Do Unemployment Benefits Cause Unemployment?

The continued meme from the political right suggests that monthly disability benefits encourages people to have disabilities; Social Security checks are creating a generation of old lazy people; food stamps inspire poor people to quit their job (or not look for one) so they can eat steak and lobster for free; welfare checks seduces young unmarried women to lay on the couch all day long eating Bonbons while having multiple babies --- just as life insurance causes people to die prematurely; auto insurance recklessly leads to car accidents; home insurance rewards hard-working people to burn down their own homes; and health insurance causes perfectly healthy people to become seriously ill.

So does unemployment insurance also cause joblessness?

This is an old story that won't go away - - - even though federal extended unemployment benefits are no longer available for the long-term unemployed, and most likely, won't be ever again (unless the country faces another serious economic crisis like we did during the last Great Recession.) So the only possible reason this story is (once again) rearing it's ugly head is because, there is a movement under way by the political right to reduce state unemployment benefits as well — which has a 26-week maximum in most states. (The Social Security retirement and disability programs are already currently under attack by the political right.)

According to a new study by the NBER (National Bureau of Economic Research), Congress failing to reauthorized the extension of unemployment insurance (for the long-term unemployed) resulted in 1.8 million additional people getting jobs. In an article at The Next New Deal, they ask: "But wait, how does that happen when only 1.3 million people had their benefits expire?"

They were referring to an article at the Washington Post, titled: A new study argues cutting unemployment benefits created 1.8 million jobs. The authors of the study had previously made a well-criticized splash in 2013 by arguing that most of the rise in unemployment in the Great Recession was driven by extended unemployment benefits (before these benefits ended in December 2013).

Dean Baker (at the Center for Economic and Policy Research) replaced the NBER’s employment data in their new study with the more reliable CES employment data — and finds the opposite result. Also, Robert Hall (at the Hoover Institute, Stanford) recently says of NBER's earlier paper: “This paper has attracted a huge amount of attention, much of it skeptical."

Michael Thornton, who has in the past written about unemployment at the Huffington Post, The Examiner, AlterNet (and other outlets), recently sent a letter to the author of that Washington Post article, where he wrote:

I read your story and I was very disappointed that so little effort was given to present alternative analysis and facts. It always amazes me that so many people constantly look at the unemployed as "lazy" and looking for a handout. And your 'wonk' piece adds to that misconception. And to consider all long-term unemployed as same, is also lacking.

First of all, the NBER is funded by very conservative groups; John M. Olin Foundation, Inc.; Lynde and Harry Bradley Foundation; Scaife Foundations (Sarah Mellon Scaife); and Smith Richardson Foundation.

While on the other hand, why doesn't the Federal Reserve analysis get the same type of push from conservatives, Republicans, libertarians and Tea Party types — those who don't create jobs, but criticize those who don't have one. The GOP introduced about 50 abortion bills and almost as many bills to repeal the Affordable Care Act (Obamacare) — while at the same time, the Republicans want to give corporations bigger tax breaks so they can simply purchase more shares of their own stock (stock buybacks), rather than investing in the labor force and hiring people.

From the Board of Governors of the Federal Reserve System: 2012 had a larger rate of long term unemployment decline than 2014. Look at the Fed's graphs: I don't see the NBER pointing out that fact. Long-term unemployment has been declining at a steady rate since 2011, when unemployment benefits lasted much longer. As shown (in Panel A of Figure 2) their monthly probability of moving from unemployment to employment has recovered only modestly — and still remains depressed relative to its pre-recession level. Moreover, (as shown in Panel B of Figure 1) this indicates that the long-term unemployed are about twice as likely to move to nonparticipation (that is, to drop out of the labor force) as to employment.

So the bottom line is, some long-term unemployed are finding work, and that's been the case for three years. So to say it all corresponds to ending benefits is simply "conservative rubbish". Unfortunately, the Washington Post is unable to breathe some additional analysis into this conservative meme that "unemployment benefits are detriments to working". It's BS. Especially considering that only 25-33% of all unemployed receive benefits.

