The president repeats it ad nauseum: Congress could take any number of steps right now to improve joblessness and boost the economy, from increasing unemployment benefits to extending the payroll tax cut. But new White House chief economist Alan Krueger knows what the president seems not to: Boosts to unemployment insurance won’t stimulate the economy. If anything, such improved benefits will likely only boost joblessness. In fact, Krueger wrote a paper to that effect. The Heritage Foundation’s Lachlan Markay reports:
Krueger co-authored a paper for the Handbook of Public Economics in 2002 that seems to undercut the economic argument for extending unemployment benefits. The paper found that those benefits tend to increase the length of unemployment by discouraging the search for a new job, and may actually encourage layoffs. Conversely, the paper also found that unemployed persons who are ineligible for benefits search harder for a job and are therefore unemployed for less time. …
The paper also finds that increasing the length of unemployment benefits directly contributes to unemployment. “[I]ncreases in either the level or potential duration of benefits raise the value of being unemployed,” the paper states, “reducing search intensity and increasing the reservation wage.” More generous unemployment benefits, in other words, reduce the incentive to find employment. “Higher and longer duration UI benefits,” the paper adds,” will cause unemployed workers who receive UI to take longer to find a new job.”
On the other hand, workers who are not eligible for unemployment benefits or who have approached or reached the maximum duration of benefits, are more likely to search for, and hence to find work. The study saw an increase in the “escape rate from unemployment for workers who currently do not qualify for benefits and for qualified workers close to when benefits are exhausted.” The study calls this the “entitlement effect.”
Like other entitlements, it is meant as a “social safety net,” not an economic recovery policy. There may be humanitarian reasons to extend unemployment benefits (with corresponding budget offsets), but as a jobs program, by Krueger’s account, the policy will probably fall flat.
But whether Krueger will advise the president to abandon his ill-advised insistence on such an ineffective solution to joblessnes remains to be seen — and it seems safe to say the president wouldn’t accept such advice anyway.
Much more likely Krueger will be lauded (and listened to) for his inane conclusions about increases to the minimum wage. Oh, wait. He already has been.