Unemployment Benefits Hurting the Economy?
Paul Krugman and many other liberal economists cite the high ratio of unemployed workers to job openings as meaning that labor demand, rather than supply, contracted the labor market. Casey B. Mulligan, an economics professor at UChicago, claims this isn't the entire picture. In this article, he reveals that it could also be telling of the supply side; namely, that additional subsidies in the form of unemployment benefits, etc. would give no incentive for companies to try to fight layoffs.
In an example such as a new tax imposed by the government on employers, companies certainly do have an incentive to let lower-wage workers go to save costs. At the same time, the other side of the equation can't be forgotten:
Subsidies for unemployed people also make labor more expensive as low-wage jobs are more likely to end by layoff and unemployed people can be choosier about the jobs they take. When labor is more expensive, employers have an incentive to get by with fewer employees and for that reason may well reduce the number of job openings they have.
This kind of thinking allows such economists to "contend that the labor market would rebound" by providing even more benefits for the unemployed. In actuality, this approach may actually be hurting the economy overall, as the unemployed have less reason to find work, and labor becomes more expensive overall.
I'm honestly on the fence about this. The reasoning behind it makes sense, but I have a hard time figuring out how to apply this. The unemployment benefits argument will always be ongoing, and a bipartisan compromise is near impossible. I'm interested in hearing what you guys have to say about this.
It's almost a certainty that 'subsidies for unemployed people', along with things like the federal minimum wage, have something to do with boosting natural unemployment ('natural' in the sense that, given that these policies are in place, unemployment would be unable to go below a certain point).
That said, with all such policy, it's necessary to weigh the trade-offs: From a social justice perspective, would lowering the minimum wage be acceptable knowing full well that it would degrade many a person's standard of living, even as it led to more employed Americans? Similarly, if we decreased welfare benefits or other such 'subsidies', thereby making low-end labor less expensive, it would again lead to more employment (at least on the margin -- that is, people on the fence between working and not working). But what about the people who are jobless because of structural economic changes, or the death of a family member, or, for whatever unlucky reason, can't simply return to work when they find their benefits slashed?
There are no simple answers, and a person's deep-seated socio-political philosophy is probably going to inform his or her opinion on the matter to a much greater degree than it should.
Unemployment benefits most definitely push the unemployment rate up. This can be seen by looking at European nations that have consistently higher long term unemployment rates. Unsurprisingly, these nations tend to have much more generous unemployment benefits as well. However, the United States doesn't exactly have lush unemployment benefits, especially when compared to other developed countries.
It should be noted that the multiplier effect from those that rely on unemployment benefits is substantially higher than for others in the economy. More often than not, the money received is quickly pumped back into the economy as unemployment recipients spend the money on necessities. Decreasing unemployment benefits wouldn't lead to dramatic reductions in the unemployment rate. I think the amount that unemployment benefits push up the unemployment rate is really small, especially when considering how much the benefits are in the US. Plus, decreasing unemployment benefits would cause substantial suffering for those that have fallen victim to this economy, and in return we'd see minuscule improvements in the unemployment rate.
I think a lot of times people are under the impression that those on unemployment benefits are living the life and enjoying an extremely early retirement. This could not be further from the truth.
Its easy to debate unemployment when you work on wall street and come home, write a quick blog and carry on with your day.
Its a totally different story when you work hard for 6 years, get laid off because your company decided to outsource to China, and now you are stressed to hell trying to find a job so you can put bread on the table for your wife and 3 kids.
Unemployment wasn't designed to trigger economic activity. It was put in place to help unfortunate unemployed people by providing basic pay required to sustain themselves while they are out of work.
Sometimes its about doing the right thing.
unemployment benefits hurting the economy? how about unemployment itself?
Where is your source on Krugman saying that? I have a hard time believing a Nobel Laureate would be so foolish to ignore our current CapU.
I know it would be unpopular to say this here, but the problem is that Pete Peterson and cronies are in bed with both sides of the fiscal wing. Anyone preaching austerity measures is merely begging for the economy to slide back into a deep deep recession.
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