Thursday, October 24, 2013

Extended unemployment benefits explain high unemployment rates

I've featured this chart many times in recent years, always commenting to the effect that the decline in the number of people receiving unemployment insurance benefits was good news for the economy since it increased the incentives of the unemployed to find and accept jobs. Recall that Congress in 2008 took the unprecedented step of creating "emergency unemployment benefits, which had the effect of significantly boosting the number and duration of people receiving benefits. Until the Great Recession, we had never seen such a high level of unemployed receiving benefits for so long, so it is very tempting to link that with the fact that the unemployment rate has been exceptionally high in recent years.

As this paper points out, however, I may have missed the more important impact of extended unemployment benefits. Extended unemployment benefits keep worker's salary expectations high, and that has the effect of reducing employers' willingness to hire. It's not that unemployed individuals are insufficiently motivated to find work, it's that employers are insufficiently motivated to seek out more workers since salary expectations remain high.

... our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility.
... extending unemployment benefits exerts an upward pressure on the equilibrium wage. This lowers the profits employer receive from the filled jobs. As in equilibrium expected profits from filled jobs are driven down to the cost of vacancy posting, vacancy posting has to decline. Lower vacancies imply a lower job finding rate for workers, which leads to an increase in unemployment. 

In any case, the ongoing and significant decline in the number of people receiving unemployment benefits (down 21% in the past 12 months) is a good reason to remain optimistic about the economy's ability to expand total employment.

HT: Greg Mankiw


NormanB said...

I've seen stats on when people have their unemployment benefits run out. Right at the end they get lots of jobs, like a hockey stick. I wish I had the graph for you.

William said...

Scott - a couple question.

I don't understand why the 10 year Treasury yield has fallen from briefly at 3.5% a month ago down to nearly 2.5%.

Secondly, I don't understand why the US Dollar has fallen in value against the EURO - now at 1.38. For the previous couple years, the opposite relationship prevailed: they rose and fell in lock-step.

Thank you in advance for your reply. William

William said...

But why shouldn't employees expectations remain high since corporate profits are the highest ever.

I would argue that it is incredible that working folks have accepted annual salary increases which barely keep up with inflation i. e. 1.5 - 2% when equity owners are being rewarded with much higher increases in dividend payout and in capital gains.

I suppose corporate managements' primary motivation is to keep the stock price up - higher wages would obviously lower profits and the stock price. Higher dividends in the long run usually leads to higher stock prices. Right ??

Benjamin said...

Extending unemployment insurance was a dubious call. A check from the government for not working is a disincentive.

There are today about 2.8 million Americans collecting unemployment insurance checks. The good news is that the checks stop after a couple of years, and the beneficiary must then find work (we hope).

There are 3.5 million Americans--a larger number-- collecting monthly disability checks from the VA. The bad news is that these checks will never stop, as long the beneficiary is living.

For anyone truly disabled, I have sympathy, and would advise compensation. But when one-third of returning gets claim PTSD, or even stateside vets claim bad knees, and collect checks every month that I have to work and pay for....maybe this program needs a gimlet-eyed review. Along with the extended unemployment situation...

It is a double disincentive, of course.

Taxes are raised on working people and businesses to pay for the unemployment and disability benefits---decreasing the incentive to work---and then the benefits are paid out to recipients, decreasing their incentive to work.

Hans said...

It is another social engineering program, which distorts not only individual incentive but also the labor markets..

Excellent post, Ben Jamin!