You get what you pay for
By Scott Sumner
In my previous post, I pointed out that the unusually generous unemployment benefits being paid out until early September were likely to depress employment of lower skilled workers during the summer months. You might wonder if there is any research that supports this claim. It turns out that there is. A 2016 NBER study by Marcus Hagedorn, Iourii Manovskii & Kurt Mitman found that the expiration of the extended unemployment benefits at the end of 2013 led to an unusually large jump in employment during 2014. Here’s the abstract:
We measure the aggregate effect of unemployment benefit duration on employment and the labor force. We exploit the variation induced by Congress’ failure in December 2013 to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. Our baseline estimates reveal that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.019 log points. In levels, 2.1 million individuals secured employment in 2014 due to the benefit cut. More than 1.1 million of these workers would not have participated in the labor market had benefit extensions been reauthorized.
You may recall that Keynesian economists predicted the exact opposite, that cutting off benefits would reduce spending and thus reduce employment. Yes, demand matters. But so does supply.
One point I forgot to mention in the previous post is that the artificially created labor shortage this summer is likely to lead to more illegal immigration.