Don't Blame Unemployment Insurance for Joblessness

Job applicants waiting in line to speak with recruiters during a job fair in College Park, Ga., in 2012 Photograph by Erik S. Lesser/EPA EPA via Corbis

Do unemployment insurance benefits kill jobs? Some prominent researchers have said so. “Most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility,” a working paper argued last year. The authors said that the availability of unemployment insurance forces employers to raise wages to attract workers, which lowers their profit from filled jobs, which causes them to post fewer jobs, which leads to higher unemployment.

That pessimistic argument—you can’t help jobless people without forcing unemployment way higher—got lots of attention from economists and the media. But a new paper by economists at the Federal Reserve Bank of Cleveland comes to a different conclusion. Using more and fresher data, the research finds “a much smaller impact” than the earlier paper did. The unemployment effect of extending benefits through the effect on wages and job creation, the Cleveland authors wrote, “can, at its highest, account for only one-fourth of the increase in the unemployment rate; an impact that is much lower than other estimates in the literature.”

This chart shows that the unemployment rate did indeed rise at the same time that unemployment insurance benefits got more generous. But the arrow of causality runs from high joblessness to better benefits, not from better benefits to high joblessness.

Source: Bureau of Labor Statistics, Federal Reserve Bank of Cleveland

Notice that the unemployment rate started falling while benefits were still at their most generous.

Two variations in the new research account for the different result: It covers a longer period of time: from 2003 to 2013, instead of just 2005 to 2012. And it excludes some “outliers”—bits of data that can skew a result. Louisiana, for example, had a big jump in unemployment insurance benefits, and the unemployment rate also rose. But the culprit wasn’t unemployment insurance. Blame Hurricane Katrina.

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