The New York Times's Nobel laureate economics columnist, Paul Krugman, has a column today on the question of whether extending unemployment benefits contributes to unemployment. He writes: "Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment....But that's not how Republicans see it. Here's what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say ...: unemployment relief 'doesn't create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.' In Mr. Kyl's view, then, what we really need to worry about right now — with more than five unemployed workers for every job opening, and long-term unemployment at its highest level since the Great Depression — is whether we're reducing the incentive of the unemployed to find jobs. To me, that's a bizarre point of view."
Mr. Krugman's invocation of a "textbook economics" consensus on this point notwithstanding, it depends on whose textbook you are talking about. Harvard Professor Greg Mankiw's textbook Principles of Economics states "While unemployment insurance reduces the hardship of unemployment, it also increases the amount of unemployment. The explanation is based on one of the Ten Principles of Economics in Chapter 1: People respond to incentives. Because unemployment benefits stop when a worker takes a new job, the unemployed devote less effort to job search and are more likely to turn down unattractive job offers."
Just yesterday the Chicago Tribune ran a column by Greg Burns that quoted a professor of economics at the University of Chicago, Robert Shimer, on the extensions of unemployment benefits: "'Those programs subsidize unemployment,' explained Robert Shimer, economics professor at the University of Chicago. 'There could be good reasons to do it, but we should be clear on the cost. It has a pretty substantial impact.' He reckons that the current level of benefits probably accounts for 1 to 1.5 percentage points of the 9.7 percent national unemployment rate."
Here's a Heritage Foundation summary of the research: "The consequences of extended unemployment benefits are some of the most conclusively established results in labor economic research. Extending either the amount or the duration of UI benefits increases the length of time that workers remain unemployed. UI benefits subsidize unemployment. They reduce the incentive unemployed workers have to search for new work and to make difficult choices--such as moving or switching industries--to begin a new job. Roughly one-third of workers receiving UI benefits find work immediately once their benefits expire. This happens both when unemployment is high and when unemployment is low. Economic research shows that extending UI benefits from 26 weeks to 46 weeks increases the average duration of unemployment by approximately three weeks."
