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Posts Tagged ‘Unemployment Insurance’

Over the past several years, I’ve repeatedly argued that you get more unemployment when the government pays people to be unemployed. But I’m not just relying on theory. I’ve cited both anecdotes and empirical research to bolster my case.

You won’t be surprised to learn that many politicians have a different perspective. They say it is compassionate to provide unemployment insurance benefits. And they say it is cruel and heartless to put a time limit on those payments.

And if you believe Nancy Pelosi, unemployment handouts actually are good for the economy!

You might think this is one of these never-to-be-resolved Washington debates, but we actually have two natural experiments over the past year that show one side was right and the other side was wrong.

Writing for the Wall Street Journal, John Hood of the North Carolina-based John Locke Foundation describes what happened when his state decided to limit unemployment benefits.

Here are the changes that were made.

A year ago, North Carolina became the first state in the nation to exit the federal government’s extended-benefits program for the unemployed. …Gov. Pat McCrory and the state legislature…reduced the amount and duration of unemployment-insurance benefits, which had been higher in North Carolina than in most states. As a result the state lost its eligibility to participate in the extended-benefits program on July 1, 2013. …liberal activists pounced. …media outlets excoriated North Carolina for ending extended benefits. New York Times columnist Paul Krugman called it a “war on the unemployed.”

And here are the results.

North Carolina didn’t descend into the Dickensian nightmare critics predicted. For the last six months of 2013, it was the only state where jobless recipients weren’t eligible for extended benefits. Yet during that period North Carolina had one of the nation’s largest improvements in labor-market performance and overall economic growth. According to the U.S. Bureau of Labor Statistics, the number of payroll jobs in North Carolina rose by 1.5% in the second half of 2013, compared with a 0.8% rise for the nation as a whole. Total unemployment in the state dropped by 17%, compared with the national average drop of 12%. The state’s official unemployment rate fell to 6.9% in December 2013 from 8.3% in June, while the nationwide rate fell by eight-tenths of a point to 6.7%.

But we didn’t just have a state-based experiment. Hood explains that the same thing happened on the national level six months later. Congress rejected Obama’s call for another extension of benefits.

So what happened?

Still not convinced that leaving the extended-benefits program encouraged both job creation and job acceptance? As of Jan. 1, 2014, the extended-benefits program expired nationwide. Yet there has been no sudden exodus of discouraged workers to the fringes of the national economy. Both job creation and household employment are up. The nation’s employment-population ratio was 58.9% in May, up from 58.6% in December.

This is a powerful point.

We may not have a strong job market, but the numbers definitely have improved since the start of the year.

There’s actually an important lesson here. You don’t need perfect policy to get better performance. The private economy will generate growth so long as it has some breathing room.

Heck, sometimes the absence of bad policy is enough to boost economic performance. The post-2010 gridlock didn’t lead to a lot of good policies, but it did end the threat of major new statist initiatives from the Obama White House. And that was enough, in my humble opinion, to give us better numbers.

But better numbers are not the same as impressive numbers. This is still the weakest economic recovery since the Great Depression. So while it’s good to have a bit of improvement, we should be dissatisfied until we at least get back on the long-run trendline for 3 percent average real growth.

And what needs to happen to give us that kind of growth? The answer is simple: Free markets and small government.

P.S.  Since the main point of today’s column is unemployment insurance, let’s close with some great cartoons on that topic from Michael Ramirez, Robert Gorrell, and Chuck Asay, as well as a superb Wizard-of-Id parody.

P.P.S. On a separate topic, here’s a superb video of a 1948 cartoon comparing free markets to the poisonous ideology of “isms” such as communism, fascism, and socialism.

Very well done, particularly considering that it’s almost 70 years old. And if you want to see how economic growth can make a huge difference over that amount of time, check out this comparison of Argentina and Hong Kong.

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President Obama has presided over a terrible jobs market.

Unemployment is more than two-percentage points higher today than the White House claimed it would be if the so-called stimulus was enacted.

Even more worrisome, the employment-population ratio seems to have permanently fallen, which is bad news for economic performance since our output is a function of how much capital and labor is being productively utilized.

So what’s the response from the Obama Administration? Well, they want to further subsidize people for not working.

I’m not joking. Here’s some of what has been reported by the Huffington Post.

