Getting Rid of Extended Unemployment

I’d love to see some reasonable explanations on what would happen to those who would lose their extended unemployment benefits in the current state of things.

Consider the latest employment report from March as reported by Calculated Risk:

From the BLS:

Nonfarm payroll employment increased by 162,000 in March, and the unemployment rate held at 9.7 percent, the U.S. Bureau of Labor Statistics reported today.

Census 2010 hiring was 48,000 (NSA) in March.

This was about at expectations given the level of Census 2010 hiring and some bounce back from the snow storms in February.

To explain, Census 2010 hiring created 48,000 temporary (months at most) jobs and a bounce from the snow storms in February means people were temporarily hired during March to make up for the shut downs due to snow storms in February. What this means is these jobs are inconsequential long-term and job creation is still very slow—far below what’s necessary to make up for population growth (those fresh 18 year olds will be jumping into the pool looking for work).

We are in what’s called a jobless recovery. Annie Lowrey:

Wondering what’s behind those recent jobless recovery numbers?

  1. Fortune 500 companies tripled their profits to $391 billion in 2009.
  2. They also slashed their payrolls by more than 800,000 jobs.

As Ezra Klein explains, “[c]orporations are getting more from fewer workers.” Klein also writes:

Recent recessions have been met with sharp increases in productivity growth. We lost jobs, but the workers who still had jobs compensated by producing more. We’ve actually seen productivity growth of 5 percent this year, which is very high. The forecasts, however, expect it to settle down next year. If that proves false, it’ll be very rough on jobs: For every percentage point faster it is than expectations, that’s a million and a half jobs that we won’t get, at least if it’s not matched by faster-than-expected growth.

This means exactly what you think it means: joblessness is going to be with us for years to come. The people who argue that extended unemployment is simply keeping people from finding work are not looking at the data showing that the work is simply not there—and it won’t be there for some time. They argue that the country is recovering and that jobs are right around the corner, that people on unemployment are simply sitting on their rear ends doing nothing to look for work.

There is some historical basis for this; here, I explained how people on unemployment insurance tend to find jobs right before or right after they exhaust their unemployment benefits. This may be true for the most part, particularly when there is rapid job recovery after the economy begins to grow again post-recession, however the last several post-recession recoveries have been slow on job growth.


What you’re seeing in this graph are very long recovery process in the job sector after the 1990, 2001 and 2007 recessions. On top of that, the current recession hasn’t even been deemed over yet.

A new paper by Rob Valletta and Katherine Kuang of the Federal Reserve Bank of San Francisco shows just how wrong are those people who argue extended unemployment benefits maintain high unemployment levels. Michael Derby writes for the Wall Street Journal:

Sen. Jon Kyl (R., Ariz.) was widely quoted this spring as saying unemployment insurance creates a “disincentive” to find new work.

That’s essentially wrong, economists Rob Valletta and Katherine Kuang write. They say the record high duration of unemployment has a “quite small” relationship with the maximum amount of time one can draw unemployment benefits. “Extended [unemployment insurance] benefits have had a relatively modest effect” on the jobless rate. “We calculate that, in the absence of extended benefits, the unemployment rate would have been about 0.4 percentage point lower at the end of 2009, or about 9.6% rather than 10.0%.”

So the question, then, is how we go about changing that.

Scott Sumner and Paul Krugman, two prominent economic scholars, have been somewhat feuding with each other about how to go about increasing the rate of job recovery. They both agree that the best option is monetary expansion by the Federal Reserve:

Consider Sumner:

Here’s what I find so bizarre.  Almost the entire political establishment thinks we need much more AD.  Even Republicans that argue against the fiscal stimulus don’t say the problem is that it will boost AD; rather they make the opposite argument, they claim it will “fail” where failure is defined as a lack of AD, a continuation of the recession.  Meanwhile the people at the Fed are perfectly aware of Woodford’s argument that I discussed in a recent post.  They know that they could boost AD by setting a higher inflation target.  They simply don’t want to.  And yet almost the entire political establishment thinks Bernanke is doing all he can from the monetary end.

