Saturday, February 27, 2010

Clueless in Kentucky

New York Times Editorial "Clueless in Kentucky" (February 26th, 2010) provides no evidence that unemployment benefits will help Kentucky's jobless recovery, but implies that senators have made a mistake by not extending benefits.
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.

1 comment:

  1. Further it is noted that the reason for Bunnings resistance to the bill is that the Congress did not generate any means to pay for the benefits extended - in violation of Congressional rules and one could argue harming the national economy long term. One might expect that a responsibly managed economy with reasonable predictability of governmental policy would be more likely to grow, create jobs and remove the need for extending unemployment compensation.