Labor Market Recovery Begins when States Begin to Open

The first chart below is an estimate of weekly US employment per adult.  It suggests that the bottom was the week ending May 7, and that a recovery may have begun.

The estimated recovery may not look large on the scale of the current depression, but it is about 7.5 million employees above May 7 and 3 million employees above late April.  Note that the entire recovery from the 2008-9 recession was "only" 7 million employees above population growth and took ten years rather than a week or two.

At about the same time, states began ending their stay-at-home orders.  E.g., Texas May 1 and California May 8.  I expect another increase in early June as more reopening occurs.  A big increase will occur when UI bonuses expire, which may be as early as August.

The imputation is based on the scatterplot below.

Notes on 2020 CARES Act, in reading order

Note that this law is just one of multiple new COVID-19 relief laws.  These are my notes on the labor market provisions in the law, which are all of Titles I and II, and parts of Title III.

Title I KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT

• A.k.a., 7(a) loans
• "Loans" to small businesses that maintain their payrolls
• Payroll does not include any payments to employees making $100K+ annually
• The loan amount is capped by the prorated amount of payroll for the prior year
• The loans can be forgiven in whole or part
• The forgiveness is capped by the minimum of
• $10 million;
• the sum of ongoing payroll, rent, utilities, interest;
• the loan amount (itself capped at 2.5 times average monthly in the prior year).
• The forgiveness is free from business tax.
• For this act, a small business is less than 500 employees.
• The date of this determination is crucial.  If the SBA Administrator is not careful with its guidance, it could be interpreted as the date of the loan.
• For businesses with more than 500 employees, this act would be a MASSIVE SUBSIDY TO FIRING enough people to be at 499 or less before making the loan application.
• Firing employees making more than 100K is most advantageous under this title.
• The SBA Administrator's definition will also affect expectations about how extensions of this Title will be implemented.
• Another part of this law will pay the fired employees, perhaps more than they were making as workers.
• Nonprofits are eligible too.
• Ends June 30, 2020
• Businesses with significantly less than 500 employees have a zero marginal cost of adding employees.  However, June 30 is too soon to make much profit from hiring.

Title II

• Section 2102.  PANDEMIC UNEMPLOYMENT ASSISTANCE
• A new program making payments to unemployed not covered by traditional unemployment assistance, such as someone who
• quit their job, or
• has no work experience.
• This program expands the UI-eligible pool by a factor of at least six.
• Normal pool is a subset of persons laid off from work, which should be less than 20 million.
• With Section 2102, the pool is any adult not on a full time payroll, which is at least 128 million (259 million adults minus Feb 2020 full-time employment of 131 million). 
• See Section 2104 below ("$1000 a week") and then calculate what the Treasury would spend on that section if, say, 80 million people were collecting $1000 per week.
• Program lasts through Dec 31.
• Weekly benefits last 39 weeks plus the duration of any extension of traditional UI.
• If a state were to deny UI benefits to a person failing a drug test, this program would pay them full benefits at Federal expense!
• Section 2103.  EMERGENCY UNEMPLOYMENT RELIEF FOR GOVERNMENTAL ENTITIES AND NONPROFIT ORGANIZATIONS.
• The Federal government takes over the UI "contributions" of government and nonprofit employers through Dec 31.
• Background: Normally, all employers make contributions that partially reflects their history of layoffs.  In effect, part of a UI benefit is paid by the employer who fired the person.  This is a normally a tax on making layoffs.
• By eliminating such contributions, the new program is a SUBSIDY FOR LAYOFFS by government and nonprofit employers
• Section 2104.  $1000 a week!
• Not to be outdone by the 2009 "stimulus" law, which paid a $25 weekly bonus to UI recipients, the 2020 EUC program pays a $600 weekly bonus!
• This bonus goes on top of the normal UI benefit, which averaged $378 per week at the end of 2019.  i.e., get paid $1000 per week for NOT WORKING!!
• It lasts through the end of July.
• $1000 per week is more than most full-time workers get paid for working.
• This disincentive to work and subsidy for layoffs is massive and not even close to any historical precedent.
• Section 2105.  Federal financing of the first week of unemployment.
• As with Section 2103, this is a subsidy for layoffs but for all employers.
• In contrast to Section 2103, this section only pays for one week.
• Section 2106.  Clean up of the previous coronavirus law.
• Section 2107.  Pandemic EUC
• Like the 2009 EUC program, this EUC programs provides Federal money to continuing paying UI benefits after state benefits have been exhausted.  It is limited to 13 weeks, putting the total duration of UI benefits at 52 weeks.
• Beneficiaries have to be actively seeking work.
• This will means some VERY long lines to apply for jobs, because standing in such line is both (i) proof of actively seeking and (ii) pretty safe protection against a job offer that would end UI.
• It lasts through the end of the year.
• Sections 2108-2110.  Part-time UI (a.k.a., "work share")
• Pays Federal benefits to part-time workers whose hours were reduced from full time.
• It lasts through the end of the year.
• Take a worker earning $800 per week full time.  With the CARES Act, the employer has two more options
• Lay her off so she can get $1000 per week from UI.
• Change her to half time so she can get $400 per week from the company plus another $500 week from UI, for a total of $900 per week.
• Section 2301.  Employee retention tax credit.
• Businesses with 0-100 full-time employees
• Section 2301 is a 50 percent tax credit for wages paid to any employee.
• Businesses with 101+ full-time employees
• Section 2301 is a 50 percent tax credit for wages paid to employees on the payroll but not at work due to COVID-19.
• For these employers, Section 2301 is a tax on work because employer has full payroll tax only when the employee works (as opposed to being on the payroll).
• Regardless of size, the employer must have gross receipts that are sufficiently low compared to the previous year.
• The credit applies to wages paid through the end of the calendar year, and cannot exceed $5000 per employee.
• These credits are fully refundable and administered through the payroll tax.  Nonprofits can get them too.
• Regardless of business size, Section 2301 is a step-function sales tax.  i.e., as soon as sales exceed a threshold, the payroll tax jumps discretely.
• Sections 2303-4.  Symmetric treatment of business gains and losses.
• Background: As an business' net income changes sign from year to year, so does her after-tax cost of payroll because the deduction of payroll from business income has tax value only in years with positive net income (subject to some complicated carry forward and backward provisions).  This normally gives employers an extra incentive to stop paying workers during a loss year.
• These sections by themselves, increase the incentive to have payroll during a year with negative net income, which 2020 will be for many businesses.  I don't think the sections have much effect on the incentive to have the employees actually work (as opposed to be paid without working).
• These sections also open the door to Treasury losses due to clever tax accounting, which is why gains and losses are historically treated asymmetrically.

Title III forthcoming

Inflation has little to do with the Unemployment Rate

Copyright, TheHill.com

The April unemployment rate, released Friday, showed the headline unemployment rate below 4 percent, which has rarely happened in the past 48 years. But a low unemployment rate does not necessarily mean high inflation.

