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Commentary

The Consequences of Unextending Unemployment Benefits


     
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There is an ongoing political debate over unemployment benefits. Last month, Senator Jon Kyl opposed extension of payments to unemployed workers. This week Senator Tom Coburn blocked legislation that would further extend jobless benefits. The main arguments against extending job benefits are that this will add to the national debt, involve high administrative costs, and can also discourage workers from finding jobs. It is obvious that new spending increases debt and administrative costs, but the idea that jobless benefits make people less anxious to find work is less obvious. Supporters of extended jobless benefits, like Senator Max Baucus, have claimed that unemployed American workers are not satisfied with jobless benefits, and will look for work regardless of these benefits.

Surely, most Americans find unemployment benefits inadequate or even demeaning. However, economic logic tells us to examine the marginal effects of policies. Americans are not a uniform or homogeneous group; we react differently to incentives. We must consider how many workers are at the margin where extended unemployment benefits will slow their search for work. Given that Americans are a highly diverse group of people, there is at least a minority of us who will take advantage of jobless benefits. The real question then is how many of us are at the margin where extended unemployment benefits matter.

Economist Stephen Nickell has found that nations with more generous and long-lasting unemployment benefits have higher rates of unemployment.[1] Unemployment rates in many European nations are higher than America’s. In fact, many European nations have unemployment rates in the double digits at all times, even during expansions. The problem of disincentives regarding social welfare programs is more general. Sweden provided not only unemployment insurance, but also paid sick leave. In 1963 the average Swedish worker was sick thirteen days per year. By 1988 the average Swedish worker claimed 25 paid sick days per year. The Swedes addressed this and other apparent abuses of social programs with welfare reforms. Improved economic performance followed the implementation of welfare (and tax) reforms in Sweden. We can learn something from this example, as well as from our own experience with welfare reform during the 1990s.

The idea that jobless benefits discourage job seeking has been met with criticism and even ridicule. However, sound economic theory indicates that jobless benefits do provide a disincentive to finding work, and the empirical data supports this claim. Some people claim that our present circumstances make it too hard to find work anyway, that increasing the incentive to find jobs that presently do not exist is futile. This argument at best represents short-term thinking. Unemployment is caused by more than labor market restrictions and unemployment benefits. The recent financial crisis has exacerbated unemployment, but how did this happen? Economist Jonah Norberg explains in his recent book (Financial Fiasco) that the boom that led to this crash was financed by the Federal Reserve Bank, and encouraged by a number of other governmental policies regarding bank lending. 

The present job situation is difficult, but the recent crisis was in fact the product of short-term thinking on the part of public officials. At present, we should resist efforts to extend unemployment benefits. Ultimately, we should aim at freeing labor markets from policies that inhibit its functioning and also address the root cause of financial booms and busts: federal regulation of interest rates and finance in general.

Notes

[1] Nickell, Stephen. Unemployment and Labor Market Rigidities: Europe versus North America. The Journal of Economic Perspectives 11, no. 3: 55–74


Douglas W. MacKenzie is Adjunct Fellow at The Independent Institute and Visiting Assistant Professor of Economics at the U.S. Coast Guard Academy.






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