Should Unemployment Compensation be Extended? Becker

 

President Obama during this past week signed into law extending unemployment benefits to a maximum of 99 weeks, or almost two years, for persons who have been unemployed for over half a year and have exhausted their state benefits. The degree of extension varies among states depending on a state’s unemployment rate, with higher unemployment states getting longer durations of coverage. The bill that became law is highly partisan, passing with almost all Democrats, 31 House Republicans, and only 2 Republican senators.  I believe the law extends unemployment benefits for too long, although the economics of optimal unemployment insurance gives a less than certain answer.

Unemployment insurance tries to balance two conflicting goals. One is to protect at least some of the earnings of workers laid off from their jobs through no fault of their own, while the conflicting goal is not to make unemployment status so comfortable that workers try to get laid off, and do not look seriously for jobs when they are unemployed. The first aim is a typical goal of insurance against bad outcomes, while the second goal is to reduce the degree of “moral hazard”; that is, to reduce the incentive of persons to reduce their efforts to remain employed and look seriously for work when unemployed because they have insurance against the cost of being unemployed.

One typical way insurance tries to reach a compromise between these conflicting goals is to have a deductible that is paid by insured persons, such as the $500 deductible many car owners have on their automobile insurance. The trouble with practically all the state-run unemployment insurance plans is that they typically have no or a minimal deductible because they provide coverage essentially from the first week of unemployment. In addition, they usually limit coverage to a fixed number of weeks, such as 26 weeks. This is an inefficient and costly approach since practically all the unemployed can readily cover their first several weeks of unemployment from savings, spouses’ earnings, or borrowing on credit cards and in other ways. Unemployed workers usually run into financial trouble only when they have been unemployed for an extended time. An optimal unemployment insurance plan would make unemployed workers responsible for their first month or two of unemployment, and mainly spend unemployment insurance resources on the longer-term unemployed.

A second insurance approach to the moral hazard problem is to require significant co-payments, so that the insured have to pay a portion of any additional losses they experience after they exhaust the deductible. American unemployment insurance plans usually do pretty well on this by only paying about half or so of the earnings the unemployed had received when they were employed. Many European plans had usually replaced most or all of the earnings of the unemployed, and covered unemployed for many years. After they learned the hard way the prediction of economic theory that this encouraged significant increases in unemployment, several countries greatly cut back both the duration and payment (i.e., replacement) rates for the unemployed. Interestingly, In Germany this was done under a center-left Social Democratic government.

This analysis of insurance provides background for evaluating the new extension of unemployment benefits for the longer-term unemployed. The approximately $30 billion committed to this extension has been partly justified as a stimulus to what may be a slowing US economy. However, since any “stimulus” from $30 billion would be paltry even to the most optimistic stimulus calculations, such a stimulus can hardly be a serious justification for this extension of benefits. This is especially the case when federal budget deficits have been so large during the past couple of years, and there is no serious evidence that the $800 billion stimulus package passed over a year ago has had much stimulating effect on unemployment or GDP. Much of the evidence usually cited about number of jobs created by the stimulus package is based on terrible analysis. Any new hires under stimulus money is assumed to be net jobs created by the stimulus rather than a transfer of employment from non-stimulus activities to stimulus-supported activities.

So the case for the new law rests on its insurance provisions rather than on its stimulus capabilities. I argued earlier that covering the longer-term unemployed is the more optimal way to approach unemployment insurance since the long-term unemployed face the largest economic hardship. From that viewpoint, extending the duration of coverage beyond 6 months makes sense in an environment where the unemployment rate remains excessively high at 9.5%, especially if the extension is accompanied by the elimination of unemployment coverage for the first 6-8 weeks of unemployment.

However, the actual large extension poses a major risk of creating an unemployment culture where men and women remain “ unemployed” for years. Once the period of unemployment becomes long enough, people begin to get the habits from being unemployed for a long time: they sleep late, develop various leisure interests, and at the same time their work skills depreciate from not using them for an extended period. Studies have shown that skill depreciation is a serious effect of being unemployed for a long time.

Some might retort that this argument is persuasive during periods of normal unemployment rates, perhaps 7% and under, but not when jobs are scarce, the unemployment rate is over 9%, and it is coming down slowly. There is merit to this response, but on the other hand, the JOLTS data show that even with the current high unemployment rates, about 4.5 4 million persons were hired in May 2010 (and about the same number are either being laid off or quitting their jobs). So for the most part, even the long term unemployed can find jobs if they are willing to take a cut in their earnings, and/or move to other industries and occupations.

This analysis leads me to the following conclusions. During bad times, 6 months of unemployment compensation may not be long enough, but the 2 years in the new law is too long.  About 9 months of unemployment compensation would be the right length. Anyone unemployed longer than that would lose these benefits. If they want to work they should be forced to adjust, at least temporarily, to the bad economic environment, and accept jobs that they would turn down during good economic times.

