There’s a new paper out at the San Francisco Fed in which the authors, Henry Faber and Robert Valletta, examined the effects of extended UI benefits on unemployment. My attention was drawn to it after hearing claims several times and in different contexts over the last few years that offering extended UI benefits reduces exit of unemployment to employment, i.e. paying people to not work, so they don’t. The findings of this study indicate that those claims are not valid; that extended UI does not have an effect on the rate at which exit of unemployment to employment occurs, but extends the duration of unemployment spells for those who would have otherwise left the workforce.
Here is the summary of the findings from the report:
Overall, our estimates suggest that extending unemployment insurance benefits in weak labor markets has virtually no effect on the rate of job find but that, on average, unemployment spells are somewhat longer as a subset of UI recipients remain nominally unemployed rather than exit the labor force. In addition to these limited implications for economic efficiency, we find only small impacts on the aggregate labor market. We estimate that extended UI increased the overall unemployment rate by only about 0.4 percentage points in the recent episode, which is small in comparison with the peak unemployment rate of 10 percent.
The findings in this paper do not come as a shock, at least to me, partly because I’ve been in the unemployment support groups. I’ve been through the resume rework of the rework proof reading for group mates, and the cover-letter editing, and the sighs of desperation near despondency that go on for months with the group getting larger over time – then smaller for no celebratory reasons. We had little news to celebrate while I was a regular attendee; and I’ve been no less than annoyed hearing claims that we were paid to not work, so we didn’t bother to find it. Those claims are nothing but cynical, narcissistic falsehoods that created public distraction from the real reason extended UI was necessary in the first place – monetary policy gone wrong.
In my opinion, mass unemployment that comes from sticky wages is much easier to prevent than it is to remedy once it takes hold; a point that I wish had been taken under consideration before explicit inflation targeting inclusive of headline inflation was adopted. The first casualty of high headline inflation is employment, as if it’s a main lever by which demand is cooled when the underlying conditions of higher headline inflation perhaps do not warrant that remedy; making that particular choice of monetary policy regime seem rather sadistic and rife with moral hazard. Obviously, my understanding of how or why any rational person would support it is very limited.
If an ounce of prevention is indeed worth a pound of cure, and avoiding all of the political difficulties that come with depression is desirable, then it makes perfect sense to have a regime change to NGDP level targeting. If we wish to overcome the current set of difficulties and uncertainties, and keep the political peace, NGDP level targeting is the only way to go; and I really do not understand why we’re not doing it. Perhaps we just have some strange need of foisting unnecessary financial misery on ourselves and beating each other with ugly political sticks for no real purpose instead.