David R. Henderson  

The Effect of Unemployment Insurance on Unemployment

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An increase in U.S. aggregate labor demand reflected in rising job vacancies has not been accompanied by a similar decline in the unemployment rate. Some analysts maintain that unemployed workers lack the skills to fill available jobs, a mismatch that contributes to an elevated level of structural unemployment. However, analysis of data on employment growth and jobless rates across industries, occupations, and states suggests only a limited increase in structural unemployment, indicating that cyclical factors account for most of the rise in the unemployment rate.
This is from Rob Valletta and Katherine Kuang, "Is Structural Unemployment on the Rise?", FRBSF Economic Letter, November 8, 2010. The article also addresses the effect of unemployment insurance on the unemployment rate, which I've discussed here and here. They write:
In addition, the availability of extended unemployment insurance benefits, which reached a maximum of 99 weeks in most states in 2009, could explain a portion of the shift depicted in Figure 1. By easing the financial burden of long-term unemployment, extended benefits reduce the incentives of eligible workers to search for jobs and fill vacancies. Research by Valletta and Kuang (2010) suggests that the impact of extended insurance benefits on the unemployment rate in late 2009 was only about 0.4 percentage point. Updated estimates for all of 2009 and the first half of 2010 suggest a larger impact of about 0.8 percentage point.
HT to ARJTurgot2.

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CATEGORIES: Labor Market



COMMENTS (11 to date)
Hyena writes:

I suspect that the impact is worsened by the structure of benefits because they reduce the ability of people to move to higher employment states.

Since unemployment is particularly high for people without a college degree, we can assume that the worst off unemployed are unlikely to be able to afford a major move without a job. I doubt, as the study states, it has to do with mortgage obligations.

I also wonder what the 0.4-0.8% are like. Are they primarily educated people enjoying their "funemployment"? People who can't hope to match previous earnings? People in households which retain a regular earner? What were they doing before?

When this is discussed, I usually immediately see talk about "99ers". What if it's actually just the addition of a few extra weeks across vast numbers of people? That's what incentive stories usually look like in real terms.

I think a lot of the important questions have been sidelined in favor of fights over pet theories regarding the long arc of civilization (e.g., "the recalculation story" or "skill-biased technical change" narratives).

Dewey Munson writes:

What do "economists" say about offshore manufacturing of local products?

Jeremy H. writes:

Dewey Munson,
Most "economists" would say this frees up domestic labor to do other, more productive things. Unless domestic labor is given incentives to remain unemployed.

Tom West writes:

Well, we could also bring the long-term unemployment rate down to near-zero by simply shooting the family of anyone who was unemployed for longer than a year. I'd bet almost everyone would miraculously find jobs.

The point is *of course* making unemployment less of an utter personal disaster increases unemployment. The point of unemployment insurance is to reduce *suffering*, not reduce unemployment.

Scott Miller writes:

Unemployment payments for medium and low wage workers should be called something else. The idea of unemployment is "to fill the gap until you find a job", by default any job. But now unemployment is more "to fill the gap until you get a similar job with the same wage". Or waiting for the job they had to rehire (like aircraft union work). I know friends who have been on unemployment forever. Higher wage workers have a larger gap between benefits and what they made, so they will be more likely to accept something else or even to move somewhere else. I know this from experience. I lost my job, the gap between unemployment and my old pay was too great, so I moved to accept another job.

Hyena writes:

Mr. Miller,

But do we want people taking the first job they can find?

If we create an enforcement mechanism we'd have a dictator game issue: anyone who is receiving unemployment would be forced to accept any offer because declining the offer would mean losing benefits. In theory, I could hire engineers at minimum wage.

It would primarily encourage people to make offers quickly at the lowest possible bid.

Joe Cushing writes:

It's nice to see numbers on this topic. Of course they are a guess but at least somebody is putting out numbers.

Nick writes:

Dr. Henderson,

So I take it you discount the effects of the bad housing market completely, as a factor in unemployment?

David R. Henderson writes:

Nick writes:
"So I take it you discount the effects of the bad housing market completely, as a factor in unemployment?"

Not at all. To mention one factor that accounts for 0.8 percentage points of a 9+ percent unemployment rate is certainly to allow that other factors must account for the remaining percentage points.

Arthur_500 writes:

Unemployment is often broken down into unemployed and under-employed. I want to ignore under-employed as it is like saying my 1956 Cadillac is under-valued (by the insurance company).

Let's say the government did not provide unemployment benefits without work. If you are unemployed then you can work for the State in return for unemployment cash/ benefits.

Now have the State put these people to work picking up trash in the local park, cutting lawns, painting buildings, working in the library, etc. The individuals actually have to "work" each day albeit at jobs they may not want. But the individual keeps the work ethic skills alive and has incentive to look for new work.

I'll bet there would be no 99-weekers

mwangy writes:

Having experienced unemployment myself 18 months ago, I can tell you that the unemployment benefits were no where near enough for me to live off. My medications would have taken more than one half of my monthly income. Thank God, I was able to receive them from the pharmaceutical companies.

My pantry contained rice, beans, tuna, pb&j and not much else.

My friends were all working so there was no socializing going on. I was alone in my tiny apartment plugged ino my computer for three weeks, with daily interruptions from neighbors that i did not care to get to know. That i why I began to spend 4-6 hours per day at the state employment agency using their computers, fax, paper, etc.

There was no money for cable tv or broadband, or even a matinee movie, etc. I reserved my gas for trips to church, the employment office and interviews that did not materialize. Everyday I worried about keeping the utilities connected.

In the seven months I was unemployed, I applied for more than 80 jobs online. In all of that I was called for only 2 interviews. At the end of the first one they told me that they really had no money to pay me and would I be willing to volunter. Not one employer ever called to check my references.

After 6 months, I grabbed the one and only offer I had received and moved to a town where I scarcely knew anyone and have yet to make friends.

Life is drastically different but I am employed with benefits and thank God for that.

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