Krugman's Faulty Analogy
By David Henderson
I promised earlier to post on a couple of Paul Krugman’s posts that caught my eye. In a June 10 post, “Unemployment Benefits and Actual Unemployment: An Analogy,” Krugman admits the point that unemployment benefits can increase the unemployment rate by making people pickier about jobs. But he says that doesn’t apply when the unemployment rate is so high.
First, his admission:
Here’s what is true: there’s respectable research — e.g., here — suggesting that unemployment benefits make workers more choosy in the search process. It’s not that workers decide to live a life of ease on a fraction of their previous wage; it’s that they become more willing to take the risk of being unemployed for an extra week while looking for a better job.
By the way, it’s typically for more than an extra week.
Then his statement that that analysis doesn’t apply now:
But all of this is totally irrelevant to our current situation, where inflation is running below target, the target is too low anyway, and the reason we have mass unemployment is that there just isn’t enough demand, and hence there just aren’t enough jobs, no matter how desperately people search for them.
Then his analogy:
One way to think about this is to say that unemployment benefits may, perhaps, reduce the economy’s speed limit, if we think of speed as inversely related to unemployment. And this suggests an analogy. Imagine that you’re driving along a stretch of highway where the legal speed limit is 55 miles an hour. Unfortunately, however, you’re caught in a traffic jam, making an average of just 15 miles an hour. And the guy next to you says, “I blame those bureaucrats at the highway authority — if only they would raise the speed limit to 65, we’d be going 10 miles an hour faster.”
Dumb, right? Well, so is the claim that unemployment benefits are causing today’s high unemployment.
Krugman’s analogy is a good one, but it’s too inclusive. What’s the problem? In the highway case, everyone is trying to go in the same direction. In the employment case, not everyone is looking for, or qualified for, the same job. There are literally hundreds of thousands of potential jobs out there, with various degrees of skill and experience required. So it’s likely that (1) there are employers out there willing to hire someone qualified now at a wage that it is just a little too low for qualified people to accept and (2) their wage at which they’re willing to accept is made somewhat higher by the fact of unemployment insurance. That’s what’s wrong with Krugman’s statement that the claim that UI makes people pickier is “totally irrelevant to our current situation.”
Do high unemployment benefits account for all of the high unemployment? No. Do they account for some? Absolutely.
By the way, here’s what Larry Summers said about the effect of unemployment insurance on unemployment.