A conventional wisdom, sometimes known as the Phillips curve, holds that low unemployment creates inflation as employers increasingly bid against each other for workers and pass on some of their labor costs to consumers.

One problem with the theory is that low unemployment is not synonymous with high employment. Aside from identifying Americans as either working or being unemployed, federal government statisticians also put adults into a third category: out of the labor force (OLF).

In other words, "unemployed" is just one of two not-working categories, so that both employment and unemployment can fall at the same time if enough people are switching from unemployed to out of the labor force.

The official distinction between unemployed and OLF is whether the not-working person is actively looking for work. This distinction helps to prevent confusing a retiree or a full-time student with a laid-off head of household who is eagerly looking for a new job.

But a number of people are on the margin of looking for work and could be classified either way. During President Obama's first term, the federal government was actively assisting out-of-work people with temporary cash, health and mortgage assistance but only if they said that they were looking for work. That by itself inflated the measured unemployment rate above what it would have been.

When the temporary assistance programs began to expire during 2010 and 2011, that's exactly when the unemployment rate started falling. Some of that drop was a result of additional employment, but an important part of it was just a shift to the OLF form of not working.

To further add to the statistical distortion, the headline unemployment rate is measured as a share of people in the labor force rather than a share of population. When 3.9 percent of the labor force is unemployed, that means that an even lesser percentage of the adult population is unemployed because a great many adults are not in the labor force.

Increases in the number of people classified as OLF can, therefore, reduce the headline unemployment rate without changing the number of people who actually are unemployed.

The chart below shows unemployment (blue) and OLF (red) on the same scale, which is a fraction of the adult population (I have subtracted 28 points from OLF so that the two series come together around 2010).

Around 2010, the two started moving in opposite directions, and this trend continued until about 2016. By that point, unemployment was historically low, in comparison with the population, but employment was not historically high.

What had really changed between 2010 and 2016 was the propensity of people who are out of work to say that they are actively looking.

The most recent year has been different, with unemployment falling yet no real increase in OLF. But that change is fairly small in comparison to the changes from 2010 to 2016.

The other problem with the Phillips curve theory is that it has been backward many times in history; there have been times of rapid economic growth at the same time that inflation was low or even negative.

The takeaway: If you want to understand what is happening with inflation, look somewhere else than the unemployment rate.

Robert Reich: Changing the Facts to Fight the Good Fight

Yesterday Robert Reich claimed that

"Most people who lose their jobs don't even qualify for unemployment insurance."

As you can see from my cut and paste of his quote (italics added), he cited a newsmax article.  But that article lists several reasons why the unemployed choose not to apply for benefits.  On this issue of eligibility, the article says that most UNEMPLOYED do not qualify.  The reason is typically that the non-qualifying unemployed DID NOT LOSE THEIR JOBS.  As the article says,

"Unemployment benefits are only available to those who lost a job through no fault of their own. ... Many of the unemployed are recent college or high school graduates who are now looking for work. Others may have quit their jobs, or they left work years ago to take care of children and are now job-hunting again. People in those categories make up 52 percent of the unemployed."

You would think that Mr. Reich knows the facts because he was IN CHARGE OF THE FEDERAL DEPARTMENT OF LABOR, which is intimately involved with unemployment insurance benefits.  But he also knows a good narrative, which is that job loss is typically endured with no government help.

Changing Assistance for the Unemployed

Copyright, The New York Times Company

Even if federal unemployment insurance expires at the end of the year, it will be replaced by an even more generous assistance program for people leaving their jobs.

Unemployment insurance is jointly administered and financed by federal and state governments, offering funds to “covered” people who lost their jobs and have as yet been unable to find and start a new one. The cash assistance comes weekly, with states paying benefits of about $300 a week for 26 weeks or until the person starts a new job, whichever comes first.

Normally, the assistance stops after 26 weeks, even if the beneficiary has yet to find a job. But during recessions the federal government’s temporary “extended” and “emergency” unemployment compensation programs pick up benefits after the state benefits are exhausted.

During the recent recession, the federal government paid benefits for up to 73 additional weeks, making the total benefit duration 99 weeks.

The temporary federal programs have expiration dates, but Congress has routinely extended them, at least through 2012. A couple of the federal programs fully expired that year, so in 2013 the unemployed could get benefits for no longer than 73 weeks.

The last remaining federal program, known as Emergency Unemployment Compensation, is set to fully expire at the end of this year. Congress has extended its final expiration date several times in the past – most recently as part of the fiscal cliff deal – but there is no guarantee that Congress will continue its extensions.

If the emergency program continues while the new health care assistance comes on line, the incentives of workers and employers to create and retain jobs will take a big hit. The solid line in the chart below shows my estimates of the average marginal tax rate on worker’s income, accounting for the fact that earning income on a job results in both additional taxes and withheld federal benefits. The higher the tax rate, the less is the incentive to work.

Casey B. Mulligan’s estimates of the impact of emergency unemployment compensation ending in December 2013.

The dashed line shows the marginal tax rate if the emergency program really does expire at the end of the year. Tax rates will increase in January, but much less than they would without the expiration, because the assistance lost from the emergency program will be offset by the health assistance coming online.

The federal unemployment benefits at risk of expiration are economically more important than the already-expired programs, because it is less common for unemployment to last more than 73 weeks (when the expired programs kicked in) than it is to last 26.

Unemployment benefits from any program help people who desperately need it, but they also keep the labor market depressed by permitting people to remain unemployed longer and making layoffs more common. The remaining emergency program is the most important and thereby does the most to help people and the most to keep the labor market depressed.

Even if the emergency program is allowed to expire on Jan. 1, it will ‘be replaced by an even larger program — the Affordable Care Act — assisting the unemployed and others, including premium subsidies for health insurance.

Most people have jobs that provide health insurance and will be ineligible for premium subsidies for as long as they work. But as soon as they are fired, quit, retire or otherwise leave the payroll, they will be eligible for monthly assistance to pay for their health insurance premiums and out-of-pocket expenses.

For households between 100 and 400 percent of the poverty line – that’s about half of households – the new assistance will average about $110 a week, tax free (unlike unemployment benefits, which are taxable). Moreover, the premium assistance is not limited to 26 weeks; it can last for decades.

Regardless of how you evaluate the relative costs and benefits of the emergency program, now is the time for Emergency Unemployment Compensation to expire to make way for new assistance programs.

The New Subsidy for Layoffs

Copyright, The New York Times Company

A major provision of the American Recovery and Reinvestment Act helps predict what will happen in the insurance market next year.

Employees and employers often take steps to avoid layoffs, like working hard to encourage customers and clients to continue buying the goods and services provided by the business.

