Monday, August 30, 2010

If you subsidize unemployment, don't be surprised if you get more of it


Robert Barro has a good article in today's WSJ, titled "The Folly of Subsidizing Unemployment."  In it he argues reasonably that "the expansion of unemployment-insurance eligibility to as much as 99 weeks from the standard 26 weeks" has made the economy less efficient "because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment." My chart above helps illustrate the numbers he uses in his article, making it clear that we have never before seen such a large number of people receiving unemployment compensation. The 1981-82 recession saw a higher unemployment rate than we have seen in the recent recession, but one-third fewer people were subsidized for not working. This undoubtedly helps explain why this recovery has proceeded at a very disappointing pace.

... it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person's state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries.
The administration has argued that the more generous unemployment-insurance program could not have had much impact on the unemployment rate because the recession is so severe that jobs are unavailable for many people. This perspective is odd on its face because, even at the worst of the downturn, the U.S. labor market featured a tremendous amount of turnover in the form of large numbers of persons hired and separated every month.
For example, the Bureau of Labor Statistics reports that, near the worst of the recession in March 2009, 3.9 million people were hired and 4.7 million were separated from jobs. This net loss of 800,000 jobs in one month indicates a very weak economy—but nevertheless one in which 3.9 million people were hired. A program that reduced incentives for people to search for and accept jobs could surely matter a lot here.

10 comments:

Public Library said...

The same applies to subsidizing failed banks, real estate companies, automobile manufacturers, and finance cos with transferred wealth from taxpayers.

We are one gigantic welfare state and it is getting worse, not better thanks in large part to the Federal Reserve.

Ironically, I saw an upbeat GE Capital commercial over the weekend that made me laugh. Every time I see one of these zombies (GM, Chrysler, GE Capital, Citi et al) advertise it reminds me of how delusional our country truly is.

Dr William J McKibbin said...

The fact is that once the unemployed have reached 99 weeks of unemployment benefits, those same people historically will never work again during their lives in America. Thus, the unemployment checks become welfare checks. However, I am not suggesting in the least that having millions of disenfranchised citizens living in a country is a good idea either. The question is what can be done to keep the disenfranchised from creating civil unrest, and herein lies the problem of ignoring the problem of uemmployment. At some point after unemployment becomes widespread and chronic, that country risks civil unrest and possibly civil war or revolution, neither of which are to be taken lightly by those who argue that the unemployed are too lazy to find a job. Nothing is more dangerous than large bands of idle disenfranchised males roaming the countryside with a chip on their shoulders...

John said...

Of course subidized unemployment would lead to more of it at the margin. If you offered 100 people the choice between working 40 hours in a week to receive $1,000 vs. working zero hours to receive $350, at least some of them would be in a position to take the second option.

Frozen in the North said...

Barro's article was very strange. It's an economic segment he has historically avoided. His strength lay elsewhere, specifically with market information asymmetry. To me this WSJ appears to be another shot for a fall Republican Congress to: "Remove all economic stimuli". somewhat similar to the "new" Tea Party credo of cutting government expenses.

There is here, more than meets the eye!

Frozen in the North said...

Moreover, the increase to 99 week of unemployment benefits is a catastrophe for the American economy. The reality today is that there are 6 job seekers for every job available. The government has little choice than to increase benefits -- the other options are too dire for the Democrats to consider (maybe the Republican can, but I doubt it)

Buddy R Pacifico said...

As an employer, I would question an applicant very closely who has been on extended unemployment. I would want to know why this person didn't work part-time or at a job out of their field until opportunities opened up in their type of work. Re-training in a new field might be worthy reason.

Based on my experience people who have received long-term unemployment (over twelve months) can get very comfortbale with rewards for not working.

Public Library said...

Blame it on the Federal Reserve. They are sinking this country one debased dollar at a time.

Great quote: "When you've gone through all the good ideas and now you're on to the stupid ones. …"

http://mises.org/daily/4651

Benjamin said...

Oh PL, lighten up.

Name one modern country that has prospered under price stability (zero inflation or deflation).

Now, think the the long, long roll-call of nations that have prospered under mild inflation. Indeed, post WWII, most of the world has been uplifted out of miserable poverty, amid mild inflation. Since we went off the gold, global living standards have soared.

There were a few outliers, nations such as Zimbabwe or Argentina that went too far and ended up with hyperinflation. Yes, there are lulus out there.

We do have the example of Japan, where there has been virtually no inflation for 20 years, and even some deflation years. Their stock and property markets are off 75 percent in that time frame, and they have posted 0.8 annual GDP growth, despite having a good work force and a business culture. Tight money and tight shoes look good, but casue more pain than utilitarian results.

Cranck up the presses and print money, and generate some mild inflation again. It is the salve that that obviates wage stickiness, that greases investor confidence.

On unemplopyment: If you are over 50, white-collar and unemployed, you will never get a job again.

I would advise trying anything until age 62, then collecting reduced Social Security and moving to Thailand or other inexpensive foreign country. It is about your only shot.

Public Library said...

Benj,

That is absolutely absurd. Man has existed for millenia without fractional reserve banking enforced by law, not by choice.

Fractional reserve banking did not create the industrial revolution, telecommunications, the internet, or trade amongst nations. These are the sources of improvement in the standards of living.

Your spurious correlations are downright frightening and expose the same desperate mindset within the Federal Reserve.

Read this succinct little post: Mo' Money, Mo' Problems http://mises.org/daily/4651

Flex said...

Despite the loss of income, when money is free and time is all mine, it is much easier to NOT go out hard for a Jobsearch.