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Effects of Unemployment Benefits

Posted By James Sherk On May 13, 2010 @ 11:08 am In Economics | Comments Disabled

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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 [2].” 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 [3] that “more generous UI benefits have been found to be associated with longer spells of unemployment,” and further finds [4] 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 [5] 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.” [6] In fact it is textbook economics …Paul Krugman’s Macroeconomics textbook, to be exact [7]:

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.


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URL to article: http://blog.heritage.org/2010/05/13/effects-of-unemployment-benefits/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/unemployedCA.jpg

[2] “an insult to these millions of people who have lost their jobs through no fault of their own: http://www.nytimes.com/2008/06/13/washington/13jobless.html

[3] wrote: http://ideas.repec.org/h/eee/pubchp/4-33.html

[4] finds: http://ftp.iza.org/dp3667.pdf

[5] has said: http://www.econlib.org/library/Enc/Unemployment.html

[6] “a bizarre point of view.”: http://www.nytimes.com/2010/03/05/opinion/05krugman.html

[7] Paul Krugman’s Macroeconomics textbook, to be exact: http://books.google.com/books?id=dpTBdNGGrtUC&pg=PA210&lpg=PA210&dq=krugman%20eurosclerosis%20unemployment%20incentive&source=bl&ots=GiMUCFpvMz&sig=vCcb2wkdXyBbx7wMDf_pjewae2U&hl=en&ei=FRORS-_BD8H08QaU9dz2BA&sa=X&oi=book_result&ct=result&resnum=4&ved=0CBQQ

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