Is Unemployment Insurance Boosting Unemployment?

Economist Robert Barro says "yes," but he's getting a chilly reception in the economics blogosphere

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The Obama administration's dogged pursuit of extensions on unemployment insurance is hurting the economy. That, at least, is the argument outlined by economist Robert Barro in The Wall Street Journal. Other economists and business bloggers, though, are quite critical of the piece.

Barro approaches the matter from the classic economics problem of incentives: if you provide unemployment insurance, at some level it reduces the incentive for people to find work. While "it is reasonable during a recession to adopt a more generous unemployment-insurance program," because, "in a recession, it is more likely that individual unemployment reflects weak economic conditions" rather than a personal decision or sloth, the Obama administration has taken things too far, he says. How so? One feature of this recession has been a high turnover rate in the labor market--i.e. "large numbers of persons hired and separated every month." That means that incentives for seeking jobs could "matter a lot here." Barro looks to the recession of 1981 and 1982, when insurance wasn't so aggressively expanded, and decides that, without the policy initiatives this time around, the unemployment rate would only be about 6.8 percent. Though the Obama administration argues their policies aren't increasing unemployment, because "the recession is so severe that jobs are unavailable for many people," Barro is skeptical: "generous unemployment-insurance programs," he points out, "have been found to raise unemployment in many Western European countries in which unemployment rates have been far higher than the current U.S. rate."

So is he right? Here are the objections his peers and critics are raising:

  • His Son Would Seem to Disagree "It's not clear to me why we should assume that the share of long-term unemployment in this recession should equal that in 1983," writes Alex Tabarrok at Marginal Revolution. He excerpts some analysis from "Josh Barro, son of Robert" in which Josh Barro argues unemployment insurance extensions probably haven't even "contributed" as much as 0.4 percentage points to "current unemployment." Josh Barro also says he's not worried about the U.S. becoming like Europe, since the U.S. "has gone through many cycles of extending unemployment benefits in recession and then paring them back when the economy improves." Says Tabarrok: "I call this one on both counts for Josh."
  • Why This Is Not Like 1982   Joe Weisenthal at Business Insider is one of many to take issue with Barro's estimate that the unemployment rate would be 6.8 percent without the unemployment insurance extension. "How does he arrive at this number?" asks Weisenthal. "Simple," he writes: "he just presumes for no reason that the nature of the recent jobless spike is no different than the one seen in the early 80s." But it is different, argues Weisenthal: "we're not merely in a post-burst era--home values are still going down, and construction is at something of a standstill, which means this is an active drag on the economy." Robert Reich concurs, pointing out that in the earlier recession "the rate of long-term unemployed then was nowhere as high as it is now. 1981-1982 was a "far more benign" recession, "and over far sooner."
  • Ignores Basic Facts  "In theory, Barro is correct," says public policy professor Robert Reich. "If people who lose their jobs receive generous unemployment benefits they might stay unemployed longer than if they got nothing." But the reality, he argues, is quite different:
Most states provide unemployment benefits that are only a fraction of the wages and benefits people lost when their jobs disappeared. ... fewer than 40 percent of the unemployed in most states are even eligible for benefits, because states require applicants have been in full-time jobs for at least three to five years. ... So it's hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work.
  • Even If Barro Were Right, There's an Easy Fix  Libertarian economist Arnold Kling admits he hasn't "gone through [Barro's] analysis," but suspects that he "would not find it persuasive." He also highlights an easy fix to (or at least mitigation of) the problem of unemployment benefits disincentivizing the job search:
I think there is a case to be made for allowing people to continue to collect unemployment benefits after they find a new job, until their benefits are scheduled to expire. We can argue about how generous the unemployment benefits should be overall, but for any level of benefits it is possible to reduce the disincentive to find work.
This article is from the archive of our partner The Wire.