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US Daily: Extended Benefits Are Not the Main Source of High Unemployment (Stehn)
6:37 PM Wed Jan 12 2011
Some commentators have argued that extended unemployment insurance (UI) benefits are the key reason for high unemployment in the United States. Using data from 20 OECD countries we present evidence to the contrary. Our results suggest that only ½ percentage point of the current 9.4% jobless rate can be explained by the extension of UI benefits. Moreover, our calculations suggest that this effect will fade when the extended benefits eventually expire. These estimates--broadly in line with a recent study by the San Francisco Fed--reinforce our view that the overwhelming share of unemployment is cyclical rather than structural.
As part of the fiscal compromise package signed into law at the end of last year, extended unemployment insurance (UI) benefits were renewed for 13 months, until the end of 2011. Individuals in most states are thus eligible to receive UI benefits for up to 99 weeks, well above the normal level of 26 weeks.
Whether and to what extent extended UI benefits have contributed to the high rate of unemployment in the United States has been a topic of debate. On the one hand, Harvard economist Robert Barro calculated last summer that unemployment would be almost 3 percentage points lower if jobless benefits had not been extended to 99 weeks. (See "The Folly of Subsidizing Unemployment," The Wall Street Journal, August 20, 2010.) On the other hand, economists at the San Francisco Fed found that the unemployment rate would be only 0.4 percentage points lower in the absence of the extended benefits. (See "Extended Unemployment and UI Benefits," FRBSF Economic Letter, 2010-12, April 19, 2010.)
Gauging the effect of UI benefits on the unemployment rate is challenging because benefits are typically extended during times of high unemployment. For this reason a number of previous studies have explored the implications of UI benefits for a group of OECD countries to take advantage of differences in benefits between countries. (See, for example, Stephen Nickell and others, "Unemployment in the OECD since the 1960s. What do we know?" The Economic Journal, 115, January 2005.)
Following these studies, we explore the effect of the extension of UI benefits in two steps.
First, we use an OECD index of the "benefit replacement rate" to measure the generosity of unemployment benefits. This index measures the (pretax) level of unemployment benefits as a share of average earnings, taking into account both the level and duration of benefits. The chart below shows that the generosity of unemployment benefits remains relatively low in the United States even if we take into account the recent extension of unemployment benefits (from 26 to a maximum of 99 weeks). (As the OECD replacement rates are only available until 2007, we estimate the current replacement rate for the United States using this increase in the duration of benefits.)
We then estimate a simple panel regression model for 20 OECD countries using annual data between 1970 and 2007 to explore the effect of the benefit replacement rate on unemployment. In particular, we run a regression in which we explain the jobless rate with (1) the one-year lagged unemployment rate; (2) the OECD's estimate of the output gap as a measure of the cycle; and (3) the benefit replacement rate. (Moreover, we allow for variations in the unemployment rate that are unrelated to UI benefits--due to either country-specific circumstances and/or global shocks--by including so-called "fixed effects".)
The table below presents our results. We find that a 10 point increase in the replacement rate--broadly similar to what we saw during the Great Recession in the United States--is associated with a 0.2pt increase in the unemployment rate in the same year. Given the persistence in unemployment, the effect ultimately grows to just above 1 percentage point if the extension of the benefits is permanent (calculated as 0.2 divided by (1-0.83)). These estimates suggest that the unemployment rate is currently ½ percentage point higher due to the extension of the UI benefits than it otherwise would be. (As we are roughly in the third year of the UI benefit increase this figure is calculated as 0.2+0.83*0.2+0.83^2*0.2). Our estimates are thus similar in magnitude to the San Francisco Fed's study but much smaller than Robert Barro's.

