Arnold Kling  

The Unemployment Problem

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Megan McArdle writes,


How much unemployment reduction you get for a given amount of stimulus spending is, obviously, at best an imperfect estimation. But let's take the CBO's estimates as representing a rough consensus of those who favor stimulus: for our $800 billion, we got a reduction of 0.7 to 1.8 percentage points.

Full employment is perhaps 4.5-5%. If we assume that stimulus benefits increase linearly, that means we would have needed a stimulus of, on the low end, $2.5 trillion. On the high end, it would have been in the $4-5 trillion range.

Read her whole post.

Robert Barro writes,


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.

He claims that the unemployment rate would be much lower now if Congress had not passed any extensions of unemployment benefits. I have not gone through his analysis, but I suspect that I, like Alex Tabarrok, would not find it persuasive. Nonetheless, I think there is a case to be made for allowing people to continue to collect unemployment benefits after they find a new job, until their benefits are scheduled to expire. We can argue about how generous the unemployment benefits should be overall, but for any level of benefits it is possible to reduce the disincentive to find work.


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COMMENTS (5 to date)
John Thacker writes:
I think there is a case to be made for allowing people to continue to collect unemployment benefits after they find a new job, until their benefits are scheduled to expire.

The obvious case against this is how to prevent companies from gaming the system. Firing somebody, then re-hiring that person at a lower (but federally subsidized!) wage. Sure, we'd stamp it out at the most obvious level, but with subsidiaries and shell corporations, and simply the incentive for people to "get laid off" and then go and work at their close competitor, I don't see how it would work.

megapolisomancy writes:

Unemployment benefits do not just affect incentives to search for and accept a job, but also incentives to create a job (become an independent contractor, start a business) and to re-educate oneself.

In this sense, unemployment benefits reduce the necessary re-calculation in the economy because many people keep waiting for the same old (high wage paying) job being offered to them.

Floccina writes:

If you are going to do that wouldn't it be better incentive wise to send every USA citizen a check each week in place of EI, AFDC, minimum wage, SS, public housing etc. a la Charles Murray?

Or alternatively have a hourly wage subsidy.

Liam writes:

Come again, Arnold? A case can be made to allow people to continue to collect Unemployment Benefits after they find a new job? Granted you add that we should discuss the level of the subsidy but can you elaborate on this point, please?

I am curious as I feel that there should be very limited insurance (say 3 months) as the disincentive to work is remarkable.

David was a guest on a radio show about this and one caller claimed "When someone with my resume goes into to Wal-Mart looking for a job they don't even consider you." This is exactly not the case. My Father-in-Law works at Wal-Mart and he was a successful business owner with 2 degrees. People say they would flip burgers if they had to and yet they don't. They don't even cut back on things like cell phone usage. I don’t want to blow my own horn but I think I am the only person I can think of that when I lose my job I change to basic cable, use a pay as you go phone, turn down the air conditioning (and I live in Singapore) take the bus, drink only Instant coffee, etc...

Barro points out that people tend to spend it right away and it helps stave off disaster and we can always prune it back in better times. Are you of this opinion also?

prometheefeu writes:

Lliam when someone looses their job, they of course start to cut back on spending to some extent. But not everybody does it the same way. I prefer to downgrade my housing than my food for instance... And having applied at low paying retail, i can tell you that the answer I get is: you'll just leave as soon as you find a better job... Also holding a job does make it harder to find a better one.

@arnold: universal income or whatever you want to call it has fewer perverse effects...

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