The Congress has passed and the President will sign a new increase the the number of weeks that the unemployed workers may collect state and federal unemployment compensation. Lost in the shuffle is something very important: Subsidizing the unemployed may very well result in those without a job staying out of the labor market even longer.

Economists have long pointed out that if you subsidize people to do something, you’re creating the incentive for people to produce more of it. If you extend that amount of time that those who have lost their jobs can collect unemployment compensation at the taxpayers’ expense, don’t be surprised if they delay looking for work. 

Under the new rules that Congress has just passed, a person who had lost their job will be eligible for state and federal unemployment compensation for almost a year, and in some cases even longer. With unemployment compensation averaging $1,200 a month, this would come to a total of $14,400 for a year. 

U.S. per capita income in 2007 was $38,600. Thus, one year of unemployment payments is equal to almost 40 percent of this per capita income. If both workers in a two-income household were to be let go from their jobs, they would collect around 75 percent of per capita national income during their year of unemployment. 

In one-third of the states, per capita income is lower than the national average, and is in the range of $29,000 and $33,000. Thus, if both breadwinners in a two-income family were to be unemployed in 17 states they would be receiving between 85 and 100 percent of that per capital income. 

If, instead, we look at household income we discover that in 2007 about 12 percent of all U.S. households had an income in the range of $15,000 or less. For those who fall into this category, one year of the average unemployment compensation will more than cover all of the income that household would normally have earned. 

And 31 percent of the population has an average household income of $30,000 or under. If two income-earners in a family in this range found themselves unemployed, their combined average unemployment compensations would, again, be more or virtually equal to what they had been earning while on the job. 

For the proponents of the recent extension of unemployment compensation this is all to the good. The state and federal governments will pick up the tab to assure those at the lower end of the income brackets will not face financial ruin. 

But there is another aspect to guaranteeing people’s incomes in this way through unemployment compensation for a year. It is the fact that you potentially create a perverse incentive for some of the unemployed to be less diligent in finding a job and less willing to accepting work at what the market considers their worth in terms of the wage offered. 

Suppose that someone falls into that category of household income of $15,000 or less (which, we saw, covers 12 percent of the population). If he can collect that average unemployment compensation of $14,400 for the year, why rush out looking for a job, especially in “bad times,” when to be rehired may very well require him to accept a new starting salary less than he had been previously earning.

Even if someone had been earning more than the annual average unemployment compensation for which he may be eligible, that individual has to weigh the advantage of taking any job that comes along – even if at a salary not much different from the one he had on his old job – and what he would be getting from the government for staying unemployed 

Suppose that this individual had been making $20,000 a year. That $14,400 of average annual unemployment compensation represents practically 75 percent of his previous annual salary. And suppose that his spouse has not lost her job. Staying home and taking care of the kids as “Mr. Mom” for a good part of a year of unemployment compensation might actually leave the family financially better off.  It may save on day-care or baby-sitting expenses that otherwise would have to be paid, and which would more than compensate for the lost income while on unemployment compensation. 

At an unemployment rate of 6.5 percent, about 10 million members of the work force are not on the job. If each of these unemployed workers were to stay off the job collecting unemployment compensation for the full year, the cost to Uncle Sam would be almost $145 billion. 

Even if the perverse incentive from unemployment compensation only delayed 25 percent of these 10 million unemployed from accepting a job six months earlier than they otherwise might have, this in itself will result in $18 billion more in unemployment compensation payments at state and federal taxpayers’ expense than if they had taken a job sooner. 

Increasing the time when those without a job can be on unemployment compensation seems like a compassionate and positive good for many in the society. But it is not without its costs. 

It adds to the money working taxpayers must pay to cover the expenses of those unemployed. And it also delays the return of some of the unemployed to the workplace where they can make productive contributions to the wealth and prosperity of the country.