Monday, March 8, 2010

Unemployment Insurance: Neither All Nor Nothing

I have recently returned to the topic of unemployment insurance (UI), showing how it does reduce employment, even during a recession. All of the UI extensions done by Bush and Obama have made national employment be less than it would have been (of course, lower employment may be a price worth paying to help people who lost their jobs).

At the same time, I think that UI explains only a small part of the employment drop since 2007. If it were not such a great illustration of faulty economic reasoning, it would be low on my list of things to study about this recession.

Here are a couple of reasons (nothing new, just a recap of earlier posts) why I think UI explains only a sliver of what's happened during this recession:
  • a recession that was caused solely by UI would have a larger labor force (recall that the labor force is the sum of employees plus unemployed), because some of the people who would normally leave the labor force (say, by retiring or becoming housewives) would stay in the labor force in order to get UI benefits. Our economy today has a SMALLER LABOR FORCE
  • in order for a UI program to create a recession of this size, it would have to be very "well" (that is, destructively) targeted and would need a least a trillion dollars. Our UI system does not spend this much, and is not well-targeted.
  • Professor Shimer has estimated that UI explains about one percentage point (maybe a bit more) of the almost 10 percentage point unemployment rate -- that leaves 9 points to be explained by something else.
  • Much unemployment occurs among teenagers who are not eligible for UI.

Nor can much of the recession be blamed on the minimum wage hikes, or even the combination of minimum wage hikes and UI.

I think it is likely that employment would be millions higher if our government had abstained from the top dozen employment-reducing policies it has undertaken during this recession. But we economists have a long way to go to determine whether that policy combination destroyed 8 million jobs, or "just" 2 million (not to mention, some economists have a long way to go before they admit that government policy has destroyed any jobs).

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