Do unemployment benefits reduce the incentive to find work and thus increase the length of unemployment?
It’s an interesting question, made more pertinent by the record increase in unemployment duration during the current recession. As of March, 4.3 percent of the U.S. work force had been unemployed for at least six months, much higher than the previous record of 2.6 percent in the ‘83 recession.
The question has largely broken along political lines. Some conservatives have argued yes, unemployment benefits lengthen unemployment because they in effect subsidize laziness. Liberals, on the other hand, point out that in the current economy the problem is a great shortage of jobs, not of job seekers. Statistics indicate that there are five or six job seekers for every job opening, with thousands of eager applicants showing up at every job fair.
Economists at the San Francisco Federal Reserve decided to tackle the issue, and seem to have hit upon a pretty good way to approach it. As they point out, roughly two-thirds of the unemployed are eligible for unemployment benefits, because they held full-time jobs that they lost through no fault of their own.
However, that leaves a significant number of unemployed who cannot collect benefits. The ineligible may have left their jobs voluntarily, they may have been self-employed or independent contractors, they may have been fired for cause or they may be new entrants into the job market. For whatever reason, they are jobless, they want jobs, but they collect no unemployment benefits.
With two groups of unemployed — one that is collecting benefits, one that is not collecting benefits — you can begin to get at an answer. How long on average does each group remain unemployed? Put more bluntly, how big is this supposed “laziness subsidy?”
Here’s what they found:
“As of the fourth quarter of 2009, the expected duration of unemployment had risen about 18.7 weeks for job losers and about 17.1 weeks for leavers and entrants, using the years 2006-2007 as a baseline. The differential increase of 1.6 weeks for job losers is the presumed impact of extended UI benefits on unemployment duration.”
In other words, it exists, but it’s not much.
They also note that extended unemployment benefits (now as long as 99 weeks in some states, including Georgia) keep people in the official job market who might otherwise become discouraged and quit looking (proof of active job-seeking is a requirement of collecting benefits.) Without benefits, those people would cease going through even the motions of job search and drop out of the workforce altogether, dropping the official unemployment rate from 10 percent to 9.6 percent.
Although economists have shown that extended availability of UI benefits will increase unemployment duration, the effect in the latest downturn appears quite small compared with other determinants of the unemployment rate. Our analyses suggest that extended UI benefits account for about 0.4 percentage point of the nearly 6 percentage point increase in the national unemployment rate over the past few years. It is not surprising that the disincentive effects of UI would loom small in the midst of the most severe labor market downturn since the Great Depression.