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Why doesn’t anyone mention the proposed policy response to structural unemployment?

By Mike Konczal

Speaking of Allison Schrager’s recent summary, I’m noticing everyone is name-dropping and referencing Federal Reserve Bank of Minneapolis President Narayana Kocherlakota’s argument that a skills mismatch is causing our current unemployment crisis, without mentioning his first policy response to that problem. David Brooks hasn’t mentioned Kocherlakota’s policy response when he references his unemployment argument, for instance. Neither did Bill Clinton. Same for Schrager and a host of others.

But his first policy response is quite clear. Let’s go to Kocherlakota’s Aug. 17, 2010, speech, in which he outlines his argument. Here’s what he said (my bold):

Of course, the key question is: How much of the current unemployment rate is really due to mismatch, as opposed to conditions that the Fed can readily ameliorate? The answer seems to be a lot. I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 percent, we would have an unemployment rate of closer to 6.5 percent, not 9.5 percent. Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.

Given the structural problems in the labor market, I do not expect unemployment to decline rapidly. My own prediction is that unemployment will remain above 8 percent into 2012. Persistently high unemployment of this kind will impose considerable losses on many of our citizens. Good public policy requires that we help mitigate their losses via a well-designed unemployment insurance program. Recent economic research, including some done at the Federal Reserve Bank of Minneapolis, shows that such a program will not feature the termination of benefits after 26, 52, or 99 weeks. Instead, a good insurance program should offer constant benefits over the entire duration of an unemployment spell, however long. It should provide incentives only through the level of those benefits, not through their timing.

For the record: The godfather of the structural unemployment argument wants to see unemployment extended well past 99 weeks. (He cites Shimer, Robert and Iván Werning, 2008, “Liquidity and Insurance for the Unemployed,” as forming the basis of his argument.)

Economists have spent the past decades worried that unemployment insurance gives workers bad incentives to not find a job, and they justified this by slower job finds for those insured and spikes when unemployment insurance does runs out. A lot of new empirical research has been done recently on this and has found that these problems with unemployment insurance are really overstated. More than half of the reasons for observed slower job finds for those on unemployment is healthy increases in finding the best fit for a job -- having access to liquidity -- not incentives to not work.

Another thing economists are realizing is that the spike is often a measurement error associated with people dropping out of the labor force (pdf). This recession is the first time on record since at least the 1960s where it is more likely for a person to leave unemployment by dropping out of the labor force rather than finding a job, so this is a serious problem for us now.

And this is a good time to bring up the Economic Policy Institute’s Heidi Shierholz and Lawrence Mishel’s "A Good Deal for All,” arguing for the positive macroeconomic impact of extending unemployment benefits:

Table 1 gives the impact in terms of both gross domestic product (GDP) and employment of continuing through 2011 the federally funded unemployment insurance extensions that are currently in place. (The numbers in this table are calculated using the methodology described in the appendix of Mishel and Shierholz (2010).

The estimated cost of continuing the extensions through 2011 is $65 billion. The economic impact of this spending is much higher, however, because of its large “multiplier” effect. UI benefits for the long-term unemployed give the economy a particularly big boost because long-term unemployed workers are very unlikely to have any choice but to immediately spend their unemployment benefits. The resulting spending on rent, groceries and other necessities saves and creates jobs throughout the economy. For this reason, government spending on unemployment insurance benefits during a downturn is recognized by the Congressional Budget office (CBO) as one of the most efficient things that can be done to create new jobs.

Spending $65 billion on unemployment insurance extensions will increase GDP by an estimated $104.7 billion, which is roughly 0.7 percent of our $14.7 trillion GDP. This increase in GDP translates into 488,000 payroll jobs. In other words, extending the federally funded unemployment insurance extensions through 2011 would not only be a lifeline to the families of millions of unemployed workers, it also supports spending responsible for the existence of nearly half a million jobs.