Sometimes layoffs are not avoided by such efforts, which is why many employers also take steps to ease the burden of a layoff on employees and their families and to minimize disputes between them and the employer. Many businesses voluntarily offer cash severance pay, which is intended to replace the usual paycheck for several weeks or months after the layoff, depending on the length of time that the employee had been with the company. (During the time of unemployment, the former employee can many times collect both the severance pay and state unemployment insurance benefits.)

Employers may also offer to help laid-off workers continue with their health insurance during the unemployment spell. (Indeed, a laid-off worker who intended to spend some severance pay on health insurance premiums would save money on taxes if the former employer were paying those premiums, even if it meant lower severance.) Severance pay and health insurance costs for former employees are significant expenses that employers presumably take into account when they decide the number and timing of their layoffs.

During 2009 and 2010, the American Recovery and Reinvestment Act had the federal government pay some costs of layoffs, especially with its premium-assistance program, which paid 65 percent of the premiums that a laid-off employee would pay to stay on the former employer’s health plan. People who could join a spouse’s employer health plan and people without health insurance on their previous job were ineligible for the program.

Economists understand this premium assistance to be a subsidy to layoffs, making them cheaper and less of a burden. Employers saw it this way, too, according to an Urban Institute study.

“Some large‐firm interviewees reported that before A.R.R.A. they provided some amount of free or reduced cost Cobra coverage for laid‐off workers, based upon the prior duration of employment,” the study found, referring to the Consolidated Omnibus Budget Reconciliation Act, which allows workers who have lost their jobs to purchase coverage. ”Several of these companies reported that they reduced or dropped this prior benefit in reaction to A.R.R.A.”

Although we will learn more when (and if) the United States Treasury releases its final report on the premium-assistance program, it appears that program participation was high. An interim report indicated that perhaps two million households and even more individuals had their health insurance subsidized within nine or 10 months of starting the program.

The law’s premium assistance program ended in 2010, but significant amounts of premium assistance are coming next year as a part of the Affordable Care Act. For families with income between 100 and 250 percent of the poverty line, the Affordable Care Act is even more generous than the Recovery Act, because it helps them pay for both health insurance premiums and out-of-pocket costs like co-payments and deductibles. Also, health insurance is more expensive now than it was in 2009, which makes a percentage subsidy that much more valuable.

Moreover, unlike the Recovery Act’s program, next year’s program welcomes people out of work even if they left work by quitting, retiring or being fired for cause. It also welcomes people who have the possibility of joining a spouse’s plan and people who had no health insurance on their prior job.

Thus, we are about to begin a federal program that subsidizes layoffs to a degree that we have not seen before. Nevertheless, economic and budget forecasts by the Congressional Budget Office and others have yet to consider the effects of the layoff subsidy on the size of the program and the number of layoffs that will occur.

The C.B.O. has concluded that 800,000 people will take early retirements or quit as a consequence of the Affordable Care Act, not from its premium assistance, but based on the assumption that the unsubsidized nongroup health insurance market will operate better. The C.B.O. still needs to estimate how many people will be laid off as a consequence of the new subsidy to layoffs.

Over all, the C.B.O. predicts that 11 million people will receive premium assistance in 2015 (and even fewer in 2014), the vast majority of whom would be employed or dependents of an employed person. Yet the Recovery Act’s experience suggests that three million or four million people will receive premium assistance through unemployment alone, not to mention the millions more that receive it while working.

Be prepared for some unpleasant surprises over the next year or two, both as to the amount that the labor market is depressed and the unanticipated federal spending that will be needed to provide the benefits promised by the Affordable Care Act.

Subsidizing Layoffs

I noticed this in an Urban Institute report:

Some large‐firm interviewees reported that before ARRA they provided some amount of free or reduced cost COBRA coverage for laid‐off workers, based upon the prior duration of employment. ...Several of these companies reported that they reduced or dropped this prior benefit in reaction to ARRA.

In other words, these employers normally were paying for health insurance for workers they laid off, but for a while (from April 2009 to May 2010) the ARRA picked up the tab. This is yet another reason why laying people off during the recession was cheaper than layoffs normally are.

Substitution between Exchange Plans and Employer Plans

I received this question:

Do you believe the incentive effects related to the ACA will be more limited since: (i) they are more difficult to value/understand as compared to an unemployment check and (ii) the impact is less direct and comprehensive.

My reply:

You have hit on a key, and so far uncertain, economic force in the ACA. At one extreme, people may perceive the exchanges [the method of ACA subsidy delivery] to be something like Medicaid -- far inferior from the coverage they get from an employer. At the other extreme, they may view the coverage as quite similar, and then it becomes a question of which approach saves them money.

Note that U.S. Senators and Congressman will be using the exchange plans, so perhaps they will be pretty nice plans, which is why I am inclined to expect the latter case. But I am examining the former case too because (a) it makes more economic sense for Obamacare to be run that way (see also http://economix.blogs.nytimes.com/2013/05/01/health-coverage-worthy-of-a-senator/) and (b) Massachusetts ran their reform that way.

RE difficulty to value and understand, note that employer insurance is complicated, but employers already have HR personnel in place to assist employees in choosing plans, getting enrolled, and getting reimbursed. When employers drop their insurance, I expect that they will use these personnel to assist their employees with the exchanges too. Moreover, the federal government is devoting advertising dollars and enrollment assistance, so that the exchanges may ultimately enjoy a competitive advantage over employer plans.

Also note that the ACA’s employer and individual penalties are economic equivalents of unemployment assistance from a labor supply point of view, regardless of how people perceive exchange plans, because workers will be subject to the penalties but unemployed people will not.

With that said, I expect a transition period during which time the exchange plans are perceived to be inferior and the labor market impacts of the ACA are muted.

Wow! Astonishing Incongruence with Conventional Wisdom

The videos were under oath.

"In late 2009 when we began to see some glimmer of hiring returning to the economy; however, we were hit head on with a hurdle we did not anticipate. We had applicants applying for jobs, but only to protect their status for unemployment insurance."
Stacey G. Reece, Spherion Staffing and Professional Recruiting [emphasis in original].

"Our experience would say that 8 out of 10 people on unemployment or other benefit programs will utilize those benefits as much as possible to avoid working. We have interviewed and offered people jobs on various benefits and we often hear:

'I have x number of weeks left on unemployment, I’m going to ride it out then look for a job.'

'I think there will be an extension to unemployment and I won’t need to look for a job.'

'I’ve been on unemployment for 2 years and it runs out in a couple of weeks. Do you have any openings?'

'The starting/training wage for this job is less than what I make on unemployment. I’ll stick with unemployment until it runs out.'

... our local employers are exceeding frustrated.  We struggle to successfully run our companies continually short-handed."

