Kentucky has lost about 60,000 jobs since the end of 2008. In December, its unemployment rate stood at 10.7 percent, the highest since 1983. So what exactly is going on in the minds of Kentucky’s two Republican senators, Mitch McConnell and Jim Bunning? This week, Mr. Bunning single-handedly shot down a one-month extension of unemployment benefits, along with a federal subsidy for the unemployed to maintain health coverage.Unemployment benefits are meant to cover search costs for those looking for relatively high-wage jobs. It is possible that Kentucky has to adjust to a lower demand for labor, and the it has become optimal for workers to accept lower wages than those they previously earned. In this rather likely case, extending unemployment benefits would only result in a net loss to society.
In addition, it may be optimal for Kentucky citizens to move to a new state in order to match with new employers. For example, if industrial work moves from Kentucky to Minnesota, Kentucky industrial workers should move to Minnesota. However, unemployment benefits distort their choice set and keep workers in Kentucky inefficiently.