Freedomnomics

Article published Monday, September 29, 2008, at Fox News.

More Benefits, More Unemployment

By John R. Lott, Jr.

Many see last week's reported spike in unemployment insurance claims as a signal of the economy's weakness. There will be more questions this Friday when September's unemployment numbers are released. In fact, it is a sign of Washington at work.

The number of new unemployment claims soared last week to 493,000. Fox Business's Donna Fuscaldo spun the news as “underscoring the dour state of the U.S. economy.”

After starting to rise in early January, initial jobless claims peaked this last March. New jobless claims either fell or leveled off after that -- until July, that is, when they started to rise and kept on rising ever since. After leveling off in June, the unemployment rate also shot up in July and August.

So what happened? What changed in July? The increase has had only one cause: longer unemployment insurance benefits. President Bush signed the Iraq war-funding bill on June 30. The bill increased unemployment insurance benefits from 26 to 39 weeks for claims filed after the law went into effect on July 6.

If you don't think that the unemployment insurance matters, what do you think happened to the initial jobless claims during the week between when Bush signed the legislation and when new claims would be eligible for the 13 weeks of additional benefits? By just waiting a week to file a claim, you got the benefit, and indeed people waited to file. During that limbo week, initial claims feel by 58,000, a 14 percent drop.

After July 6, there has only been one week when initial jobless claims were as low as they were before Bush signed the extension.

This pattern is exactly what economists would predict. For example, Larry Katz, the Democratic chief economist at the Labor Department during the Clinton Administration, found that workers are almost three times more likely to find jobs when benefits are just about to run out.

Indeed, dozens of economic research papers predicted this outcome. When you extend or increase unemployment benefits, you extend unemployment. If you set a date certain for getting rid of benefits, people find jobs. You get more of what you subsidize and here we are subsidizing unemployment.

Wanting to help the unemployed is surely understandable, though politicians surely didn't see the same urgency in expanding unemployment insurance during the Clinton administration when finding a job was no less difficult and the unemployment rate was the same or higher than today.

The jobless could have been helped in other ways that didn't boost unemployment. For example, instead of requiring people to remain unemployed to get the new benefits, we could have offered additional assistance without creating more unemployment by simply giving a lump-sum payment only to those workers who'd already exhausted their original 26 weeks of benefits.

The impact of these new jobless claims is still not completely felt after almost three months. Most research indicates that a 50 percent rise in benefits increases unemployment by those eligible for insurance by 50 percent.

But total unemployment will change nowhere near as much, because most people aren't covered. Eight-five percent of the unemployed live in states that are now receiving the extended benefits, and about half of the unemployed in those states are eligible for unemployment insurance.

For the benefit hike that just took effect, the math works out to a rise in unemployment from 5.5 percent in June to 6.4 percent. So, for the next month or two you can expect to see repeated bad news from labor markets. Perfect timing for the Democrats for the election.

Politicians would appear insensitive if they ever claimed that the increased unemployment rates mean little more than people getting paid not to work. But while you are watching the higher unemployment rate numbers that are released later this week, remember that the troubling numbers are a politically created mirage.

*John Lott is the author of Freedomnomics and a senior research scientist at the University of Maryland.

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