Garett Jones  

How Much do 99 Weeks of Unemployment Benefits Raise the Unemployment Rate?

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About 1%.  

Bill Dickens, Bryan's first economics professor, writing in the Milken Institute Review:

[A] number of estimates suggest that we have paid a price for the extended unemployment benefits adopted by Washington in response to the recession - somewhere between 0.4 and 1.8 percentage points of unemployment. 

Steven Mullins, in Econ Journal Watch, arguing against Barro's claim in the Wall Street Journal that the extra benefits raised unemployment by 2.7%:

The UI benefit extensions that have occurred between the summer of 2008 and the end of 2010 are estimated to have had a cumulative effect of raising the unemployment rate by .77 to 1.54 percentage points.

Numbers quite similar to Dickens's take.  Mullins finds that even when you take into account the fact that awful recessions have high unemployment, recessions when UI benefits last longer have even more unemployment.  

Mullins's short empirical piece is just sophisticated enough to change some skeptical minds, just transparent enough that any macroeconomist can quickly take in the message.  For policy-relevant work, we could use more publications like this.  A good complement to the structural approaches that fill the journals today.  

But here's the bad news: If we cut unemployment benefits back to the usual 26 weeks, a 1% fall in the unemployment rate wouldn't cause a 1% rise in the employment rate.  Mullins and Dickens take the same reading of the literature that I do.  Mullins: 

[W]hen their unemployment benefits expire, the majority of the unemployed leave the labor force rather than take a job. 

I know that people game the unemployment system and start looking for work a few weeks before the benefits run out: I know people who do that.  

But that's not most of the story.  Instead, when your benefits expire, you usually just stop calling yourself "unemployed" when the government bureaucrat calls to survey you.  Instead you just tell her "I've stopped looking for work."  

Generous unemployment benefits change how people answer a government-run survey.  Further evidence that people respond to incentives.  

[Update: When I refer to "%" above, I should be referring to "percentage points."  xkcd's take on the %/percentage point distinction here, Drexel Math Forum's more serious take here.]


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CATEGORIES: Labor Market



COMMENTS (13 to date)
Doug writes:

"[W]hen their unemployment benefits expire, the majority of the unemployed leave the labor force rather than take a job. "

The question is for how long. You can construct a simple model where those who run out of UI after 28 weeks leave the labor force 100%, then slowly trickle back in. Such that a large majority are re-employed after 99 weeks.

It's not enough to say what their status is at week 29, to compare a 28 week policy with a 99 week policy you have to determine what their status is at week 99.

kebko writes:

I agree. But, right now there are about 2.2 million people on extended UEI and about 2.7 million people who have been unemployed for more than 26 weeks but are not on UEI, so right now there do appear to be a good number of people who have been unemployed for some time without insurance who still consider themselves to be unemployed.
But, the question I have for you is this: My understanding is that UEI is being phased out by the end of 2012. Available weeks have been decreasing, I don't think they have accepted new applicants since June, and the number of fresh unemployed workers using up their regular insurance is trending to fairly normal levels, so it seems reasonable to believe that the policy would not be extended into 2013. If that is the case, and there are 2.2 million people still on it (rapidly shrinking), how in the world does the FOMC at the Fed forecast unemployment at the end of 2013 still at 7.7%?. We can bridge that gap just with 600,000 of the currently insured people leaving the job market and the employment rate otherwise remaining stagnant.

Tom West writes:

I know people who do that.

I have to admit it was a hell of a shock the first time (in my early thirties) I encountered this behaviour is someone I knew well.

Changed my entire perception of humanity. Suddenly economists were not all utter human nature pessimists :-).

(Of course, it also corresponded to getting to know people for whom a job was solely a way of earning money to enjoy other things rather than a source of intellectual interest and identity.)

MG writes:

I wonder how they control for the effect of other, so many, coinciding policy actions that can also be expected to work in the same direction. For example, if one accounted (and controls for) for the administrative changes that must be behind the exceptional jumps in disability enrollments and the growth in various forms of means-tested aid, one may very well find that they any one policy action has a smaller elasticity than expected. Of course, if we don't add all the impacts together, we may never be hesitant about adding just this one change...

MikeDC writes:

OK, is this implying the real danger is that extended UI benefits permanently erode the labor force?

Under No/limited UI, do people re-enter the labor force while under extended UI, people, once receiving UI, take it then exit entirely?

Bostonian writes:

Some of the people leaving the labor force apply for disability benefits. Abuse of the system was described in a WSJ article "Disability-Benefits System Faces Review".

Floccina writes:

If people are gaming the UI system (I have known people who will collect UI and work for cash as long as they can), would it be better to reduce the amount than to shorten the period. If they are working the system like a described UI becomes a wage subsidy, better to replace UI with a wage subsidy all together or just write a check to every adult American each week and do away with all most all welfare programs. People who are not working in the taxed economy are usually still working everyday.

heiner writes:

Wait, does it raise by 1% or 1 percentage point? The is a difference, you know.

Arthur_500 writes:

I come from a different reality in which either I work or I starve. I cannot understand the idea of dropping out of the workforce.

Some people might go to school which pulls them out of those ranks. Others become self-employed which pulls them out of those ranks. Possibly many people get paid less than they might have before which still means they are working.

I do believe that the unemployment system is mis-used as is the welfare system. So why don't we limit benefits?

What is the value of an appropriate incentive not to utilize government benefits? Ask any business how many government employment programs they utilize and most will tell you it isn't worth the difficulties. So why do we make it so easy for indiviuals?

If I buy insurance (unemployment is indeed insurance) I get a payout and that is it. I can't go back to my insurance company and tell them that I need more for my car because I want a car with higher value.

We need to quit playing with the numbers and realize that there is a level of unemployment that will never go away. Is it 4% or 7%? It matters little as it is just a number that equals zero as a baseline.

heiner writes:

Wait, does it raise by 1% or 1 percentage point? There is a difference, you know.

Tom Dougherty writes:

Garett writes, "I know that people game the unemployment system and start looking for work a few weeks before the benefits run out: I know people who do that."

But in order to collect UI benefits you must be looking for work the entire time you are receiving benefits not just before your benefits expire.

Hedlund writes:

Help me out here:

"Mullins finds that even when you take into account the fact that awful recessions have high unemployment, recessions when UI benefits last longer have even more unemployment."

We're clearly distinguishing between people on the unemployment rolls and people who've dropped. So why are we treating "longer UI benefit periods correlate to more UI benefit receipts" as an interesting statement?

kenih writes:

There is an inverse correlation between the length of time someone is unemployeed and the chances they can find a job i.e. it becomes harder and harder to get a job when you have been unemployeed a long period of time. By extending unemployment the government has in effect made many american's unemployable. Sure you can point your fingers at the individual and say it's their own fault but 99 weeks of unemployment checks is one heck of a sweet incentive to stay unemployed. Most people don't think about the consequences... Our government is doing it's best to destroy our country :(

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