Ensuring Unemployment
The state of Missouri has extended unemployment benefits for up to 20 weeks. This is undoubtedly a temporary boon to the people who receive the benefits, but it can only hurt the economy. In particular, it will cause more people to stay unemployed longer. A fundamental rule of economics is that if you subsidize something, you will get more of it, and unemployment is no exception.
You might be tempted to dismiss that idea as little more than armchair theorizing, but there are solid numbers to back it up. For instance, take this blog post from University of Chicago economist Casey Mulligan about unemployment in Pittsburgh from 1980–1985:
Unemployment rates got quite high in Pittsburgh in those days, reaching 16 percent at one point, and staying over 10 percent for two and a half years. The chart below shows some of the results. It graphs weeks from unemployment benefit exhaustion against the fraction of unemploy[ed] people either finding a new job or being recalled to a previous job in that week. “Exhaustion” refers to the time when benefits cease being paid to the unemployed person, regardless of whether they have found a job.
Almost no one started working during the 2-3 weeks prior to the exhaustion of their unemployment benefits (weeks “-3” and “-2” in the chart). Miraculously, more than one quarter started work a week later (19% started a new job, 10% returned to a previous job). Economists agree that a huge reason for this behavior is that people are more willing to remain unemployed when unemployment itself generates a paycheck. (The job they take may not be great, but the data show that often there is a job to take).
If incentives mattered in Pittsburgh in the early 1980s, why wouldn’t they matter in the United States today? Or why did employment increase almost 1,000,000 last summer?
Not only would this decision cause more unemployment in Missouri, it would also further stretch an already overextended budget. It’s a bad idea all around.
(Casey Mulligan link via Marginal Revolution.)
