Thursday, January 24, 2013

Scott Sumner Again Takes on Unemployment Insurance

     This is a fairly common meme for him. He's at it again in response to a recent comment by White House Spokesman Jay Carney:

    "Joseph sent me a WSJ article by Stephen Moore:
Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance “creates jobs.” She received this slap down: “I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper.”
    "OK, so Jay Carney is an arrogant jerk. But is that a crime? Many people would say the same about me. The problem is that he isn’t just arrogant, he’s uninformed. Yes, there is a theoretical possibility that UI can lower the unemployment rate, but the evidence suggests just the opposite. See, for example, this essay on unemployment by Larry Summers:
To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.
First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the labor force even though these people are better described as nonemployed—that is, not actively looking for work.
In a study using state data on registrants in Aid to Families with Dependent Children and food stamp programs, my colleague Kim Clark and I found that the work-registration requirement actually increased measured unemployment by about 0.5 to 0.8 percentage points. If this same relationship holds in 2005, this requirement increases the measure of unemployment by 750,000 to 1.2 million people. Without the condition that they look for work, many of these people would not be counted as unemployed. Similarly, unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits.
The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.
    "Larry’s right. I’ve seen studies that suggest that extended UI caused the unemployment rate to rise by a half of a percentage point in recent years. It’s hard to believe that even the most fervent Keynesian would claim that the stimulative effects of the UI insurance extension on AD, by itself, would reduce the unemployment rate by 50 basis points. So Carney is almost certainly wrong."

     This is typical Sumner meme as well. He figures some liberal Democrats will hold it against him for holding up Carney for criticism so he will allow another very famous liberal Democrat do the honors-none other than Larry Summers.

      Never mind the fact that Summers wrote this awhile ago. Sumner also tries to head off possible objections by saying that in this recession, unemployment insurance isn't the main culprit-he agrees that it's demand driven; his solution of course is NGDP level targeting.

    However, he does claim that we are losing about half a percentage of unemployment due to UI. Her he anticipates other objections:

     1. ”We are in recession.” But studies show UI causes higher unemployment even in economies with very high cyclical unemployment.

    2. ”Most of the excess unemployment in the US in recent years is due to a demand shortfall, not UI effects.” I agree.

   3. “So you oppose UI?” No, I think we should have an UI program, although I’d favor reforms to make it include at least some personal accounts.

   If he really wants reforms how about something even the Republicans used to be for-before Obama suggested it back in 2011: allowing UI beneficiaries to collect for about 8 or 9 weeks after they started working again.

   As far as Larry Summers' analysis is concerned his first way UI increases unemployment is pretty meaningless. Basically, the requirement that you at least look for work puts you back in the workforce officially, which leads to a merely statisical increase in unemployment. However, in reality more people aren't unemployed just more people are considered such. So this reason is wholly meaningless. Indeed, some say that U6 grossly under-reports unemployment anyway. By this logic we should do away with the welfare requirement as that too raises the statistical measure of unemployment.

  The question of incentives is at least tangible though I think it's over done. Again, let's take it away by allowing people to collect for a little while when they start working.

   I think Oh,My in the comments puts it well:

   "This should be simple even for a neoclassical economist. If UI adds to spending (i.e. they are not redistribution from someone else to the unemployed, it means they are not “paid for” by higher taxes) then they add to AD and higher AD always means lower unemployment. So it depends on the base case: if UI is paid out of an extra deficit then it lower unemployment, if it is “paid for” by higher taxes then one could expect it go either way."

   "People like Summers don’t understand that reasons for unemployment are macroeconomic, not a lack of incentives. It is the “100 dogs, 95 bones” problem – if you ask 100 dogs to dig out and bring bones but you only bury 95 bones 5 dogs will come up short, no matter what “incentives” you cook up, whipping, burning, torture – doesn’t matter. But Summers is apparently unclear about this. Take away water from the dogs, let them try harder. Sigh."





  1. Earlier today I actually had the opportunity to hear Casey Mulligan present his work on this topic. In his new book he argues that while the extensions to UI did raise unemployment, they are only about a third of the story.

    As he tells it, UI and other benefits raise the marginal tax on working by increasing the payoff to not working. While I think there are some demand-side aspects of these benefits, it's hard to ignore the changing incentives created by these programs.

  2. I tend to think they're overblown as well-and you have to factor in the demand-side aspects you mention.

    With the meager level of benefits it would only discourage people from taking very low paying jobs that pay about $100 a week after taxes.

    Again, if you want the right incentives why not let people keep their benefits for the first 8 weeks of employment?

    1. I wouldn't be opposed to subsidizing benefits for a short-time period, especially during recessions when it may take a bit longer to find a job. That being said, extending the timeline from 26 to 99 weeks is crazy. Remember that most of the people these decisions affect are low wage workers, precisely because the difference between potential wages from working and non-working are comparable.