Tuesday, April 13, 2010

More Estimates of the Effect of UI on the Unemployment Rate

Professor von Wachter et al: extended benefits account for about a percentage point. Professor von Wachter said this in his presentation at the Univ. of Chicago -- I'm not sure how clear the working paper is on this point. He also qualified his prediction -- he is studying Germany, not the U.S., etc. -- but he was very clear that longer benefit eligibility results in more time unemployed.

Professors Elsby et al, writing for Brookings: UI could account for “as much as 15 to 40 percent of the rise in aggregate unemployment duration, a potentially substantial effect. In terms of the unemployment rate, this corresponds to between 0.7 and 1.8 percentage points of the 5.5 percentage point rise in the unemployment rate witnessed in the current recession.”

Dr. Feroli at JPMorgan: extended benefits account for 1.5 percentage points of the current unemployment rate

Professor Robert Shimer: all benefits account for 1 - 1.5 percentage points of the current unemployment rate

Federal Reserve Board: "The several extensions of emergency unemployment benefits appear to have raised the measured unemployment rate" (Jan 2010 FOMC minutes). They cite other estimates, which could overlap with the above.

Econbrowser claims that raising the unemployment rate might enhance welfare -- for a more detailed discussion of that remarkable claim, see this short post.

For my own decomposition of the "offsetting" effects of UI, see this post from last summer.

I am well aware that the Meyer study and the study of Pittsburgh are "partial equilibrium" -- in theory it is conceivable that one person's work behavior is offset (or more than offset) by the work decisions of others. Indeed, I have given a great deal of attention to empirically estimating the feedback effect, and found (in this paper, this post, and the posts linked therein) that an increase in labor supply of one group is not fully offset by decreases in labor demand for other groups, but rather increases aggregate labor usage (as partial equilibrium theory would predict).

Although a bunch of economists proclaim that UI's general equilibrium effect offsets its partial equilibrium effect, they have put forward zero evidence in support. It is my opinion that unemployment insurance significantly raises unemployment and significantly reduces employment, even after accounting for general equilibrium effects. Whether that's good or bad is another question.

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