Do Programs like Unemployment Insurance attempt to repeal the "laws" of economics?
The following is a commentary that was delivered on WAMC radio by Professor Michael Meeropol on June 2, 2006
EXTENDING UNEMPLOYMENT BENEFITS: IS THE HUMANITARIAN IMPULSE IN CONFLICT WITH ECONOMIC REALITIES?
Today, June 3, unemployment compensation specifically targeted at survivors of hurricanes Katrina and Rita will run out.[1] That gives me an opportunity to discuss this issue as a case study of how hard-headed economic understanding often appears to collide with humanitarian instincts.
To illustrate the humanitarian point of view, I quote from a recent e-mail from the AFL-CIO’s Working Families activist e-network encouraging people to write to members of Congress in support of an extension:
They suggest the following text for such a letter:
“Jobless benefits for tens of thousands of survivors of hurricanes Katrina and Rita will run out beginning June 3 unless you act before the Memorial Day recess to extend them.
As the Gulf Coast slowly recovers from last year's tragic hurricanes, 80,000 residents are still relying on unemployment benefits to help them get back on their feet. Failing to extend those benefits will make it impossible for many of them to escape abject poverty.”
Quite straightforward: People are out of work, they need these benefits, and thus we have a moral duty to help them. This point of view sees spending to provide unemployment compensation payments as a simple matter of justice. Interestingly enough, I would venture to guess that most Americans see it that way as well.
In contrast to this humanitarian point of view, many economists believe that unemployment benefits create bad incentives. Rather than feeling pressure to pursue all leads to decent jobs or to consider geographic relocation or retraining, the newly unemployed person is guaranteed a check for 13 or 26 weeks --- and when there are special laws passed such as those in the wake of Katrina and Rita that guarantee is extended.[2]
This creates precisely the opposite effect than what would be best for all concerned, especially the newly unemployed. They need to find a new job not sit back and collect a check hoping for a miracle that will get them their old job back.
So there you have it -- the bleeding heart liberal appeal to “social justice” vs. the hard-headed tough love conservative appeal to economic science. The hard-headed economics approach was typified by Rep. Dick Armey right after the September 11 atrocity when he opposed extending unemployment benefits, saying "The model of thought that says we need to go out and extend unemployment benefits … is not one that is commensurate with the American spirit here."[3]
Without for a second denigrating the fair-mindedness exhibited by the “social justice” approach, I want to interject a little hard-headed economic analysis in support of extending unemployment benefits. Put very simply, if the unemployed are able to maintain their level of consumption spending (paying the rent or the mortgage, keeping up on car payments, keeping ahead of the credit card company) then every business or individual who makes a living by in part selling something to these people will benefit. Unemployment payments do not just benefit the unemployed – they benefit all of us because for the most part every penny distributed is spent by the recipients.[4]
The argument that unemployment insurance slows the search for that next job is based on the false implication that there are plenty of jobs out there and the unemployed simply refuse to take them because unemployment insurance is such a good deal. In fact, most of the unemployed are involuntarily unemployed.[5]
By putting income into the hands of the unemployed, a downward spiral of loss of jobs, reduced incomes and reduced spending and further loss of jobs can be stopped. Extending unemployment benefits when unemployment rises is almost always good policy.[6]
If you’re listening to this commentary try to get your Representative or Senator to support the unemployment benefits extension. In the House it’s HR 5392 in the Senate, it’s S. 3030.
ENDNOTES:
[1]On May 16, a bill was introduced in the House (H. R. 5392). It was referred to the Committee on Transportation and Infrastructure. It read as follows:
. . . Notwithstanding any other provision of law, in the case of an individual eligible to receive unemployment assistance under section 410(a) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5177(a)) as a result of a disaster declaration made for Hurricane Katrina or Hurricane Rita on or after August 29, 2005, the President shall make such assistance available for 52 weeks after the date of the disaster declaration.
[one can find any law before either House of Congress by going to www.house.gov or www.senate.gov. The direct link to a law is at the following site: (http://thomas.loc.gov/cgi-bin/thomas)].