 

 

 

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 [K1]“The vote in the House was 272 to 152, with 31 Republicans joining 241 Democrats in supporting the measure. Voting against were 142 Republicans and 10 Democrats.”

 

NYT: http://www.nytimes.com/2010/07/23/us/politics/23jobs.html?scp=3&sq=unemployment%20benefits%20extension&st=cse

 

Fewer senators crossed partisan lines (2 Republicans and 1 Democrat) on this issue.

Comments

[odszkodowania]

interesting publication

[Jake]

Aw, shucks, NEH, ever been down in the old iron mines in the Mesabi Range? Or the old Lukens Steel mill in Coatesville, PA? Or running a vertical boring mill, turning out 48-inch pipeline valve bodies, on the graveyard shift? Or spend any time on a rooftop, pouring hot tar in mid-summer?

And Joshua Norman's talk about sending out 10-15 job applications a day may persuade Mom and Dad not to kick him out of their cellar, but lends his arguments no credibility.

[Joshua Norman]

Jake says:
"Aw, shucks, NEH, ever been down in the old iron mines in the Mesabi Range? Or the old Lukens Steel mill in Coatesville, PA? Or running a vertical boring mill, turning out 48-inch pipeline valve bodies, on the graveyard shift? Or spend any time on a rooftop, pouring hot tar in mid-summer?

And Joshua Norman's talk about sending out 10-15 job applications a day may persuade Mom and Dad not to kick him out of their cellar, but lends his arguments no credibility."
Actually I have my own apartment far away from them. In fact, until I lost my job I was providing support to them. It's pretty obvious that you Jake is nothing more than a troll on this board. Since you are either unwilling or unable to read my ideas on how to reduce unemployment in this country, perhaps you should find someone who will. Instead of making personal insults against me coupled with your silent assertion with regards to solving the problem of unemployment and lack of trade competitiveness, offer something of substance.

[NEH]

Joshua, My five great grandfather is buried someplace in Kentucky just south of Cincy. He and his son owned a farm down there in the late 1790's. And the family moved up just north of Cincy. in about 1803. Yeah, some of those old square head German immigrants can be a bit on the Conservative side, yet there are quite a few who can be quite Liberal. Those are the escapees from the Prussian State Secret Police after the Revolution of 1848-49. I'm related to these guys too. As for myself, I reside in the Chicago area and Houston-Austin areas. Trying to expand my job search area and luck in landing a new job. "Overqualified", "Underqualified", "Not qualified" I've heard it all and not heard thing. This is the worst job market I've ever seen or experienced.

As the saying goes, "All my problems would go away if I could get a full time paying job with benefits". Do those even exist anymore?

[NEH]

Jake, Never been up in the Mesabi range. Did see the old ore boats coming into Cleveland and Chicago to unload the taconite briquets though. Lukens? Never was at the Plant, although I have been involved in the design, fabrication and installation of ASME Pressure Vessels utilizing their heads in oil, gas and petrochemical plants. 48" Line valves? Purchased and installed them too. Not too mention, all other types and sizes of valves, pipe and associated equipment.

[New Balance Sneakers]

Life is made up of sobs, sniffles and smiles with sniffs predominating. Do you understand?

[Jake]

Way to go, NEH. If you know the oilpatch, you are by definition a good man.

And Joshua -- my most distant American ancestor came here from Holland in 1660. (His farmhouse in NJ still stands and remains inhabited.) My fellow ancestor and namesake was a lieutenant in General Washington's army. And my great-great-great-great grandfather had the misfortune to lose his scalp to a Native American over a land dispute. Past generations would be amazed at what many of us find uncomfortable or inconvenient or unfair or unjust these days. Personally, I count my blessings.

[Joshua Norman]

Jake:

If you're such a fan of people in the oil business I worked for an oil distribution company in 2004 before accepting a position with PNC's investment administration division.

As for Dutch relatives, my paternal grandmother's family came from Holland at the turn of the century. A distant relative in that side of my family married Samuel Gompers the labor leader. And a great-aunt on my mother's side and her family survived Auschwitz.

As for past generations being amazed at what we find uncomfortable, inconvient, unfair or unjust, it was because they refused to accept the status quo and fight for what we enjoy today. I bless the fact that they fought for the 8 hour day, jobless benefits, overtime pay, collective bargaining, better pay for workers, against child labor, against sweatshops, against unlimited immigration streaming across our borders and against subsidized import dumping by our "trading partners". Plus the labor movement saved capitalism from itself. Only in America are labor unions nearly as capitalist as management.

