Unemployment Benefits

In a couple previous posts (here and here), I considered the claim that unemployment benefits are stimulative for the economy. My focus mainly centered on the determinants of consumption and disregarded the discussion regarding the disincentives to work. My position on the latter has always been that if you lengthen the duration of unemployment benefits, you will increase the average duration of unemployment at the margin. This is straightforward economics.

Today, Robert Barro considers the effects of disincentives to work in the WSJ:

The peak unemployment rate of 10.1% in October 2009 corresponded to a mean duration of unemployment of 27.2 weeks and a share of long-term unemployment of 36%. The duration of unemployment peaked (thus far) at 35.2 weeks in June 2010, when the share of long-term unemployment in the total reached a remarkable 46.2%. These numbers are way above the ceilings of 21 weeks and 25% share applicable to previous post-World War II recessions. The dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost surely the culprit.

This is the important point in the debate. It is likely that a number of individuals have increased the duration of unemployment at the margin due to the lengthening of benefits. I do, however, remain skeptical that the magnitude of the effect is as large as Barro claims.

Finally, I would point out that it is not necessarily a bad thing for the duration of unemployment to increase if it ultimately results in a better match between the skills of the worker and the firm than would have otherwise taken place. Of course, this last point is nearly impossible to determine.

One response to “Unemployment Benefits

  1. Pingback: Unemployment Benefits | The Everyday Economist | The Daily Conservative

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