Economics, Pethokoukis

Explaining the weak U.S. labor market: More unemployment benefits means more unemployment

There have been numerous studies linking increases in unemployment benefits to increases in unemployment. One, from the San Francisco Fed, estimates that absent the extended UI benefits in 2009, the unemployment rate would have peaked at 9.6% rather than 10%.

Calafia Beach Pundit Scott Granis gives his take:

The chart above shows how different this recession has been from other recent recessions: at the peak, the percentage of the labor force receiving unemployment compensation was 67% more than at the peak of the 1981-82 recession. This goes a long way to explaining why this recovery has been so tepid. It’s been the weakest recovery ever, in part because we’ve never paid so many people for so long not to work. And the main cause of that huge increase was Congress’ decision in July 2008 to create a program called “Emergency Claims,” which went on to double the number of people receiving benefits by early 2010. Congress’ “compassion” for the unemployed had the unintended consequence of slowing and drawing out the recovery for everyone.

20 thoughts on “Explaining the weak U.S. labor market: More unemployment benefits means more unemployment

  1. Even if I take the SF Fed study at face value it’s talking about a difference of .4% which is hardly the majority of our current unemployment problem.

    In addition if this thesis was correct you would expect that unemployment would be lower for those individuals who do not qualify for benefits (i.e. new entrants into the work force like college graduates or people who quit their jobs). But that’s not what you see (

  2. As I said in a post on one of your earlier articles today…The current economic malaise in the US can not realistically be evaluated over the short term ie from 1947 onward.

    You must go back to at least the 1830′s, and the Jacksonian Recession.

    Romney is repeating the failed policies of Andrew Jackson, it created disaster then, and will hold back our economy now.

    • All due respect, Tim, I understand what you are saying, but I am not sure the analysis holds for two main reasons

      The economy is radically different from the 1830′s.

      It’s a global economy now.

      On a slightly different note, I don’t think it is fair to say Mitt Romney is repeating the same failed policies of Andrew Jackson because Mitt’s policies don’t exactly exist yet. They are ideas, nothing more.

      • Jon, Thanks! Your two points are valid.

        The fracturing and stratification of the US economy during the Jacksonian Recession was a reflection of the inability of the various states to realize that a sustainable recovery required their mutual cooperation. Instead, each took an independent path the result of which was one of the worst economic failures in American history. The various states did not understand just how much they needed eachother for there to be success.

        This is an analogue of the global economy today – we want to act independently, but haven’t come to fully realize that we need eachother to succeed over the long term.

        You are also correct about Romney’s plan…he only has a set of very general goals containing no specifics. So if one uses just his goals, then the only way for him to achieve those goals is through the imposition of Jacksonian policies in one form or another.

        Here’s my original post on another of Pethokoukis’ articles.

        “Obviously, the economy is slowly improving as your chart shows. Yes! GDP is below its potential. Housing prices are also below potential, but when a bubble collapses one can not expect to return to those pre-collapse prices within a few short years. Would we even want the prices to return to those levels in a short period of time?

        What would happen to the economy if prices, or the GDP, were to return to it’s potential in a short time frame? The economy would rapidly fail again and again. The solution is a steady and seemingly slow climb back up to the real potential of the economy over time so that chaos and cyclic fluctuations are weakened. We do not need nor should we want a rapid recovery. The wild swings in the data from businesses, the government and the private sector would never stablize. Economic history validates this claim.

        Real data collection on the economy began in the ’20′s, but there are methods that would translate data from the 1790′s onward into useful information from which valid trend analysis can be made.

        At the very least, prior to this current recession (or double dip recession), the worse down turn in our national economy occurred in the 1830′s through much of the 1840′s.

        This recession, I call it the Jacksonian Recession, was caused by several concurrent events:

        1) real estate bubble (like today)
        2) lack of sufficient regulatory oversight of Wall Street and banks (again like today)
        3) a run from currencies to specie (ie gold and silver)
        4) and most significantly, Jackson’s defunding of the nationally chartered bank by moving federal monies from the national bank to the various state banks, and the ensuing chaos that caused in financing and the stratification of banking, money and economies between the states. This singular action by Jackson was the force that pushed the economy into real peril, thus ensuring a long down turn and preventing a sustainable recovery.

        Durning the Jackson era and for nearly ten years afterward, attempts by congress and by the states were disjointed, chaotic, and uncoordinated. The result was that the entire country suffered because of an ideologue (Jackson).

        What lesson can we learn from the Jackson Recession?