Andrea L. Carter. President Hydranamics, Inc., single-quoted text are statements by applicants for her Ohio manufacturing positions. [read more here]

Earned Income Ironies

Copyright, The New York Times Company

The “earned income tax credit” is, ironically, more likely to be received by unemployed people than by workers who do not spend any time unemployed.

The credit was created years ago to reduce tax burdens on the poor and to “provide a genuine incentive for working;” a household must have some wage and salary income in order to receive the credit.

However, because the credit is administered on a calendar-year basis and is phased out with calendar-year wages and salaries, it is disproportionately received by people unemployed after a layoff.

As I illustrated in an earlier post, the credit follows a mountain-plateau pattern: an increasing portion for the lowest calendar incomes, a flat portion, a decreasing portion and then a flat portion of zero.

Internal Revenue Service

You might think that unemployed people do not receive the credit because they do not have any wage or salary income, but typically people unemployed from layoff do have wages or salary income during the calendar year of their unemployment from their previous job. Their layoff might have occurred after the beginning of the calendar year. Even a layoff occurring in December of the previous year might generate wage and salary income in the current year because of a severance payment or accumulated sick and vacation pay.

Moreover, an unemployed person might have a spouse with wage and salary income, and the spouse’s income counts toward the credit.

Because unemployment compensation is supposed to be reported on the recipient’s federal individual income tax return, I was able to further investigate this issue by examining a large sample of individual income tax returns for the years 2000-07 provided by the Internal Revenue Service to the National Bureau of Economic Research and other institutions for research purposes.

In 2007, 97 percent of the 7.6 million returns showing unemployment-compensation income (that is, the taxpayer or spouse was unemployed and receiving benefits some time during the calendar year) also had wage and salary income during the year. That percentage was essentially the same in each of the years 2000-06.

Of the same 7.6 million returns with unemployment income in 2007, one quarter received the earned income tax credit. By comparison, the credit was received by only one-sixth of the returns with wage and salary income but no unemployment income.

Among returns with unemployment income, the average earned income tax credit was $486, compared with $347 among the returns with wages but not unemployment income.

For most of the returns with both unemployment income and the earned income tax credit, the credit would have been even greater if the taxpayer had been employed fewer weeks than he or she actually was. Still more returns with unemployment income but no earned income tax credit would have received the credit if the unemployment had lasted longer.

This situation occurs so often because unemployment benefits are based on a person’s weekly work situation while the earned income credit is based on a household’s annual wages and salaries, and because weekly unemployment benefits by themselves are usually less than weekly wages and salaries.

The earned income tax credit is thus a good example of how a so-called tax credit can act like a tax from a working person’s point of view.

Making More Unemployed than Employed

By adding significantly to benefits for unemployed people without commensurate additions to the incomes of workers, the 2009 American Reinvestment and Recovery Act (a.k.a., "stimulus law") changed 100 percent taxation from a rare circumstance to one that presented itself to about five million household heads and spouses. If Congress had heeded the advice of those calling for a "bigger stimulus," as many as 13 million people would have made more unemployed than they would as workers. Watch this 19 min video to see how such high implicit tax rates became reality.

Viewers interested in more information on this topic: please look at http://www.nber.org/papers/w18591

It happens in Japan too (ht Austen Bannan).

Labor Market Side Effects of Health Reform in Massachusetts and America

Massachusetts began a near-universal healthcare system circa 2007. The entire United States will begin one twelve months from now, pursuant to its "Affordable Care Act" (ACA). Can a labor economist interested in the ACA learn from the MA experience?

The ACA design is said to have been influenced by the MA program. I agree with that for the purposes of discussion.

The CBO and other analysts of the ACA have jumped to the conclusion that the major MA labor market effects, if any, of the MA reform are informative about the US labor market effects of the ACA.

It may be true that the HEALTH MARKET effects of the ACA will be similar to the MA health market effects of the MA reform, but economic theory contradicts the assumption that the two laws have similar LABOR MARKET effects.

From a labor market perspective, two margins are important: the margin between working and nonworking, and the margin between employer-sponsored insurance (ESI) and other sources of insurance. The ACA and the MA situations are entirely different in these dimensions.

THE REWARD TO WORKING

The ACA is the first piece of federal legislation that gives essentially free health insurance to people not working but not technically poor (with the exception of 18 months or so during the "stimulus" when COBRA payments were 65 percent subsidized for people on unemployment insurance). In this way, the reward to working in the US will be significantly lower after 1/1/2014 than it was before.

The MA reform did not change this part of the reward to working in MA because health insurance was already close to free for the unemployed. By the time MA had implemented its health reform, its "Medical Security Program" (MSP) was almost 20 years old. MSP gave (and still gives) people on unemployment insurance (UI) the option to have the state (actually, I think MA calls itself a Commonwealth) pay for 80 percent of their private health insurance premiums (up to $1200 per month!) or to receive health services directly from the Commonwealth, for as long as their UI lasts. MA's MassHealth Essential program provides benefits for the long-term employed (whose UI benefits have presumably expired). Like UI itself, these two programs are not asset tested. The employer financing of the two HI-for-unemployed programs is not experience rated (i.e., employers who layoff more do not have to pay more).

The MA reform even served to reduce UI a bit because the UI benefit amount is based on cash compensation, and the MA reform was encouraging the labor market to tilt a bit away from cash compensation and toward fringe benefits.

[Note that unemployed with UI benefits is not the only form of not working, or even the only form of unemployment (although a large majority of the unemployed since 2007 received UI).  In those cases, the two programs above do not apply.  Other MassHealth programs might, but I am not yet aware how similar or different MassHealth's programs are from Medicaid programs in the rest of the states.]

Massachusetts also encouraged using the federal tax exclusion for ESI, whereas the ACA tries to wean people off of it.  MA told employers: offer tax-excludable ESI -- make employees pay 100% if you want, it doesn't matter if it's affordable or if employees accept your offer -- or else we'll send you the bill for 100% of your employees' uncompensated care.  The ESI tax exclusion helps employed people save money, but does nothing for someone not employed.  [this para was added Feb 24]

Another part of the reward to working comes from the sliding scale subsidies to people working for employers not offering ESI. Both MA and US reforms have subsidies like these, but the MA subsidies apply to a much smaller slice of the population. For one, the frequency of no-ESI employers is much greater in the US pre-ACA than it was in MA pre-MA-reform. Second, the MA subsidies applied to persons up to 300 percent of the federal poverty line (FPL), as compared to the 400 percent threshold in the ACA; there's a lot of people in that 300-400 percent range. Third, the ACA subsidies will be more like cash than the MA subsidies because ACA beneficiaries will use them for pretty much any health insurance plan (for example, the same health plan that their Congressman and his family will use) whereas the MA subsidies can only be used for one of five state-sponsored plans. Judging by their pre-subsidy costs, the MA Commonwealth-sponsored plans appear to offer less than private sector plans. This MA practice enhances the reward to working: as one moves above 300 percent of the poverty line he loses his subsidy, but he also gets access to better health plans.

