Monday, December 23, 2013

A couple more thoughts on Emergency Unemployment Insurance

One wrinkle in the changes in North Carolina labor statistics in the period since they cut Emergency Unemployment Insurance (EUI) is that more North Carolinians have left the unemployment rolls than were even enrolled in EUI.  Since June, more than 75,000 North Carolinians have exited unemployment, but there were probably only about 30,000 to 35,000 receiving EUI.

This could be because there are many other factors affecting unemployment, so EUI may account for less than half of the net changes.

The End of EUI as Fiscal Stimulus

But, this gets me thinking about the general tenor of discussions about this issue, and one overlooked factor that, to me, seems too obvious to leave aside.  There are many pundits who describe EUI as a fiscally stimulative policy.  But, especially to the extent that we continue to see a large number of long term unemployed workers, and also especially considering we are 5 years past the shock in real national production, any stimulative effect is likely to be nominal (that is to say, inflationary).

So, if we start from a context where a worker is unemployed and is not receiving benefits, changing to a context where he remains unemployed, but receives benefits, nominal GDP might be increased (assuming a stable monetary policy), but real production at this point is arguably not significantly changed.

But, if at this juncture, a cancellation of benefits leads a portion of EUI recipients to exit unemployment and become employed more quickly than they would have otherwise, then this clearly is a real fiscal stimulus.  This will lead to an increase in real GDP.

Now, the overlooked issue is that an increase in employment of this type will have complementary effects.  There will be jobs that are complementary to the jobs which are now being filled more quickly, so that there will be some "multiplier" effect from these former EUI workers.  And, the new real increase in production should also lead to other complementary increases in economic activity.  It is possible that the increase in employment due to the end of EUI will be larger than the actual number of EUI recipients.

Evan Soltas linked to this paper that outlined a logical argument for why moderate unemployment insurance might increase production in the long run because it helps facilitate better job matching, so that productivity improves.  But, what that logic is saying is that UI makes up for higher current unemployment with future productivity.  Isn't that the opposite of the logic of all the other Keynesian fiscal stimulus policies?  Aren't we supposed to be willing to take small decreases in future production in order to increase current production immediately?  If these workers are becoming employed as a result of the end of EUI, isn't the end of EUI as effective a fiscal stimulus as we could ask for?

EUI as Bizarro Social Safety Net

Duration of unemployment increases with age and with education levels.  This is because older, more educated workers have a better personal safety net, and have more discretion in their work decisions.  Even in the oft-referenced situation where older unemployed workers are ironically denied jobs because they are overqualified, the operating issue there is that, because workers in their position tend to have so much more discretion than other workers, they cannot credibly signal a commitment to the job in question.  Duration is negatively correlated with desperation.

Here's what median duration of unemployment looks like, by age:
There are several items to note here:

1) I haven't included 16-24 year olds here.  The median for all adults (16+ year olds) is so low because the median duration for 16-24 year olds is very low and 16-34 year olds tend to have a much higher unemployment rate than 35+ year olds, with the unemployment rate decreasing with age.

2) So, 16-34 year olds represent a large proportion of the unemployed, and generally the most vulnerable, since their incomes tend to be lower and they have less savings.  Median unemployment for these groups has never been above 10 weeks in any previous recession.  So, only a very small percentage of the most vulnerable population has ever benefited from extended UI.  Even in the current recession, these age groups topped out at a little over 20 weeks, so that most of them would not have used it.

3) Even among the older groups, median durations topped out at around 15 weeks or less in previous recessions, so that most workers were not affected by EUI.  And, the workers who would have used EUI would have tended to be the workers with the highest incomes, the most savings, and the most discretion as a result of their own personal safety nets.  Notice how the 55-64 and 65+ age groups are the age groups that show the most inflation in unemployment duration during the recent recession.  To the extent that former EUI recipients leave the labor force, we can infer that the vast majority are the workers who were the oldest and wealthiest and who are able or nearly able to qualify for Medicare & Social Security benefits.  The GAO survey results corroborate this inference.

In sum, desperate workers generally must find work as quickly as possible, and are not in a position to use EUI.  Twenty-six weeks covers the vast majority of them.  For each week that is added to UI benefits, the policy will be increasingly targeted to workers who do not need the benefit.  I think it would be very illuminating to see the age, average wealth, and lifetime income of workers who were taking EUI benefits beyond 50 weeks.

But there is one additional point I want to make about this graph.  This graph only goes back to 1977 because that's how far the age-specific data goes.  But, the trend shown here goes all the way back to 1948.  Median unemployment durations have never been more than 10 weeks at any time since WWII.  The anomaly in the latest recession is stark and unique.  This tremendous and unprecedented jump in unemployment duration just happens to coincide with a tremendous and unprecedented jump in EUI benefits.  How much of our current perception of a broken labor market is the result of this one policy?  Have we found a policy that is self-sustaining?  It creates unemployment, and then the existence of that unemployment is cited as the reason why we need the policy?

It so happens that unemployment under 26 weeks is very nearly back to normal.  Most of the remaining excess unemployment is long-duration unemployment.  That's quite a coincidence.  At this point, most of the long-term unemployed are not on EUI, but this raises the question about whether former EUI recipients were incentivized to extend their unemployment duration against their better interests, and now find that they have hobbled themselves with a giant red flag when they try to re-enter the labor market.  (No problem.  Just blame the employers.)

This also poses another problem for the idea that EUI creates a net benefit in the long term by increasing subsequent worker productivity.  If the typical EUI recipient will be earning a full-time income for a decade or less, the payoff of marginally higher productivity will not be substantial, certainly not enough to justify adding a year or more to their unemployment duration.

The Social Cost of Moral Posturing

I can understand the feeling that some people have as guardians of the public safety net.  They feel that there are political jackals about that are always trying to undermine the system and leave vulnerable families in dire straits.  But, if any discussion about the effectiveness of our current programs is met with a knee-jerk reaction of Dickensian doomsaying, then this social posture is the enemy of a well-functioning safety net.  If we can't have reasonable public discussions about the effectiveness of these programs, then they will inevitably be ineffective.  Expensive and ineffective social programs are a much larger danger to an effective public social policy than are programs that are too small.

In these discussions, it is important to keep in mind the most vulnerable citizens who might be affected, and to make sure they are protected.  But, this goal is not served by public flagellation and concern-peacocking.  There are valid reasons why this policy is not in the country's best interest.

And, please note, I am not casting aspersions at recipients of these benefits, or making any moral judgments about anyone's decision to accept or not accept them.

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