Marketplace Scratch Pad

Job bennies: A bad drug?

Scott Jagow Nov 17, 2009

Congress recently extended unemployment benefits again. 28 states are now giving out 79 weeks of jobless insurance. The first extension came with the stimulus package last February. Here’s a good topic for debate: Has this increased the unemployment rate?

Alan Reynolds of the Cato Institute argues in the New York Post that extending jobless benefits has added two percentage points to the unemployment rate:

(Economic adviser Larry) Summers knows why the US rate is so high. He explained it well in a 1995 paper co-authored with James Poterba of MIT: “Unemployment insurance lengthens unemployment spells.”

That is: When the government pays people 50 to 60 percent of their previous wage to stay home for a year or more, many of them do just that…

When you subsidize something, you get more of it. Extending unemployment benefits from 26 to 79 weeks was guaranteed to leave many more people unemployed for many more months.

Reynolds cites another study that suggests people will wait until their unemployment benefits are nearly exhausted to really spend time looking for a job:

In other words: If you extend benefits to 79 weeks, many people won’t find an acceptable job offer until the 76th or 78th week.

It’s a plausible argument, backed up with some evidence. But one flaw: Reynolds points to European countries like Germany and Sweden, saying their unemployment rates are lower. Last time I checked, the job bennies in Europe are much more extensive than here.

Germany now significantly reduces jobless benefits after one year, but in most of Europe, unemployment benefits are far more generous. Earlier this year, the Wall Street Journal compared the two:

Jobless benefits vary around Europe, just as they can vary state-by-state in the U.S. But in most Western European countries, the state replaces 60% to 80% of the average worker’s lost salary, compared with just over half on average in the U.S., according to the Organization for Economic Cooperation and Development.

European benefits also tend to last longer. In Belgium, jobless benefits have no time limit at all. In Denmark, the state replaces up to 90% of lost wages and invests over 4% of gross domestic product every year in supporting and retraining the jobless.

Before Congress extended unemployment benefits here, Harry Moroz argued at the Huffington Post:

In addition to the benefit to individual households, unemployment insurance provides significant economic stimulus. The unemployed tend to spend all of their benefits and quickly, providing an important economic jolt. Allowing unemployment benefits to expire for hundreds of thousands of families would undermine the successes of the American Recovery and Reinvestment Act and slow the nation’s economic recovery.

I don’t know. I wonder if we’d be better off spending the money on incentives for companies to hire, education and retraining for workers and programs of that nature. What do you think? Are unemployment “benefits” a curse for the job market?

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