The end result of the MA sliding scale subsidy is that only 0.16 million people (including dependents) receive them in a Commonwealth with a population of 6.6 million. The ACA subsidies, on the other hand, are widely expected to be received by a much greater fraction of the US population. Naturally, a subsidy hitting a larger fraction of the population has a larger labor market impact.

So the only ways that MA health reform can be informative about the effects of the ACA on the quantity of labor (e.g., the fraction of the population employed) is that: (a) the reward to working doesn't matter that much or (b) analysts have made a correction or adjustment for this fundamental difference between the two reforms. So far, I doubt that either condition holds.

EMPLOYERS' COMPARATIVE ADVANTAGE IN PROVIDING HEALTH INSURANCE

The MA reform is also quite different from the ACA in terms of how it changes the incentives for employers to offer health insurance. There are many differences in this regard, but I begin by naming one or two.

The MA reform distinguishes offering health insurance to employees from helping employees pay for it. In MA, employers can offer health insurance to employees without an employer premium contribution by setting up a "125 plan," which allows employees to use their own pre-tax dollars to buy health insurance (for employees below 300% FPL, I think this opportunity includes the purchase of subsidized plans). Under the 125 plan, the employer only assists a bit in the administration of the premium payments/withholding.

The MA employer penalty for NOT offering a 125 plan (or ESI narrowly defined) can potentially be large: the employer can, in effect, be liable for all of the health costs the Commonwealth of MA incurs in caring for its employees. A small to medium-sized employer with the bad luck of having two employees get triple-bipass surgery in the same year may find himself wiped out by this "employer free-rider penalty." Admittedly, as of 2010 the Commonwealth of MA had yet to collect a single dollar of the free-rider penalties, but employers may nonetheless be scared to death of that liability, which may have led them to adopt 125 plans in mass (and thereby the Commonwealth gets no revenue from the penalty).

The MA employer penalty for not paying for any/enough of their employees' health insurance is just $295 per employee per year.

The ACA does not attempt to encourage 125 plans. In fact, MA may have to eliminate this part of its health reform when the ACA goes into effect. The ACA penalizes employers $2000 (and growing) per full=time employee if the employer does not offer affordable ESI.

One issue here is measurement. Does an employee who buys insurance through a 125 plan consider himself as having ESI? My guess is that he does, and that some of the population surveys are not well suited to detect the distinction, but more research is needed on this. Until then, I'm not sure how to interpret findings that ESI increased somewhat in MA after its reform.

Second, if we include 125 plans as ESI, the MA employer penalty for not having ESI in one form or another is potentially much larger than the $2000 ACA penalty.

Third, as noted above the MA subsidies to persons without ESI are infrequent as compared to the expected frequency of ACA subsidies. Moreover, the MA subsidies are less because MA restricts subsidy recipients to one of five less costly plans. Thus, MA employers have relatively few employees who would gain if ESI were dropped.

In summary, ACA proponents have likely been mistaken in taking comfort in the MA experience: the MA and ACA reforms are not comparable from a labor market perspective.

• A fully implemented and enforced ACA will significantly add to distortions on the margin between unemployment and working, whereas the MA reform did not.
• Via its sliding scale subsidies, a fully implemented and enforced ACA will distort other decisions that enhance family incomes, whereas the MA sliding scale subsidies hit a much smaller slice of the MA labor market.
• A fully implemented and enforced ACA will, on a variety of margins, move people out of jobs offering ESI, whereas the MA changes in these margins (if any) were significantly less, and different.

Surely, if it cares about its labor market, America was imprudent to adopt such a sweeping law before these issues could be acknowledged and better understood.

[the above was edited a few hours after posting to reflect comments by John Cochrane -- please don't blame him for mistakes that remain]

The ARRA: Some Unpleasant Welfare Arithmetic

Food stamps, unemployment insurance, and other subsidies to persons who are unemployed and otherwise with low incomes, have recently been made more generous and available in more situations.  Did extra transfers help prevent a deeper recession, or did it amplify and prolong it?  Economists cannot fully answer these questions without examining the incentives of persons receiving the transfers.  The purpose of this paper is to quantify the number of people who recently had essentially no short-term financial reward from working, and how that number might have been different if safety net program rules had been made more generous, or if they had remained what they were in 2007.

American economists often discuss the unemployment insurance (hereafter, UI) system and its moral hazards as if the penalty for accepting a new job were about 50 percent of compensation,[1] which would suggest that the financial reward to working would be positive and significant in all but a few rare circumstances.  At the same time it is commonly noted that the average weekly unemployment benefit of about $300 barely exceeds the compensation from a full-time minimum wage job, and for this reason alone UI is almost always inferior to a real paycheck.  These claims are incorrect because they ignore payroll taxes, income taxes, and other safety net programs.  The tax arithmetic suggests that many UI participants would, even under 2007 rules and even ignoring all safety net programs aside from UI and the personal income tax, keep about 30 percent – and maybe as little as ten percent – of the compensation generated by accepting a new above-minimum-wage job because taxes typically took as much of the reward from working as foregone unemployment benefits did.  These thin margins essentially disappeared under the American Recovery and Reinvestment Act of 2009 (hereafter, ARRA).

Even when helping the poor is a primary policy motivation and the wage elasticity of labor supply is low, optimal tax theory frowns on labor income tax rates that equal or exceed one hundred percent (as long as work is not socially harmful) because at a one hundred percent rate there is no longer a tradeoff between efficiency and government revenue.  From a positive point of view, economists expect that employment rates will be low, if not zero, in groups of people who are aware that they receive no financial reward from working.  These are a couple of more reasons to quantify the prevalence of marginal tax rates that are near or exceed one hundred percent.[2]

The paper begins with a brief overview of the major safety net programs affecting the financial reward to working.  The first quantitative results are 2009 marginal tax rates and their components for some of the more common tax situations encountered by American workers and their families.  The rates are calculated for three scenarios: actual benefit and tax rules, benefit and tax rules as they would have been if they had not been changed since 2007, and benefit and tax rules as they might have been in a bigger stimulus.  The following section considers the rich and complicated variety of possible tax situations in order to arrive at estimates of the number of household heads and spouses with little or no financial reward to accepting a new job.  A “demand shocks and job search gambles” section shows how job acceptance rewards are nonlinear in the amount of a job offer, and the final section concludes.

Conclusions

            Before the recession began, going from unemployment back to work did not pay that well for someone eligible for unemployment benefits, but almost always paid a little something, with at least twenty percent of compensation from a job going toward enhancing the new employee’s disposable income above what it was during the spell.  Despite its inclusion of a “making work pay” tax credit and its expansion of the “earned income tax credit,” the ARRA increased marginal tax or “job acceptance penalty” rates for the vast majority of the unemployed and essentially erased the short-term financial benefits from working for two to three million non-elderly and unemployed household heads and spouses.  About five million had their job acceptance penalty rates increased above 80 percent by the ARRA.

