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  • Effects of Unemployment Benefits

    The economic effects of prolonged unemployment insurance (UI) have become a controversial topic recently. Conservatives have pointed to a raft of economic studies to demonstrate that, in addition to the benefits they provide, extended UI benefits also come with an economic cost – lengthening the amount of time that those without jobs stay unemployed. Many liberals ridicule conservatives for suggesting this could happen. Speaker Nancy Pelosi recently called the notion “an insult to these millions of people who have lost their jobs through no fault of their own.” If liberals want to point fingers at insulting economists, however, they should start with the Obama administration.

    Alan Krueger, the current Assistant Secretary of the Treasury for Economic Policy and a highly respected labor economist has said in his academic writing exactly that: unemployment insurance causes the unemployed to stay unemployed longer.

    In his academic studies Dr. Krueger wrote that “more generous UI benefits have been found to be associated with longer spells of unemployment,” and further finds that “the job finding rate jumps up around the time benefits are exhausted. Most importantly, we find that job search intensity is inversely related to UI benefit generosity for those who are eligible for UI.” In other words, a senior Obama administration official finds that less generous UI benefits cause the unemployed to search harder for new work.

    Lawrence Summers, Director of the White House’s National Economic Council has said the same:

    government assistance programs contribute to long-term unemployment by providing an incentive, and the means, not to work. Each unemployed person has a ‘reservation wage’—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer.

    Liberal economists outside the administration also agree … or at least they did before it became a political issue. Nobel economics laureate and prominent liberal columnist Paul Krugman recently described Sen. Jon Kyl’s (R-AZ) statement that unemployment insurance causes individuals to stay out of work longer “a bizarre point of view.” In fact it is textbook economics …Paul Krugman’s Macroeconomics textbook, to be exact:

    Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job.

    Unemployment insurance exists for good reason, and no-one has suggested abolishing it. However, the good that it does also comes with a cost in delaying the return of the unemployed to work. Economists from right to left and in the Obama administration agree about this. Wishing it were not so does not make it true. Congress should consider both the costs and benefits of extended UI benefits when weighing how many years of benefits to provide unemployed workers.

    Co-authored by Aleksey Gladyshev.

    Posted in Economics [slideshow_deploy]

    7 Responses to Effects of Unemployment Benefits

    1. Pingback: Benefits lead to longer term unemployment, says Obama's Sec. for Treasury.

    2. Pingback: » Financial News Update – 05/13/10 NoisyRoom.net: The Progressive Hunter

    3. Mick, NJ says:

      Except that Summers said he was taken out of context with a lot of these statements especially as reported in the Wall Street Journal. He goes on to say, and there are studies from the Fed, that say the main reason for this prolonged unemployment is lack of jobs. So yeah, keep spinning…

    4. anom, lohar says:

      How many unemployed miss the 4.2% unemployment , thriving economy, and record stock markets with small businesses booming from coast to coast that we had under Bush , up until the Democrats took over the houses in 2007? We also had a terrible economy under Clinton until the Republicans replaced the Democrats and ran both houses. Any of you unemployed see a pattern here?
      http://technologiez.net/2010/07/22/unemployment-b

    5. Tom, L.A. says:

      The author quotes Krugman's textbook but then omits the key phrase "In the United States, these benefits typically replace only a small fraction of a workers income.." Krugman's point was that generous benefits, as they have in Europe, reduce an unemployed worker's incentive to quickly find a new job. The fact that no such generous benefits exist in the U.S. is key to understanding why Krugman would find McCain's statement that unemployment insurance causes individuals to stay out of work longer to be a bizarre point of view. I find it disturbing that the author finds it necessary to distort an opponents' meaning in order to make his point.

    6. Pingback: Americans think jobless benefits prolong unemployment - Page 3

    7. LOUDelf says:

      There are two parts here:

      1. Currently, "unemployment" is calculated by counting who receives these benefits. It does not count the ineligible or the people who have rolled off. Extending benefits under this current calculation will most surely increase the number of unemployed statistically. In this, Kyl is 100% correct.

      2. The other side of this is the human nature part. If people know there is an end date to receiving checks, are they more- or less-likely to come up with an action plan to get them income? Of course, they are more likely. But on the flip side, the contention that unemployment benefits incentivize people not to work is mostly false. Most people do not like being unemployed (insert reason here — lower pay, embarrassment, need to do something meaningful). There are definitely the system-soakers out there, however, and if we deal with these, we may find that unemployment insurance serves the people in need, excluding the lazy. In this, Kyl is right about SOME of the people, but I don't believe most.

      As the column says, unemployment is a political issue, full of spin. The spin needs to stop, including from Kyl, Krugman and others. Solutions need to happen, such as seeking out the abusers, and getting them off the rolls. Then it won't be such a political football.

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