The joys of unemployment (insurance)

Via Greg Mankiw, I came upon an excellent essay from Larry Summers on unemployment.  Among other things, it makes the point that by keeping wages artificially high, unions raise unemployment--particularly in declining industries, because union workers have an especially hard time accepting market wages for other work.

He also covers unemployment insurance.  Like unionization, unemployment insurance is known to increase unemployment--not the number of people who lose their jobs, but the number of weeks they spend unemployed.  As long as the checks are coming in, people are less motivated to take any job that's offered.

This makes me wonder whether unemployment insurance makes the economy more or less efficient.  Letting people stay unemployed longer could actually be productivity enhancing, on net, if it allows people to find jobs that are a better fit for their skills.  On the other hand, there is the deadweight loss from taxation to cover the unemployment insurance, and also the lost production from people who are staying out of the labor force while they search for a never-never job.

Much depends on the length of the insurance.  In Europe, it's pretty clear that generous jobless benefits have been productivity destroying--people stayed unemployed for years waiting for another steelworking job to open up in Eastern Germany, and friends from the Netherlands and the Nordic countries all seem to know someone who just stayed on the dole for a year or so because they wanted a vacation.  That's changing now, with Denmark leading the way, but on net, systems that let you stay on benefit for years at a time probably destroy more economic benefit than they create.

But a short term system like the US gives people a little time to do a thorough job search--and in times like now, the benefits can be extended in order to compensate for longer search times.

Even if it weren't productivity enhancing, our system of unemployment insurance would be a good idea, because it keeps a sudden job loss from throwing people into immediate disaster.  But it's nice to realize that giving people benefits might actually be making the rest of us better off in the long run.