Layoffs have also long been subsidized by unemployment insurance and other safety net programs, but again typically public treasuries would pay for less than 90 percent of the compensation lost from a layoff, while employer and employee had to absorb the rest.  When the ARRA was in full force, over three million workers could be laid off with a subsidy of 90 percent or more, and another five million with a subsidy rate of 80 to 89 percent.  A bigger stimulus would have put as many as 30 million workers in that situation.

To the degree that unemployment responds to the financial incentives for working, the ARRA and other programs assisting the unemployed interact with demand shocks in determining the number unemployed: an adverse demand shock increases unemployment more under the ARRA than it would if the same demand shock were experienced under 2007 tax and subsidy rules.

None of these results hinge on the increase of the duration of unemployment benefits from 26 to 99 weeks, which was achieved by legislation separate from the ARRA (United States Department of Labor 2011).  I count each unemployed person only when they are laid off; the results here reflect the level of benefits delivered by tax and subsidy programs to unemployed persons beginning to receive UI.  UI and other program eligibility rule changes are not considered in this paper but are important for quantifying changes in marginal tax rates between 2007 and 2009, and comparing such changes across demographic groups.

My findings of large, even confiscatory, job acceptance penalty rates are not the result of “cliffs” in transfer program formulas in which many dollars of benefits are lost for earning a particular marginal dollar (Yelowitz 1995) because I look at the consequence of more “discrete” decisions of accepting a job, or initiating a layoff, that change calendar year income by thousands of dollars.  Instead, my large rates reflect the combination of tax and subsidy rules, especially unemployment insurance.  Not surprisingly, my rate estimates exceed those of previous studies of transfer program marginal tax rates that omit unemployment insurance (Holt and Romich 2007) and exceed those of previous studies of unemployment insurance that ignored taxes (Chetty 2008).  But taxes, unemployment insurance, and other transfer programs have recently contributed significantly to the living standards of the poor and unemployed (Sherman 2011), so we cannot have a full understanding of the magnitude of marginal tax rates without considering the safety net broadly.

I have likely somewhat under-estimated the number of people with marginal tax rates in excess of one hundred percent because I have omitted a number of other possible sources of implicit taxes.  They include other means-tested cash assistance programs such as Disability Insurance, TANF and Supplemental Security Income; means-tested housing subsidies; means-tested tuition assistance; and means-tested energy assistance programs.  They also include court-enforced wage garnishment associated with the collection of delinquent consumer, tax, and child support debts.

            At the same time that incentives to retain and accept jobs were erased for millions, millions were laid off from their jobs and remained unemployed for an extended duration.  I estimate that 2.3 million additional non-elderly household heads and spouses were laid off in 2009 than would have been laid off if the 2000-2007 average number of layoffs had persisted through 2009.  The number of unemployed household heads and spouses were about 5 million greater than normal.  In other words, the extraordinary numbers of persons laid off and unemployed are of roughly the same magnitude as the numbers of persons having their incentives essentially erased by the ARRA.  The fact that more persons would have had incentives erased if the ARRA had been more generous to the unemployed suggests that it is possible that a bigger stimulus would have resulted in more unemployment than the actual stimulus did.

            It is beyond the scope of this paper to quantify the impacts that the large penalties for work from the ARRA (or other legislation) had on the labor market for people laid off during the recent recession.  Nor do I attempt to determine whether increasing marginal tax rates beyond 100 percent matters more or less than increasing them beyond, say, 70 percent.  But even before obtaining such estimates we should not expect that a labor market would function normally while the private benefit to working was zero or negative.  For this reason, the arithmetic presented in this paper is indeed unpleasant, and disturbingly similar to discredited welfare program rules of the distant past.  As James Tobin put it in 1965,

“[A 100 percent tax rate] does just that, causing needless waste and demoralization.  This application of the means test is bad economics as well as bad sociology.  It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.” (Tobin 1965, 890)

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[1] Chetty (2008) estimates the U.S. UI replacement rate as 50 percent for the purposes of demonstrating that it might be slightly less than optimal.  See also Fujita (2010).

[2] Behavior in the neighborhood of 100 percent tax rates would be especially interesting if it were true that (a) when tax rates are lower and more typical of their historical values, the amount of unemployment were insensitive to the amount of the UI benefits and (b) unemployment would be high if unemployment paid better than working.  To see this, try drawing a graph of the relationship between unemployment and the size of UI benefits that satisfies the properties (a) and (b): it must turn or jump sharply toward high unemployment as the benefit approaches the amount of pay from working.

Why Doesn't UI Stimulate? 7 Min Podcast

WLS AM Don Wade and Roma 7 min podcast

Highlights

• Law of Unintended Consequences
• 99 weeks of UI is only one of many program expansions
• The labor market is not a zero sum game

Recession by Redistribution

Copyright, The New York Post

Doubt of the benefit

Why increasing unemployment aid is prolonging the recession

By CASEY B. MULLIGAN

More families used food stamps this past Thanksgiving than ever in history, while Congress is pushing to extend benefits — again — for the longterm unemployed.

But what if such aid isn’t helping us weather the recession, but instead prolonging it?

The White House, and other believers in Keynesian policy refer to subsidies to the unemployed, poor and financially distressed as “automatic stabilizers” and insist that subsidies have a large positive effect on national income.

Yet when the subsidy spigots were opened wide in 2008 and 2009, labor market activity contracted sharply, and stubbornly refuses to rebound.

Getty Images

It is time to reconsider the old-school economic idea that paying people to be unemployed reduces employment. The more we pay poor people, the more poor people we will have. The more we help people and institutions in financial distress, the more financial distress there will be.

It is easy to look at a particular instance of redistribution — say, unemployment benefits — and conclude that its aggregate effects are minimal, or approximately zero. But policymakers did not expand just one provision of one program.

Food-stamp recipients were given a big raise in October 2008, and then another raise six months later. Thanks to the elimination of asset-testing by the majority of states, just about anyone who is the sole earner in their household now find themselves eligible for food stamps during periods of unemployment.

The American Recovery and Reinvestment Act, popularly known as the stimulus, gave unemployment insurance recipients a weekly bonus, and offered to pay for the majority of their health insurance expenses. FDIC and Treasury reduced some “unaffordable” mortgage payments, which means that successful people need not apply. The list goes on and on.

The essential consequence for all of these is the same: a reduction in the reward to activities and efforts that raise incomes.

I’ve studied how redistribution affects the “reward” for working.

We start with a monthly index of government benefits. Before the recession began, an unemployed person typically received about $10,000 a year in government benefits. By the end of 2009, program rule changes alone had increased the typical benefit to almost $16,000.

