Subsidizing Unemployment

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Subsidizing Unemployment

Harvard economist Robert Barro recently wrote an article in The Wall Street Journal1 analyzing the Obama administration's decision to extend unemployment insurance from 26 weeks to 99 weeks.  In it, Barro argues that some support of the unemployed is dictated by compassion, but too much support — or support for too long a time period — causes inefficiencies in the market by discouraging people from looking for work or accepting available work if it's not what they want to be doing at that particular time.

It's true that in a recession, most unemployment results from basic economic factors, rather than any decision on the part of an individual to refuse work.  So, historically, the government has extended unemployment benefits to 39 weeks during serious downturns — and in some cases, a bit more.  But the extension of those benefits to almost two years is unprecedented and it resembles the policies of welfare states such as France, where citizens rioted recently because the retirement age was being raised to 62.

The administration's rationale for extending unemployment insurance beyond the norm is that there really are no jobs, owing to the depth of the recession.  But the Bureau of Labor Statistics reports that even at the bottom of the recession in March of 2009, almost 4 million people were hired, while nearly 5 million were let go.2  So, even though the net loss of 800,000 jobs demonstrates that the economy was in recessionary territory, there were still 3.9 million people hired during that period. 

Unemployment peaked at just above 10 percent in October 2009.  But during the 1982 recession, it rose even higher, to almost 11 percent.  Unemployment benefits were kept in the normal range at that time and the economy recovered just fine, along with employment levels.  So there is some reason to believe that abnormally long periods of unemployment insurance benefits can lead to chronic unemployment, as has happened in some European countries. 

Between World War Two and 2008, the peaks for both average length of unemployment and for the number of long-term unemployed workers occurred during the 1982 recession.  People who were unemployed at the peak of that recession in late 1982 were out of work an average of 17.6 weeks.  Those who were out of work for more than 26 weeks represented 20.4 percent of the total. 

By mid-1983, the unemployment rate overall had fallen from 10.8 percent to 9.4 percent, while those who were unemployed waited an average of 21.2 weeks to get a job, and the long-term unemployment rate went up to 24.5 percent of the total...

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