Unemployment and Extended Benefits: A Labor Day Comment

Today's employment report showed more joblessness. Harvard economist Robert Barro recently argued that today's unemployment rate might be as low as 6.8% rather than 9.5% (as of the time of his writing) if the maximum duration of unemployment benefits had not been extended from 26 weeks to 99 weeks.

Here's another back-of-the-envelope estimate: the academic research suggests that every additional week of unemployment insurance eligibility extends the actual duration of unemployment by about 0.2 weeks. (See this review of the literature, pp. 15-16.)  The increase from 26 weeks to 99 weeks would then imply an extra 15 weeks of average unemployment. For reference, the current median duration is about 20 weeks, and normal is somewhere between 5 and 8 weeks. That suggests that the extended benefits might have had a very large impact.


There are plenty of reasons to be skeptical of the data estimates, not the least of which is that the relationship between extended benefits and duration may not be linear. Even if we had a good estimate of the impact of a one-week extension, we might not be able to multiply it by 73 to capture the impact of a shift from 26 weeks to 99 weeks of eligibility. However, there is good reason to be concerned about the lengthy benefit eligibility.

Robert Reich, former labor secretary, replied with a simplistic answer: "So it's hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work."

Let me explain how this works. Reich is correct that no one (well, maybe one or two, but not many) turns down a good job offer to collect unemployment benefits. However, what happens before the job offer is received is crucially dependent on incentives.

Joe is unemployed. On Monday morning he wakes up and starts looking for work. He answers an on-line ad. Then he calls a friend and asks if his company is hiring; the friend promises to ask around and get back to Joe. Then Joe goes down to a local company and applies for work in person.

Now it's noon. Joe has three applications or feelers out, and any one of them might turn into a job offer. What does Joe do Monday afternoon?  And Tuesday, Wednesday, Thursday and Friday? Keep in mind that Joe is like most of us: he does not like looking for work. He finds it difficult, frustrating and embarrassing. He might talk himself into sitting back and waiting to see if anything comes of his applications. Or he might keep plugging away, spending 40 hours a week looking for work.

It may seem that "there are no jobs out there," given that the Department of Labor continues to report virtually no growth in total employment. That view, however, would be mistaken. Last month over four million people were hired. There wasn't nearly that much net new job formation, but an unemployed person does not need a net new job. A job vacancy caused by a quit, retirement or death works just as well.

The government surveys Americans on how they spend their time, and it turns out that the unemployed only spend about 41 minutes per weekday looking for work. Research finds that the intensity of job search is sensitive to how much generous unemployment insurance benefits are, and how long they will last.

Finally, it's hard to be ungenerous to the working man and woman on Labor Day, but here's a little bit of additional research: virtually all of the tax that funds unemployment insurance benefits is passed on to workers in the form of lower wages. So this is not a benefit provided by "business" but one paid for by workers themselves.

Are there enough vacancies for everyone? No, but faster matching of job applicants with job openings would be stimulative to the economy for sure.