Plot that against the hours an average American adult spends away from work in a year (the difference between total hours in a year and hours at work). Largely because of the increase in the number of people without jobs, the average work hours were about 120 fewer at the end of 2009 than they were at the end of 2007 — a 10% decline.

But things start to change at the beginning of 2010. Slowly, the number of hours of work by the average American begins to climb. Not coincidentally, the average annual government benefit for the unemployed dropped to $14,000.

The increase in benefits provides a disincentive to work. From 2007 until 2009, I found a startling 13% decline in the “reward” for working — that is, how much better the average job would be over collecting benefits.

Considering that, why is the labor market still so far from a full recovery? Because government benefits are still far from returning to pre-recession levels.

But wait, a Keynesian would say. Unemployment benefits are good for the economy overall, since it is money spent and not saved.

It’s true that the poor and unemployed tend to quickly spend what they have on basic needs. Yet Keynesians have gone further to claim that spending patterns of the poor are why redistribution raises total spending and thereby employment. Redistribution changes the composition of spending and employment in the direction of industries like discount groceries and low-cost retail that disproportionately serve poor customers and away from industries like, say, airlines. The stimulating effects of benefit spending for the overall economy is limited.

Redistribution is not free. Redistribution depresses employment, aggregate spending and GDP, by implicitly punishing the successful and implicitly rewarding the unsuccessful.

We don’t like to see people suffer, and it’s a natural instinct to want to increase redistribution in a time of recession. But the better economic solution reduces the implicit penalties of government aid, and gets more people working, so they don’t need the help.

Casey B. Mulligan is a professor of economics at the University of Chicago and author of the new book “The Redistribution Recession” (Oxford University Press); redistributionrecession.com

Job Openings: What do They Mean?

Copyright, The New York Times Company

A high ratio of unemployed to job openings means that the unemployed are competing a lot for jobs, many news reports say, when in fact it could indicate the opposite.

It’s true that a reduction in labor demand — from, say, a new tax on employers — would motivate employers to get by with fewer employees. As they do, employers would reduce job openings and lay off workers. One result would be fewer job openings and more unemployed people, and thereby more unemployed people per job opening.

But a reduction in labor supply in the form of additional subsidies for unemployed people would have similar effects. Unemployed people would be choosier about the jobs they accept, especially the low-wage ones. With more help for people after layoffs, employers and employees in struggling industries would do less to avoid layoffs, especially layoffs from low-paying positions. Either way the result would be more unemployed people.

Subsidies for unemployed people also make labor more expensive as low-wage jobs are more likely to end by layoff and unemployed people can be choosier about the jobs they take. When labor is more expensive, employers have an incentive to get by with fewer employees and for that reason may well reduce the number of job openings they have.

In this way a reduction in labor supply by itself, a reduction in labor demand by itself or both together can increase the ratio of unemployed to job openings. It makes little sense to point to a high ratio as proof that labor demand is low, because it could just as easily tell us that labor supply is low. All a high ratio tells us is that the labor market has contracted, and that we could readily and more reliably detect without any data on job openings by just looking at the unemployment rate itself, or the ratio of employed to population.

My conclusion is not new to labor economists, who have long understood that supply factors could increase the ratio of unemployed to job openings. Christopher A. Pissarides, a professor at the London School of Economics, literally wrote the book on job openings and unemployment, and his book explains how more generous unemployment compensation would have these effects (see Figure 9.2 from his latest edition; I thank my colleague Robert Shimer for this reference).

The black series in the chart below shows the ratio of unemployed to job openings. The chart also shows in red the marginal tax rate on labor income (the extra taxes paid, and subsidies forgone, as a result of working, expressed as a ratio to the income from working) for a typical head of household or spouse based on the ever-changing eligibility and benefit rules for safety-net programs. The ratio increases fastest between the first half of 2008 and the first half of 2009, just when the marginal tax rate series increases the most. Both series peak in late 2010 and decline thereafter. Neither series has returned to its prerecession level.

Ratio of unemployed per job opening is calculated from Bureau of Labor Statistics seasonally adjusted monthly figures for number of unemployed and total nonfarm job openings, as provided by the St. Louis Fed. Marginal tax rates are as calculated by Casey B. Mulligan in “The Redistribution Recession” (Oxford University Press, 2012).

For the reasons mentioned above, the chart is by no means proof that supply was a major factor during the recession. That proof requires other sorts of analyses, which are shown in my book.

Nevertheless Paul Krugman continues to cite the high ratio of unemployed to job openings as evidence that demand, rather than supply, contracted the labor market: “There are now four job seekers for every job opening, which means that workers who lose one job find it very hard to get another” (see Page 9 of “End This Depression Now!”). He and other economics commentators citing this fact never explain why the very same ratio should not be interpreted as a drop in supply, or as a combination of reduced supply and reduced demand. Instead they contend that the labor market would rebound with still more help for the unemployed.

Believe it or not, Keynesian economics is not the only way to interpret the job openings data.

Keynes, Labor Supply, and Depressions

If alive today, would Keynes join most of the economics profession and assess the current economic situation without any reference to labor supply incentives?

I don't know, but it is worth noting that Keynes' writings about periods of high unemployment consider supply incentives more than his 21st century followers do. In particular, his 1919 Economic Consequences of the Peace repeatedly looks at supply channels.

Europe at the time had a population of 450 million people. I believe that unemployment was a problem at the time, but more important I think Keynes perceived it to be a problem as he describes "that 15,000,000 families were receiving unemployment allowances." If we assume that a 450 million population would support a labor force of about 150 million (ie., excluding women, small children, and noting that the post-war population was likely disproportionately female), that makes an unemployment rate of at least 10% and more to the degree that (as is the case today) some of the unemployed were members of families not receiving assistance.

Notably absent from his extensive discussion of the supply of commodities is the qualification offered by modern-day Keynesians that we don't have to worry about supply constraints until the economy is at full-employment. Instead, he describes how (in the context of describing how price regulations are futile) people may not exert effort if they do not find it sufficiently profitable:

...the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it.

If you are open to the idea -- supported by extensive research -- that labor supply incentives might still matter during depressions, take a look at the startling findings in my new book The Redistribution Recession.

Social Insurance and Layoffs

Copyright, The New York Times Company

Unemployment insurance and other types of social insurance subsidize job separations and thereby result in too many layoffs and too few people employed.

A variety of programs help workers after they leave a job and do not start a new one, depending on the circumstances of the job separation.

Unemployment insurance is often available when the worker was laid off and continues to look for work. Disability insurance is available when a worker’s health makes it too difficult to remain on the job. Social Security’s old-age insurance program provides income for elderly people after they leave their jobs.

Layoffs, disability events and retirements have some differences, of course, which is why each type of job separation has a separate insurance program. But in each case, a working relationship between an employer and an employee has been terminated, and the worker has not started a new one with, say, different working conditions or a different rate of pay.

