Tuesday, July 6, 2010

Loss of Jobless Benefits Could Lower Unemployment Rate

CNBC article "Loss of Jobless Benefits Could Lower Unemployment Rate" (June 30th, 2010) argues that when unemployment benefits run out, some unemployed will become depressed and stop looking for work, causing the unemployment rate (a measure of those looking for jobs but unable to find them) to decrease. Presumably, this is bad for the economy and such a decrease in the unemployment rate would be a false sign of recovery. Then the article makes a point that would seem to wash over its whole argument, but the article does not elaborate.
"We believe that the expiration of jobless benefits will cause many workers to drop out of the labor force and will motivate others to accept jobs they had previously rejected."
If jobless benefits were causing people to stay out of the labor force by rejecting jobs in order to continue a search for work they likely will not find, the these benefits were creating frictions in the economy that kept it from adjusting to a shift in the labor force composition. Unemployment benefits are rationalized by the notion that people need time to find the most efficient job. If months of search prove fruitless, it may be time to adjust to a new labor market equilibrium. It is unclear exactly why people would drop out of the labor force if they are not paid to look for jobs. On the contrary, it would seem that in order to eat, they would start working immediately. The economist Casey Mulligan provides evidence to this effect at his blog Supply and Demand. He creates the following chart, showing that as soon as unemployment benefits run out (weeks around exhaustion = 0), there is a huge jump in the number of people returning to work (click here to enlarge image).

1 comment:

  1. It seems that the logic of the argument really is facilitated by thinking in terms of a segmentation of the unemployed population. (1) Some people experience extreme distress even with unemployment compensation and are impelled to take the available job ASAP. (2) Some people are sustained by unemployment compensation at an acceptable level and are only impelled to take the available job when the unemployment compensation runs out. For these second group the presence of the unemployment compensation facilitates staying out of the workforce longer to search for an optimal job and in that case does increase the friction in the workforce. (3) Some people have assets or support systems allowing them to continue to remain more "picky" regarding work opportunities so that when compensation runs out they choose to remain unemployed - technically decreasing the unemployment rate but still depriving the economy of the work they would have done had they chosen to work at the available salary and role. Whenever conditions perk up they will return to the job seeking activities and incrementally raise the unemployment rate. Perhaps for this third group it would be more useful to focus on the total employment as a percent of the population. For example, in June while the "unemployment rate" declined, the total nonfarm employment actually dropped - hence the truth of the matter is that fewer people were actually working. Given that the population did not decrease in June, focus on the employment rate gives a better reflection of the truth of the current Obama stagnation.