Monday, August 30, 2010

Unemployment Insurance

The idea that 'if you subsidize something you get more of it' seems as good a law in economics as you can find. Robert Barro argues today in the WSJ that since we moved unemployment insurance from 26 weeks of 'temporary' relief, to now 99 weeks, we have exacerbated unemployment problem, and now are approaching the European base rate. Isn't a more 'European style' economy what Obama wanted? Alas, when we create an American Europe, we don't get to choose what parts transfer.

Barro notes that increasing unemployment insurance lowers the probability a job seeker will accept a new job, and the economy is always creating and destroying a lot of jobs:
For example, the Bureau of Labor Statistics reports that, near the worst of the recession in March 2009, 3.9 million people were hired and 4.7 million were separated from jobs. This net loss of 800,000 jobs in one month indicates a very weak economy—but nevertheless one in which 3.9 million people were hired. A program that reduced incentives for people to search for and accept jobs could surely matter a lot here.

But, for the other side, the issue is rather simple. If we did not give people unemployment insurance, they would die. Here's American Prospect columnist Tim Fernholz explaining his utter disdain for Jim Bunning, the congressman who tried to block increasing unemployment insurance without funding it first.


  1. Anonymous9:37 AM

    UI is a good tool to reduce crime and social unrest. If you relax Barro's assumption for a second that we'll go back to 4% unemployment only if get rid of UI, the program makes a lot of sense.

    If you think getting rid of UI will decrease unemployment to 6-7%, then sure get rid of it. But that seems like a highly unreasonable assumption given that we are still recovering from one of the worst financial crises of the last 100 years.

  2. Anonymous11:01 AM

    I read this blog for the laughs, and your lack of critical thinking skills here and reactionary position has made my day. Thank you Eric Falkenstein for that...

  3. Anonymous11:10 AM

    hilariously, as well, Robert Barro works from the assumption of fully formed Rational Expectations...something Mr. Falkenstein has railed against on his blog... I am beside myself with laughter...

  4. I think it's a bit post hoc to say we have an increased unemployment rate BECAUSE of the increased benefits. How many employers are out there moaning they can't find anyone to work because people are off enjoying their unemployment benefits?

    The only job someone would not take because they are on unemployment was a job that didn't provide the same level of compensation and benefits. Seeing that unemployment benefits only offer a percentage of what a person was earning (and no benefits), I think there is still a strong incentive to seek and accept work.

    Unemployment insurance may lower the probability a job seek will accept a new job in the abstract, but in reality, does anyone honestly thing it effects the probability in a significant way?

  5. Does the subject of Fernholz's glasses come up during this debate?

  6. Anonymous3:03 PM

    Like most things in life UI is more nuanced than people realize.

  7. Anonymous8:34 AM

    That reduced incentive to find work is exactly why they need to stop funding Phd programs

  8. Anonymous #53:29 PM

    Eric's focus on UI as a cause of unemployment is a bit like his focus on the CRA as a cause of the housing bubble -- he has the sign right but is way off on the significance. Basically in Eric's view all problems are either laws of nature or caused by counterproductive liberal policies, so it's not that surprising that he dwells so much on these two policies; confirmation bias afflicts us all.