Don't Blame Unemployment Benefits for High Unemployment

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One of the major criticisms of the government's war on joblessness is that we are unwittingly encouraging unemployment with unemployment benefits. It's a simple argument, really. You subsidize something to get more of it. When you pay people because they're unemployed, you risk producing higher unemployment. Moderate and liberal economists like Larry Summers and Paul Krugman have said explicitly that generous jobless benefit systems (look at Europe) produce lasting high joblessness because folks without work see lower marginal value in looking for a new position.

But that's not what's happening in the current recession/recovery. It's true that extensions for the hardest hit states could grow jobless benefits up to about two years on the government's dole. But that's not why 10% of the labor force is officially unemployed. No, 10% of the labor force is officially unemployed because firms aren't hiring.

That was the thesis of this Atlantic column that tried to rebut the claim that canceling unemployment insurance (UI) would slash the unemployment rate by two percentage points (approx. 3 million jobs) rather quickly. The San Francisco Fed has weighed in with its own report on the effect of UI on unemployment. The verdict: "We calculate that, in the absence of extended benefits, the unemployment rate would have been about 0.4 percentage point lower at the end of 2009, or about 9.6% rather than 10.0%."

This debate isn't over, and it shouldn't be. Limitless unemployment insurance should not be an eternal lifeline well into the recovery, and as the unemployment rate drops the White House and Congress will look to wean Americans off UI. But here's the rub. Both the White House and the Fed expect unemployment to remain above 9% by the end of the year and above 8 percent through 2011. This will create significant pressure for benefits to continue, especially since the Congressional Budget Office considers UI one of the most effective fulcrums for raising aggregate demand and creating more work hours. But eventually, UI could unnaturally extend periods of unemployment, costing the government billions of dollars (both in spending and foregone tax revenue) and subsidizing the atrophy of our labor force's skills. Like so much about the federal deficit, jobless benefits today are necessary and potent medication -- but they should not come with permanent refill option.

(via Michael S. Derby at the Wall Street Journal).

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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