The Senate version was introduced May 24.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled
. . . Section 2 of the Katrina Emergency Assistance Act of 2006 (Public Law 109-176) is amended by striking `39' and inserting `52'.
The normal period for the receipt of Unemployment Insurance is 13 weeks, often extended to 26 weeks. The original bill to help Katrina victims was to extend unemployment benefits to 39 weeks which in fact ends June 3, 2006.
[2] See for example, Martin Feldstein, former Chairman of President Reagan’s Council of Economic Advisers and a Harvard Economics Professor: “There is no such thing as a Jobless Recovery” a commentary from the Wall Street Journal, October 13, 2003. This commentary is available at the National Bureau of Economic Research’s web site
http://www.nber.org/feldstein/wj101303.pdf. The crucial assertion is contained in the following sentences:
“A negative influence on the rate of new hires in every recovery is the distorting effect of unemployment insurance. The increase in the maximum duration of unemployment benefits that Congress enacted last year [in 2002] has delayed the current [2003] employment recovery even more than usual.
Unemployment benefits typically equal about half of the pretax wage that the individual earned before becoming unemployed. When taxes are taken into account, net-of-tax unemployment benefits replace about 60% of the previous net-of-tax wage.
Because of the combination of taxes and unemployment benefits, an individual whose pretax wage before becoming unemployed was $600 a week loses less than $200 of spendable income by remaining unemployed for an additional week. While some unemployed individuals try to find a new job as quickly as possible, others respond to the low net cost of remaining unemployed by spending more time searching for a better job or simply using the time for household activities.
Statistical studies show a substantial effect of unemployment benefits on the duration of benefits and a significant surge in job finding in the weeks just before benefits run out. When Congress extended the maximum duration of benefits from the usual 26 weeks to 39 weeks, it slowed the rate at which the unemployed found jobs. While no one should begrudge unemployed workers the protection of unemployment benefits it is important to recognize that those benefits raise the unemployment rate and delay the rise of employment in every economic recovery.”
[3] “A Nation Challenged: The Benefits; House Republican Leaders Balk at Any Help for Laid-Off Workers” The New York Times, September 26, 2001: Section C, p. 6. The context was an argument between Democrats and Republicans as to whether the $15 billion bail-out bill for the airlines industry in the wake of the September 11 attacks should be followed by an effort to extend unemployment benefits to cushion of the blow of layoffs suffered in the wake of those attacks.
[4] Except for very high income individuals who find themselves unemployed, the average unemployed worker suffers a significant decline in income (even using Professor Feldstein’s numbers from above) when she/he loses their job. People usually attempt to maintain their previous level of consumption spending in the face of what they hope will be a temporary income decline. Thus if we assume that someone was saving close to 20% of her or his income before being laid off, the 60% replacement of lost wages (per Professor Feldstein) would almost certainly all be spent.
[5] This was actually the centerpiece of the work of John Maynard Keynes in The General Theory of Employment Interest and Money which launched what has come to be known as the “Keynesian revolution” in economics. Prior to the publication of Keynes’ book in 1935, the majority of the economics profession believed that in equilibrium there was no such thing as involuntary unemployment – unless wages were kept artificially high by minimum wages or union contracts. (This is the root of the argument addressed in a previous commentary that a rise in the minimum wage will increase unemployment.) Keynes showed that it was perfectly possible for workers to be ready, willing and able to work at the prevailing wage but for businesses to not feel it was profitable enough to hire them. Keynes and his followers also showed that if businesses were to respond to declining sales by cutting wages across the board, the resulting declines in income by workers will lead to further declines in business sales which will cause businesses to have to cut back output and lay off even more workers.
[6] This is probably as good a place as any to respond to Professor Feldstein’s assertions in the Wall Street Journal opinion piece from 2003. Such arguments can be found all over the writings of many prominent economists. I believe there is actually a way to test that assertion over the historical record and I engaged in such an activity with a class a year or so ago. What follows is a shortened version of a handout that I submitted to my students entitled:
DOES UNEMPLOYMENT COMPENSATION ENCOURAGE MORE UNEMPLOYMENT?
