Uncompassionate Economics: Blaming Unemployment Compensation for Our Job Woes

By :: August 30th, 2010

In a Wall Street Journal op-ed this morning, Robert Barro lays blame for the nation’s stubbornly high unemployment rate squarely on President Obama’s doorstep. The outspoken Harvard economist asserts that unemployment would stand at 6.8 percent—well below today’s 9.5 percent—if only the president and Congress hadn’t extended unemployment compensation to 99 weeks.

Barro does acknowledge the need for compassion in tough times:

"The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.

"In a recession, it is more likely that individual unemployment reflects weak economic conditions, rather than individual decisions to choose leisure over work. Therefore, it is reasonable during a recession to adopt a more generous unemployment-insurance program."
Yet, he goes on to say, unemployed workers would find jobs more quickly and companies would boost hiring faster if we sharply constrained the maximum duration of jobless benefits and held down the taxes that pay for them. Barro cites as evidence what happened to long-term unemployment in 1982. Then the unemployment rate peaked at 10.8 percent, higher that in our current Great Recession. Congress extended the maximum duration of unemployment compensation that year to 39 weeks—60 weeks less than the current limit.  The mean length of jobless spells hit 21.2 weeks and 24.5 percent of workers had had gone jobless for more than 26 weeks, compared to 35.2 weeks and 46.2 percent this past June. Today’s historically high numbers result entirely from the 99-week limit, says Barro. Cut that back to 39 weeks and the jobless would find work, dropping the overall unemployment rate by nearly a third to 6.8 percent.

That conclusion might follow if the two situations fit economists’ simplifying assumption of ceteris paribus—“all else the same.” But the two recessions, though both horrible, differ significantly. Both were worldwide but there was no financial market meltdown in 1982: firms could borrow, albeit at extraordinarily high interest rates. High mortgage rates, approaching 20 percent, caused house sales to fall by roughly half in 1982, but foreclosures didn’t soar as they have this time around. And firms weren’t sitting on piles of cash, unwilling to invest until the economy strengthens.

Research by Rob Valletta and Katherine Kuan at the Federal Reserve Bank of San Francisco suggests that the effect of extended benefits would be much smaller than Barro’s estimate, probably less than half a percentage point. They found only small differences between how quickly job losers (who qualify for unemployment benefits) and job quitters (who don’t) find new jobs, suggesting that duration of benefits has only a small effect on today’s high unemployment rate.

Sure, people may take a little longer to find a job when they have benefits to support them. But those benefits are meager, averaging less than $300 a week. That benefit may lead low-wage and secondary workers to wait longer to take a job but not primary and more skilled workers.  The problem is that jobs just aren’t available—the Bureau of Labor Statistics reports only one job opening for every five unemployed workers. That’s more than double the next highest ratio since the BLS started collecting data on job openings but that was only in 2000 so we can’t compare the value with 1982. Regardless of how today’s ratio stacks up against the past, cutting benefits off earlier won’t change that ratio or create new jobs. But it would leave unemployed workers with less cash, leading them to cut spending and weakening our already anemic economic recovery.

Given the continued weakness of the economy and the dearth of available work, now’s the time to emphasize compassion and defer hard-hearted economic efficiency.

20Comments

  1. Anonymous  ::  1:35 am on August 31st, 2010:

    Every time I see the name Barro floating around the blogs and op-eds I know I'm in for a good chuckle. Normally it involves the “Ricardian Equivalence” theory in which he asserts that Joe Sixpack computes an infinite horizon of tax rates and deficits before purchasing his next Bud. It's possible that econ grad students at Harvard do this or think they do. Outside of that The Equivalence appears to exist only in professor Barro's head.
    Now he tells us that employers are offering jobs aplenty but they can't find anyone to work because of those awesome UI benefits. Obama, he says, is “too focused on aggregate demand”. I've been in business for 30 years and I can tell you that employers are not hiring because they don't have enough customers. Period. Barro needs to get out more.

  2. Anonymous  ::  1:40 am on August 31st, 2010:

    In addition to helping workers and their families, the Unemployment Insurance programs play a key role in helping businesses, communities, and the nation's economy. It was created in 1935 in response to the Great Depression, when millions of people lost jobs. They couldn't buy goods and services, which contributed to more layoffs.exchange rate
    Now, as then, the program helps cushion the impact of economic downturns and brings economic stability to communities, states, and the nation by providing temporary income support for laid off workers.

  3. Anonymous  ::  2:14 am on August 31st, 2010:

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  4. Anonymous  ::  3:28 am on August 31st, 2010:

    If anything, the tax penalty that employers pay after layoffs should be increased to at least the point that it stops those firings which occurred not because the business was failing, but because it wanted to be more lean and profitable. A higher penalty UI rate would do that – and a secondary higher rate should be imposed if a layed off worker requires extended benefits.
    Do that and layoffs will not only stop, people will be called back quickly.
    This should be a fairly obvious point. Shame on the Democrats for not making it. Their ties to industry are showing again.