What bothers me about you is you're not getting it. America may be stronger now than the turn of the 20th century, or during early days of independence, or during the colonial days. However, with the way America is headed, that will not be the case. And the worst thing is this country threw away its advantages in order to be like the nations of the world. That is why I offered my proposals, which you have yet to weigh in on.

As for work related endeavors, I entered into negotiations to form an independent research partnership with a gentleman in NYC. Ironically he works as a project manager for an Indian offshoring bodyshop. The Odd Couple's Odd Couple eh? Well there goes the neighborhood. Anyway we are looking to make money by identifying wasteful government spending as well as publicizing our research efforts and getting Congress and the President to do the right thing. If you'd like to contribute money to our efforts please don't hesitate to do so. We're targeting small contributions, $30, $50, $100 etc.

[Jake]

Gosh almighty, Joshua, I'm so glad to hear you "worked for an oil distribution company in 2004." Working with oily stuff would seem to explain your slippery rhetoric.

What is truly pathetic is your idea that "America may be stronger now than the turn of the 20th century, or during early days of independence, or during the colonial days," if only the proletariat would listen to your "proposals," which amount to a plea for "small contributions, $30, $50, $100 etc." [sic].

At best, sir, you are a damned fraud. At worst, you dream of running a Stalinist gulag.

Quit screwing around and get a job. Hint: you can stand on the street corner where the Hispanic gentlemen congregate each morning and find work.

[New Balance Shoes]

The baby sucked at the bottle.

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[New Balance Shoes]

The baby sucked at the bottle.

http://www.yaahshoes.com/

[Joshua Norman]

Jake, stop twisting the words around.

I mentioned my time with the oil distribution company because you seemed to respect NEH for working in the oil industry.

I'm not looking to run a Stalinist Gulag. I would like to see this country return to the values of the founding fathers. Right now, America is sprinting down the road to leftist-socialist anarcho-tyranny. I knew that electing Obama would be a mistake. My mother’s family hailed from Hartford, CT. Hartford elected Thurman Milner, a member of the ObamaNation as mayor in 1981, followed by Carrie Saxon Perry in 1987 and Eduardo Perez, a former leader of the Ghetto Brothers gang. Needless to say it no longer holds its position as the insurance capital of the world, as well as Connecticut's leading city.

America may be the world's leading superpower now, but unless we stop giving everything away to the Chinese, Latinos, Mohammedans, Indians and Japanese, America will be right back to where they were in 1607.

I asked for money for four reasons:
1. I was concerned that the initiative would take longer than anticipated, cutting into my time for my MBA program as well as computer programming training.
2. With the capital market volatility, I didn't want to take on new debt.
3. I was performing a service that many people talk about but are unable to take it to a next level.
4. Other individuals and organizations offer their research and analysis for sale. Why would you react with such visceral hatred for me offering to do the same? People give money to political candidates so they can try to change the system, why not nonaligned researchers.

As for getting a job, you think its that easy to just up and get a job? The number of job openings in the last 10 years has declined by about 40%, thanks to offshoring of jobs. Also when I-Bankers are applying for junior research associate jobs, your advice is naive and Pollyanish at best.
As for the Hispanic day laborers on the corner, I proposed deporting those illegal aliens so as to reduce the supply of labor which would increase purchasing power for those who take their place. I just got off the phone with a major asset management boutique. They liked my resume, but they thought I may have been too overqualified for the position I applied to. I wanted to tell them that, but I held my tongue and told that I applied for the position to get additional project management experience.

If you don't want to debate me on my ideas, I would say you are against them. Unless you respond differently I will say you are in favor of the following:
1. Jake is in favor of 12 million illegal aliens to come to this country, undercut native laborer wages, and cost the taxpayers hundreds of billions of dollars in aid payments to these people.
2. Jake believes our immigration laws should not be enforced because it brings millions of brown helots and coolies to work in America.
3. Jake supports giving millions of foreigners green cards and visas to come into this country to put further pressure on American wages and working conditions.
4. Jake supports our country incurring large trade deficits with our mercantilist "trading partners", as well as the offshoring of American jobs to Third World countries. Jake is enthusiastic that they tariff our exports to their countries while demanding no tariffs on their exports to this country.
5. Jake accepts the current taxation regime in America where a person pays more taxes on domestic goods than imports.
6. Jake has no problem with the government living beyond its means and getting in hock to countries who hate us like China & Japan.

[Joshua Norman]

http://investigates.i2i.org/2010/08/05/documents-reveal-potential-widespread-fraud-at-department-of-labor/
Jake was ranting and raving at me yet I heard nary a peep from him about this?

[Jake]

Idiot.

Consider that a peep.