I would like to discuss this issue with the help of two tables – the first from p. 284 in the 2000 GREEN BOOK shows monthly percentages of the unemployed who were actually receiving unemployment compensation for the years 1967 – 1999. [The Green Book is a publication of the House Ways and Means Committee with a more elaborate title “Overview of Entitlement Programs.” It is published every two years by the Government Printing Office and provides a wealth of information] The second table is from the Bureau of Labor Statistics’ monthly unemployment rates for the same years. [To get this information, first go to http://www.bls.gov/webapps/legacy/cpsatab7.htm. This will put you at a table where you can click on any demographic group to either get total number of unemployed or the unemployment rate. I clicked on all persons 16 years and older and was taken to a table where monthly data was available. I then chose the years of coverage I wanted.] Thus, anyone who wants to check my numbers from the argument below will need both the GREEN BOOK and the specific BLS table.
MY ARGUMENT AGAINST THE FELDSTEIN APPROACH
First of all – unemployment has a supply side AND a demand side. While the decision to offer oneself for work in the labor force is definitely a voluntary one, the decision of whether or not to hire more people (or lay people off) is also a voluntary one. If Professor Feldstein is going to emphasize the “voluntary” nature of unemployment, then we are actually talking about voluntary withdrawal from the labor force. In that case, the person who voluntarily withdraws is not counted as unemployed. The counter-argument is that because of the presence of unemployment compensation, people who would normally voluntarily withdraw from the labor market come into the labor market solely for the purposes of collecting unemployment – thereby artificially inflating the unemployment numbers.
It has been the contention of Keynesian economists that the fluctuations in the unemployment rate are almost completely dependent on decisions of businesses to expand, contract or continue the level of business activity. Since unemployment compensation is a constant (with extended benefits being voted for discreet years), it does not make much sense to contemplate fluctuations in the “desire” to work based on a non-fluctuating benefit. The alternative view is that because unemployment is subsidized by the unemployment compensation system, it will increase. If the subsidy becomes more generous (say, when Congress votes an extension of the number of weeks one can collect), unemployment will increase even more. An important corollary of this is that, if the benefits are reduced, unemployment will decrease.
Taking the latter view, it is clear that the very existence of unemployment compensation (or welfare programs in general that “reward” non-work) will reduce the supply of labor. The former (Keynesian) view reminds us that unemployment compensation also puts purchasing power into the hands of people who are very likely to spend it all. To the extent that spending money subsidizing the unemployed also increases aggregate demand, whatever it does to the supply of labor it will undoubtedly increase the demand for labor.
Because these forces are contradictory (reduces supply, increased demand), it boils down to an empirical question: Does the “generosity of unemployment benefits” raise or lower overall unemployment?
That is where the data comes in.
How would one utilize the evidence in the two tables to determine whether the assertion that unemployment compensation increases the level of unemployment is true or not?
I propose that if there is a high percentage of the unemployed receiving unemployment insurance payments, that would lead to people voluntarily remaining unemployed for longer periods of time and thus a higher (on balance) level of unemployment. [Precisely Professor Feldstein’s assertion.] In effect, I am arguing that the numbers on the chart labeled Insured Unemployment as a percentage of the unemployed is a useful proxy for the “subsidy” of unemployment. If we see high percentages of the unemployed receiving benefits when unemployment is, say, above 6%, that might suggest a positive relationship.
Unfortunately, it’s not so simple. Just a quick look at the tables will show that the recession periods (1970, 1974-75, 1981-83, 1990-91) seem to have [with one major exception] increased percentages of the unemployed receiving benefits AND increased levels of unemployment. However, this is actually the result of Congressional action extending the number of months people could receive those payments [except during the recession of 1981-83 when unemployment compensation was not extended as in other recessions]. Thus, sorting out the causation actually becomes rather tricky.
What we want to see is if the periods following the liberalization of unemployment benefits (periods where the participation of the unemployed jumped – such as 1975 and 1992) were followed by an increase in the overall rate of unemployment. We also want to see if the one recession when unemployment insurance was not extended so that there were rather low percentages of the unemployed receiving benefits exhibited a different pattern of unemployment – a more quick reduction in unemployment rates overall as opposed to other recessions.