Ben Bernanke, the chairman of the Fed, has sunk his teeth into complacency and won’t budge. Neil Irwin of the Washington Post explains:

In recent weeks, there have been a series of positive readings on the economy, including news that job growth was its strongest in three years in March and a report Wednesday that March retail sales rose a strong 1.6 percent. But in describing his view of the economic outlook to the Joint Economic Committee, Bernanke sounded the same restrained tone in describing his expectations that he did in testimony back in the winter.

“On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters,” Bernanke said in prepared testimony. He added later that, “if the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8 1/2 million jobs that were lost during the past two years.”

In other words, as Matthew Yglesias put it, Bernanke is telling the unemployed to drop dead.

Back to Sumner, from the same blog post above:

At this point Krugman directs his moral outrage at the conservative knuckleheads in Congress who won’t accept anything bigger than a measly $800,000,000,000 stimulus package, which he thinks is woefully inadequate.


In this new post Krugman concedes that monetary policy is the best way of reducing the high unemployment rate, and fiscal policy is second best.

Fiscal policy is accepted as the second best approach to fixing the joblessness problem, with monetary policy being the best and cheapest policy, but such a direction is not politically feasible (to both Krugman and Sumner’s dismay, although Sumner ribs Krugman for not speaking up about it).

So the market won’t increase job availability (increased productivity screws that pooch), fiscal policy won’t work, and the most prominent economists won’t argue strongly about changing monetary policy.


Krugman should have been advocating monetary stimulus all along.  The real problem is that his allies in government; Obama, Pelosi, Reid, etc., don’t even know the first best option exists.  And how could they?  How often is monetary stimulus mentioned in columns written by liberal pundits?   If they realized that they were about to get decimated in the 2010 midterm elections because a few nutty right-wingers at the Fed think the economy needs less stimulus, not more, there would be outrage in Congress and the Administration.  They’d be marching down to the Fed (metaphorically of course, to avoid looking heavy-handed) and make it very clear that the Fed needs to produce robust growth in aggregate demand or else there will be big changes in the way the Fed is set up and regulated.

It’s very evident that unemployment will remain high for the next several years. This is not only a tragedy on the face of it but, even worse, the long-term unemployment “can lead to all manner of negative impacts on a worker’s future ability to be hired. Skills atrophy, habits change, and workers can find it increasingly difficult to make their way back into the labor force” (Michael S. Derby).

The only good, long-term option is re-education and learning new skills but that takes money and time—two things the unemployed simply don’t have on their side. Congress has been juggling extending unemployment benefits for months now with conservatives trying to make the case the benefits should end—and, as I said before, there is some honest argument for ending them but only if one considers half the data (the argument works when there is rapid job recovery, not slow job recovery).

Even if the unemployed jump to an opportunity to go back to school, what kind of work will they find? The 50 Best Careers of 2010, according to US News & World Report require years of education—again, not a luxury many have, especially with the anxiety-building, edge of your seat month-to-month benefit extensions in congress.

As Derby notes:

San Francisco Fed chief Janet Yellen warned earlier this month the unemployment rate may only tick down to 9.25% by year’s end, before heading to a still high 8% by the end of 2011. If she’s right, that suggests the problem of extended unemployment will be an enduring one. Economists and legislators alike will have to confront again the issue of unemployment insurance, both as a lifeline and as coddling element.

Valletta and Kuang write:

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.

So, in conclusion, ending the extended unemployment benefits would leave many high and dry. The “600,000 potential workers who could become virtually unemployable if their reliance on UI benefits were to continue indefinitely (Kuang)” would actually remain jobless in an economy with slow job growth. Not only that but by ending the unemployment benefits, demand from those on the benefits would drop (no money, no shopping), adding a droop to overall economic recovery, which would worsen job prospects and possibly lead to even more joblessness.

The only good solution is change at the Federal Reserve but, as observed, that’s a near impossibility. The Fed chair, Bernanke, couldn’t care less about the unemployed. Sen. John Kyl couldn’t care less if the unemployed drop dead from abject poverty—and those who advocate simply dropping unemployment benefits are sending the same message to Washington and the rest of the world.

Ending extended unemployment benefits, and even flirting with the idea, is simply not a practical, or responsible, option.


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