[CM]

Do you think it might be worth making the distinction between there being "no serious evidence that the $800 billion stimulus package passed over a year ago has had much stimulating effect on unemployment or GDP" and there being no evidence which you find convincing. There seem to be many reputable and serious economists who disagree strongly with what you are saying, based on evidence they find compelling. What does it mean to be serious in an academic context? I would say part of it is taking competing points of view seriously.

And since serious evidence is what is required to make statements about economic policy, what serious evidence is there that "even the long term unemployed can find jobs if they are willing to take a cut in their earnings, and/or move to other industries and occupations"? You refer to the JOLTS data but how does this show that the long term unemployed found jobs by changing their willingness to work in a given industry or for a given wage? Or that they can? And in what sense are the long term unemployed unwilling to take a cut in their earnings? Or unwilling to move to a different industry or occupation? They have no earnings, industry or occupation. This statement is absurd prima facie.

[Joshua Norman]

Jake sneers
"Idiot. Consider that a peep."

When I pointed out that illegal aliens were collected unemployment benefits that they were not entitled too. He showed more outrage at me for posting the story rather than the illegal aliens who were collecting unemployment. I was going to ask myself why, but since Jake loves illegal aliens because they undercut native laborer wages, and cost the taxpayers hundreds of billions of dollars in aid payments to these people, I already know the answer.

[Joshua Norman]

CM says "Do you think it might be worth making the distinction between there being "no serious evidence that the $800 billion stimulus package passed over a year ago has had much stimulating effect on unemployment or GDP" and there being no evidence which you find convincing. There seem to be many reputable and serious economists who disagree strongly with what you are saying, based on evidence they find compelling. What does it mean to be serious in an academic context? I would say part of it is taking competing points of view seriously."

I think the stimulus could have been handled better. I think the government should have cut income tax rates permanently, as well as cut wastefully spending programs, starting with foreign aid, closing agencies that have no constitutional purpose and reductions in entitlement spending.

"And since serious evidence is what is required to make statements about economic policy, what serious evidence is there that "even the long term unemployed can find jobs if they are willing to take a cut in their earnings, and/or move to other industries and occupations"? You refer to the JOLTS data but how does this show that the long term unemployed found jobs by changing their willingness to work in a given industry or for a given wage? Or that they can? And in what sense are the long term unemployed unwilling to take a cut in their earnings? Or unwilling to move to a different industry or occupation? They have no earnings, industry or occupation. This statement is absurd prima facie."
It is easy to talk workers being willing to change industries & jobs and move to other parts of the country. However because employers have so many candidates to choose from, they can hire someone local who is willing to make a lateral or downward move rather than the flexible outsider candidate.

[CM]

Josh I appreciate what you are saying, especially about closing wasteful spending on purposeless agencies. There are particularly compelling examples of this in the area of homeland security. Foreign aid is also something that could perhaps be better handled, whether it is pursued for reasons of morality/ethics or due to foreign policy considerations. As far as cutting income tax, I have to disagree that that is an efficient or intelligent way to stimulate the economy under other circumstances.

[Joshua Norman]

OK CM, unlike Jake you've shown some civility with regards to your points. With regards to cutting spending in the areas of homeland defense do you have specific programs you'd propose either cutting the program or reducing the spending?

For your aid I have enclosed a link showing all the Federal Homeland security spending programs that will be enacted in Obama's 2011 Federal Budget.
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/dhs.pdf

I believe that in a strong national defense and homeland security, however with over $1 trillion of spending on the following agencies I'm sure that there are areas one can cut:
1. Department of Defense
2. Department of Homeland Security
3. Department of Veterans Affairs
4. Army Corps of Engineers

[nfl jerseys]

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[Pandora Bracelet]

Your analyze is deeply,Good!

[Phil H]

"Extend or not to Extend" that really is the question. Insurance is too complicated. Look at no-fault vs indemnity. However, if there was consistency across state lines to pay benefits up to 104 weeks only, there would be no question. The government could take that $30 Billion and hire those who have been unemployed for two years at minimum wage and put a half million people to work for two years. That would be a real stimulus package.

[Joshua Norman]

Phil Says: ""Extend or not to Extend" that really is the question. Insurance is too complicated. Look at no-fault vs indemnity. However, if there was consistency across state lines to pay benefits up to 104 weeks only, there would be no question. The government could take that $30 Billion and hire those who have been unemployed for two years at minimum wage and put a half million people to work for two years. That would be a real stimulus package."
If the government was to deport all the illegal aliens, enforce current immigration law, get rid of the anchor baby loophole and limit legal immigration quotas to those with skills & education, then they could reduce unemployment, which would result in less spending on unemployment benefits.

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[Roscoe]

These are extraordinary times that require new ways of thinking. Let's face it, many jobs/industries are gone or have left (the country). Many people need help in "re-creating" their work lives. Unemployment needs to be structured so as to support this.