        1) national banking and a federal reserve system is the best way to provide a smoothing out of the wild and chaotic fluctuations ever present in unregulated and uncoordinated but inextricably interconnected economies. Sound familiar? When economies are so closely intertwined, as in our world of today, then the best way to ‘smooth out’ erratic and chaotic cycles is to work more closely together, not act as if our single economy is all that matters.
        2) a sustainable recovery is only possible through increased coordination between governments, and today this is evermore important in an inextricably intertwined global economy,
        3) Jackson’s ideological prescription was a failure, and policies by government(s) that make dramatic cuts in any area of the government work only to lengthen the down turn.

        Finally, if an analysis is to be valid in its trend studies, then it should include the Jackson Recession. And, we should work to not repeat the mistakes of the Jackson era.
        Romney’s team of economic advisors have neglected the lessons from Jackson, and seem intent on putting policies in place that will effectively repeat Jackson’s mistakes.

    • Romney is repeating the failed policies of Andrew Jackson, it created disaster then, and will hold back our economy now“…

      Wow! When did Romney become president?

  3. The conclusion from the SF Fed paper:

    the effect in the latest downturn appears quite small compared with other determinants of the unemployment rate

    Valetta, one of he co-authors of the SF Fed paper, subsequently teamed up with Farber, and wrote another paper which is here.

    The conclusion is the same: The results
    reveal small but precisely estimated reductions in unemployment exits and small
    increases in unemployment durations arising from the UI extensions.

    Grannis is merely parroting the non-empirical party hack talking points.


      “Unemployment benefits are creating jobs faster than practically any other program, House Speaker Nancy Pelosi said Thursday.

      Talking to reporters, the House speaker was defending a jobless benefits extension against those who say it gives recipients little incentive to work. By her reasoning, those checks are helping give somebody a job.

      “It injects demand into the economy,” Pelosi said, arguing that when families have money to spend it keeps the economy churning. “It creates jobs faster than almost any other initiative you can name.”

      Pelosi said the aid has the “double benefit” of helping those who lost their jobs and acting as a “job creator” on the side.”

      What Nancy and libs in general can’t understand is that when you give money to unemployed Joe, it certainly helps Joe. And he does spend and consumes. But where does the money come from? You have to take (tax) money from employed Mike, leaving him with less money to spend on consumption. Or you can borrow it from Mike by selling him Treasuries. Mike then doesn’t invest into IBM, Exxon or WalMart–or any big jobs creator, he spent it on the bonds.

      And if Mike doesn’t spend it or buy that bond and then takes his money to his bank, then that bank lends Mike’s money out to those who consume and invest. This is obviously a much better deal for the economy because it keeps the money in circulation. As a result, the velocity of money may even accelerate as well.

      And here is the kicker. Since you can spend the money only once–the little secret that libs don’t want you to know about (Pelosi never got this far herself)–under her entitlement system you have nothing but a ZERO-SUM GAME.


    This just in from the Colorado Secretary of State: Of the 626,097 ballots counted in the first-week of voting, 39% were republican and 36% were democrats.

    Independents were not reported, but the lean looks very promising.

      • Republicans in battleground Colorado are continuing to outpace Democrats in early ballot returns, growing their lead with ballots returned as of this morning.

        Surprisingly, Republicans are winning both the mail-in/absentee ballot returns AND early voting.

        According to a Colorado Peak Politics source with access to ballot return numbers that are in line with Friday’s Sec. of State’s ballot report, the figures are as follows:


        R: 187,824 (39.7%)

        D: 171,971 (36.3%)

        U: 108,421 (22.9%)

        Mail-In/Absentee Ballots

        R: 172,461

        D: 158,139

        U: 98,532

        Early Voting

        R: 15,363

        D: 13,832

        U: 9,889

        The latest Denver Post poll of Colorado has Romney winning Unaffiliateds 43/39. Polls also reveal that Romney is also ahead in the party/crossover (Dem to Repub and Repub to Dem) vote.

        Advantage, still Romney.

  5. Consider a woman with a couple of kids. Let’s say she takes a part-time job and earns, say $12,000. She’s below the poverty line. But she gets an earned income tax credit, Medicaid and SCHIP, day-care subsidies for her kids, free meals at schools, rent subsidies, utility subsidies, food stamps, a free Obamaphone, and, of course, pays no income taxes.
    Now imagine that woman decided to start a free-lance business doing, say, web design. She might gross $60,000. From which she would have to pay 16% self-employment and 10% fed and state income taxes. She would have to buy health insurance for her family, she would lose her day-care, rent, and utility subsidies, have to buy her own cellphone and food.
    She’ll work an extra 30 hours a week and have, maybe $5000 more to spend than when she was on welfare. That’s about $3/hour.
    And we wonder why so many more people choose welfare over work?

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