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Might Unemployment Benefits Shrink the Deficit?

At The Wall Street Journal, Sara Murray makes an interesting argument — that expanded unemployment benefits might reduce the deficit, by keeping people working and off of other government programs, like disability.

Once older workers are laid off they take the longest to find new jobs. For workers 65 and up, it takes a median of 45.1 weeks to find a new gig. For those 55 to 64, 38.7 weeks. It takes a slightly shorter 30.4 weeks for those who are 45 to 54-years old. Unemployment checks have the added benefit of helping these people feel like they’re still a part of the labor force. When the checks run out, and with few glimmers of hope in their job searches, they’re more likely to drop out of the labor force and turn to a program like disability. And unlike a relatively short-term fling with jobless benefits, their attachment to disability is more likely to be permanent. … [S]tudies have shown that for each percentage point increase in the unemployment rate, disability rolls increase anywhere from 2 percent to 7 percent. Some studies show that effect grows larger in the following two years.

Paul Krugman, writing on his New York Times blog, fleshes out some of the math, relating to the broad question of austerity and the budget, rather than the small question of unemployment benefits and workers going onto disability or other programs:

How big do these negative effects [of a weak economy] have to be to turn austerity into a net negative for the budget? Not very big. In my example, the real interest payments saved by a 1 percent of GDP austerity move are less than .02 percent of GDP; if the marginal tax effect of GDP is 0.25, that means that a reduction of future GDP by .08 percent is enough to swamp the alleged fiscal benefits. It’s not at all hard to imagine that happening.

In short, there’s a very good case to be made that austerity now isn’t just a bad idea because of its impact on the economy and the unemployed; it may well fail even at the task of helping the budget balance. It’s important to realize that I’m not saying that government spending always pays for itself, and that saving money is always counterproductive. These kinds of effects are specific to a liquidity trap situation. But that’s the situation we’re in.

I wonder if there are newer and more thorough studies of the phenomenon Murray is describing — as the academic work she cites is from 1995 — of older workers exiting the work force early due to joblessness, and taking benefits like Social Security, welfare and disability in higher numbers rather than continuing to work.

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