Economics, Pethokoukis, U.S. Economy

Did cutting jobless benefits promote work? Not so much

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What happens to the unemployed in the worst labor market in living memory when their long-term jobless benefits end? Some people, including many Republican lawmakers, had a theory: ending benefits would give the unemployed a nudge. With no more government checks coming, these folks would start looking harder — much harder — for a job or perhaps accept a job they wouldn’t have earlier. This is the logic behind Congress declining this year to renew the federal program funding extended jobless benefits.

Two pieces of evidence suggest this “bootstraps” theory might be wrong. First, a new paper from the Boston Fed paper looking at the Not-So-Great Recovery finds that, yes, the unemployed tended to remain so until their UI benefits were exhausted. But their next move wasn’t into a job. Rather, they became “more likely to drop out of the labor force; transitions to a job appear to be unaffected by UI benefit extensions, ” writes Katharine Bradbury in “Labor Market Transitions and the Availability of Unemployment Insurance.”

Second, economist Justin Wolfers looks at what happened in North Carolina after the state in July last year lost its eligibility for the federal Emergency Unemployment Compensation program. While employment grew over the next six months, it actually grew a bit slower than in neighboring South Carolina, which has a similar economy. After also comparing North Carolina to Georgia and Tennessee, Wolfers concludes, “The bottom line is that North Carolina looks quite similar to its peers, and certainly not better.” Nor has South Carolina performed better than North Carolina this year after the feds cut long-term UI benefits.

One more thing: a new NBER paper, “Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit” by Joanne Hsu, David Matsa, and Brian Melzer looks at how jobless benefits affected the mortgage market and find “that Federal expansions of UI helped to avert about 1.4 million foreclosures and $70 billion of housing-related deadweight losses between 2008 and 2012.”

Certainly these analyses aren’t the end of the story. But are they really counter-intuitive in an improving-but-still-weak job market? The US employment rate of 59.0% is still well below its prerecession level. And there are still 3.2 million long-term unemployed vs. 1.3 million in December 2007. It is important to keep people in the labor force looking for work or otherwise risk many of these people, as AEI economist Michael Strain points out, ending up on government assistance until they reach retirement age. (Strain’s “Jobs Agenda for the Right” is still worth a look, as is his chapter in “Room to Grow.”)

It also important to understand how the safety net supported American incomes during the recession and its aftermath. As the Manhattan Institute’s Scott Winship wrote last year, ” … while the middle class—and especially the poor—saw declines in market income after 2007, the safety net appears to have performed just as we would hope, mitigating the losses experienced by households. By 2011, the safety net had returned middle-class and poor households’ incomes to the highest levels ever seen.” And jobless benefits were a key part of that safety net.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

10 thoughts on “Did cutting jobless benefits promote work? Not so much

  1. James: these people had long ago dropped out of the labor force, they were basically faking looking for work in order to keep getting benefits. UI should go to those who really want a job, not those who for one reason or another are no longer looking.

    • We should have you decide, James, who really wants to work or not and deserves benefits. I have used UI, and I can tell you for sure, I would much prefer work to UI. I think the vast majority wants work, and it’s better to keep people in the economy with UI than to drop them as NC did.

  2. Monthly unemployment insurance pays somewhere between $1,100 and $1,600 per month depending on the state the unemployed person worked in. This is very little money for someone who supports a family. A single person can probably scrape by on this much money but it is still really tight. Consequently, I have always been skeptical that someone would prefer receiving unemployment insurance to working.

    The fact of the matter is that our labor market has not improved much since we hit the bottom somewhere during the first half of 2009. This is a massive failure by U.S. policymakers. President Obama has done nothing to improve our labor markets and encourages large amounts of illegal immigration that further drives down the equilibrium wage level for lower skilled workers. This is insanity in the middle of the worst sustained economic downturn since the Great Depression of the 1930′s. Obama deserves to be remembered as one of our worst presidents for his miserable economic performance.

    • There seems to be a good deal of confusion in the original article. It’s one thing to offer income support, quite another to offer support IF a person remains unemployed. If the issue is to provide income support to the needy, then fine, let’s do it. But not through guaranteed payments so long as they remain unemployed. I’m unfamiliar with the studies cited, but it seems unlikely that providing unemployed people support only so long as they remain so encourages them to maximize their efforts to find work.

      • Mike, the only confusion in the original article is the confusion you took away from it. The last sentence of your remark demonstrates that you clearly paid no attention to what the article is saying. In fact, the very point is that the study demonstrates exactly that which seems “unlikely” to you. The presumption, especially amongst conservatives, is that UI provides enough of a disincentive so that, once the disincentive is removed, people will get off their lazy cans and go find themselves a job, resulting in higher rates of employment amongst former recipients of UI. The problem is that that presumption doesn’t hold up in the real world: removing benefits from the unemployed led to no corresponding bump in employment. In other words, there’s absolutely no indication that the presence of UI benefits or lack thereof was the determining factor in people’s efforts at finding employment.