In their analyses of disability and old-age insurance, economists have found that insurance reduces the cost of job separations and thereby increases their numbers, because the insurance helps replace the income and production that is lost when the worker stops working.

The prospect of the insurance payments gives employers less reason to change the nature of a job to encourage a disabled or elderly employee to remain at work and gives employees less reason to accept changes in working conditions or pay that would make it easier for employers to retain them.

David Autor of the Massachusetts Institute of Technology has studied the United States federal disability-insurance program and finds that it “provides no incentive to employers to implement cost-effective accommodations that would enable disabled employees to remain on the job.”

The Congressional Budget Office explains further about disability insurance that “because the D.I. program is funded through a flat-rate payroll tax on employers and employees, employers do not bear the costs associated with a disabled worker who stops working and becomes a beneficiary in the D.I. program.”

Note that disability benefits are paid to employees, not employers. Nevertheless Professor Autor and other economists conclude that the benefits affect employer behavior because the employment relationship is exactly that: a relationship between employer and employee.

If an employee has better, or less bad, options outside the relationship, then the employer will find the employee more expensive to keep. Disability and other forms of social insurance increase the income employees can receive outside the job and thereby make employees more expensive from an employer’s point of view.

The economists Jonathan Gruber and David Wise have found that Social Security provisions “provide enormous incentive to leave the labor force early.” Just like disability insurance, Social Security provisions can shift some of the burden of job separations from the private sector to the public insurance programs and thereby give the private sector too little incentive to prevent or delay the separations.

Employers sometimes experience reductions in demand from their customers, as auto manufacturers and home builders did early in the recent recession. One way they react is to lay off part of their work forces. But they could also adapt to less demand by work-sharing, reducing prices charged their customers (or increasing those prices less than the general rate of inflation) or reducing wages.

Smart employers recognize that one of these adjustments — layoffs — brings forth help from the government through its safety-net programs (on behalf of employees); the other adjustments do not. If the safety net were less generous, there would be fewer layoffs during a recession, because employers would adjust less with layoffs and more in other ways.

(State unemployment insurance programs are, and have been, “experience rated” in the sense that employers sometimes find their payroll taxes increased for each employee they dismiss. However, the experience rating is imperfect; some employers are already at the maximum tax rate and further layoffs would not increase it. More important, the effect of experience rating on employer costs of layoffs was present even before the recession. What’s new since 2008 are the federal extended and emergency unemployment programs that are not experience-rated, thereby adding to the benefits an unemployed person can expect to receive without adding to the taxes levied on his former employer).

Thus, even if it were true that the unemployed completely ignored the safety net’s generosity in their decisions to seek and accept jobs, the safety net would still increase unemployment during a recession by increasing layoffs.

Yet economists have recently forgotten this important connection between unemployment insurance and the number of people employed. The C.B.O. has looked at the economic effects of unemployment insurance and noted that extending unemployment benefits would “reduce the intensity of some workers’ efforts to search for a new job because the higher benefits would lessen the hardship of being unemployed.” But the C.B.O. concluded that “the net impact on the unemployment rate from some workers’ reduced efforts to find a job would be slight.”

Although it looks at incentives to avoid job separations in its consideration of disability insurance, the C.B.O. makes no mention of the same incentives in its analysis of unemployment insurance and consequently is premature in its rejection of the basic economic proposition that paying people for not working will reduce the number of people who work.

Pre-order your copies of The Redistribution Recession

In the next several days I will be reviewing the page proofs of my forthcoming book The Redistribution Recession.

You can pre-order a hard cover version with color charts, including shipping, for less than $35!! That's so cheap that you'll want to order one for home and another for the office.

Amazon.com

Barnes and Noble

Redistribution, or subsidies and regulations intended to help the poor, unemployed, and financially distressed, have changed in many ways since the onset of the recent financial crisis. The unemployed, for instance, can collect benefits longer and can receive bonuses, health subsidies, and tax deductions, and millions more people have became eligible for food stamps.

Economist Casey B. Mulligan argues that while many of these changes were intended to help people endure economic events and boost the economy, they had the unintended consequence of deepening-if not causing-the recession. By dulling incentives for people to maintain their own living standards, redistribution created employment losses according to age, skill, and family composition. Mulligan explains how elevated tax rates and binding minimum-wage laws reduced labor usage, consumption, and investment, and how they increased labor productivity. He points to entire industries that slashed payrolls while experiencing little or no decline in production or revenue, documenting the disconnect between employment and production that occurred during the recession. The book provides an authoritative, comprehensive economic analysis of the marginal tax rates implicit in public and private sector subsidy programs, and uses quantitative measures of incentives to work and their changes over time since 2007 to illustrate production and employment patterns. It reveals the startling amount of work incentives eroded by the labyrinth of new and existing social safety net program rules, and, using prior results from labor economics and public finance, estimates that the labor market contracted two to three times more than it would have if redistribution policies had remained constant.

In The Redistribution Recession, Casey B. Mulligan offers hard evidence to contradict the notion that work incentives suddenly stop mattering during a recession or when interest rates approach zero, and offers groundbreaking interpretations and precise explanations of the interplay between unemployment and financial markets.

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I understand that physical copies are scheduled to ship from the press' warehouse on October 4 ... a week or two after that, the book should be available for immediate purchase.

Suddenly Starting a New Job after 79 Weeks of Unemployment

On the 12th of this month, unemployment benefits were terminated for persons living in Illinois who had so far been unemployed and collecting benefits for 79-99 weeks.

The New York Times interviewed one of the persons affected, Candace Falkner, 50. Persons, like Ms. Falkner, who are unemployed for 79 weeks or more are often described as being unable to find a job. They would never turn down a job just because they were receiving unemployment benefits.

Yet, according to the New York Times, Ms. Falkner is working now, only a week or two after her unemployment benefits ran out. With no jobs to be found for the prior 79 weeks, did Ms. Falkner's job coicidentally appear?

The story describes Ms. Falkner's new job as "a commission-only, door-to-door sales job," and describes Ms. Falkner as a person with a master's degree, so I think we are to understand that Ms. Falkner is qualified for a better job than that. If so, it seems the 79+ weeks that she was unemployed cannot be described as a time when there were no jobs to be found, but rather a time when there were no "good" jobs to be found.

That's exactly the story I have been telling on this blog for several years: unemployment insurance makes unemployment last longer, even while it goes to people in unenviable situations. It also raises wages, as the jobs that are not good enough for the unemployed to accept either go unfilled or are not created in the first place.

Perhaps these consequences are desirable or at least tolerable for the intrinsic benefit of knowing that taxpayers are helping people when they experience tough times. But they are consequences nonetheless: the fact is that some of the reason that the unemployment rate is 8 percent rather than 5 is that unemployment is subsidized.