... Furthermore, the actual cost to the budget is far less than the sticker price of $65 billion. The 723,000 full-time-equivalent jobs created or saved means: (1) the government will bring in more revenue from the taxes paid on the wages earned by those who otherwise would not have jobs, and (2) it will spend less on safety net measures (for example, Medicaid and food stamps) related to unemployment. In other words, when jobs are created, it adds to government revenues and reduces government expenditures. ... That alone is a good deal for all involved, but when we remember that these expenditures will at the same time be providing a lifeline to millions of families of the long-term unemployed during the worst downturn in seven decades, the case for continuing the extensions could not be clearer.

So there you have it. Extending unemployment insurance past 99 weeks and into 2011: Great policy for Keynesians who realize we are stuck in a liquidity trap, and great policy for those who think that unemployment is high because employees don’t have great skills.

For an ideologically honest post-election bipartisanship movement, I’m sure we’ll be able to reach across the aisle and extend this crucial safety net.

Mike Konczal is a fellow at the Roosevelt Institute. He blogs about finance, economics and other topics at Rortybomb and New Deal 2.0, and you can follow him on Twitter.

By Mike Konczal  | November 8, 2010; 1:15 PM ET
 
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Comments

good post, the mixing of the fresh and salty waters.

Posted by: bdballard | November 8, 2010 1:23 PM | Report abuse

"Great policy for Keynesians who realize we are stuck in a liquidity trap, and great policy for those who think that unemployment is high because employees don’t have great skills."

You mean the Keynesians whose policies drove us into the liquidity trap?

If unemployment is high because employees don't have great skills, extension of unemployment benefits ad infinitum isn't going to do anything to correct the mismatch of skills, but will certainly create a whole new and entitled underclass.

Posted by: bgmma50 | November 8, 2010 1:58 PM | Report abuse

I mean, it's not like we don't have 11 million illegal residents performing work that doesn't require great skills......

Posted by: bgmma50 | November 8, 2010 1:59 PM | Report abuse

So unemployment insurance extension is going to be due for renewal in the upcoming lame duck session of congress.
Here is an idea:
Why not encourage companies to hire Americans while at the same time find a way to fund unemployment insurance extension without impacting the deficit....
Let me explain:
Why not cover unemployment insurance extension with increasing the fees on the H-1b and L1 visas. This would have the effect of encouraging companies to hire and even sometimes train the unemployed, while at the same time discourage them from using those visas as a way to outsource or insource those jobs using cheaper imported labor.
There are over a million displaced software developers, who would be able to find good paying jobs if companies are discouraged form going the cheap labor outsourcing way...

Posted by: UnemployedSeniorSoftwaredeveloper | November 8, 2010 2:15 PM | Report abuse

"For this reason, government spending on unemployment insurance benefits during a downturn is recognized by the Congressional Budget office (CBO) as one of the most efficient things that can be done to create new jobs."

This is counter intuitive. I understand the saved jobs argument, but on what basis can NEW jobs be created through UI? One presumes that UI people contract their spending to meet lower income levels.


"The 723,000 full-time-equivalent jobs created or saved means: (1) the government will bring in more revenue from the taxes paid on the wages earned by those who otherwise would not have jobs, and (2) it will spend less on safety net measures (for example, Medicaid and food stamps) related to unemployment. In other words, when jobs are created, it adds to government revenues and reduces government expenditures. ..."

This is an obviously fallacious argument. You are counting the savings twice. " it will spend less on safety net measures (for example, Medicaid and food stamps) related to unemployment'

No it won't spend less, it IS spending on those things because the people are on UI.


"Great policy for Keynesians who realize we are stuck in a liquidity trap,"


No only newspaper columnists and university economists who want a stimulus say this. Business people say it is a DEMAND problem, not a liquidity problem.

Posted by: 54465446 | November 8, 2010 2:29 PM | Report abuse

Here's a tactical idea for the lame duck session: pair a one year extension of unemployment benefits -- possibly with some of the skills training incentives aforementioned -- with a one year extension of the upper income tax cuts.

Posted by: dollarwatcher | November 8, 2010 3:12 PM | Report abuse

What about the policy response of more government funding for education and training, making it more affordable to go to college, or back to college.

Posted by: RichardHSerlin | November 8, 2010 4:23 PM | Report abuse

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