Unemployment Benefits Affect Employment

by John Hood

Noting that the unemployment rate continues to drop, albeit at a painfully slow rate, one think tanker told The Wall Street Journal that recent reductions in the generosity of the unemployment insurance system could be playing a role in boosting employment.

During the recession, Congress extended unemployment benefits to as long as 99 weeks in some states, the Journal reported. Now the maximum duration of UI benefits is 73 weeks, and in many states it is far lower. As the think tank analyst told the newspaper, research suggests that unemployment payments lead some recipients not to look as hard for jobs, and the loss of benefits may have pushed some job seekers to accept work they might otherwise have rejected.

Now, who was this heartless free-market ideologue with the audacity to accuse UI recipients of exhibiting basic human nature? His name was Gary Burtless, an economist at the left-leaning Brookings Institution in Washington.

Here in North Carolina, the debate about proposed changes to the unemployment-insurance system have prompted left-wing analysts to ridicule the notion that the amount and duration of UI benefits have an effect on the propensity for jobless recipients to accept employment offers. The notion is far from ridiculous, however. It is the consensus finding among labor economists of all ideological stripes. They may not agree about the magnitude of the effect, but they do agree that both job-search activity and the willingness to accept job offers tend to rise as the expiration date of UI benefits approaches. States and countries with more-generous UI benefits tend to have higher unemployment rates, all other things being equal, than states or countries with less-generous benefits.

How much do the estimates of this effect vary? Here are a couple of examples. In a paper published last year, Makoto Nakajima of the Federal Reserve Bank of Philadelphia concluded that federal extensions of UI benefits had pushed the unemployment rate 1.4 percentage points higher than it would otherwise have been during the Great Recession. That works out to be about 30 percent of the increase in unemployment during the period studied.

On the other hand, Rob Valletta and Katherine Kuang of the Federal Reserve Bank of San Francisco published an earlier paper that, using a different model, yielded an effect of only four-tenths of a percentage point.

I say “only” in a relative sense. In absolute terms, we’re still talking about a sizable number of jobs. North Carolina’s U-3 unemployment rate in November 2012 was 9.1 percent, representing about 432,000 people out of a workforce of 4.7 million. If we took the midpoint between the two estimate effects – 0.9 percentage points – and applied it to North Carolina, we could say that without the federal government’s extended-benefits policy, our U-3 rate might be more in the range of 8.2 percent. In other words, about 40,000 more North Carolinians might well be employed today – often at jobs they wouldn’t have preferred, admittedly, but employed nevertheless – if Washington had not embarked on its extended-benefits program.

If the federal government’s extended benefits affect the incentives for jobless recipients to remain in job-search mode rather than fill available positions, then surely the amount and duration of state UI benefits also affect those incentives. Reforming North Carolina’s UI system isn’t only about paying off the state’s $2.5 billion debt to the federal government. It is also about properly aligning short-term and long-term effects.

The UI system is designed to buffer workers from the short-term effects of sudden job loss. It was never designed to be a source of long-term public assistance. Nor is it a magical money-making machine that strengthens the economy, as some modern-day Keynesians claim. At most, it redistributes purchasing power from those who bear the incidence of the payroll tax (employed workers) to those who get benefits (unemployed workers). No economy ever grew more healthy and productive by paying employable adults not to take jobs.

This is not a conservative talking point. It is a widely understood principle, except in certain fever swamps from which rational discourse is excluded.

John Hood is president of the John Locke Foundation and an NC Spin Panelist.