By Patrick Brennan
Monday, January 26, 2015
Those who’ve listened to President Obama’s speeches over
the past couple months have heard him boast that 2014 has seen impressive
improvements in the labor market — the best year in job creation since 1999, he
points out, and he’s right. But there’s no obvious explanation for why 2014 has
been, by a good margin, the best year of a weak jobs recovery. The president
has naturally credited his policies (without any justification). But what if
2014’s jobs boom is mostly thanks to the expiration of a program that the Obama
administration and Democrats fervently pushed to renew?
That’s the finding of a new NBER working paper from three
economists — Marcus Hagedorn, Kurt Mitman, and Iourii Manovskii — who contend
that the ending of federally extended unemployment benefits across the country
at the end of 2013 explains much of the labor-market boom in 2014.
About 60 percent of the job creation in 2014, 1.8 million
jobs, they find, can be attributed to the end of the extended-benefits program.
That’s a huge amount, and suggests that long-term unemployment benefits, while
there’s a good charitable case for them, could have played a big role in the
ongoing lassitude of our labor market. (Indeed, an earlier working paper from a
few of the same authors argued that extended benefits raised the unemployment
rate during the Great Recession by three percentage points; see a summary of
that paper here.)
So what was the program Democrats wanted to renew? States
run their own unemployment-insurance programs, which provide around 26 weeks of
benefits to people who’ve lost jobs and are looking for new ones. But during
the recent recession, as they have in other downturns, Congress repeatedly
authorized federal extensions that allowed people to draw benefits for much
longer. At the end of 2013, the Senate narrowly passed a renewal of the
program, but the House never took it up and the extensions, already much longer
than any previous recession had seen, expired.
This created something of a “natural experiment.” States
had unemployment-insurance programs of widely varying length — they ranged from
40 weeks up to 73, roughly — but after the end of the federal extensions at the
start of 2014, the duration of benefits in almost all states went back to
around 26 weeks.
The paper uses that shift to examine how expiring
benefits might have affected the labor market, and they find that the
expiration of extended benefits produced a big boost to job creation,
labor-force participation, and hiring. It’s a dramatically different result
than what the White House and Democrats were predicting at the end of 2013: The
Obama administration was predicting that the drop-off in stimulative spending
from the expiration would cost 240,000 jobs, while the NBER paper finds that it
created 1.8 million jobs.
The authors don’t think this happened the way you think
it might: It’s not so much that the cut-off drove individuals on benefits back
to work, but more that less-generous benefits actually spurred job creation on
a macro level, getting employers to hire and drawing into the labor force
people who hadn’t been looking for a job. They don’t lay out how that worked,
but in their October 2013 paper, argue that extended unemployment benefits
artificially boosts wages — when they expire, employers then boost job openings
and start hiring people.
Of course, the usual caveats apply: This is not a perfect
experiment at all, and the paper, while very rigorous, can’t get past the fact
that it’s just crunching numbers about macro trends. And there are some
concerns with the authors’ county-level data, though they try to make up for
that.
The simplest form of the analysis was just looking at
states that had long benefit terms versus short ones. In 2013, job creation was
worse in more generous states than the national average; in 2014, after those
states dropped their much more generous programs, it was much better than the
national average:
There’s a lot more analysis they did, which I won’t get
into — but to untangle related effects, they look at neighboring counties in
states with different unemployment regimes, etc.
Now, this is just one paper and it involves some fancy
econometrics, but it answers an unresolved question — why 2014 saw the labor
market perk up (there’s also a possible end-of-austerity explanation, but it’s
the labor market, not the economy overall, that’s really improved noticeably).
It should prompt passionate supporters of the extended
unemployment-insurance program to consider whether it made as much sense as
they thought. Even conservative economists, such as Michael Strain, pushed for
the extension of long-term benefits. The length and scale of benefits during
the Great Recession was unprecedented, but advocates for the program argued
that this was necessary so long as unemployment, and especially long-term
unemployment, remained historically elevated. Besides the moral case for
supporting the unemployed, the market-friendly case for extending benefits is
that one has to be searching for a job to get them. Cut the benefits, and
you’ll see the long-term unemployed drop out of the labor force for good, the
argument went. (It’s extremely hard to tell what did happen with these people
when benefits expired, and the NBER paper here doesn’t comment on that.)
Advocates for extended benefits also argued that it was
just an effective form of stimulus for the economy, because recipients spend
their benefits immediately. That was always a pretty lame case, since the
program’s value to the economy in spending terms — in the Obama White House’s
generous estimation, 240,000 jobs in 2014 – would probably be outweighed if
either side’s arguments about the labor-market effects proved mostly true.
Indeed, if the new NBER paper is right, letting benefits expire produced 7.5
times as many jobs as the White House said it would cost.
The general economic consensus has always been that
unemployment insurance slightly boosts the unemployment rate. Even liberal
economists accept this, although they lampoon the idea that people might prefer
benefits to working (that isn’t the point, Paul — people act at the margin).
But we still have unemployment insurance, of course, because we want a safety
net for people in the event of job loss. That just has to be balanced against
the costs that the program imposes on the labor market. The new NBER paper
doesn’t find that those costs in general are much higher than economists
generally assume; rather, it suggests that the benefits of reining in long-term
programs can be quite substantial.
There was always good reason to think this is the case:
One of the many differences between American and European labor markets is that
most of the latter have unemployment benefits systems of effectively unlimited
duration — and much higher levels of structural unemployment.
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