because layoffs were often temporary. "The layoff-recall process is much less important today than it was in the 1970s and early 1980s downturns," he said. Katz blamed "structural unemployment problems" for the spike in long-term joblessness.

Several new studies, which use data from the current recession, refute the idea that extending unemployment benefits significantly boosts the unemployment rate. Researchers at the Federal Reserve Bank of San Francisco found that jobless people who were not eligible for benefits stayed unemployed for nearly as long as those who received aid. Jesse Rothstein, an economist at UC Berkeley, recently wrote that benefit extensions during the recession had raised the unemployment rate by just 0.2% to 0.6%, far less than previous estimates.

Researchers say that the deterrence argument doesn't hold up in the face of the current downturn. "Relatively few people are going to say I'm going to turn down a job offer just so that I can get a few more weeks of unemployment benefits," says Raj Chetty, a professor at Harvard who studies unemployment.

Unemployment benefits may actually create jobs by sustaining consumer spending. Jobless people are far more likely to spend their benefits than recipients of tax cuts or credits, which means their payouts are quickly funneled to mortgage lenders, healthcare providers, and grocery stores. The Congressional Budget Office has said that $1 of unemployment benefits generates as much as $1.90 in economic growth, making it a far more effective form of stimulus than payroll or income tax cuts. Wayne Vroman, an economist at the Urban Institute, recently found that, between 2008 and 2010, extended benefits raised GDP by an average of $57 billion per quarter.

The elimination of emergency aid could send a shock-wave to the economy, according to Heather Boushey, an economist at the left-leaning Center for American Progress. "Individuals will be more likely to foreclose. Renters will stop paying their rent. And it will be bad for business--they will quite simply see fewer customers," she said.

Some Fortune 500 CEOs have acknowledged the impact that unemployment benefits have on their bottom line. The head of Walmart USA (WMT) said recently that the number of its customers relying on government aid was rising. The CEO of Fred's, a large grocery store chain, said this summer that the company's "core customers" in the South derived 23%-25% of their personal income from federal assistance. But leading business organizations are mostly silent on the issue. Fortune asked the National Federation of Independent Business, Chamber of Commerce, and National Grocers Association about the economic impact of unemployment benefits; none of the groups offered comment.

Why is Corporate America mum on the issue? Some business leaders, like Burd, may fear that such programs discourage the jobless from looking for work. Others may simply be wary of taxes. Though the extensions are funded by the federal government, the private sector could be called on to foot the bill down the road. "At the end of the day, the federal government has to balance the budget, and it's going to come out of general tax revenues," says Chetty.

But Perry, the Maine grocer, says he would rather pay higher taxes than endure lower customer demand. "If there's a way to put money in the average person's pocket, that will go a lot further towards me investing in my business," he says.

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