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Are Unemployment Benefits Actually Increasing the Unemployment Rate?

I wanted to pull out part of my article from this morning, as it makes a somewhat confusing but nevertheless important point. Most policy experts and economists think that unemployment insurance discourages people from looking for work or accepting jobs offered to them, keeping them unemployed for longer — a serious point of contention right now, given the fight for extended benefits in Congress. But most think that, given how bad the labor market is, the impact is very, very small. New York Times columnist and Princeton economist Paul Krugman explains:

Do unemployment benefits reduce the incentive to seek work? Yes: workers receiving unemployment benefits aren’t quite as desperate as workers without benefits, and are likely to be slightly more choosy about accepting new jobs. The operative word here is “slightly”: recent economic research suggests that the effect of unemployment benefits on worker behavior is much weaker than was previously believed. Still, it’s a real effect when the economy is doing well.

But it’s an effect that is completely irrelevant to our current situation. When the economy is booming, and lack of sufficient willing workers is limiting growth, generous unemployment benefits may keep employment lower than it would have been otherwise. But as you may have noticed, right now the economy isn’t booming — again, there are five unemployed workers for every job opening. Cutting off benefits to the unemployed will make them even more desperate for work — but they can’t take jobs that aren’t there.

But in an interview for the article, economist Heidi Shierholz of the Economic Policy Institute made an interesting further argument: The United States’ unemployment benefits are inadvertently *lowering *the unemployment rate. “When you’re in a downturn like this, the logic gets flipped on its head,” she explains. “To receive unemployment benefits, you need to be looking for work. You are actually required to be looking for a job, whereas if you aren’t getting unemployment insurance, and there aren’t any jobs, you might lose your incentive to look for work.”

To unpack that a bit: In the United States, you need to be actively seeking work — sending out resumes, etc. — to receive your UI checks. (The government does not tap your phone to make sure, of course, but it does check in.) Once your UI ends, so does the requirement to keep looking for a job. You’re on your own. An enormous body of people — at least one million of them — have graduated from their unemployment benefits into further joblessness, rather than work. Many of those people, rather than continuing to look for a job, have given up because the labor market is so bad. Those people are lowering the unemployment rate, because they are not in the labor force anymore. And were they still seeking jobs — which many would be, if their unemployment insurance lasted for longer — the unemployment rate would be in the double digits.

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