Let us compare the experience during the 1974-75 recession to the experience during the 1981-83 recession.
In 1974, the recession began in the first quarter and did not reach its trough until the first quarter of 1975. Unemployment reached 9% in May of 1975 and did not fall below 7% until late 1977. This was the recession where the percentage of the unemployed covered by unemployment compensation was at the maximum for the entire period covered by this data. From January of 1975 till August of 1976, more than 65% of the unemployed were covered by unemployment insurance.
In 1981, the recession began in the third quarter and reached it’s trough in the fourth quarter of the next year. Unemployment peaked at 10.8% in November and December of 1982 and did not fall below 7.5% until the fall of 1984 (not below 7% until 1986). In marked contrast to the recession of 1975, the percentage of the unemployed covered by unemployment insurance did not rise above 50% in the year of 1982 and was never more than 53% during the first five months of 1983 after which it fell to 40% and below.
I submit that these contrasting experiences indicate that the high percentage that was receiving unemployment did not cause unemployment to remain high any longer than the much more “modest” (stingy would be a better word) benefits levels of the 1981-83 recession. In fact, one could see an inverse relationship utilizing the two recessions – the recession where unemployment insurance was less generous was deeper and maintained unemployment at a much higher level longer into the recovery.
Finally, let us consider the recession of 1990 – 1991 (and the jobless recovery for much of 1992 as well). Unemployment insurance was only extended at the end of 1991 (By twelve states -- see the jump from the percentages between June and November and the percentages from December, 1991 and through May of 1992). Despite no extension of unemployment insurance before December of 1991, the unemployment rate climbed from June of 1990 (the recession began in the third quarter) till July of 1992. The extension of unemployment insurance beginning in January of 1992 did not seem to have stopped the unemployment rate from beginning its (albeit painfully slow) descent in July of 1992. There was no up tick in unemployment at all during early 1992 when unemployment benefits were in extended mode and were covering a higher percentage of the unemployed than in the first eleven months of 1991.
EXTENDING UNEMPLOYMENT BENEFITS: IS THE HUMANITARIAN IMPULSE IN CONFLICT WITH ECONOMIC REALITIES?
Today, June 3, unemployment compensation specifically targeted at survivors of hurricanes Katrina and Rita will run out.[1] That gives me an opportunity to discuss this issue as a case study of how hard-headed economic understanding often appears to collide with humanitarian instincts.
To illustrate the humanitarian point of view, I quote from a recent e-mail from the AFL-CIO’s Working Families activist e-network encouraging people to write to members of Congress in support of an extension:
They suggest the following text for such a letter:
“Jobless benefits for tens of thousands of survivors of hurricanes Katrina and Rita will run out beginning June 3 unless you act before the Memorial Day recess to extend them.
As the Gulf Coast slowly recovers from last year's tragic hurricanes, 80,000 residents are still relying on unemployment benefits to help them get back on their feet. Failing to extend those benefits will make it impossible for many of them to escape abject poverty.”
Quite straightforward: People are out of work, they need these benefits, and thus we have a moral duty to help them. This point of view sees spending to provide unemployment compensation payments as a simple matter of justice. Interestingly enough, I would venture to guess that most Americans see it that way as well.
In contrast to this humanitarian point of view, many economists believe that unemployment benefits create bad incentives. Rather than feeling pressure to pursue all leads to decent jobs or to consider geographic relocation or retraining, the newly unemployed person is guaranteed a check for 13 or 26 weeks --- and when there are special laws passed such as those in the wake of Katrina and Rita that guarantee is extended.[2]
This creates precisely the opposite effect than what would be best for all concerned, especially the newly unemployed. They need to find a new job not sit back and collect a check hoping for a miracle that will get them their old job back.
