Unemployment insurance isn’t keeping people from taking work. It’s keeping them from giving up looking for it. And giving the economy a little boost too.
Sen. Rand Paul thinks the long-term unemployed have had too much cake. That what they really need is a swift kick in the you-know-what. And, in his compassion, he wants to give it to them.
It’s about the incentives, Paul said yesterday on Fox News. If you pay people not to work, they won’t. And if you want them to work, you should stop paying them not to. So extended unemployment benefits “do a disservice to workers, causing them to become part of this perpetually unemployed group.” (Emphasis added). In other words, we just have to stop coddling the jobless, and they’ll find jobs … even though there are three of them for every opening.
Paul has the self-assurance of someone who doesn’t realize the world is more complicated than Econ 101. Now, it’s true that unemployment benefits make people stay unemployed for longer. They use this lifeline to look for the best, and not necessarily the first, job they can find. But it’s not true that long-term benefits are causing long-term unemployment. It’s (yes, here we go again) the economy, stupid.
You can see that in the chart below that compares the change in long-term unemployment (blue) with the change in jobs from six months prior (red). The simple idea is the biggest increase in people being out of work for six months should happen six months after the biggest job losses, and then fall together. That’s what we see. Now, long-term unemployment did increase faster in the months after benefits increased—which I’ve annotated with arrows—but the timing is off. It’s hard to explain why long-term unemployment peaked so soon after benefits expanded to 99 weeks if those benefits are to blame. It’s not hard to explain why long-term unemployment peaked six months after job losses did.
(Note: I’ve averaged both series over three-months to smooth out the noise. I also inverted the jobs numbers, so they would move in the same direction as the long-term unemployment ones).
But this time was different. Just look at long-term unemployment after the tech and housing bubbles burst. This time, there were more than three times as many people out of work for six months or more. What changed, besides the benefits? Well, the crash did.
Imagine you lost your job when the economy was in free fall, and six months later it was still in free fall. You sent out resumés every day, and every day you heard nothing back from companies too scared to hire. Then things finally started to look better. Companies finally started to think about hiring again. But you still heard nothing. See, you’d been out of work for so long that employers wouldn’t even look at your resumé. That’s what Rand Ghayad, a PhD candidate at Northeastern University, found when he sent out fictitious job applications. Companies would ignore all-but-identical resumés if they showed longer unemployment. There’s a perverse logic to it: if other employers have passed on you, why should they spend time finding out why? They don’t. They have software programs that cut you out before you even have a chance.
This long-term unemployment trap has nothing to do with long-term benefits. Indeed, Ghayad looked at the labor markets for unemployed people who are and aren’t eligible for benefits, and found they’ve been equally dysfunctional. No, this long-term unemployment trap has to do with our great recession, and not-so-great recovery. With a labor market that doesn’t work for people who made the mistake of losing their job at the wrong time. If anything, unemployment benefits have kept people from giving up; remember, you have to be actively looking for a job to qualify for them. The San Francisco Fed, for one, estimates that unemployment would have been 0.4 percentage points lower without extended benefits, mostly because more people would have stopped trying to find work.
A liberal is a libertarian who has been mugged by the invisible hand. Someone who recognizes the government needs to step in when the private sector won’t. Like when people who want a job can’t find one, because they lost their old one at a bad time in the business cycle. Extending unemployment insurance is just about the least we can do for them. It gives them a reason to keep looking for work. Gives them barely enough money to stay afloat. And gives the economy a little stimulus—the CBO calculates that extending benefits would add 200,000 jobs this year.
A little better than cake.