Don't Blame Unemployment Insurance for Joblessness

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.”