Our simple regression, however, is subject to a number of caveats. First, our setup might still suffer from the possibility that countries increase the generosity of UI benefits in response to rising unemployment. This "reverse causality" problem, however, would bias the estimated coefficients upward, implying that the effect of higher benefits on unemployment would be even smaller if we could adequately control for this problem. Second, the magnitude of the effect of UI benefits on unemployment is sensitive to the sample period. Considering a more recent time period, however, reduces the size of the effect: for example, the coefficient almost halves for a sample starting in 1980 instead of 1970. Finally, our very simple setup leaves out many other institutional variables that might affect the rate of unemployment, including employment protection laws, the tax burden and the prevalence of trade unions. Studies that include such variables, however, find broadly similar effects. Stephen Nickell and others (cited above), for example, obtain almost identical effects to ours in a much richer model.
We conclude that merely ½ percentage point of the current jobless rate can be explained by the extension of UI benefits. Moreover, our estimates suggest that this effect will fade when the extended benefits eventually expire. These findings reinforce our view that the overwhelming share of unemployment is cyclical rather than structural.
Sven Jari Stehn
Jan Hatzius
Ed McKelvey
Alec Phillips
Sven Jari Stehn
Andrew Tilton
David Kelley

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sixpackshaker said:

Ending unemployment could lead to mass troubles...

That's why Rome ran so long with Bread and Circuses.

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@Li3n said:

Any effect on unemployment pails in comparison to what will happen if all of a sudden there are a lot of people left without any income... last time i recall someone left people to starve because the economy would recover on it's own Madame La Guillotine had quite a work-out.

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First Lady Puffinstuff said:

I know of recent graduates who have no family and live in inexpensive shared housing who do the bare minimum to collect unemployment, and so yes - there are some people who would and could get jobs but choose not to due to the availability of unemployment insurance.

However, the vast majority of workers are not in a position where unemoployment will cover their expenses.

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GasBandit said:

@Li3n - you filled my head with dancing visions of DC in flames, is all.

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Chibibar said:

This is just my personal opinion (from talking to some of my friends and their acquaintances)
There are a lot of low end jobs like McD and such that are hiring, but the income are so low that a person who use to earn 100k+ a year won't do due to pride and such. Now of course some jobs pay almost or just a little higher than poverty level (entry positions) and some might think, why work for same "low money" when I can just get it "for free" until I find something better.

One of my friend (whom I want to smack sometimes, but he is one my trusted best friend) is kinda like that. I have send him some job opening that my work have and he never apply because it was less than 60k a year

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First Lady Puffinstuff said:

Pride may well be involved but there are a lot of downsides accepting a low wage job such as fast food - for one you won't get many hours, health insurance, and therefore the job won't actually make very much money. For two, a good job search can take significant time. If you really want to get another six figure job, it's very likely that you're spending 40-60 hours a week working on finding the positions, learning about them, the company, and the people involved, finding people within your network that have connections or information about the positions, company and people you're looking at, starting discussions with the hiring managers and potential coworkers, etc, etc, etc. Not to mention scheduling difficulties trying to line up low wage work and interviews.

It's not a trivial amount of work, and distractions that will earn you little will lengthen that process, and cost you more in the long run.

For instance, say you get a job at the same time, and over two months that job earns you $3k. If you didn't have that job, it's quite possible you could have put more effort and resources into your job search, getting your higher paying job in a month instead of two, and over those two same months you would have earned $6k - 0 for the first month, and 6k for the second month.

I'm not advocating sitting around doing nothing, and if the situation calls for it you need to do whatever you can to support yourself and your family, however you can't blindly assume that it's an illogical choice due to pride that prevents one from taking a low paid temporary position.

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Chibibar said:

FLP: Oh I agree. I am just coming from my friends who are looking for jobs and trying. Some would take any technical job (his field) but having hard time finding anything that will hire him, while my other friend is really picky, but not really networking as much (the 60k+ guy)

Edit: It is sad that while the system is good to keep people from losing everything (a little money can go a long way for some people) that some people will take advantage of the system (like Welfare that I have read about) and just milk the system and don't contribute

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Krisken said:

Don't forget, Gas, after that first revolution of head choppings, the French went and killed those who did the chopping to begin with.

When the change you propose leads to chaos, don't expect roses to follow.

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GasBandit said:

@Li3n - you filled my head with dancing visions of DC in flames, is all.

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Mathias said:

Half the time I'm pretty sure he's had about 20 hits off a bong before posting, but that's just me.

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@Li3n said:

What confused me was that you said "you" twice...

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