This is analysis from the Federal Reserve of San Francisco from 2010. And look at the graph here from the St. Louis Fed: I ask, is the rate of long-term unemployment dramatically steeper to the downside? No.

A record-low 25 percent of unemployed Americans will receive benefits, now that Congress has allowed the federal program to expire, according to data from the Department of Labor. The number is the lowest since the Department of Labor began keeping records in 1946. Before Congress let the federal unemployment benefit-assistance plan expire on December 28 2013, only 38 percent of unemployed Americans who paid unemployment taxes were receiving unemployment insurance — either through their state or the federal government.

I hope that in the future, you can find the time to give a more realistic perspective on the long-term unemployed — or at least, more so than the NBER.

Michael Thornton

(The author of the Washington Post article has not responded to Mr. Thornton’s letter as of the publishing of this post.)

And so, while on the subject of the NBER's study — This is John H. Cochrane at his blog: "I think it's widely accepted, if sometimes grudgingly, that unemployment insurance increases unemployment. If you pay for anything, you get more of it. People with unemployment insurance can hold out for better jobs, put off moving or other painful adjustments, and so on." (I'm not sure what he means by "If you pay for anything, you get more of it.")

But then he goes on: "But the question remains. How much? How much does unemployment insurance increase unemployment? Just why did unemployment in the U.S. suddenly drop coincident with sequester and the end of 99 week unemployment benefits?"

Then he quotes Bob Hall (at the Hoover Institute) "We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut ... absent the increase in UI benefits, unemployment in 2010 would have been about 3 percentage points lower."

Noah Smith commented: "Excellent post." (FYI: Here's his blog, if you want to get know more about this "economic commenter". Google his name to see what others say about him.)

One reader, Ray Lopez, also comments on Cochrane's blog and provides a link to his comment at another post: "States that had high unemployment benefits had a faster return to work when unemployment benefits were abruptly ended in Dec 2013 than states that had poorer unemployment benefits. But from a Bayesian analysis, the authors fail to account for these facts."

Meanwhile, back at John H. Cochrane's blog, another commenter wrote: "As I look at this (being a conservative and a business expert) it becomes clear that economists sit in their offices playing with models and statistics, most of them have no concept of or connection to the realities of business or the labor market or just about anything else. The use of math does not mean economics is a science, despite what economists might think. The claims for unemployment in 2010 are ludicrous to anyone who knows anything about the real operations of businesses. 1.8 million jobs created by the end of extended unemployment? No undergrad business major would ever say anything that ridiculous."

Even though almost 9 million are still "counted" as unemployed, as of January 2015, U.S. jobless claims dropped sharply to near 15-year low. So, the good news is, that even though the job creators haven't been hiring enough people, they also aren't firing as many as they used to either.

But getting back to the original question: Does unemployment insurance cause unemployment? Probably not. But the point (and the entire argument for that matter) is mute anyway — at least for now. Because with a GOP controlled Congress, there is no way that the federal extended unemployment insurance program (that once offer 99 weeks of benefits) will ever be revived for the long-term unemployed. A few states have already slashed state UI benefits to the bare bones. In North Carolina, it's now only 12 weeks (After that, start packing your bags.)

But the real question should be: Can stupidity cause right-wing economists, bloggers and journalists to become shills for the Republican party, those who only want to starve the beasts? Most of the empirical evidence would lead one to conclude that, yes, most of the time it does.

As for liberal economists, bloggers and journalists? Well, it's fairly common knowledge that "facts" have a well-known liberal bias ;)



Rebuttal: UI benefits causes Joblessness

@ Off The Charts (by Chad Stone, Chief Economist at the Center on Budget and Policy Priorities)

"The Unconvincing Claim That Unemployment Benefits Hurt Jobs"