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Hood: Economists agree that if you cut benefits, unemployment will decline

John Hood, president of the John Locke Foundation, writes in his blog Daily Journal, that there is strong evidence that reducing unemployment benefits results in a drop in unemployment. The column can be read at www.carolinajournal.com.

"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.


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why are you accommodating this soulless blowhard?

Seriously, I can understand some rightwing basement-published Internet rag in Beaufort breathlessly repeating every word John Hood says, but this is the N&O. Since when do you start running canned soundbites and FACTLESS crap from extremists? Whatever credibility John Hood once had is gone. For the past two years, he has been deliberately misleading and has shown an alarming willingness to pick and choose his "facts" and research back-up. Don't give him the print space. He needs to be ignored in favor of more thoughtful, fact-based policy voices. They're out there.

Beyond that, he is also unforgivably BORING.

A rather odd post

Rob - This is kind of a weird post since it appears you've merely reprinted Hood's column in its entirety.

Seems as if you'd at least want to add some quotation marks at the end so readers could tell that it's all coming from him or maybe just have a summary and a link.

No it doesn't

I'll just quote, in full, the overview on this from the Center on Budget and Policy Priorities (http://www.cbpp.org/cms/?fa=view&id=3646):

Does extending unemployment insurance make unemployment worse?

Opponents of continuing emergency unemployment benefits often assert that UI discourages people from looking for work and that ending these benefits would speed a return to full employment. Though research from earlier periods showed that additional weeks of unemployment insurance have an impact in lengthening unemployment spells, the most careful recent research indicates that these concerns are overblown. [13]
Additional weeks of UI benefits have three distinct effects on the duration of unemployment spells. First, unemployment insurance has the beneficial effect of allowing an otherwise financially strapped unemployed worker to search more efficiently for an appropriate job (rather than having to accept the first job offered, whether or not it is a good match for his or her skills). Second, since unemployed workers are required to seek work in order to qualify for UI benefits, additional weeks of UI benefits keep unemployed workers attached to the labor force and looking for jobs for longer than they might have without those benefits. Finally, UI creates minor disincentives to look hard for a job.
One study released in early 2010 offers the "back of the envelope calculation," based on the relevant research, that weeks of benefits added through EUC could account for "between 0.7 and 1.8 percentage points of the 5.5-percentage-point rise in the unemployment rate." [14] But it also suggested that "the true effect of extended UI benefits on unemployment duration is likely to be at the lower end of these estimates."
Indeed, a careful study of recent evidence by economist Jesse Rothstein (former chief economist at the Labor Department) found that federal extensions of UI in the past few years likely had an even smaller effect than this. Rothstein found that the unemployment rate in December 2010 would have been only about 0.2 percentage points lower without the extension of unemployment compensation. [15] Moreover, Rothstein also found that at least half of this 0.2 percentage-point increase could be from increasing labor force attachment — i.e. keeping UI recipients actively searching for work rather than dropping out of the labor force. Most other studies of the disincentive effect of UI in the current downturn have also found relatively small effects.
Harvard economist Lawrence Katz has also observed that traditional estimates of the relationship between UI and the length of unemployment spells ignore other effects, such as "the macroeconomic stimulus impacts of increased consumption expenditures by the unemployed … as well as the gains from keeping more of the long-term unemployed attached to the labor market rather than moving onto disability programs." [16]
Arguments that emergency UI benefits are an important contributor to high unemployment in today's economy have cause and effect backwards. We have a temporary federal program because unemployment is so high and jobs are so hard to find. When there are four unemployed workers for every job opening, it is hard to see how sharply curtailing the duration of unemployment insurance benefits would increase the pace of job creation.

[13] For a more thorough discussion of some of the research on the disincentive effects of extended UI compensation, please see Chad Stone and Hannah Shaw, "Emergency Unemployment Insurance Benefits Remain Critical for the Economy," Center on Budget and Policy Priorities, November 10, 2010, http://www.cbpp.org/files/11-10-10ui.pdf.
[14] Michael Elsby, Bart Hobijn, and Aysegul Sahin, "The Labor Market in the Great Recession," Brookings Institution Papers on Economic Activity, Spring 2010, http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2010_spring_bpea_papers/2010a_bpea_eslby.pdf.
[15] This is the estimate Rothstein finds using his preferred method of estimating the effect. Using alternate specifications he finds the range of the effect is from 0.1 to 0.5 percentage points. Jesse Rothstein, "Unemployment Insurance and Job Search in the Great Recession," University of California, Berkley, October 16, 2011, http://gsppi.berkeley.edu/faculty/jrothstein/workingpapers/Rothstein-UI-Oct2011.pdf. For a concise summary of this paper, please see Heidi Shierholz, "What's UI got to do with it?" Economic Policy Institute, September 22, 2011, http://www.epi.org/blog/unemployment-insurance-benefits/.
[16] Lawrence F. Katz, "Long-Term Unemployment in the Great Recession," testimony before the Joint Economic Committee, U.S. Congress, April 29, 2010, pp. 4-5, http://jec.senate.gov/public/index.cfm?a=Files.Serve&File_id=e1cc2c23-dc6f-4871-a26a-fda9bd32fb7e. For a concise summary of this testimony and other recent research, see Joint Economic Committee, "Does Unemployment Insurance Inhibit Job Search?" July 2010, http://jec.senate.gov/public/?a=Files.Serve&File_id=935ec1e7-45a0-461f-a265-bbba6d6d11de.

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