Freedomnomics

Article published Tuesday , October 14, 2008, at Investor's Business Daily.

Subsidize Unemployment, Get More Of It

By John R. Lott, Jr.

The almost continuous rise in new unemployment insurance claims since the beginning of July confirms many people's fears about the economy's weakness. In fact, however, it is a sign of Washington at work.

New unemployment claims declined slightly last week to 478,000. But as CNN, for one, pointed out, the numbers had just "edged off a seven-year high." CNN also linked the high numbers to the "financial meltdown." Similarly, on Oct. 3, the Department of Labor announced that another 159,000 jobs were lost in September.

After beginning 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.

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

If you don't think 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 fell by 58,000, a 14% drop. Since July 6, there has only been one week when initial jobless claims were as low as they were before Bush signed the extension.

Yet this is exactly what economists would predict. They include 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.

Indeed, dozens of economic research papers predicted this 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.

Desiring to help the unemployed is perfectly 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.

We could have helped the jobless in other ways that didn't boost unemployment. Instead of requiring people to remain unemployed to get the new benefits, for example, 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% rise in benefits increases unemployment by those eligible for insurance by 50%.

But total unemployment will change nowhere near as much, because most people aren't covered. Of those who are unemployed, 85% 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, these research papers imply a rise in unemployment to 6.4% from 5.5% in June. So, for the next month or two 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. The irony is that as increased unemployment insurance payments increase unemployment, Sen. Barack Obama and House Speaker Nancy Pelosi are calling for even bigger increases in unemployment insurance payments.

But as the unemployment rate becomes more of an issue in the campaign, 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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