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One of the little shouting matches going on over the effects of the various policies tried during the Great Recession is the one about the effects of extended unemployment benefits. For those who don’t follow this sort of economic trivia in the US your unemployment benefits usually run out after 26 weeks. After that you’re pretty much on your own until you can find a new job. During this recession just past they were extended out to 99 weeks. And the shouting match is about whether this increased the unemployment rate or not. For, one might think, the prospect of having no money at all might well make someone a little more eager to take whatever job there was rather than waiting for a better fit.
On the other side the contention is twofold. Firstly, that paying extended benefits pumped more money into the economy and this extra demand created some jobs. That’s somethng that’s almost certainly true but it’s not actually a very important point. The sums involved are not large enough to have any more than a trivial effect. Secondly, that there just weren’t any jobs anyone could take and therefore having extended benefits or not just wouldn’t have made any difference to the eagerness with which people would get a job. This one is untrue. For a start it’s not what we’ve observed at other times and secondly we’ve now a paper exploring this point.
We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.
Do note that this does not answer the question of whether benefits should have been extended. All this is telling us of is one of the costs of having done so: more unemployment. To make a decision we must know both
the costs and the benefits: and one obvious benefit is that a large number of unemployed people had an income. And how you weigh those two, that cost and that benefit, is entirely up to you. Just do recall that within economics there are no solutions, only trade offs. And to be able to decide we have to know what the trade off is.
There is one futher point :
This is a huge mistake. The longer you’re off the market, the harder it is to find a job. It’s an entirely understandable mistake, one I myself made during my two-year attempt to find a permanent job after grad school. But a policy that helps people make that mistake is a bad policy. And while a 0.5 percent increase in the unemployment rate may not sound like that, we’re talking about hundreds of thousands of people who we seem to have helped to commit this grave error.
My old professor, Richard Layard, is perhaps the doyen of the study of this question over in my native UK. And his basic theoretical structure is that once you’ve been unemployed for two years or more then it’s going to be darn near impossible to get back into the labour market. Partly because you’ve just got out of the habit but in the main because potential employers seem to have a strong aversion to employing people who have been out for two years or longer. It’s not a hard and fast rule, of course, there’s a spectrum in this as in so many other things. But, in general, two years’ unemployment leads to a large liklihood that it will be permanent unemployment.
So, we can say that extended unemployment benefits have led to the unemployment rate today being higher than it would have been without them. For it is true that a major feature of the current US labour market is the manner in which short term unemployment is now down to normal levels. That we’ve still got (slightly) elevated unemployment levels in total is because we’ve a chunk of long term unemployment that the improving labour market isn’t shifting. As Layard rather predicts will happen.
I go along with McArdle in concluding that the extension was the right decision but that doesn’t mean that it doesn’t have costs. Nor that a more interventionist program might not be needed to deal with the effects of that long term unemployment.
My latest book is “The No Breakfast Fallacy, why the Club of Rome was wrong about us running out of resources.” Amazon and Amazon.co.uk. $6.99 and relevant prices in other currencies.