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Benefits and Disincentives

Congress is once again debating an extension of unemployment benefits amidst our non-recovery from the recession. Economist Scott Sumner pleads with progressive bloggers to remember that whether UI benefits have disincentive effects (i.e. encourage them not to get jobs) or not is an empirical question. He’s right and it’s absurd to think that extending UI would have no effect on employment:

The statistical evidence on UI is overwhelming significant.  When the UI benefits maxed out at 26 weeks, there was a spike in the number re-employed right after the benefits ran out.  That’s not to say the benefits are necessarily inefficient, if the spike was due to the income effect then UI might actually make the job market more efficient.  But it’s hard to dispute the fact that UI insurance does have some effect on labor supply.

Whether or not progressives on the whole acknowledge this enough or not, I’m not sure, but anyone interested in helping the most people are right to focus on more important figures. There is no evidence that extending UI benefits is significantly reducing the labor supply.

These aren’t perfect proxies but, as you can see, unemployment duration among people ineligible for UI (blue line) is roughly the same for those eligible (red line). Furthermore, even if you were to completely eliminate UI benefits, there just aren’t enough job openings for the unemployed to fill.

(via Jared Bernstein)

Too many conservatives seemingly believe that we need to make a moral statement rather than helping the unemployed. Even if removing benefits would knock half a point off the unemployment rate as some studies have found and the multiplier effect of giving cash to likely spenders isn’t as powerful as other studies have found, we’d be hurting the vast majority of the unemployed. They’d be stuck without jobs or vital benefits.

Just to preempt some people who might wonder why 3.4 million unemployed haven’t filled those job openings, it’s important to remember that many of those job openings do get filled. A large portion of the openings are part of the normal churn of openings and fillings. Another portion is due to skills-mismatch (an unemployed construction worker isn’t about to fill a job opening for a hedge fund manager). And some jobs are open because policies like the mortgage interest deduction distorted the market away from renting, which sometimes traps people from being able to move to where the jobs are available.

Job openings are usually higher in healthier economies:

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