So there you have it -- the bleeding heart liberal appeal to “social justice” vs. the hard-headed tough love conservative appeal to economic science. The hard-headed economics approach was typified by Rep. Dick Armey right after the September 11 atrocity when he opposed extending unemployment benefits, saying "The model of thought that says we need to go out and extend unemployment benefits … is not one that is commensurate with the American spirit here."[3]
Without for a second denigrating the fair-mindedness exhibited by the “social justice” approach, I want to interject a little hard-headed economic analysis in support of extending unemployment benefits. Put very simply, if the unemployed are able to maintain their level of consumption spending (paying the rent or the mortgage, keeping up on car payments, keeping ahead of the credit card company) then every business or individual who makes a living by in part selling something to these people will benefit. Unemployment payments do not just benefit the unemployed – they benefit all of us because for the most part every penny distributed is spent by the recipients.[4]
The argument that unemployment insurance slows the search for that next job is based on the false implication that there are plenty of jobs out there and the unemployed simply refuse to take them because unemployment insurance is such a good deal. In fact, most of the unemployed are involuntarily unemployed.[5]
By putting income into the hands of the unemployed, a downward spiral of loss of jobs, reduced incomes and reduced spending and further loss of jobs can be stopped. Extending unemployment benefits when unemployment rises is almost always good policy.[6]
If you’re listening to this commentary try to get your Representative or Senator to support the unemployment benefits extension. In the House it’s HR 5392 in the Senate, it’s S. 3030.
ENDNOTES:
[1]On May 16, a bill was introduced in the House (H. R. 5392). It was referred to the Committee on Transportation and Infrastructure. It read as follows:
. . . Notwithstanding any other provision of law, in the case of an individual eligible to receive unemployment assistance under section 410(a) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5177(a)) as a result of a disaster declaration made for Hurricane Katrina or Hurricane Rita on or after August 29, 2005, the President shall make such assistance available for 52 weeks after the date of the disaster declaration.
[one can find any law before either House of Congress by going to www.house.gov or www.senate.gov. The direct link to a law is at the following site: (http://thomas.loc.gov/cgi-bin/thomas)].
The Senate version was introduced May 24.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled
. . . Section 2 of the Katrina Emergency Assistance Act of 2006 (Public Law 109-176) is amended by striking `39' and inserting `52'.
The normal period for the receipt of Unemployment Insurance is 13 weeks, often extended to 26 weeks. The original bill to help Katrina victims was to extend unemployment benefits to 39 weeks which in fact ends June 3, 2006.
[2] See for example, Martin Feldstein, former Chairman of President Reagan’s Council of Economic Advisers and a Harvard Economics Professor: “There is no such thing as a Jobless Recovery” a commentary from the Wall Street Journal, October 13, 2003. This commentary is available at the National Bureau of Economic Research’s web site
http://www.nber.org/feldstein/wj101303.pdf. The crucial assertion is contained in the following sentences:
“A negative influence on the rate of new hires in every recovery is the distorting effect of unemployment insurance. The increase in the maximum duration of unemployment benefits that Congress enacted last year [in 2002] has delayed the current [2003] employment recovery even more than usual.
Unemployment benefits typically equal about half of the pretax wage that the individual earned before becoming unemployed. When taxes are taken into account, net-of-tax unemployment benefits replace about 60% of the previous net-of-tax wage.
Because of the combination of taxes and unemployment benefits, an individual whose pretax wage before becoming unemployed was $600 a week loses less than $200 of spendable income by remaining unemployed for an additional week. While some unemployed individuals try to find a new job as quickly as possible, others respond to the low net cost of remaining unemployed by spending more time searching for a better job or simply using the time for household activities.
Statistical studies show a substantial effect of unemployment benefits on the duration of benefits and a significant surge in job finding in the weeks just before benefits run out. When Congress extended the maximum duration of benefits from the usual 26 weeks to 39 weeks, it slowed the rate at which the unemployed found jobs. While no one should begrudge unemployed workers the protection of unemployment benefits it is important to recognize that those benefits raise the unemployment rate and delay the rise of employment in every economic recovery.”
[3] “A Nation Challenged: The Benefits; House Republican Leaders Balk at Any Help for Laid-Off Workers” The New York Times, September 26, 2001: Section C, p. 6. The context was an argument between Democrats and Republicans as to whether the $15 billion bail-out bill for the airlines industry in the wake of the September 11 attacks should be followed by an effort to extend unemployment benefits to cushion of the blow of layoffs suffered in the wake of those attacks.
