Unemployment Benefits and Unemployment

http://www.futureofcapitalism.com/2011/02/unemployment-benefits-and-unemployment-1

The decision by President Obama and Congress to extend unemployment benefits has contributed to the higher unemployment rate, the Federal Reserve Bank of San Francisco says in a new economic letter:

Economists have cited a number of possible reasons why the natural rate of unemployment may have risen in recent years. In early 2009, eligibility for unemployment benefits was extended from 26 weeks to as much as 99 weeks. Extended benefits reduce the hardship on unemployed workers and their families during this severe downturn. However, they may also reduce the incentive of the unemployed to seek and accept less desirable jobs, which in turn may raise the measured unemployment rate. Indeed, some European countries may have higher natural rates of unemployment because they offer more generous unemployment benefits than the United States....

Valletta and Kuang (2010) estimate that the extension of unemployment benefits increased the natural rate by about 0.8 percentage point. Other estimates suggest even larger effects (Fujita 2011). Importantly, the direct effects from unemployment benefits should end after the maximum eligibility period is brought back to its normal level....

Mounting evidence suggests that structural factors may have increased the "normal" rate of unemployment to about 6.7%. Much of this increase is likely to be temporary. In particular, the extension of unemployment benefits probably accounts for about half of the increase.

Link via Economic Policies for the 21st Century.

I was giving some career counseling to a friend the other day about whether to accept a job she'd been offered. She'd recently been laid off from her previous job, so accepting the new job meant that she would be giving up those 99 weeks of unemployment benefits — essentially walking away from tens of thousands of dollars. For her, this was a real factor, not just some imaginary theoretical disincentive imagined by academic economists.

by Ira Stoll  |  Feb 15, 2011 at 9:47 am Related Topics:  Federal Reserve, Politics, President Obama receive the latest by email: subscribe to the free futureofcapitalism.com mailing list