The Obama administration on Friday came out strongly in support of extending long-term unemployment insurance past its current expiration date. …”We have always done so when unemployment is this high and would make little sense to fail to do so now when we are still facing the burdens of the worst downturn since the Great Recession,” [Obama economic adviser Gene] Sperling said. “It is high bang for the buck for the economy, reduces poverty and helps workers who lost jobs due to no fault of their own get back on their feet.”

But is it true that providing more unemployment benefits is an approach that “helps workers”?  In their academic writings, both Paul Krugman and Larry Summers have pointed out that you get more unemployment when you subsidize joblessness.

And research by Professor Casey Mulligan also has found a very clear link between government benefits and unemployment. If you’re still not convinced, here’s some more empirical evidence showing that you get more joblessness when you subsidize leisure.

And now we have even more evidence showing that it doesn’t make sense to make leisure more attractive than employment. Four economists conducted some new empirical research to look at how unemployment benefits impact economic performance in the labor market. First they explain the theoretical concerns.

Unemployment in the U.S. rose dramatically during the Great Recession… The policy response involved an unprecedented extension of unemployment benefits with benefit duration rising from the usual 26 weeks to as long as 99 weeks. …The effectiveness of this policy response was questioned by Barro (2010) and Mulligan (2012), among others. Because unemployment benefit extensions represent an implicit tax on market work, they subsidize unemployment and discourage labor supply. …Everything else equal, extending unemployment benefits exerts an upward pressure on the equilibrium wage. This lowers the profits employers receive from filled jobs, leading to a decline in vacancy creation. Lower vacancies imply a lower job finding rate for workers, which leads to an increase in unemployment.

Then they report their findings, including the remarkable result that the bulk of poor employment numbers in recent years are the result of extended unemployment benefits.

Our empirical strategy exploits a policy discontinuity at state borders to identify the effects of unemployment insurance policies on unemployment. …We explicitly control for the effects of other policy changes at the state level (that could be correlated with the expansion of unemployment benefit durations) to ensure that our estimates isolate the effects of unemployment benefit extensions. …We find that unemployment rises dramatically in the border counties belonging to the states that expanded unemployment benefit duration as compared to the counties just across the state border. The quantitative magnitude of this effect is so large that our estimates imply that benefit extensions can quantitatively account for much of the unemployment dynamics following the Great Recession.

Some Keynesians argue that unemployment benefits are nonetheless good for the economy because of the impact on aggregate demand. But even if you believe Keynesian theory, the authors find that unemployment benefits don’t help because of the offsetting foregone income resulting from fewer jobs.

…an increase in unemployment due to benefit extensions is similar in magnitude to the decline of employment. Thus, the total effect on spending is ambiguous as extending benefits increase spending by the unemployed but at the same time decrease spending as fewer people are employed.

So what’s the bottom line? Simply stated, we need some tough love. There needs to be a limit on unemployment benefits so that companies will have more incentive to create jobs and so that unemployed people will have more incentive to get off the couch and find a job.

I’ve made this point during television interviews, but I suspect that many people will find this Michael Ramirez cartoon more compelling and convincing. In any event, it’s more entertaining.

And we definitely can’t overlook this superb Wizard-of-Id parody. It doesn’t focus on unemployment benefits, but it makes a great point about labor supply incentives in a very amusing fashion.

But let’s close on a serious note. Comparing data from the United States and Europe also shows that government policy has a big impact on the labor market. And if you prefer anecdotes, check out this story from Michigan and this example from Ohio.

P.S. At least the President is consistent. He also is pushing another policy that would increase unemployment.

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I recently wrote about the pinheads at the Equal Employment Opportunity Commission, who are threatening legal action against companies that are leery about hiring people with criminal records.

Now some states and cities are making it illegal to discriminate against those that have been unemployed for a long period of time.

Unlike special legal status for ex-cons, this sounds reasonable. After all, we all would like to help the long-term unemployed break free of the chains of government dependency.

But sometimes good intentions generate undesirable effects. I explain in this Fox Business News debate that companies will do their best to avoid even interviewing the long-term unemployed if they have to worry about potential legal pitfalls whenever they make a hiring decision.

I also explain that businesses have no incentive to engage in unjustified discrimination. After all, that would imply a willingness to deliberately sacrifice profit in pursuit of some irrational bias.

But as Walter Williams has succinctly argued, some forms of discrimination make sense.

And if there are two applicants who otherwise seem to have equal qualifications for a certain job, but one has been out of work for more than 12 months, it’s only logical that the employer will think that a lengthy stint of sitting on a couch does not suggest great habits.

