Advancing a Free Society

Extending unemployment insurance

Thursday, July 8, 2010

I would like to offer a few thoughts on extending unemployment insurance.

Supply-side effects & the tradeoff

There are negative supply-side effects from providing unemployment insurance (UI) benefits.  The best estimates I have seen suggest the current 9.5% unemployment rate is 0.5 – 1.0 percentage points higher than it would otherwise be because of previously-enacted expanded and extended UI benefits.  I will start by using the bottom end of that range (0.5).

I use 5.0% to represent full employment.  We are 4.5 percentage points above that.  If we did not have expanded UI we would be 4.0 percentage points above full employment.  That means for every 9 people out of work, one is being discouraged from taking a new job because of the expanded benefits (0.5 / 4.5).  Said another way, eight people who would like a job but cannot find one are getting more generous UI benefits for each person who is getting those same benefits and choosing not to take a new job.  We have to make a tradeoff between our desire to help those who want a job but cannot find one and those who would choose to stay unemployed while they have extra benefits.

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