One Final Time: We Should Extend Unemployment Benefits

Rand Paul FilibusterAPRand Paul is wrong. We should extend emergency unemployment benefits.

Tim Carney is annoyed that liberals have refused to engage with conservative arguments over the potential negative effects of unemployment benefits and wants them to examine the evidence more carefully.

He’s right.

Carney cites two ways that unemployment benefits could reduce employment.

First, workers could forego work and choose to accept benefits instead. This is the common conservative criticism of safety net programs in general.

Liberals (including myself) have argued that there are nearly three times as many job applicants as there are job openings and that this is prima facie evidence that unemployment benefits cannot be holding back the economy. After all, even if some workers choose to forego work, there are plenty of others for firms to hire.

This reasoning is logical, but it ignores all empirical evidence. JPMorgan’s analyst Michael Feroli succinctly summarized the research on unemployment insurance in a note in November. He found that the end of emergency benefits could cause the unemployment rate to drop by 0.25%-0.50%.

But this is not only the result of unemployed Americans accepting a job now that their benefits have been revoked. Instead, much of it is the result of workers dropping out of the labour force. In order to collect unemployment benefits, individuals must continue looking for work. This keeps workers in the labour force who would otherwise have dropped out.

“[T]he lapsing of EUC could lower the unemployment rate by perhaps 0.25%-0.50%-pt, with much of the effect coming through reduced labour force participation, rather than increased employment,” Feroli writes.

This doesn’t mean that the expiration of the EUC has no effects on employment. It just means that the participation effect is likely stronger than the employment effect. Overall, both effects are minimal.

The second way that Carney explains how jobless benefits could hurt employment is a bit more complicated. Basically, it says that workers will holdout for a higher wage when they are receiving unemployment benefits and the higher wages force companies to hire fewer workers.

The only evidence for this theory is from a National Bureau of Economic Research study. The researchers found that this effect is large enough to explain “most of the persistently high unemployment after the Great Recession.”

That’s an incredible finding. It means that high unemployment is almost entirely the result of unemployment benefits, not a lack of demand. That’s hard to believe.

Accordingly, economists have found problems with the authors’ model. For instance, it does not take into account the mass layoffs that occurred in 2008, a focal point of the recession. The model also presumes that extended unemployment benefits would drive up wages of incumbent workers by increasing their bargaining power. But those workers would have to quit to take advantage of the extended unemployment benefits and workers who quit are in fact not eligible for those benefits. Thus, the extended benefits don’t actually improve their bargaining position.

In addition, the Bureau of Labour Statistics data that the researchers use is problematic. The BLS uses state level variables to predict county level employment. That means that neighbouring counties in different states could have similar employment levels, but the BLS data could show otherwise due to the effect of those state-level variables. Since the researchers methodology is to compare county employment data for counties in neighbouring states, their results are unreliable.

“It’s econometrics that probably doesn’t stand up to scrutiny,” said Chad Stone, the Chief Economist for the Center on Budget and Policy Priorities. “I think people have legitimate questions about whether it’s actually a robust empirical study.”

Stone noted that the econometrics model is sophisticated and deserves further testing, but right now it is dangerous to take much from their findings. More researchers need to try to replicate and test these results before we should let them inform our decision making.

That’s the full picture of how unemployment benefits affect employment. At best, conservatives can conclude that they minimally hold back employment based on the available research. Sen. Rand Paul (R-Ky.) is certainly way off in his description of the evidence.

But it’s important to remember the other side of this equation. If the consequences of extending emergency unemployment benefits are the cost of the program and a minimal negative effect on employment, here are the benefits:

  • Allowing millions of Americans to pay for food, housing and other household essentials.
  • Keeping workers in the labour force who otherwise would have dropped out of it.
  • Increasing consumer spending by billions of dollars which helps economic growth.
  • Giving workers the opportunity to search for a job that is a better match for both the employer and employee.

To his credit, Carney notes most of these benefits and seems to indicate that he supports the extension as well.

He should.

When you survey the available evidence on extending emergency unemployment, it’s abundantly clear that Congressional Democrats are right and (most of) their Republican colleagues are wrong. We should extend the program.

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