[4] Except for very high income individuals who find themselves unemployed, the average unemployed worker suffers a significant decline in income (even using Professor Feldstein’s numbers from above) when she/he loses their job. People usually attempt to maintain their previous level of consumption spending in the face of what they hope will be a temporary income decline. Thus if we assume that someone was saving close to 20% of her or his income before being laid off, the 60% replacement of lost wages (per Professor Feldstein) would almost certainly all be spent.
[5] This was actually the centerpiece of the work of John Maynard Keynes in The General Theory of Employment Interest and Money which launched what has come to be known as the “Keynesian revolution” in economics. Prior to the publication of Keynes’ book in 1935, the majority of the economics profession believed that in equilibrium there was no such thing as involuntary unemployment – unless wages were kept artificially high by minimum wages or union contracts. (This is the root of the argument addressed in a previous commentary that a rise in the minimum wage will increase unemployment.) Keynes showed that it was perfectly possible for workers to be ready, willing and able to work at the prevailing wage but for businesses to not feel it was profitable enough to hire them. Keynes and his followers also showed that if businesses were to respond to declining sales by cutting wages across the board, the resulting declines in income by workers will lead to further declines in business sales which will cause businesses to have to cut back output and lay off even more workers.
[6] This is probably as good a place as any to respond to Professor Feldstein’s assertions in the Wall Street Journal opinion piece from 2003. Such arguments can be found all over the writings of many prominent economists. I believe there is actually a way to test that assertion over the historical record and I engaged in such an activity with a class a year or so ago. What follows is a shortened version of a handout that I submitted to my students entitled:
DOES UNEMPLOYMENT COMPENSATION ENCOURAGE MORE UNEMPLOYMENT?
I would like to discuss this issue with the help of two tables – the first from p. 284 in the 2000 GREEN BOOK shows monthly percentages of the unemployed who were actually receiving unemployment compensation for the years 1967 – 1999. [The Green Book is a publication of the House Ways and Means Committee with a more elaborate title “Overview of Entitlement Programs.” It is published every two years by the Government Printing Office and provides a wealth of information] The second table is from the Bureau of Labor Statistics’ monthly unemployment rates for the same years. [To get this information, first go to http://www.bls.gov/webapps/legacy/cpsatab7.htm. This will put you at a table where you can click on any demographic group to either get total number of unemployed or the unemployment rate. I clicked on all persons 16 years and older and was taken to a table where monthly data was available. I then chose the years of coverage I wanted.] Thus, anyone who wants to check my numbers from the argument below will need both the GREEN BOOK and the specific BLS table.
MY ARGUMENT AGAINST THE FELDSTEIN APPROACH
First of all – unemployment has a supply side AND a demand side. While the decision to offer oneself for work in the labor force is definitely a voluntary one, the decision of whether or not to hire more people (or lay people off) is also a voluntary one. If Professor Feldstein is going to emphasize the “voluntary” nature of unemployment, then we are actually talking about voluntary withdrawal from the labor force. In that case, the person who voluntarily withdraws is not counted as unemployed. The counter-argument is that because of the presence of unemployment compensation, people who would normally voluntarily withdraw from the labor market come into the labor market solely for the purposes of collecting unemployment – thereby artificially inflating the unemployment numbers.
It has been the contention of Keynesian economists that the fluctuations in the unemployment rate are almost completely dependent on decisions of businesses to expand, contract or continue the level of business activity. Since unemployment compensation is a constant (with extended benefits being voted for discreet years), it does not make much sense to contemplate fluctuations in the “desire” to work based on a non-fluctuating benefit. The alternative view is that because unemployment is subsidized by the unemployment compensation system, it will increase. If the subsidy becomes more generous (say, when Congress votes an extension of the number of weeks one can collect), unemployment will increase even more. An important corollary of this is that, if the benefits are reduced, unemployment will decrease.
