Unemployment insurance (UI) is a crucial component of the American social safety net, but since 2010, the share of unemployed workers receiving UI benefits has eroded to one of its lowest points in decades.He concludes:
Between stubbornly long average durations of unemployment spells and cutbacks in UI at both state and federal levels, the recipiency rate dropped sharply in 2012 and 2013. Then the Emergency Unemployment Compensation (EUC) program that was signed into law in the middle of 2008 expired at the end of 2013, and Congress failed to extend it.Here is the graph:
Lengthened unemployment durations are known, fairly uncontroversially I thought, to be a product of unemployment insurance. From Laurence Ball's 2009 paper:
One story is that a decrease in aggregate demand initially causes a rise in short-term unemployment, but this turns into long-term unemployment if the slump continues. The initial short-term unemployment causes inflation to fall, but then inflation stabilizes. At that point the NAIRU is higher because of the large pool of long-term unemployed. This story is lent plausibility by evidence (in both my 1997 and 1999 papers) that a long duration of unemployment benefits magnifies hysteresis.That kind of sounds like now. Here is the 1997 paper from Ball, where he finds that many labor market distortions may be overstated, but that extensive unemployment insurance together with tight monetary policy, seems to lead to long term unemployment.
Here is a discussion by Paul Krugman, in 1994, that describes the sharp tradeoff between unemployment and wages, especially when wages are increasingly divergent, with policies like employer health and other mandates, minimum wage hikes, and generous unemployment insurance, leading to higher unemployment.
So, it seems odd to me that much of the public support for extended unemployment insurance simply ignores this problem. And the implication of articles like the EPI article and Thoma's reference too it is that extended unemployment insurance (EUI) has been stingy. While there have been states, especially in Europe, that have had UI policies more generous than recent US policy, the plain fact of the matter is that recent US policy has been much more generous than any previous US policy, and that the shape of the current labor market is reflective of this generosity. As a prerequisite to a serious discussion, surely we must agree on this, and then address the balance between generosity and recovery.
The Evidence from 2008
Note that in the previous two downturns, EUI was not implemented until continued claims had risen for more than a year, and then plateaued. In the recent downturn, EUI was implemented by President Bush in July 2008, very early in the cycle, before unemployment durations were particularly long. Also, we must remember, that the Federal Reserve was explicitly pushing a disinflationary policy at the time. In fact, none other than Janet Yellen, at the fateful September 2008 FOMC meeting (which happened after the Lehman Brothers failure and before the 4th quarter CPI collapsed to a SAAR of -8.85%), agreed with the consensus view that the Fed Funds Rate should be kept at 2%, and that with an inflation target of 2%, over/under risks were roughly balanced.
So, in September 2008, the FOMC was reassured by falling inflation expectations, after EUI had already begun, and EUI itself became an input into tighter monetary policy.Furthermore, we have seen a remarkable decline in inflation compensation for the next five years in the TIPS market. I would not rely heavily on this decline to support my view, but I do have to say that the decline is a lot more reassuring than the alternative. I was also encouraged by the 30 basis point drop in long-term inflation expectations in the most recent Michigan survey. I anticipate that the recent jump in the unemployment rate will place some additional downward pressure on growth in labor compensation, which has been quite low, and in core inflation.Although the jump in the unemployment rate probably partly reflects the extension ofunemployment insurance coverage, a back-of-the-envelope calculation suggests that the upper bound on this effect is just a few tenths of a percent. (pg. 34)
The labor market subsequently froze up. We can see in the graph above how continued claims spiked to extremely high levels, but then roughly followed the path of previous recessions. Long term unemployment is a poor signal for EUI because of the circular causation. By 2012, as signaled by the behavior of regular UI, labor markets were back to where EUI had been discontinued in previous recessions.
So, EUI was more generous than ever before, it was implemented sooner and kept longer than in any previous cycle, and it was implemented while the Fed was pursuing tight policy (not only in 2008, but arguably when it discontinued QE1 and QE2).
Measures of Unemployment Insurance
Here are some graphs to supplement the EPI graph.
The first graph shows UI as a proportion of Labor Force, instead of as a proportion of unemployment. The second graph is a reproduction of the EPI graph, but with UI subdivided between regular UI and EUI. The third graph further subdivides the EPI graph, so that it shows regular UI as a proportion of UI eligible unemployment (less than 26 weeks) and EUI as a proportion of EUI eligible unemployment (more than 26 weeks).
In late 2013, the proportion of all unemployed workers who were on EUI had fallen to about 12%. EPI implies that this was due to stingy policy. But, we can see that coverage was declining in spite of the fact that EUI was still nearly twice as generous as in previous cycles (a max. of 47 additional weeks compared to 26 weeks). Coverage was basically back to historical recovery levels in late 2013, even as generous benefits continued.
Why was coverage so low? Because by 2013, the labor market was divided between a regularly functioning market, where few newly unemployed workers were experiencing durations above 26 weeks, and a small group of very long term unemployed workers who had outlived the unprecedented level of EUI benefits. Exits from long term unemployment have accelerated since the end of EUI, so that, if we still had 73 weeks of total coverage, EUI would be covering less than 1 million workers.
There is probably no amount of time extensions that would be able to pull EUI coverage back to the coverage levels we have seen at the height of these three cycles. There just aren't that many workers left who would be eligible for EUI, even if it were available for 4 years. The total number of long term unemployed, whether eligible for UI or not, is now about 30% of total unemployment and is below 2% of the labor force.
Short term UI behavior is well into recovery mode. Newly unemployed workers are dealing with an employment market that would never have been remotely considered fitting for an EUI policy.
So how does EPI find such a low recipiency rate? Because the denominator they are using (total unemployment) includes about 1.2 million very long term unemployed workers, many of whom timed out of EUI some time ago, and who have unemployment durations of well over 2 years. Any honest review of this policy would need to start with the question, "How much of this long term unemployment problem is a product of aggressive EUI?"
Considering monetary policy and the behavior of the labor market seen in my first graph, one has to wonder. How much of that spike in UI coverage in late 2008/early 2009, followed by the stubborn persistence of very long term unemployment in 2010 and after, was a product of the combined monetary/EUI policy? I don't have the precise answer to that question. But, surely that is the question to ask. "Did the negative side effects of tight money and generous EUI outweigh the positive benefits of the generosity?"
Unfortunately, it sounds to me like broad segments of the American electorate are under the impression that EUI is simply stimulus, because it transfers cash from savers to spenders (I'm not even going to get into that here). It looks to me like, when the next critical moment comes, the consensus view will be to have even tighter monetary policy and more generous EUI.
Conservatives seem to generally support tight monetary policy, along with many libertarians. Progressives are torn. Some think we should have looser monetary policy. Others think we should have tighter monetary policy. They also can't decide if conservatives are stupid or evil, though they are sure it is one of the two. (Progressives that argue for tight money get a double whammy. Conservatives are evil, so they secretly want to help the rich at the expense of the poor, but they are also stupid, which leads them to support tight money.) Of course, since looser money (2%-4% inflation or 5%+ NGDP growth) would actually benefit pretty much everyone, most of all unemployed workers, these positions achieve an Abbott & Costello level of confusion.
Meanwhile, while progressives use EUI as a shaming cudgel, as in this EPI post, EUI was passed in 2008 with near unanimous Congressional support and a Republican president.
These days, we all know how desperately wrong everyone else is, but self-destructive governance seems to have safe bi-partisan support.