Unemployment Benefits: How Much Unemployment Do They Cause
Though participants agreed there was considerable slack in resource utilization, their judgments about the degree of slack varied. The several extensions of emergency unemployment insurance benefits appeared to have raised the measured unemployment rate, relative to levels recorded in past downturns, by encouraging some who have lost their jobs to remain in the labor force. If that effect were large — some estimates suggested it could account for 1 percentage point or more of the increase in the unemployment rate during this recession — then the reported unemployment rate might be overstating the amount of slack in resource utilization relative to past periods of high unemployment.
This is from the minutes of the January 26-27 meeting of the Federal Open Market Committee (p. 14).
Here’s what Obama advisor Larry Summers wrote in The Concise Encyclopedia of Economics:
Unemployment insurance also extends the time a person stays off the job. [Kim] Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000. This is all the more significant in light of the fact that less than half of the unemployed receive insurance benefits, largely because many have not worked enough to qualify.
On December 16, 2009, I wrote:
Recall that Peter Orszag sidestepped the question when asked last month if any of Obama’s economic team were against the most recent extension of unemployment benefits. My candidate for critic is Larry Summers . . .
Interestingly, Paul Krugman today called such reasoning about the effect on unemployment benefits on unemployment “bizarre.” (HT to Michael Williams.)