  5. Anonymous  ::  1:26 pm on August 31st, 2010:

    European countries have found that making it painful to fire employees has the unintended consequence of reducing hiring. If hiring an employee is an expensive long-term commitment, companies will naturally think long and hard before making that commitment.
    Making it easy to hire AND fire works better in the long run for almost everyone. It's counter-intuitive, but economists agree on this.

  6. Anonymous  ::  5:11 pm on August 31st, 2010:

    The societal inefficiencies that would be created without the unemployment compensation would far outweigh the cost of funding temporary compensation for the unemployed.

  7. Anonymous  ::  8:01 pm on August 31st, 2010:

    Ah, but if you make the changes retroactive, its too late to avoid the tax.

  8. Anonymous  ::  8:38 pm on August 31st, 2010:

    >Ah, but if you make the changes retroactive, its too late to avoid the tax.
    Too clever by half. Businesses and citizens will then correctly expect future nasty surprises from the government, and they will husband resources across the board rather than spending and investing. It's very basic economics that stability of the rules is essential to a country's economic foundation. The absence of stability, as exemplified by your suggested retroactive tax change, is the main reason that African countries have such poor economies.

  9. Anonymous  ::  3:58 pm on September 1st, 2010:

    You have only to go to old EU in general and Sweden in particular to find out that Barros argument is correct. The extremely generous unemployment benefit, in Sweden during the 70-80s lifelong, led to a permanent unemployment level of 10 % official and 20 % unofficial if including those in Government For-Works programs. Most of old EU have chronically levels exceeding 10 %.
    Nobody yet understands why generous and very long-term unemployment benefits have this effect but EU and Sweden show empirically that they do. They have a huge impact if compounded with other generous benefit systems that for their financing require very, very high taxes.
    Sweden and Switzerland parted ways after WWII all things equal up til then. The effect is that the Sweden has a GDP 40 % lower than Switzerland. The living standard for all Swiss is extremely high compared to Sweden. in the early 60s the Swiss Franc and Swedish Krona was at parity today one Swiss Frank costs 7 Kronor. (Sweden had to recurrently devalue its currency to raise competitiveness, Switzerland instead became more efficient and specialized)
    Sweden and Switzerland have basically the same welfare systems and take care of their citizens very similar. The difference is Sweden does it 90 % through government interventions and taxes whilst he Swiss rely on themselves Health-care is private but mandatory etc.
    So what does the US want to become be Sweden or Switzerland?

  10. Anonymous  ::  4:11 pm on September 1st, 2010:

    Interesting question. The Swiss harbored Nazi loot while the Swede's tried to free the oppressed. I thought that the Swede's perennially end up as being judged the happiest folks on the planet.

  11. Anonymous  ::  11:46 pm on September 1st, 2010:

    Sweden supplied Nazi Germany with iron ore and according to recent research because of that prolonged WWII for 2 years. Sweden supported Nazi Germany until Stalingrad and afterward supported the Allies.
    Sweden also allowed Nazi German troops to transit to and from the Russian front, a clear violation of neutrality.
    I was born in Sweden but our so called neutrality was a sham, a very, very shameful bit of our past.
    Whose freedom did we Swede's support? I can't recall one? (I don't consider words only actions.)
    Happiness research is in fact completely meaningless. It's based on questionnaires not on how people act and feel in real life situations. However if we try to get into that the research shows that the freer the market is the happier the people is i.e wealth creates happiness. Further the more Western a country is, liberal democracy with Rule of Law, protection of speech and property the happier the people are.
    My point was is are you an egalitarian or do you strive for the most well being for most of the population.
    Churchill put it simply:
    1. “[Liberal] Democracy is the worst form of government except all those other forms that have been tried from time to time”
    2. “The inherent vice of [a free market society] is the unequal sharing of blessings;
    the inherent virtue of [egalitarianism] is the equal sharing of misery.”

  12. Anonymous  ::  8:37 pm on September 2nd, 2010:

    I'm not clear what the Nazis have to do with this, but I think the key word you are ignoring is “generous”. $300/week is by no means generous, unless you have already been living below the poverty line. If you collect that $300 for all 39 weeks, you would net less than $11,700, before taxes. If you were on unemployment full time for an entire year, your net would be only $15,600.
    That's not exactly a dynamic income that would induce any of the jobless workers I know to stop looking for a job.

  13. Anonymous  ::  4:22 am on September 10th, 2010:

    This argument is spot on. Just go back to Nazi Germany and Sweeden. Need I say more?

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