Increasing Unemployment Benefits Yields Higher Unemployment

Does a 50 percent increase in unemployment insurance benefits increase the unemployment? You would think everyone would say “yes.” Yet, after the unemployment insurance benefits were increased in the beginning of July, I was unable to find a single news story that attributed any of the increased unemployment or the loss of jobs to the increased benefits. If you believe the news media, all of the bad employment news is just additional evidence of the weakening economy.

But why is this so hard for the media to understand or even mention? If you increase how much people get paid for being unemployed, you get more unemployment.

This hasn’t always been the case. On Fox News Sunday on Dec. 16, 2001, Tony Snow understood the point:

Senator Daschle wants to extend unemployment benefits even though the economic research indicates that when you extend those benefits, you extend unemployment. In fact, that was one of the insights behind welfare reform. If you set a date certain for getting rid of benefits, people find jobs.

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, isn’t very surprised by the media ignoring the impact of unemployment insurance. “The liberal parts of the media tend . . . to ignore the negative impact of welfare,” he said.

Those more into media bias might point out how the coverage helps the Democrats. Not only would discussing this reason for why unemployment has gone up put significant blame on the Democrats who pushed for the increased benefits, but it would also have made unemployment less of political issue -- it is harder to get concerned about more unemployment if people are doing it because of increased benefits.

Professor Robert Hansen, the Senior Associate Dean at Dartmouth’s Tuck School of Business, said that more unemployment is a natural consequence of higher unemployment insurance benefits: “Yes, so you are going to have more unemployed looking for more unemployment benefits.” He noted that higher benefits mean that some people will leave their jobs that they wouldn’t have otherwise been willing to leave and that they will be willing to stay unemployed longer.

The higher unemployment rate has surely added to the feelings of gloom or even panic. Not only did the higher unemployment rate affect the election, but President-elect Obama points to the higher unemployment rate as justifying what the New York Times “Public Works on a Vast Scale.” On Saturday, Obama said that, “We need action -- and action now.” The higher unemployment is claimed to have pushed forward the bailout for the automobile industry.

Take a simple comparison to Canada. Surely, there are lots of differences between the United States and Canada, but while the U.S. unemployment rate rose from 5.5 percent in June to 6.7 percent in October, the Canadian unemployment rate barely increased from 6.2 to 6.3 percent.

In the U.S., initial jobless claims had peaked last March and either fell or leveled off after that — until July. The unemployment rate had also leveled off by June. Then new jobless claims started to rise and have kept on rising ever since.

So what changed in July in the United States and not Canada? The increase clearly had one cause: longer unemployment insurance benefits. The Iraq war-funding bill that President Bush signed on June 30 increased unemployment insurance benefits to 39 weeks from 26 for claims filed after the law went into effectJuly 6.

Indeed, that one-week gap in time between when Bush signed the bill and it went into effect provides some evidence of how unemployment insurance distorts people’s incentives to become unemployed. 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 fell by 58,000, a 14 percent drop. After July 6, initial jobless claims soared, and there has been only one week when claims were as low as they were before Bush signed the extension.

Higher unemployment rates from larger unemployment benefits are exactly what economists would predict. This includes Larry Katz, the Democratic chief economist at the Labor Department during the Clinton administration, who found that workers are almost three times more likely to find jobs when benefits are just about to run out.

But Katz is not alone -- dozens of economic research papers predicted this same outcome. When you extend or increase jobless 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.

Most research indicates that a 50 percent rise in benefits increases unemployment by those eligible for insurance by 50 percent. But total unemployment will not increase by that much because most people aren't eligible for the insurance -- many unemployed were living in states that were already providing extended benefits and many others were not eligible for unemployment insurance.

Still, increasing the benefits should have increased the unemployment rate by about one percentage point. So most if not all of the increase in unemployment after June would have been expected simply from the increase in unemployment insurance benefits.

Even now with the unemployment rate at 6.7 percent, some perspective is helpful. 47 percent of the months during the 1980s and 1990s had unemployment rates that were 6.7 percent or higher.

Professor Hansen pointed out the irony of increased unemployment insurance benefits: “Being compassionate has consequences, one of which is a greater demand for compassion.” The higher unemployment generated from increased government benefits is going to be used to push for what could be the greatest government jobs program in U.S. history.

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