Taking the latter view, it is clear that the very existence of unemployment compensation (or welfare programs in general that “reward” non-work) will reduce the supply of labor. The former (Keynesian) view reminds us that unemployment compensation also puts purchasing power into the hands of people who are very likely to spend it all. To the extent that spending money subsidizing the unemployed also increases aggregate demand, whatever it does to the supply of labor it will undoubtedly increase the demand for labor.
Because these forces are contradictory (reduces supply, increased demand), it boils down to an empirical question: Does the “generosity of unemployment benefits” raise or lower overall unemployment?
That is where the data comes in.
How would one utilize the evidence in the two tables to determine whether the assertion that unemployment compensation increases the level of unemployment is true or not?
I propose that if there is a high percentage of the unemployed receiving unemployment insurance payments, that would lead to people voluntarily remaining unemployed for longer periods of time and thus a higher (on balance) level of unemployment. [Precisely Professor Feldstein’s assertion.] In effect, I am arguing that the numbers on the chart labeled Insured Unemployment as a percentage of the unemployed is a useful proxy for the “subsidy” of unemployment. If we see high percentages of the unemployed receiving benefits when unemployment is, say, above 6%, that might suggest a positive relationship.
Unfortunately, it’s not so simple. Just a quick look at the tables will show that the recession periods (1970, 1974-75, 1981-83, 1990-91) seem to have [with one major exception] increased percentages of the unemployed receiving benefits AND increased levels of unemployment. However, this is actually the result of Congressional action extending the number of months people could receive those payments [except during the recession of 1981-83 when unemployment compensation was not extended as in other recessions]. Thus, sorting out the causation actually becomes rather tricky.
What we want to see is if the periods following the liberalization of unemployment benefits (periods where the participation of the unemployed jumped – such as 1975 and 1992) were followed by an increase in the overall rate of unemployment. We also want to see if the one recession when unemployment insurance was not extended so that there were rather low percentages of the unemployed receiving benefits exhibited a different pattern of unemployment – a more quick reduction in unemployment rates overall as opposed to other recessions.
Let us compare the experience during the 1974-75 recession to the experience during the 1981-83 recession.
In 1974, the recession began in the first quarter and did not reach its trough until the first quarter of 1975. Unemployment reached 9% in May of 1975 and did not fall below 7% until late 1977. This was the recession where the percentage of the unemployed covered by unemployment compensation was at the maximum for the entire period covered by this data. From January of 1975 till August of 1976, more than 65% of the unemployed were covered by unemployment insurance.
In 1981, the recession began in the third quarter and reached it’s trough in the fourth quarter of the next year. Unemployment peaked at 10.8% in November and December of 1982 and did not fall below 7.5% until the fall of 1984 (not below 7% until 1986). In marked contrast to the recession of 1975, the percentage of the unemployed covered by unemployment insurance did not rise above 50% in the year of 1982 and was never more than 53% during the first five months of 1983 after which it fell to 40% and below.
I submit that these contrasting experiences indicate that the high percentage that was receiving unemployment did not cause unemployment to remain high any longer than the much more “modest” (stingy would be a better word) benefits levels of the 1981-83 recession. In fact, one could see an inverse relationship utilizing the two recessions – the recession where unemployment insurance was less generous was deeper and maintained unemployment at a much higher level longer into the recovery.
Finally, let us consider the recession of 1990 – 1991 (and the jobless recovery for much of 1992 as well). Unemployment insurance was only extended at the end of 1991 (By twelve states -- see the jump from the percentages between June and November and the percentages from December, 1991 and through May of 1992). Despite no extension of unemployment insurance before December of 1991, the unemployment rate climbed from June of 1990 (the recession began in the third quarter) till July of 1992. The extension of unemployment insurance beginning in January of 1992 did not seem to have stopped the unemployment rate from beginning its (albeit painfully slow) descent in July of 1992. There was no up tick in unemployment at all during early 1992 when unemployment benefits were in extended mode and were covering a higher percentage of the unemployed than in the first eleven months of 1991.
posted by WNECONOMICS at 8:14 AM
0 Comments:
Post a Comment
<< Home