More Research on Unemployment Insurance’s Impact on Employment

Last week my article on unemployment benefits was published in the N&O. The main premise was simple and noncontroversial: when you pay people not to work, the result will be more people not working. But apparently pointing out an obvious truth ruffles some feathers, judging from the several angry letters to the editor the article generated – with one such letter calling this self-evident bit of common sense “a stretch.”

For additional reading on the subject (as if glaringly obvious common sense is not enough to persuade them) for these deniers, they can review some recent academic findings that confirm what should be obvious to any rationally thinking person: more generous and longer extended unemployment benefits translates into higher unemployment.

• This 2012 paper by the Philadelphia Federal Reserve Bank, that finds: “The extensions of UI benefits are found to have contributed to an increase in the unemployment rate of 1.4 percentage points, which is 29 percent of the observed increase in the unemployment rate (4.8 percentage points);” and “the December 2010 extension has moderately slowed down the recovery of the unemployment rate, keeping the rate 0.6 percentage point higher during 2011.”
• Or this 2013 National Bureau of Economic Research paper that states: “Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility.”
• And this 2011 article by the Chicago Federal Reserve Bank that concludes: “the extension of unemployment insurance benefits during the recent economic downturn can account for somewhere in the neighborhood of 1 percentage point of the increase in the unemployment rate, with a preferred estimate of 0.8 percentage points.”
• This research by Econ Journal Watch that suggests: “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.”
• And then there is this article written by former Obama economic advisor Larry Summers, in which he declares: “The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.”