        The other possibility–that unemployed workers are unemployed not because they’re comfortable living on Uncle Sucker’s gravy train but because in fact there are not enough jobs to engage all of the employable workers in the labor pool–seems, in light of this study, to be the more likely explanation. And, if you’ve ever known anyone who’s been unemployed, this is really the more likely answer. The common perception is that the unemployed we know personally are there through the vagaries of fate, but that MOST of the unemployed are in fact some group of lazy slackers just waiting to pounce on an opportunity to get something for nothing. Those are the ones–THEM–that we know need to be dealt with using tough love and no tolerance for their tomfoolery. Once we remove the disincentives, they’ll get off their collective lazy duff and get out there and get a job. Unless… unless, of course, there are too few jobs to be had or, in some areas, no jobs at all. And those are the people–those deserving of our help–that we feel we need to target. But the recent cuts in UI have been a clear clean-cut natural experiment, a rarity in economics, and the results are also clear: cutting UI does not lead to a ramping up of employment. It just leads to the further immiseration of the already miserable, who also have to tolerate the sneering condemnation of those who believe that they’re only in it for the bucks.

        • Rick, excellent recycling of the argument in the article. The notion of UI as a simple transfer of wealthand to an extent wasted in the slackers of the world is challenged by these findings and belies the sterile vacuum of theory on incentives.

          In a world of hunters-gathers, one would expect all to have the ability to at least go out a forage for themselves, unless disabled or aged. However, in our highly integrated and specialized socio-economic state, many have become specialized to the extent that the skills of foraging at lost.

          The structural unemployment due to the complexities of socio-economic modernity must be addressed in our education process, both on the front end and when workers find that there is no job available for their skills set that society utilized them prior to losing an opportunity. I am a huge advocated of multiplicity of learning, where one adds to his/her tool kit in life to be able to function.

          We allow people to channel there desires into a mono-skills sets of what they want be when they grow up, which leads to structual unemployment. Instead we should encourage a multiplicity of potential prfessions, where the tools and skills we develop compliment a multiplicative ability in the work force.

          This not only a problem from the development of the worker, but employers as well. Many employers cannot see the multiplicity of skills that a worker may have, due to the hiring agent’s inability to see beyond a hiring template seeking a path depent template of skills in the decision-making process of the hiring agent.

          In my own life, I have had to challenge hiring agents that have told me that I did not have experience or skills because they did not see beyond the presumptive template they were looking for in my job history and did not look at the multiplicity of skills in my own tool kit. The famous phrase comes to mind, “I can’t put a check in this box on the hiring form.

          The problem of the unemployed is more than simple argument of incentives or constraints. It is a problem of knowledge and having the multiplicity of skills to survive in a modern world, and recognizing the multiplicity if skills in others. We must all learn how to increase our skills and tools kit to be able to entreprenurially forage for ourselves in this complex modernity. As a result, we will create opportunity for ourselves and others.

          Good luck to all of you, as I am unemployed and seeking opportunity without taking unemployment…unless I become desperate.

        • Rick, excellent recycling of the argument in the article. The notion of UI as a simple transfer of wealth and to an extent wasted on the slackers of the world is challenged by these findings and belies the sterile vacuum of theory of incentives.

          In a world of hunters-gathers, one would expect all to have the ability to at least go out a forage for themselves, unless disabled or aged. However, in our highly integrated and specialized socio-economic state, many have become specialized to the extent that the skills of foraging at lost.

          The structural unemployment due to the complexities of socio-economic modernity must be addressed in our education process, both on the front end and when workers find that there is no job available for their skills set that society utilized them prior to losing an opportunity. I am a huge advocated of multiplicity of learning, where one adds to his/her tool kit in life to be able to function.

          We allow people to channel there desires into a mono-skills sets of what they want be when they grow up, which leads to structual unemployment. Instead we should encourage a multiplicity of potential prfessions, where the tools and skills we develop compliment a multiplicative ability in the work force.

          This not only a problem from the development of the worker, but employers as well. Many employers cannot see the multiplicity of skills that a worker may have, due to the hiring agent’s inability to see beyond a hiring template seeking a path depent template of skills in the decision-making process of the hiring agent.

          In my own life, I have had to challenge hiring agents that have told me that I did not have experience or skills because they did not see beyond the presumptive template they were looking for in my job history and did not look at the multiplicity of skills in my own tool kit. The famous phrase comes to mind, “I can’t put a check in this box on the hiring form.

          The problem of the unemployed is more than simple argument of incentives or constraints. It is a problem of knowledge and having the multiplicity of skills to survive in a modern world, and recognizing the multiplicity if skills in others. We must all learn how to increase our skills and tools kit to be able to entreprenurially forage for ourselves in this complex modernity. As a result, we will create opportunity for ourselves and others.

          Good luck to all of you, as I am unemployed and seeking opportunity without taking unemployment…unless I become desperate.

      • Mike, that’s the point of his analysis—he found that people are not encouraged to find work by cutting off their benefits. Logically, the contrapositive is true:
        Providing benefits is not discouraging people to work.
        (p = people discouraged from finding work over baseline, q = cutting off benefits; p->!q, q->!p)

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