Thursday, February 18, 2010

The untold story behind today's unemployment

Everyone understands the need for unemployment insurance. You get fired because things go badly for your company, and suddenly you're on your own. It takes awhile to get back on your feet and find a job, especially if the economy is in a recession. That's why we have government- and employer-sponsored insurance programs that pay unemployment compensation for up to six months to those who lose their jobs through no fault of their own.

Occasionally, Congress will decide that economic conditions are so adverse that an extension of these benefits is called for. The most recent extension was called the Emergency Unemployment Compensation (EUC) program, and it started in July 2008. It was also by far the most generous in its eligibility requirements, effectively covering workers who became unemployed as early as May 2006. The chart above shows the number of persons receiving EUC in red, the number receiving regular unemployment compensation in blue, and the total in green. The EUC program has been extremely successful at recruiting recipients, since it has gone from zero to over 5 million in just 18 months and continues to expand, even as the number of those losing their job each week has fallen by 30% since last March.

In mid-2007, well before the recent recession began, the unemployment rate was a mere 4.4%. Out of a workforce (those working plus those looking for work) of 154 million, some 6.8 million were out of a job, and about 2.5 million were receiving unemployment insurance. Today, the workforce has shrunk to 153 million (discouraged workers have stopped working, others have decided to call it quits and retire), 14.8 million are out of a job, and 11.5 million are receiving unemployment insurance.

To put these numbers in historical and proportional perspective, I offer the next two charts.

The number and proportion of persons receiving unemployment insurance today is far greater than anything we've seen before. Even though this recession's highest unemployment rate of 10.1% was lower than the highest unemployment rate (10.8%) of the 1981-82 recession, the portion of the workforce receiving unemployment compensation today is 63% higher than it was at the peak of the 1982 recession. Fully 78% of those looking for a job today are receiving unemployment insurance, compared to only 38% at the height of the 81-82 recession.

Never before have we seen anything even close to today's largesse and compassion for those without a job. While not wanting to argue whether this is right or wrong, I would however argue that the aggregate desire of the unemployed to find a job today is undoubtedly much less than it was during the depths of the 81-82 recession.

And so we have here one more reason why this recovery is proceeding more slowly and painfully than we all would like to see. Not only are employers reluctant to hire because of all the legislative, political, and tax uncertainty out there, but the incentive for workers to seek out the jobs on offer is weaker than ever, especially for those jobs that don't come equipped with salaries exceeding their current exceptional benefits. Congressional compassion has its costs, and they are not just measured in terms of expenditures, but also in a slower recovery.


Bill said...


Do you have any evidence that folks would rather collect, on average, $300/week in Unemployment benefits than find a job? Lowe's is opening a new hotel in downtown Atlanta and had 2000 people show up for 125 mainly low paying jobs. We also see adults lining up to apply for fast food jobs that used to go to teens. If there is some hard evidence that employers can't find people to fill their job openings because people prefer to collect unemployment, I'd like to see it.

Cabodog said...

I heard directly from a local employer that two months ago, she had enough of a business recovery to hire back six people that were laid off during the summer (right after the panic).

She expressed frustration due to the fact that ALL SIX declined her offer to return to work, preferring to remain on unemployment. One of the six even told her that he couldn't afford to return to work yet, as he had more effective take-home "pay" on unemployment and various assistance programs than he would have from working.

W.E. Heasley said...

Mr. Grannis:

Thank you for posting the graph and the accompanying discussion.

Enjoyed this particular observation:

“The EUC program has been extremely successful at recruiting recipients, since it has gone from zero to over 5 million in just 18 months and continues to expand, even as the number of those losing their job each week has fallen by 30% since last March.”

Hence the following current policies have created major disincentives for employers to hire: energy cost uncertainty, health insurance cost uncertainty, tax increase uncertainty with a menu of tax proposals on the table, and the certainty of the expiration of the Bush tax cuts.

Then we have current unemployment policy causing a disincentive for the unemployed to vigorously search for work available. Of course the first set of employer disincentives affects the “work available”.

Beyond these two disincentives working side by side, the cost to provide such unemployment insurance to such an enormous percentage of people is accelerating (increasing at an increasing rate) the cost of the government -and employer- sponsored insurance programs that pay for unemployment compensation.

Therefore, the policy is to finance an extremely high cost disincentive program. Brilliant!

Scott Grannis said...

Bill: I don't have any evidence of this. But I am certain that the unprecedented, open-ended and generous provision of unemployment insurance to almost all those who are unemployed must, on the margin, reduce the incentive of those looking for work. If you were unemployed and Congress announced tomorrow that the program was set to end in three weeks, for example, wouldn't you have a suddenly increased desire to find a job, any job?

Charles said...

I know two people who are considering dropping out of the workforce because of the current level of benefits. One is being offered a less desirable job at the same pay on a shift that causes problems for her family. She qualifies for SCHIP now but is not in the program. She understands that insurance for her children will not be a problem if she is unemployed.

Person 2 is considering volunteering to be riffed because she wants to go back to school and the rules now allow this.

I don't think this generous level of benefits is a problem now in most places - but it could become an issue very quickly when people start to hire.

I do think certain sectors of the labor market in certain geographic areas will be affected.

Another factor that exacerbates unemployment is the huge increase in the minimum wage last summer.

Bill said...

I suppose I have more faith in a person's innate desire to work and be useful rather than to just sit around and collect unemployment benefits.

Colin said...

Hey, when you subsidize something you get more of it.

And it's not just the US:

In the meantime, the unemployment payments have helped create a class of the comfortably unemployed. In a cafe near the Prado museum on a recent afternoon, José Díaz, 45, said he was fired in December from his job in an electronics store in Gerona, in Catalonia, but was in Madrid on vacation. “I’m taking advantage of the fact that I’m on a break,” Mr. Díaz said.

He said that he had paid off his mortgage, that his wife had a job and that he was only two months into two years of unemployment benefits, which equaled about 25 percent of his salary. “I’m privileged,” he said.

While some people may scoff at the notion that unemployment can be preferable to working, think about the value that free times has. When you add that to the amount of unemployment insurance, the calculation may make it worthwhile.

W.E. Heasley said...

Bill said...

“I suppose I have more faith in a person's innate desire to work and be useful rather than to just sit around and collect unemployment benefits.”

Bill, you were correct until the advent of the FDR social welfare state. And the subsequent embellishment of the social welfare state from 1945 to present.

With the current policy, we are creating disincentives for both employer and potential employee and financing the arrangement to boot.

brodero said...

Compassion has its costs but in the case of unemployment and in lomg duration unemployment you need
to think outside economic theories
plus as a side note cutting unemployment benefits would kill any budding political movement.

Colin said...

More on Spanish unemployment here:

To some, the cultural acceptance of unemployment is part of the problem. “For most people here being unemployed and — while it lasts — living off state benefits is perfectly natural,” said David Pantoja, 36, an out-of-work carpenter who founded an association for the unemployed in Cádiz. “It’s just a fact of life, like love or death.”