Extended Unemployment Benefits Are Probably a Bad Idea

One of the things that was done differently in the U.S. in the Great Recession was the extension of extended unemployment benefits nationwide. Depending on your location, the Feds guaranteed you up to 47 extra weeks of unemployment. This policy was unprecedented at the national level.

The motivation for this was good-hearted: the unemployed have a tough row to hoe, and recessions aren't the fault of individuals. Of course, there was also all that hyperbole about this being The Great Recession, when really it was just ... as we showed in Case 5 of the time series portion of the class ... worse than the last two. You know just maybe using the worst thing in a generation as a justification for doing something you've never, ever, done before wasn't the best idea.

The "Depending on your location" is the key part. Because when Congress rescinded those benefits in December 2013, it provided a natural experiment for looking at the before and after effects.

Do note that in the past in this class that we have discussed the effects of extended benefits, and at the time I remarked that I didn't see that they'd made much difference because there just wasn't much evidence either way. I was wrong.

The results are now in and  ... are not pretty. Hagedorn, Manovskii and Mitman have an NBER working paper attributing 1.8 million of the 3.1 million jobs created in 2014 to rescinding those benefits. Further, they estimate that 1.0 of those 3.1 million were people who entered the work force: that is they saw people who'd been collecting benefits get them cut and go get jobs, and figured they could do the same thing too. The latter is critical because frequently critics of cutting benefits make the casual argument that if you cut benefits people just leave the labor force: the data says it's the other way around.

You can't readily disentangle the raw numbers to get at how much the unemployment rate would have changed has Congress not rescinded extended benefits. But, the unemployment rate dropped from 6.7% to 5.6% over the year, and it seems plausible that half of that was due to the benefits change.

N.B. Do note that now that we're in Spring 2015, people call the behavior of the labor market full employment, and remark that we somehow turned the corner on a weak recovery over the last year. Perhaps our members of Congress just got smarter one day in late 2013.