Which is why Obama’s policy of never-ending unemployment benefits is so misguided. People get lured into long-term unemployment and there is both anecdotal evidence (check out these stories from Michigan and Ohio) and empirical evidence (here, here, and here) showing this unfortunate impact.

Heck, even Paul Krugman and Larry Summers have admitted that you get more unemployment when you subsidize joblessness.

Ramirez Unemployment CartoonSo you won’t be surprised to know that I’ve dispensed some tough love on this topic as well.

P.S. This cartoon does a very effective job of showing the consequences of paying people not to work.

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I’ve written periodically about the perverse incentives of the unemployment insurance system. Simply stated, there will be fewer jobs if the government subsidizes joblessness, and I even showed that this is a consensus position by citing the academic writings of left-leaning economists such as Larry Summers and Paul Krugman.

The San Francisco Federal Reserve also has produced research measuring the negative impact of unemployment insurance on the job market.

Now we have some additional academic research on the topic, and the results once again show that the unemployment insurance program causes a significant increase in unemployment.

The Emergency Unemployment Compensation program created in the summer of 2008 provided for unprecedented extensions in the duration of unemployment insurance (UI) benefits. Combined with persistent high unemployment and historically long durations of unemployment during the 2008 and 2009 recession, this extension of UI has prompted renewed interest in the impact of UI benefits on job search, the duration of unemployment, and the unemployment rate. …This paper uses multiple regression analysis to estimate the impact of extended UI benefits on the unemployment rate after controlling for the severity of the recent recession. The extension of UI is found to have a positive and significant impact on the national unemployment rate… 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.

If you’re trying to educate a statist friend or colleague about the relationship between unemployment insurance and joblessness, this research should help. But you may also want to share this real-world story. And here’s another powerful anecdote.

Last but not least, this cartoon does a very effective job of showing the consequences of paying people not to work.

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I’ve written before about the perverse impact of the unemployment insurance program, and I’ve even cited how left-wing economists such as Paul Krugman and Larry Summers admit that you get more joblessness when you pay people for not working.

I’ve even shared a very good cartoon making the same point. And who can forget Nancy Pelosi’s mindless comments about unemployment benefits being a great way to stimulate job creation.

But sometimes it helps to have real-world anecdotes, and this letter-to-the-editor from a newspaper in Ohio is very educational. Here are key excerpts.

Little did I know that attempting to hire the employees needed, which I had thought to be the easiest part, would turn out to be a nightmare if not impossible. …Before 2009 if our company advertised for an open position, on average we would get 20 to 30 applications, interview six to eight of the applicants, and hire one or two, based on the quality and potential of the candidates. This process has been deteriorating dramatically since 2009 and now at the end of 2011 it has completely hit bottom. Of all the applications that we have received this year, when asked why they were seeking a job with us, one out of three answered: my unemployment is running out and I have to go back to work. Earlier this year after I hired two new full-time employees, went through our company’s orientation process, fitted them with our work clothing and booked them to start within a week, they both quit. One called ahead of the start date to apologize but wanted to inform us he would not be coming in because the government had just extended unemployment benefits again. The second one just did not show on his first day and when I called him he said he couldn’t come in now because unemployment had been extended and he was making almost as much as we were planning to start him out with.  …Our government is considering extending unemployment benefits again soon. The final absurdity might be that extending unemployment is the only thing that both the Democratic and Republican majorities both agree on.

By the way, here’s a post with a similar real-world story from Detroit.

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Who knew there was such a thing as an unemployment insurance joke? This gem comes courtesy of the Washington Watch website.

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A guy walked into the local unemployment office to pick up his check. 

He marched straight up to the counter and said, “Hi. You know, I just HATE drawing unemployment. I’d really rather have a job.”

The worker behind the counter said, “Your timing is excellent. We just got a job opening from a very wealthy old man who wants a chauffeur and bodyguard for his beautiful daughter. You’ll have to drive around in his new Mercedes-Benz CL, and he will supply all of your clothes. Because of the long hours, meals will be provided. You’ll also be expected to escort the daughter on her overseas holiday trips. This is rather awkward to say, but you will also have, as part of your job, to satisfy her sexual urges as the daughter is in her mid-20’s and has a rather strong sex drive.”

The guy, just plain wide-eyed, said, “You’re bullshittin’ me!”

The worker said, “Yeah, well .. You started it.”

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